Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

(Mark One)

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

Commission file number: 001-32938

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

(Exact Name of Registrant as Specified in Its Charter)

 

Switzerland   98-0681223

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

Lindenstrasse 8

6340 Baar

Zug, Switzerland

(Address of Principal Executive Offices and Zip Code)

41-41-768-1080

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ

  Accelerated filer ¨    Non-accelerated filer ¨   Smaller reporting company ¨
     (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of April 26, 2013, 34,579,528 common shares were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I    FINANCIAL INFORMATION   
Item 1.   Financial Statements      1   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      50   
Item 4.   Controls and Procedures      53   
PART II    OTHER INFORMATION   
Item 1.   Legal Proceedings      53   
Item 1A.   Risk Factors      53   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      54   
Item 3.   Defaults Upon Senior Securities      54   
Item 4.   Mine Safety Disclosures      54   
Item 5.   Other Information      54   
Item 6.   Exhibits      55   
SIGNATURES      56   
EXHIBIT INDEX      57   

 

-i-


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

as of March 31, 2013 and December 31, 2012

(Expressed in thousands, except share and per share amounts)

 

     As of     As of  
     March 31,     December 31,  
     2013     2012  

ASSETS:

    

Fixed maturity investments trading, at fair value (amortized cost: 2013: $6,322,067; 2012: $6,473,429)

   $ 6,458,614      $ 6,626,454   

Equity securities trading, at fair value (cost: 2013: $515,534; 2012: $480,312)

     593,562        523,949   

Other invested assets

     838,603        783,534   
  

 

 

   

 

 

 

Total investments

     7,890,779        7,933,937   

Cash and cash equivalents

     662,581        681,879   

Restricted cash

     66,700        183,485   

Insurance balances receivable

     667,499        510,532   

Funds held

     370,580        336,368   

Prepaid reinsurance

     292,574        277,406   

Reinsurance recoverable

     1,163,503        1,141,110   

Accrued investment income

     28,436        29,135   

Net deferred acquisition costs

     142,151        108,010   

Goodwill

     268,376        268,376   

Intangible assets

     50,732        51,365   

Balances receivable on sale of investments

     219,260        418,879   

Net deferred tax assets

     27,737        25,580   

Other assets

     65,170        63,884   
  

 

 

   

 

 

 

Total assets

   $ 11,916,078      $ 12,029,946   
  

 

 

   

 

 

 

LIABILITIES:

    

Reserve for losses and loss expenses

   $ 5,673,220      $ 5,645,549   

Unearned premiums

     1,465,013        1,218,021   

Reinsurance balances payable

     118,461        136,264   

Balances due on purchases of investments

     354,289        759,934   

Senior notes

     798,284        798,215   

Accounts payable and accrued liabilities

     74,848        145,628   
  

 

 

   

 

 

 

Total liabilities

   $ 8,484,115      $ 8,703,611   
  

 

 

   

 

 

 

Commitments and contingencies

    

SHAREHOLDERS’ EQUITY:

    

Common shares: 2013: par value CHF 12.30 per share and 2012: par value CHF 12.64 per share (2013: 35,937,751; 2012: 36,369,868 shares issued and 2013: 34,626,361; 2012: 34,797,781 shares outstanding)

     436,587        454,980   

Treasury shares, at cost (2013: 1,311,390; 2012: 1,572,087)

     (96,353     (113,818

Retained earnings

     3,091,729        2,985,173   
  

 

 

   

 

 

 

Total shareholders’ equity

     3,431,963        3,326,335   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 11,916,078      $ 12,029,946   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

for the three months ended March 31, 2013 and 2012

(Expressed in thousands, except share and per share amounts)

 

     Three Months Ended
March 31,
 
     2013     2012  

REVENUES:

    

Gross premiums written

   $ 837,081      $ 680,929   

Premiums ceded

     (142,029     (91,976
  

 

 

   

 

 

 

Net premiums written

     695,052        588,953   

Change in unearned premiums

     (231,824     (187,063
  

 

 

   

 

 

 

Net premiums earned

     463,228        401,890   

Net investment income

     33,388        47,209   

Net realized investment gains

     79,637        133,581   
  

 

 

   

 

 

 
     576,253        582,680   
  

 

 

   

 

 

 

EXPENSES:

    

Net losses and loss expenses

     255,178        225,202   

Acquisition costs

     56,685        47,138   

General and administrative expenses

     82,680        70,366   

Amortization of intangible assets

     633        633   

Interest expense

     14,134        13,756   

Foreign exchange loss (gain)

     2,518        (81
  

 

 

   

 

 

 
     411,828        357,014   
  

 

 

   

 

 

 

Income before income taxes

     164,425        225,666   

Income tax expense

     5,433        7,510   
  

 

 

   

 

 

 

NET INCOME

     158,992        218,156   
  

 

 

   

 

 

 

Other comprehensive loss:

    

Unrealized losses on investments arising during the period net of applicable deferred income tax benefit for the three months ended March 31, 2012: $28

            (52

Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax

            (12,107
  

 

 

   

 

 

 

Other comprehensive loss

            (12,159
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 158,992      $ 205,997   
  

 

 

   

 

 

 

PER SHARE DATA

    

Basic earnings per share

   $ 4.59      $ 5.86   

Diluted earnings per share

   $ 4.49      $ 5.70   

Weighted average common shares outstanding

     34,613,606        37,205,166   

Weighted average common shares and common share equivalents outstanding

     35,431,843        38,284,635   

Dividends paid per share

   $ 0.375      $ 0.375   

See accompanying notes to the consolidated financial statements.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

for the three months ended March 31, 2013 and 2012

(Expressed in thousands)

 

     Share
Capital
    Additional
Paid-in
Capital
    Treasury
Shares
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Total  

December 31, 2012

   $ 454,980      $      $ (113,818   $      $ 2,985,173      $ 3,326,335   

Net income

                                 158,992        158,992   

Dividends — par value reduction

     (12,981                                 (12,981

Stock compensation (1)

                   17,465               (21,603     (4,138

Share repurchases

                   (36,245                   (36,245

Shares cancelled

     (5,412            36,245               (30,833       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2013

   $ 436,587      $      $ (96,353   $      $ 3,091,729      $ 3,431,963   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

   $ 557,153      $ 78,225      $ (136,590   $ 14,484      $ 2,635,750      $ 3,149,022   

Net income

                                 218,156        218,156   

Dividends — par value reduction

     (13,701                                 (13,701

Other comprehensive loss

                          (12,159            (12,159

Stock compensation (1)

            (30,222     27,748                      (2,474

Share repurchases

                   (93,023                   (93,023
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2012

   $ 543,452      $ 48,003      $ (201,865   $ 2,325      $ 2,853,906      $ 3,245,821   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock compensation expense for the period and shares issued out of treasury for awards exercised or vested.

See accompanying notes to the consolidated financial statements.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the three months ended March 31, 2013 and 2012

(Expressed in thousands)

 

     Three Months Ended
March 31,
 
     2013     2012  

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

    

Net income

   $ 158,992      $ 218,156   

Adjustments to reconcile net income to cash provided by operating activities:

    

Net realized gains on sales of investments

     (38,533     (12,165

Mark to market adjustments

     (46,112     (122,334

Stock compensation expense

     3,995        5,471   

Changes in:

    

Reserve for losses and loss expenses, net of reinsurance recoverables

     5,278        52,414   

Unearned premiums, net of prepaid reinsurance

     231,824        187,061   

Insurance balances receivable

     (156,967     (123,374

Funds held

     (34,212     27,395   

Reinsurance balances payable

     (17,803     (31,277

Net deferred acquisition costs

     (34,141     (25,311

Net deferred tax assets

     (2,157     5,358   

Accounts payable and accrued liabilities

     (70,780     (42,340

Other items, net

     14,185        3,763   
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,569        142,817   
  

 

 

   

 

 

 

CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:

    

Purchases of trading securities

     (1,330,735     (1,138,331

Purchases of other invested assets

     (54,026     (1,050

Sales of available for sale securities

            116,303   

Sales of trading securities

     1,188,307        1,352,409   

Sales of other invested assets

     97,989        28,569   

Purchases of fixed assets

     (2,378     (567

Change in restricted cash

     116,785        (204,506
  

 

 

   

 

 

 

Net cash provided by investing activities

     15,942        152,827   
  

 

 

   

 

 

 

CASH FLOWS USED IN FINANCING ACTIVITIES:

    

Dividends paid — partial par value reduction

     (12,981     (14,208

Proceeds from the exercise of stock options

     2,472        3,332   

Share repurchases

     (36,245     (93,023
  

 

 

   

 

 

 

Net cash used in financing activities

     (46,754     (103,899
  

 

 

   

 

 

 

Effect of exchange rate changes on foreign currency cash

     (2,055     245   

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (19,298     191,990   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     681,879        633,996   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 662,581      $ 825,986   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for income taxes

   $ 6,953      $ 3,454   

Cash paid for interest expense

   $ 18,750      $ 18,750   

See accompanying notes to the consolidated financial statements.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

1. GENERAL

Allied World Assurance Company Holdings, AG, a Swiss holding company (“Allied World Switzerland”), through its wholly-owned subsidiaries (collectively, the “Company”), provides property and casualty insurance and reinsurance on a worldwide basis through operations in Bermuda, the United States, Europe, Hong Kong and Singapore. References to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland.

2. BASIS OF PREPARATION AND CONSOLIDATION

These unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Company’s financial statements include, but are not limited to:

 

   

The premium estimates for certain reinsurance agreements,

 

   

Recoverability of deferred acquisition costs,

 

   

The reserve for outstanding losses and loss expenses,

 

   

Valuation of ceded reinsurance recoverables,

 

   

Determination of impairment of goodwill and other intangible assets, and

 

   

Valuation of financial instruments.

Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the consolidation. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

3. NEW ACCOUNTING PRONOUNCEMENTS

In December 2011 (with a clarification amendment issued in January 2013), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The objective of ASU 2011-11 was to enhance disclosures about derivatives, repurchase agreements and reverse repurchase agreements, securities borrowing and securities lending transactions to the extent they are subject to master netting arrangements or similar agreements. The Company adopted ASU 2011-11 on January 1, 2013. The adoption of ASU 2011-11 did not have an impact on consolidated shareholders’ equity or net income.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

4. INVESTMENTS

a) Trading Securities

Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive income (“consolidated income statements”) by category are as follows:

 

     March 31, 2013      December 31, 2012  
     Fair Value      Amortized Cost      Fair Value      Amortized Cost  

U.S. Government and Government agencies

   $ 1,991,117       $ 1,980,420       $ 1,865,913       $ 1,854,198   

Non-U.S. Government and Government agencies

     261,191         257,743         261,627         253,657   

States, municipalities and political subdivisions

     33,825         32,857         40,444         39,342   

Corporate debt:

           

Financial institutions

     923,029         894,960         866,140         835,587   

Industrials

     1,219,360         1,203,508         1,153,909         1,139,706   

Utilities

     74,790         73,248         69,153         67,463   

Mortgage-backed

     1,560,310         1,489,124         1,958,373         1,877,854   

Asset-backed

     394,992         390,207         410,895         405,622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity investments, trading

   $ 6,458,614       $ 6,322,067       $ 6,626,454       $ 6,473,429   
  

 

 

    

 

 

    

 

 

    

 

 

 
     March 31, 2013      December 31, 2012  
     Fair Value      Original Cost      Fair Value      Original Cost  

Equity securities

   $ 593,562       $ 515,534       $ 523,949       $ 480,312   

Other invested assets

     710,140         633,941         655,888         606,521   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,303,702       $ 1,149,475       $ 1,179,837       $ 1,086,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other invested assets include investments in both hedge funds and private equity funds, but excludes other private securities described below in Note 4(b) that are accounted for using the equity method of accounting.

b) Other Invested Assets

Included in other invested assets are the Company’s hedge fund and private equity investments. The fair values of these assets have been estimated using the net asset value per share of the funds.

In general, the Company has invested in hedge funds that require at least 30 days’ notice of redemption and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending on the fund. Certain hedge funds have lock-up periods ranging from one to three years from initial investment. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, called a “gate.” The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the fund’s net assets. The gate is a method for executing an orderly redemption process to reduce the possibility of adversely affecting investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash sometime after the redemption date. Certain funds may impose a redemption fee on early redemptions. Interests in private equity funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

Details regarding the carrying value, redemption characteristics and unfunded investment commitments of the other invested assets portfolio as of March 31, 2013 were as follows:

 

Fund Type

   Carrying Value as of
March 31, 2013
     Investments
with
Redemption
Restrictions
     Estimated
Remaining
Restriction
Period
     Investments
without
Redemption
Restrictions
     Redemption
Frequency(1)
     Redemption
Notice
Period(1)
     Unfunded
Commitments
 

Private equity (primary and secondary)

   $ 116,916       $ 116,916         3 - 10 Years       $             $ 172,087   

Mezzanine debt

     52,737         52,737         8 - 10 Years                       213,057   

Distressed

     8,302         8,302         4 - 5 Years                       6,908   

Total private equity

     177,955         177,955                          392,052   
  

 

 

    

 

 

       

 

 

          

 

 

 

Distressed

     139,422         108,548         1 - 2 Years         30,874         Quarterly         45 - 65 Days           
  

 

 

    

 

 

       

 

 

          

 

 

 

Equity long/short

     178,914                    178,914         Quarterly         30 - 60 Days           

Multi-strategy

     125,470                    125,470         Quarterly         45 - 90 Days           

Global macro

     20,630                    20,630         Monthly         3 Days           

Event driven

     47,749                    47,749         Annual         45 - 60 Days           
  

 

 

    

 

 

       

 

 

          

 

 

 

Total hedge funds

     512,185         108,548            403,637                 
  

 

 

    

 

 

       

 

 

          

 

 

 

Other private securities

     128,463                    128,463                 

High yield loan fund

     20,000                    20,000         Monthly         30 Days           
  

 

 

    

 

 

       

 

 

          

 

 

 

Total other invested assets

   $ 838,603       $ 286,503          $ 552,100             $ 392,052   
  

 

 

    

 

 

       

 

 

          

 

 

 

 

(1) The redemption frequency and notice periods only apply to the investments without redemption restrictions.

 

   

Private equity funds: Primary funds may invest in companies and general partnership interests. Secondary funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

 

   

Mezzanine debt funds: Mezzanine debt funds primarily focus on providing capital to upper middle market and middle market companies and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity; however, the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

 

   

Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. Certain funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

 

   

Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and by their targeted net long position.

 

   

Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading.

 

   

Global macro funds: These funds focus on a top-down analysis of global markets as influenced by major political and economic trends or events. Global macro managers develop investment strategies that aim to forecast movements in interest rates, fund flows, political changes and other wide-ranging systematic factors. The portfolios of these funds can include long or short positions in equities, fixed-income securities, currencies and commodities in the form of cash or derivatives instruments.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

   

Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one or more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include mergers and acquisitions (arbitrage), corporate restructurings and spin-offs, and capital structure arbitrage.

 

   

Other private securities: These securities include strategic non-controlling minority investments in private asset management companies and other insurance related investments that are accounted for using the equity method of accounting.

 

   

High yield loan fund: A long-only private mutual fund that invests in high yield fixed income securities.

c) Net Investment Income

 

     Three Months Ended
March 31,
 
     2013     2012  

Fixed maturity investments

   $ 32,525      $ 46,886   

Equity securities

     3,199        3,532   

Other invested assets

     1,464        542   

Cash and cash equivalents

     488        607   

Expenses

     (4,288     (4,358
  

 

 

   

 

 

 

Net investment income

   $ 33,388      $ 47,209   
  

 

 

   

 

 

 

Other invested assets included the distributed and undistributed net income from investments accounted for using the equity method of accounting for the three months ended March 31, 2013.

d) Components of Realized Gains and Losses

 

     Three Months Ended
March 31,
 
     2013     2012  

Gross realized gains on sale of invested assets

   $ 44,249      $ 39,169   

Gross realized losses on sale of invested assets

     (6,965     (21,907

Net realized and unrealized (losses) gains on derivatives

     (977     6,684   

Mark-to-market gains (losses):

    

Fixed maturity investments, trading

     (16,475     68,490   

Equity securities

     32,973        19,785   

Other invested assets

     26,832        21,360   
  

 

 

   

 

 

 

Net realized investment gains

   $ 79,637      $ 133,581   
  

 

 

   

 

 

 

Proceeds from sale of available for sale securities

   $      $ 199,408   

e) Pledged Assets

As of March 31, 2013 and December 31, 2012, $2,226,346 and $2,141,249, respectively, of cash and cash equivalents and investments were deposited, pledged or held in trust accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.

In addition, as of March 31, 2013 and December 31, 2012, a further $1,157,768 and $1,225,155, respectively, of cash and cash equivalents and investments were pledged as collateral for the Company’s letter of credit facilities. See Note 8(d) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for details on the Company’s credit facilities.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

5. DERIVATIVE INSTRUMENTS

As of March 31, 2013 and December 31, 2012, none of the Company’s derivatives were designated as hedges. The following table summarizes information on the location and amounts of derivative fair values on the unaudited condensed consolidated balance sheets (“consolidated balance sheets”):

 

     March 31, 2013      December 31, 2012  
     Asset
Derivative
Notional
Amount
     Asset
Derivative
Fair Value
     Liability
Derivative
Notional
Amount
     Liability
Derivative
Fair Value
     Asset
Derivative
Notional
Amount
     Asset
Derivative
Fair Value
     Liability
Derivative
Notional
Amount
     Liability
Derivative
Fair Value
 

Derivatives not designated as hedging instruments

  

Put options

   $ 3,290       $ 90       $       $       $ 5,152       $ 532       $       $   

Foreign exchange contracts

     161,317         2,835         175,018         2,627         127,712         1,713         194,566         2,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 164,607       $ 2,925       $ 175,018       $ 2,627       $ 132,864       $ 2,245       $ 194,566       $ 2,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Asset and liability derivatives relating to the put options are classified within “equity securities trading, at fair value” on the consolidated balance sheets. All other asset and liability derivatives are classified within “other assets” or “accounts payable and accrued liabilities” on the consolidated balance sheets.

The following table provides the net realized and unrealized gains (losses) on derivatives not designated as hedges recorded on the consolidated income statements:

 

     Three Months Ended
March 31,
 
     2013     2012  

Foreign exchange contracts

   $ (744   $ 939   
  

 

 

   

 

 

 

Total included in foreign exchange (loss) gain

     (744     939   
  

 

 

   

 

 

 

Put options

     (3,732     (336

Foreign exchange contracts

     1,815        (2,305

Interest rate futures

     940        9,325   
  

 

 

   

 

 

 

Total included in net realized investment gains

     (977     6,684   
  

 

 

   

 

 

 

Total realized and unrealized (losses) gains on derivatives

   $ (1,721   $ 7,623   
  

 

 

   

 

 

 

Derivative Instruments Not Designated as Hedging Instruments

The Company is exposed to foreign currency risk in its investment portfolio. Accordingly, the fair values of the Company’s investment portfolio are partially influenced by the change in foreign exchange rates. These foreign currency hedging activities have not been designated as specific hedges for financial reporting purposes.

The Company’s insurance and reinsurance subsidiaries and branches operate in various foreign countries and consequently the Company’s underwriting portfolio is exposed to foreign currency risk. The Company manages foreign currency risk by seeking to match liabilities under the insurance policies and reinsurance contracts that it writes and that are payable in foreign currencies with cash and investments that are denominated in such currencies. When necessary, the Company may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts and currency options.

The Company also purchases and sells interest rate future contracts to actively manage the duration and yield curve positioning of its fixed income portfolio. Interest rate futures can efficiently increase or decrease the overall duration of the portfolio. Additionally, interest rate future contracts can be utilized to obtain the desired position along the yield curve in order to protect against certain future yield curve shapes.

The Company also purchases options to actively manage the Company’s equity portfolio.

 

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6. FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

 

   

Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

   

Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

The following table shows the fair value of the Company’s financial instruments and where in the fair value hierarchy the fair value measurements are included as of the dates indicated below:

 

March 31, 2013

   Carrying
Amount
     Total Fair Value      Level 1      Level 2      Level 3  

Fixed maturity investments:

              

U.S. Government and Government agencies

   $ 1,991,117       $ 1,991,117       $ 1,641,078       $ 350,039       $   

Non-U.S. Government and Government agencies

     261,191         261,191                 261,191           

States, municipalities and political subdivisions

     33,825         33,825                 33,825           

Corporate debt

     2,217,179         2,217,179                 2,217,179           

Mortgage-backed

     1,560,310         1,560,310                 1,404,890         155,420   

Asset-backed

     394,992         394,992                 354,089         40,903   
  

 

 

    

 

 

          

Total fixed maturity investments

     6,458,614         6,458,614            
  

 

 

    

 

 

          

Equity securities

     593,562         593,562         535,775                 57,787   

Other invested assets

     710,140         710,140                         710,140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 7,762,316       $ 7,762,316       $ 2,176,853       $ 4,621,213       $ 964,250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets:

              

Foreign exchange contracts

   $ 2,835       $ 2,835       $       $ 2,835       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

              

Foreign exchange contracts

   $ 2,627       $ 2,627       $       $ 2,627       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Senior notes

   $ 798,284       $ 929,872       $       $ 929,872       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

December 31, 2012

   Carrying
Amount
     Total Fair Value      Level 1      Level 2      Level 3  

Fixed maturity investments:

              

U.S. Government and Government agencies

   $ 1,865,913       $ 1,865,913       $ 1,529,158       $ 336,755       $   

Non-U.S. Government and Government agencies

     261,627         261,627                 261,627           

States, municipalities and political subdivisions

     40,444         40,444                 40,444           

Corporate debt

     2,089,202         2,089,202                 2,089,202           

Mortgage-backed

     1,958,373         1,958,373                 1,790,548         167,825   

Asset-backed

     410,895         410,895                 348,649         62,246   
  

 

 

    

 

 

          

Total fixed maturity investments

     6,626,454         6,626,454            
  

 

 

    

 

 

          

Equity securities

     523,949         523,949         469,269                 54,680   

Other invested assets

     655,888         655,888                         655,888   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 7,806,291       $ 7,806,291       $ 1,998,427       $ 4,867,225       $ 940,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets:

              

Foreign exchange contracts

   $ 1,713       $ 1,713       $       $ 1,713       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

              

Foreign exchange contracts

   $ 2,656       $ 2,656       $       $ 2,656       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Senior notes

   $ 798,215       $ 918,627       $       $ 918,627       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other invested assets excluded assets that the Company did not measure at fair value related to the Company’s investments that are accounted for using the equity method of accounting. Asset and liability derivatives relating to foreign exchange contracts and interest rate futures are classified within “other assets” or “accounts payable and accrued liabilities” on the consolidated balance sheets.

The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of the balance sheet date.

U.S. Government and Government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company’s U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.

Non-U.S. Government and Government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.

States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.

Corporate debt: Comprised of bonds issued by corporations that are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-term are priced using spread above the London Interbank Offered Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

Mortgage-backed: Primarily comprised of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agencies. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market or broker-dealer quotes. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

Equity securities: Comprised of common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Non-U.S. mutual funds where the net asset value is not provided on a daily basis are included in the Level 3 fair value hierarchy.

Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value of the funds as reported by the fund manager that the Company believes is an unobservable input, and as such, the fair values of those funds are included in the Level 3 fair value hierarchy. The Company does not measure investments that are accounted for using the equity method of accounting at fair value.

Derivative instruments: The fair value of foreign exchange contracts and interest rate futures are priced from quoted market prices for similar exchange-traded derivatives and pricing valuation models that utilize independent market data inputs. The fair value of derivatives are included in the Level 2 fair value hierarchy.

Senior notes: The fair value of the senior notes is based on reported trades. The fair value of the senior notes is included in the Level 2 fair value hierarchy.

The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, goodwill and intangible assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:

Investments accounted for using the equity method: When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using discounted cash flow models.

Goodwill and intangible assets: The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but at least annually for goodwill and indefinite-lived intangibles. If the Company determines that goodwill and intangible assets may be impaired, the Company uses techniques, including discounted expected future cash flows and market multiple models, to measure fair value.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3):

 

     Other invested assets     Mortgage-backed     Asset-backed     Equities  

Three Months Ended March 31, 2013

        

Opening balance

   $ 655,888      $ 167,825      $ 62,246      $ 54,680   

Realized and unrealized gains (losses) included in net income

     32,253        (1,189     (97     3,107   

Purchases

     73,210               2,461          

Sales

     (51,211     (21,645     (16,622       

Transfers into Level 3 from Level 2

            19,813                 

Transfers out of Level 3 into Level 2(1)

            (9,384     (7,085       
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 710,140      $ 155,420      $ 40,903      $ 57,787   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2012

        

Opening balance

   $ 540,409      $ 249,204      $ 94,745      $   

Realized and unrealized gains included in net income

     15,523        2,590        978          

Purchases

     1,050        9,213        34,813          

Sales

     (34,917     (81,862     (16,009       

Transfers into Level 3 from Level 2

            4,981        129,926          

Transfers out of Level 3 into Level 2(1)

            (5,752     (2,059       
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 522,065      $ 178,374      $ 242,394      $   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Transfers out of Level 3 are primarily attributable to the availability of market observable information.

The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs, such securities have been transferred to the Level 3 fair value hierarchy. The Company believes the prices obtained from the broker-dealers are the best estimate of fair value of the securities being priced as the broker-dealers are typically involved in the initial pricing of the security, and the Company has compared the price per the broker-dealer to other pricing sources and noted no material differences. The Company recognizes transfers between levels at the end of the reporting period. There were no transfers between Level 1 and Level 2 during the period.

The Company’s external investment accounting service provider receives prices from internationally recognized independent pricing services to measure the fair values of its fixed maturity investments. Pricing sources are evaluated and selected in a manner to ensure that the most reliable sources are used. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. The Company obtains multiple quotes for the majority of its securities. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each pricing service has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing service uses observable market inputs, including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value.

All of the Company’s securities classified as Level 3, other than investments in other invested assets, are valued based on unadjusted broker-dealer quotes. This includes less liquid securities such as lower quality asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The primary valuation inputs include monthly payment information, the probability of default, loss severity rates and estimated prepayment rates. Significant changes in these inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity in an event of default and prepayment rates.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

The Company records the unadjusted price provided and validates this price through a process that includes, but is not limited to, monthly and/or quarterly: (i) comparison of prices between two independent sources, with significant differences requiring additional price sources; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to their target benchmark, with significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value, including a review of the inputs used for pricing; (iv) comparing the price to the Company’s knowledge of the current investment market; and (v) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company’s external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 report) in conjunction with regular discussion and analysis of the investment portfolio’s structure and performance.

7. RESERVE FOR LOSSES AND LOSS EXPENSES

The reserve for losses and loss expenses consists of the following:

 

     March 31,
2013
     December 31,
2012
 

Outstanding loss reserves

   $ 1,538,233       $ 1,539,114   

Reserves for losses incurred but not reported

     4,134,987         4,106,435   
  

 

 

    

 

 

 

Reserve for losses and loss expenses

   $ 5,673,220       $ 5,645,549   
  

 

 

    

 

 

 

The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.

 

     Three Months Ended
March 31,
 
     2013     2012  

Gross liability at beginning of period

   $ 5,645,549      $ 5,225,143   

Reinsurance recoverable at beginning of period

     (1,141,110     (1,002,919
  

 

 

   

 

 

 

Net liability at beginning of period

     4,504,439        4,222,224   
  

 

 

   

 

 

 

Net losses incurred related to:

    

Current year

     299,248        264,684   

Prior years

     (44,070     (39,482
  

 

 

   

 

 

 

Total incurred

     255,178        225,202   
  

 

 

   

 

 

 

Net paid losses related to:

    

Current year

     3,581        1,614   

Prior years

     241,121        175,520   
  

 

 

   

 

 

 

Total paid

     244,702        177,134   
  

 

 

   

 

 

 

Foreign exchange revaluation

     (5,198     4,346   
  

 

 

   

 

 

 

Net liability at end of period

     4,509,717        4,274,638   

Reinsurance recoverable at end of period

     1,163,503        1,056,780   
  

 

 

   

 

 

 

Gross liability at end of period

   $ 5,673,220      $ 5,331,418   
  

 

 

   

 

 

 

For the three months ended March 31, 2013, the Company had net favorable reserve development in its international and reinsurance segments due to actual loss emergence being lower than initially expected. The U.S. insurance segment had net unfavorable reserve development primarily due to adverse loss emergence trends for the 2011 and 2012 loss years for certain errors and omissions and directors’ and officers’ classes of business.

For the three months ended March 31, 2012, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. Net favorable reserve development was recognized in each segment, primarily related to the general casualty, professional liability and healthcare insurance and reinsurance lines of business.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

While the Company has experienced favorable development in its insurance and reinsurance lines, there is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. It is not appropriate to extrapolate future redundancies based on prior years’ development. The methodology of estimating loss reserves is periodically reviewed to ensure that the key assumptions used in the actuarial models continue to be appropriate.

8. INCOME TAXES

Under Swiss law, a resident company is subject to income tax at the federal, cantonal and communal levels that is levied on net income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. Allied World Switzerland is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, Allied World Switzerland is subject to Swiss income tax only at the federal level. Allied World Switzerland is a resident of the Canton of Zug and, as such, is subject to an annual cantonal and communal capital tax on the taxable equity of Allied World Switzerland. Allied World Switzerland has a Swiss operating company resident in the Canton of Zug. The operating company is subject to federal, cantonal and communal income tax and to annual cantonal and communal capital tax.

Under current Bermuda law, Allied World Assurance Company Holdings, Ltd (“Allied World Bermuda”) and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Allied World Bermuda and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Allied World Bermuda and Allied World Assurance Company, Ltd will be exempted until March 2035.

Certain subsidiaries of Allied World Switzerland file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom, Ireland, Switzerland, Hong Kong and Singapore. To the best of the Company’s knowledge, there are no income tax examinations pending by any tax authority.

Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12 months of March 31, 2013.

9. SHAREHOLDERS’ EQUITY

a) Authorized shares

The issued share capital consists of the following:

 

     March 31,
2013
     December 31,
2012
 

Common shares issued and fully paid, 2013: CHF 12.30 per share; 2012: CHF 12.64 per share

     35,937,751         36,369,868   
  

 

 

    

 

 

 

Share capital at end of period

   $ 436,587       $ 454,980   
  

 

 

    

 

 

 

 

     Three Months Ended
March 31, 2013
 

Shares issued at beginning of period

     36,369,868   

Shares cancelled

     (432,117
  

 

 

 

Total shares issued at end of period

     35,937,751   
  

 

 

 

Treasury shares issued at beginning of period

     1,572,087   

Shares repurchased

     432,117   

Shares issued out of treasury

     (260,697

Shares cancelled

     (432,117
  

 

 

 

Total treasury shares at end of period

     1,311,390   
  

 

 

 

Total shares outstanding at end of period

     34,626,361   
  

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

During the three months ended March 31, 2013, 432,117 voting shares repurchased and designated for cancellation were constructively retired and cancelled.

As of March 31, 2013, Allied World Switzerland’s articles of association authorized its Board of Directors to increase the share capital by a maximum amount of 20% of the share capital registered in the commercial register up to CHF 92,259 or 7,500,728 voting shares, and create conditional capital of 5,200,000 voting shares.

b) Dividends

The Company paid the following dividend during the three months ended March 31, 2013:

 

Dividend Paid    Partial
Par Value
Reduction
Per Share
     Dividend
Per
Share
     Total
Amount
Paid
 

March 12, 2013

     CHF  0.34       $ 0.375       $ 12,981   

On May 3, 2012, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution by way of par value reductions. The aggregate reduction amount was paid to shareholders in four installments of $0.375 per share, with the last of such quarterly dividend payments being made on March 12, 2013.

c) Share Repurchases

In May 2012, the Company established a new share repurchase program in order to repurchase up to $500,000 of its common shares. Repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position, legal requirements and other factors. Under the terms of this new share repurchase program, common shares repurchased shall be designated for cancellation at acquisition and shall be cancelled upon shareholder approval.

Shares repurchased by the Company and not designated for cancellation are classified as “Treasury shares, at cost” on the consolidated balance sheets. The Company will issue shares out of treasury principally related to the Company’s employee benefit plans. Shares repurchased and designated for cancellation are constructively retired and recorded as a share cancellation. See Note 15.

The Company’s share repurchases were as follows:

 

     Three Months Ended
March 31,
 
     2013      2012  

Common shares repurchased

     432,117         1,430,804   

Total cost of shares repurchased

   $ 36,245       $ 93,023   

Average price per share

   $ 83.88       $ 65.01   

10. EMPLOYEE BENEFIT PLANS

a) Restricted stock units and performance-based equity awards

Restricted stock units (“RSUs”) vest pro-rata over four years from the date of grant or in the fourth or fifth year from the date of grant. The compensation expense for the RSUs is based on the fair market value of Allied World Switzerland’s common shares at the date of grant. The Company estimates the expected forfeitures of RSUs at the date of grant and recognizes compensation expense only for those awards that the Company expects to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

Performance-based equity awards represent the right to receive a number of common shares in the future, based upon the achievement of established performance criteria during an applicable performance period. For the performance-based equity awards granted in 2013, 2012 and 2011, the Company anticipates that the performance goals are likely to be achieved. Accordingly, these awards are expensed at 100% of the fair market value of Allied World Switzerland’s common shares on the date of grant. The expense is recognized over the performance period.

The activity related to the Company’s RSUs and performance-based equity awards is as follows:

 

     RSUs     Performance-based Awards  

Three Months Ended March 31, 2013

   Number of
Awards
    Weighted
Average
Grant Date
Fair Value
    Number of
Awards
    Weighted
Average
Grant Date
Fair Value
 

Outstanding at beginning of period

     135,123      $ 46.79        442,639      $ 54.32   

Granted

     6,439        87.58        65,523        87.73   

Additional awards granted due to achievement of performance criteria

                   7,083        46.05   

Fully vested

     (50,403     (50.56     (243,183     (46.05
  

 

 

     

 

 

   

Outstanding at end of period

     91,159      $ 49.35        272,062      $ 69.54   
  

 

 

     

 

 

   

b) Cash-equivalent stock awards

As part of the Company’s annual year-end compensation awards, the Company granted both awards classified as equity and cash-equivalent stock awards. The cash-equivalent awards were granted to employees who received RSUs and performance-based equity awards and were granted in lieu of granting the full award as a stock-based award. The cash-equivalent RSU awards vest pro-rata over four years from the date of grant. The cash-equivalent performance-based equity awards vest after a three-year performance period. The amount payable per unit awarded will be equal to the price per share of Allied World Switzerland’s common shares, and as such the Company measures the value of the award each reporting period based on the period ending share price. The effects of changes in the share price at each period end during the service period are recognized as changes in compensation expense ratably over the service period. The liability is included in “accounts payable and accrued liabilities” in the consolidated balance sheets and changes in the liability are recorded in “general and administrative expenses” in the consolidated income statements.

The activity related to the Company’s cash-equivalent RSUs and performance-based equity awards is as follows:

 

     RSUs     Performance-based Awards  

Three Months Ended March 31, 2013

   Number of
Awards
    Weighted
Average
Grant Date
Fair Value
    Number of
Awards
    Weighted
Average
Grant Date
Fair Value
 

Outstanding at beginning of period

     610,537      $ 59.86        407,504      $ 57.26   

Granted

     313,207        87.73        98,279        87.73   

Additional awards granted due to achievement of performance criteria

                   4,722        46.05   

Forfeited

     (9,631     (65.31              

Fully vested

     (212,361     (56.14     (162,122     (46.05
  

 

 

     

 

 

   

Outstanding at end of period

     701,752      $ 73.35        348,383      $ 70.92   
  

 

 

     

 

 

   

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

c) Stock compensation expense

The following table shows the total stock related compensation expense relating to the stock options, RSUs and performance-based equity awards and cash-equivalent awards:

 

     Three Months Ended
March 31,
 
     2013      2012  

Stock options

   $ 1,335       $ 1,687   

RSUs and performance-based equity awards

     2,660         3,784   

Cash-equivalent stock awards

     12,756         8,198   
  

 

 

    

 

 

 

Total

   $ 16,751       $ 13,669   
  

 

 

    

 

 

 

11. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share:

 

     Three Months Ended
March 31,
 
     2013      2012  

Basic earnings per share:

     

Net income

   $ 158,992       $ 218,156   

Weighted average common shares outstanding

     34,613,606         37,205,166   
  

 

 

    

 

 

 

Basic earnings per share

   $ 4.59       $ 5.86   
  

 

 

    

 

 

 

 

     Three Months Ended
March 31,
 
     2013      2012  

Diluted earnings per share:

     

Net income

   $ 158,992       $ 218,156   

Weighted average common shares outstanding

     34,613,606         37,205,166   

Share equivalents:

     

Options

     482,207         378,392   

RSUs and performance-based equity awards

     335,575         701,077   

Employee share purchase plan

     455           
  

 

 

    

 

 

 

Weighted average common shares and common share equivalents outstanding — diluted

     35,431,843         38,284,635   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 4.49       $ 5.70   
  

 

 

    

 

 

 

For the three months ended March 31, 2013 and 2012, a weighted average of 333 and 358,144 employee stock options and RSUs, respectively, were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

12. SEGMENT INFORMATION

The determination of reportable segments is based on how senior management monitors the Company’s underwriting operations. Management monitors the performance of its direct underwriting operations based on the geographic location of the Company’s offices, the markets and customers served and the type of accounts written. The Company is currently organized into three operating segments: U.S. insurance, international insurance and reinsurance. All product lines fall within these classifications.

The U.S. insurance segment includes the Company’s direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts. The international insurance segment includes the Company’s direct insurance operations in Bermuda, Europe, Singapore and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts from the Bermuda office and direct property and specialty casualty insurance to our non-North American domiciled accounts from the European, Singapore and Hong Kong offices. The reinsurance segment includes the Company’s reinsurance operations in the United States, Bermuda, Europe, Singapore and Hong Kong. This segment provides reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. The Company presently writes reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.

Responsibility and accountability for the results of underwriting operations are assigned by major line of business within each segment. Because the Company does not manage its assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written.

Management measures results for each segment on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio” and the “combined ratio.” The “loss and loss expense ratio” is derived by dividing net losses and loss expenses by net premiums earned. The “acquisition cost ratio” is derived by dividing acquisition costs by net premiums earned. The “general and administrative expense ratio” is derived by dividing general and administrative expenses by net premiums earned. The “combined ratio” is the sum of the “loss and loss expense ratio,” the “acquisition cost ratio” and the “general and administrative expense ratio.”

The following tables provide a summary of the segment results:

 

Three Months Ended March 31, 2013

   U.S. Insurance     International
Insurance
    Reinsurance     Total  

Gross premiums written

   $ 256,018      $ 128,516      $ 452,547      $ 837,081   

Net premiums written

     192,253        77,745        425,054        695,052   

Net premiums earned

     188,439        84,214        190,575        463,228   

Net losses and loss expenses

     (133,324     (28,935     (92,919     (255,178

Acquisition costs

     (23,128     849        (34,406     (56,685

General and administrative expenses

     (39,596     (24,789     (18,295     (82,680
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting (loss) income

     (7,609     31,339        44,955        68,685   

Net investment income

           33,388   

Net realized investment gains

           79,637   

Amortization of intangible assets

           (633

Interest expense

           (14,134

Foreign exchange loss

           (2,518
        

 

 

 

Income before income taxes

         $ 164,425   
        

 

 

 

Loss and loss expense ratio

     70.8     34.4     48.8     55.1

Acquisition cost ratio

     12.3     (1.0 %)      18.1     12.2

General and administrative expense ratio

     21.0     29.4     9.6     17.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     104.1     62.8     76.5     85.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

Three Months Ended March 31, 2012

   U.S. Insurance     International
Insurance
    Reinsurance     Total  

Gross premiums written

   $ 204,211      $ 113,590      $ 363,128      $ 680,929   

Net premiums written

     153,846        72,609        362,498        588,953   

Net premiums earned

     153,358        79,871        168,661        401,890   

Net losses and loss expenses

     (97,704     (38,100     (89,398     (225,202

Acquisition costs

     (19,972     528        (27,694     (47,138

General and administrative expenses

     (31,044     (22,401     (16,921     (70,366
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting income

     4,638        19,898        34,648        59,184   

Net investment income

           47,209   

Net realized investment gains

           133,581   

Amortization of intangible assets

           (633

Interest expense

           (13,756

Foreign exchange gain

           81   
        

 

 

 

Income before income taxes

         $ 225,666   
        

 

 

 

Loss and loss expense ratio

     63.7     47.7     53.0     56.0

Acquisition cost ratio

     13.0     (0.7 %)      16.4     11.7

General and administrative expense ratio

     20.2     28.0     10.0     17.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     96.9     75.0     79.4     85.2
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows an analysis of the Company’s gross premiums written by geographic location of the Company’s subsidiaries. All intercompany premiums have been eliminated.

 

     Three Months Ended
March 31,
 
     2013      2012  

United States

   $ 478,443       $ 388,971   

Bermuda

     228,672         182,163   

Europe

     86,509         75,376   

Singapore

     38,113         29,183   

Hong Kong

     5,344         5,236   
  

 

 

    

 

 

 

Total gross premiums written

   $ 837,081       $ 680,929   
  

 

 

    

 

 

 

Europe includes gross premiums written attributable to Switzerland of $40,806 and $29,364 for the three months ended March 31, 2013 and 2012, respectively.

13. COMMITMENTS AND CONTINGENCIES

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. These legal proceedings generally relate to claims asserted by or against the Company in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under these proceedings are included in the reserve for losses and loss expenses in the Company’s consolidated balance sheets. As of March 31, 2013, the Company was not a party to any material legal proceedings arising outside the ordinary course of business that management believes will have a material adverse effect on the Company’s results of operations, financial position or cash flow.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

14. CONDENSED CONSOLIDATED GUARANTOR FINANCIAL STATEMENTS

The following tables present unaudited condensed consolidating financial information as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 for Allied World Switzerland (the “Parent Guarantor”) and Allied World Bermuda (the “Subsidiary Issuer”). The Subsidiary Issuer is a direct 100%-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees the senior notes issued by the Subsidiary Issuer.

Unaudited Condensed Consolidating Balance Sheet:

 

As of March 31, 2013

   Allied World
Switzerland
(Parent
Guarantor)
    Allied World
Bermuda
(Subsidiary
Issuer)
    Other Allied
World
Subsidiaries
     Consolidating
Adjustments
    Allied World
Switzerland
Consolidated
 

ASSETS:

           

Investments

   $      $      $ 7,890,779       $      $ 7,890,779   

Cash and cash equivalents

     33,015        17,183        612,383                662,581   

Insurance balances receivable

                   667,499                667,499   

Funds held

                   370,580                370,580   

Reinsurance recoverable

                   1,163,503                1,163,503   

Net deferred acquisition costs

                   142,151                142,151   

Goodwill and intangible assets

                   319,108                319,108   

Balances receivable on sale of investments

                   219,260                219,260   

Investments in subsidiaries

     3,411,261        4,396,024                (7,807,285       

Due (to) from subsidiaries

     (11,979     (7,225     19,204                  

Other assets

     1,873        5,735        473,009                480,617   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,434,170      $ 4,411,717      $ 11,877,476       $ (7,807,285   $ 11,916,078   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES:

           

Reserve for losses and loss expenses

   $      $      $ 5,673,220       $      $ 5,673,220   

Unearned premiums

                   1,465,013                1,465,013   

Reinsurance balances payable

                   118,461                118,461   

Balances due on purchases of investments

                   354,289                354,289   

Senior notes

            798,284                       798,284   

Other liabilities

     2,207        12,619        60,022                74,848   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     2,207        810,903        7,671,005                8,484,115   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     3,431,963        3,600,814        4,206,471         (7,807,285     3,431,963   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,434,170      $ 4,411,717      $ 11,877,476       $ (7,807,285   $ 11,916,078   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

21


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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

As of December 31, 2012

   Allied World
Switzerland
(Parent
Guarantor)
    Allied World
Bermuda
(Subsidiary
Issuer)
    Other Allied
World
Subsidiaries
     Consolidating
Adjustments
    Allied World
Switzerland
Consolidated
 

ASSETS:

           

Investments

   $      $      $ 7,933,937       $      $ 7,933,937   

Cash and cash equivalents

     19,997        11,324        650,558                681,879   

Insurance balances receivable

                   510,532                510,532   

Funds held

                   336,368                336,368   

Reinsurance recoverable

                   1,141,110                1,141,110   

Net deferred acquisition costs

                   108,010                108,010   

Goodwill and intangible assets

                   319,741                319,741   

Balances receivable on sale of investments

                   418,879                418,879   

Investments in subsidiaries

     3,337,446        4,768,769                (8,106,215       

Due (to) from subsidiaries

     (23,864     (7,173     31,037                  

Other assets

     1,499        6,081        571,910                579,490   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,335,078      $ 4,779,001      $ 12,022,082       $ (8,106,215   $ 12,029,946   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES:

           

Reserve for losses and loss expenses

   $      $      $ 5,645,549       $      $ 5,645,549   

Unearned premiums

                   1,218,021                1,218,021   

Reinsurance balances payable

                   136,264                136,264   

Balances due on purchases of investments

                   759,934                759,934   

Senior notes

            798,215                       798,215   

Other liabilities

     8,743        17,727        119,158                145,628   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     8,743        815,942        7,878,926                8,703,611   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     3,326,335        3,963,059        4,143,156         (8,106,215     3,326,335   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,335,078      $ 4,779,001      $ 12,022,082       $ (8,106,215   $ 12,029,946   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Unaudited Condensed Consolidating Income Statement:

 

Three Months Ended March 31, 2013

   Allied World
Switzerland
(Parent
Guarantor)
    Allied World
Bermuda
(Subsidiary
Issuer)
    Other Allied
World
Subsidiaries
    Consolidating
Adjustments
    Allied World
Switzerland
Consolidated
 

Net premiums earned

   $      $      $ 463,228      $      $ 463,228   

Net investment income

     7        2        33,379               33,388   

Net realized investment losses

                   79,637               79,637   

Net losses and loss expenses

                   (255,178            (255,178

Acquisition costs

                   (56,685            (56,685

General and administrative expenses

     (10,986     (457     (71,237            (82,680

Amortization of intangible assets

                   (633            (633

Interest expense

            (13,830     (304            (14,134

Foreign exchange gain (loss)

     272        (95     (2,695            (2,518

Income tax (expense) benefit

                   (5,433            (5,433

Equity in earnings of consolidated subsidiaries

     169,699        181,480               (351,179       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 158,992      $ 167,100      $ 184,079      $ (351,179   $ 158,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ 158,992      $ 167,100      $ 184,079      $ (351,179   $ 158,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

Three Months Ended March 31, 2012

   Allied World
Switzerland
(Parent
Guarantor)
    Allied World
Bermuda
(Subsidiary
Issuer)
    Other Allied
World
Subsidiaries
    Consolidating
Adjustments
    Allied World
Switzerland
Consolidated
 

Net premiums earned

   $      $      $ 401,890      $      $ 401,890   

Net investment income

     9        3        47,197               47,209   

Net realized investment gains

                   133,581               133,581   

Net losses and loss expenses

                   (225,202            (225,202

Acquisition costs

                   (47,138            (47,138

General and administrative expenses

     (3,956     (1,152     (65,258            (70,366

Amortization of intangible assets

                   (633            (633

Interest expense

            (13,756                   (13,756

Foreign exchange gain (loss)

     89        (25     17               81   

Income tax (expense) benefit

     444               (7,954            (7,510

Equity in earnings of consolidated subsidiaries

     221,570        234,307               (455,877       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 218,156      $ 219,377      $ 236,500      $ (455,877   $ 218,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on investments arising during the period net of applicable deferred income tax benefit of $28

     (52            (52     52        (52

Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax

     (12,107            (12,107     12,107        (12,107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (12,159            (12,159     12,159        (12,159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ 205,997      $ 219,377      $ 224,341      $ (443,718   $ 205,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited Condensed Consolidating Cash Flows:

 

Three Months Ended March 31, 2013

   Allied World
Switzerland
(Parent
Guarantor)
    Allied World
Bermuda
(Subsidiary
Issuer)
     Other Allied
World
Subsidiaries
    Consolidating
Adjustments
     Allied World
Switzerland
Consolidated
 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 59,772      $ 5,859       $ (54,117   $       $ 11,514   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:

            

Purchases trading securities

                    (1,330,735             (1,330,735

Purchases of other invested assets

                    (54,026             (54,026

Sales of available for sale securities

                                     

Sales of trading securities

                    1,188,307                1,188,307   

Sales of other invested assets

                    97,989                97,989   

Other

                    114,407                114,407   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) investing activities

                    15,942                15,942   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:

            

Partial par value reduction

     (12,981                            (12,981

Proceeds from the exercise of stock options

     2,472                               2,472   

Share repurchases

     (36,245                            (36,245
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     (46,754                            (46,754
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     13,018        5,859         (38,175             (19,298

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     19,997        11,324         650,558                681,879   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 33,015      $ 17,183       $ 612,383      $  —       $ 662,581   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands, except share, per share, percentage and ratio information)

 

Three Months Ended March 31, 2012

   Allied World
Switzerland
(Parent
Guarantor)
    Allied World
Bermuda
(Subsidiary
Issuer)
     Other Allied
World
Subsidiaries
    Consolidating
Adjustments
     Allied World
Switzerland
Consolidated
 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

   $ 86,607      $ 20,789       $ 35,666      $  —       $ 143,062   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:

            

Purchases of available for sale securities

                                     

Purchases of trading securities

                    (1,138,331             (1,138,331

Purchases of other invested assets

                    (1,050             (1,050

Sales of available for sale securities

                    116,303                116,303   

Sales of trading securities

                    1,352,409                1,352,409   

Sales of other invested assets

                    28,569                28,569   

Other

                    (205,073             (205,073
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) investing activities

                    152,827                152,827   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:

            

Partial par value reduction

     (14,208                            (14,208

Proceeds from the exercise of stock options

     3,332                               3,332   

Share repurchases

     (93,023                            (93,023

Repurchase of founder warrants

                                     

Other

                                     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     (103,899                            (103,899
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (17,292     20,789         188,493                191,990   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     112,672        8,886         512,438                633,996   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 95,380      $ 29,675       $ 700,931      $       $ 825,986   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Notes to Parent Company Condensed Financial Information

a) Dividends

Allied World Switzerland received cash dividends from its subsidiaries of $90,000 and $200,000 for the three months ended March 31, 2013 and 2012, respectively.

15. SUBSEQUENT EVENTS

On May 2, 2013, Allied World Switzerland’s shareholders approved the following proposals:

Allied World Switzerland will pay dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution amount will be paid to shareholders in quarterly installments of $0.50 per share. The Company expects to distribute such dividends in July 2013, October 2013, January 2014 and April 2014. Any declaration and payment of dividends by the Company will depend upon the Company’s results of operations, financial condition and cash requirements, and will be subject to Swiss law and other related factors described in the Company’s Proxy Statement for its 2013 Annual Shareholder Meeting.

The Company will cancel 29,240 non-voting common shares held in treasury and 1,538,686 common shares previously repurchased and constructively retired, subject to a required filing with the Swiss Commercial Register in Zug.

 

24


Table of Contents

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. References in this Form 10-Q to the terms “we,” “us,” “our,” “the company” or other similar terms mean the consolidated operations of Allied World Assurance Company Holdings, AG, a Swiss holding company, and our consolidated subsidiaries, unless the context requires otherwise. References in this Form 10-Q to the term “Allied World Switzerland” or “Holdings” means only Allied World Assurance Company Holdings, AG. References to “Allied World Bermuda” mean only Allied World Assurance Company Holdings, Ltd, a Bermuda holding company. References to “our insurance subsidiaries” may include our reinsurance subsidiaries. References in this Form 10-Q to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland. References in this Form 10-Q to Holdings’ “common shares” mean its registered voting shares.

Note on Forward-Looking Statement

This Form 10-Q and other publicly available documents may include, and our officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections and statements may address, among other things, our strategy for growth, product development, financial results and reserves. Actual results and financial condition may differ, possibly materially, from these projections and statements and therefore you should not place undue reliance on them. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in “Risk Factors” in Item 1A. of Part I of our 2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2013 (the “2012 Form 10-K”). We are under no obligation (and expressly disclaim any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

Our Business

We write a diversified portfolio of property and casualty insurance and reinsurance internationally through our subsidiaries and branches based in Bermuda, Europe, Hong Kong, Singapore and the United States as well as our Lloyd’s Syndicate 2232. We manage our business through three operating segments: U.S. insurance, international insurance and reinsurance. As of March 31, 2013, we had approximately $11.9 billion of total assets, $3.4 billion of total shareholders’ equity and $4.2 billion of total capital, which includes shareholders’ equity and senior notes.

During the three months ended March 31, 2013, we continued to experience rate increases on property lines that had experienced significant loss activity in the prior year. We also continued to see rate improvement during the quarter on some of our casualty lines of business in certain jurisdictions. We believe that there are opportunities where certain products have attractive premium rates and that the expanded breadth of our operations allows us to target those classes of business.

Our consolidated gross premiums written increased by $156.2 million, or 22.9%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Our net income decreased by $59.2 million to $159.0 million compared to the three months ended March 31, 2012. While our underwriting results increased over the prior year, this was offset by lower net realized investment gains. Net realized investment gains decreased by $54.0 million for the three months ended March 31, 2013 compared to the same period in 2012.

 

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Table of Contents

Financial Highlights

 

     Three Months Ended March 31,  
     2013     2012  
    

($ in millions except share, per

share and percentage data)

 

Gross premiums written

   $ 837.1      $ 680.9   

Net income

     159.0        218.2   

Operating income

     84.2        91.5   

Basic earnings per share:

    

Net income

   $ 4.59      $ 5.86   

Operating income

   $ 2.43      $ 2.46   

Diluted earnings per share:

    

Net income

   $ 4.49      $ 5.70   

Operating income

   $ 2.38      $ 2.39   

Weighted average common shares outstanding:

    

Basic

     34,613,606        37,205,166   

Diluted

     35,431,843        38,284,635   

Basic book value per common share

   $ 99.11      $ 88.24   

Diluted book value per common share

   $ 96.50      $ 85.48   

Annualized return on average equity (ROAE), net income

     18.8     27.4

Annualized ROAE, operating income

     10.0     11.5

Non-GAAP Financial Measures

In presenting the company’s results, management has included and discussed certain non-GAAP financial measures, as such term is defined in Item 10(e) of Regulation S-K promulgated by the SEC. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the company’s business. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Operating income & operating income per share

Operating income is an internal performance measure used in the management of our operations and represents after-tax operational results excluding, as applicable, net realized investment gains or losses, net impairment charges recognized in earnings, net foreign exchange gain or loss, and other non-recurring items. We exclude net realized investment gains or losses, net impairment charges recognized in earnings, net foreign exchange gain or loss and any other non-recurring items from our calculation of operating income because these amounts are heavily influenced by and fluctuate in part according to the availability of market opportunities and other factors. In addition to presenting net income determined in accordance with U.S. GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations and our underlying business performance. Operating income should not be viewed as a substitute for U.S. GAAP net income. The following is a reconciliation of operating income to its most closely related U.S. GAAP measure, net income.

 

26


Table of Contents
     Three Months Ended March 31,  
     2013     2012  
    

($ in millions, except share, per

share and percentage data)

 

Net income

   $ 159.0      $ 218.2   

Add after tax effect of:

    

Net realized investment gains

     (77.3     (126.6

Foreign exchange loss (gain)

     2.5        (0.1
  

 

 

   

 

 

 

Operating income

   $ 84.2      $ 91.5   
  

 

 

   

 

 

 

Basic per share data:

    

Net income

   $ 4.59      $ 5.86   

Add after tax effect of:

    

Net realized investment gains

     (2.23     (3.40

Foreign exchange loss (gain)

     0.07          
  

 

 

   

 

 

 

Operating income

   $ 2.43      $ 2.46   
  

 

 

   

 

 

 

Diluted per share data:

    

Net income

   $ 4.49      $ 5.70   

Add after tax effect of:

    

Net realized investment gains

     (2.18     (3.31

Foreign exchange loss (gain)

     0.07          
  

 

 

   

 

 

 

Operating income

   $ 2.38      $ 2.39   
  

 

 

   

 

 

 

Diluted book value per share

We have included diluted book value per share because it takes into account the effect of dilutive securities; therefore, we believe it is an important measure of calculating shareholder returns.

 

     As of March 31,  
     2013     2012  
    

($ in millions, except share and

per share data)

 

Price per share at period end

   $ 92.72      $ 68.67   

Total shareholders’ equity

   $ 3,432.0      $ 3,245.8   

Basic common shares outstanding

     34,626,361        36,786,067   

Add:

    

Unvested restricted share units

     91,159        187,623   

Performance based equity awards

     272,062        524,888   

Employee share purchase plan

     5,616          

Dilutive options outstanding

     1,166,137        1,429,333   

Weighted average exercise price per share

   $ 47.34      $ 45.98   

Deduct:

    

Options bought back via treasury method

     (595,451     (957,064
  

 

 

   

 

 

 

Common shares and common share equivalents outstanding

     35,565,884        37,970,847   

Basic book value per common share

   $ 99.11      $ 88.24   

Diluted book value per common share

   $ 96.50      $ 85.48   

 

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Table of Contents

Annualized return on average equity

Annualized return on average shareholders’ equity (“ROAE”) is calculated using average shareholders’ equity, excluding the average after tax unrealized gains or losses on investments. We present ROAE as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of our financial information.

Annualized operating return on average shareholders’ equity is calculated using operating income and average shareholders’ equity, excluding the average after tax unrealized gains or losses on investments.

 

     Three Months Ended
March 31,
 
     2013     2012  
     ($ in millions except
percentage data)
 

Opening shareholders’ equity

   $ 3,326.3      $ 3,149.0   

Deduct: accumulated other comprehensive income

            (14.5
  

 

 

   

 

 

 

Adjusted opening shareholders’ equity

   $ 3,326.3      $ 3,134.5   

Closing shareholders’ equity

   $ 3,432.0      $ 3,245.8   

Deduct: accumulated other comprehensive income

            (2.3
  

 

 

   

 

 

 

Adjusted closing shareholders’ equity

   $ 3,432.0      $ 3,243.5   

Average shareholders’ equity

   $ 3,379.1      $ 3,189.0   

Net income available to shareholders

   $ 159.0      $ 218.2   

Annualized return on average shareholders’ equity — net income available to shareholders

     18.8     27.4
  

 

 

   

 

 

 

Operating income available to shareholders

   $ 84.2      $ 91.5   

Annualized return on average shareholders’ equity — operating income available to shareholders

     10.0     11.5
  

 

 

   

 

 

 

 

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Table of Contents

Relevant Factors

Revenues

We derive our revenues primarily from premiums on our insurance policies and reinsurance contracts, net of any reinsurance or retrocessional coverage purchased. Insurance and reinsurance premiums are a function of the amounts and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, are known. In addition, our revenues include income generated from our investment portfolio, consisting of net investment income and net realized investment gains or losses. Investment income is principally derived from interest and dividends earned on investments, partially offset by investment management expenses and fees paid to our custodian bank. Net realized investment gains or losses include gains or losses from the sale of investments, as well as the change in the fair value of investments that we mark-to-market through net income.

Expenses

Our expenses consist largely of net losses and loss expenses, acquisition costs and general and administrative expenses. Net losses and loss expenses incurred are comprised of three main components:

 

   

losses paid, which are actual cash payments to insureds and reinsureds, net of recoveries from reinsurers;

 

   

outstanding loss or case reserves, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and

 

   

reserves for losses incurred but not reported, or “IBNR”, which are reserves (in addition to case reserves) established by us that we believe are needed for the future settlement of claims. The portion recoverable from reinsurers is deducted from the gross estimated loss.

Acquisition costs are comprised of commissions, brokerage fees and insurance taxes. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business. Acquisition costs are reported after (1) deducting commissions received on ceded reinsurance, (2) deducting the part of acquisition costs relating to unearned premiums and (3) including the amortization of previously deferred acquisition costs.

General and administrative expenses include personnel expenses including stock-based compensation expense, rent expense, professional fees, information technology costs and other general operating expenses.

Ratios

Management measures results for each segment on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio,” “expense ratio” and the “combined ratio.” Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written. The loss and loss expense ratio is derived by dividing net losses and loss expenses by net premiums earned. The acquisition cost ratio is derived by dividing acquisition costs by net premiums earned. The general and administrative expense ratio is derived by dividing general and administrative expenses by net premiums earned. The expense ratio is the sum of the acquisition cost ratio and the general and administrative expense ratio. The combined ratio is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.

Critical Accounting Policies

It is important to understand our accounting policies in order to understand our financial position and results of operations. Our unaudited condensed consolidated financial statements reflect determinations that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If events or other factors cause actual results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to reserves for losses and loss expenses, reinsurance recoverables, premiums and acquisition costs, valuation of financial instruments and goodwill and other intangible asset impairment valuation. For a detailed discussion of our critical accounting policies, please refer to our 2012 Form 10-K. There were no material changes in the application of our critical accounting estimates subsequent to that report.

 

29


Table of Contents

Results of Operations

The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.

 

     Three Months Ended
March 31,
 
     2013     2012  
     ($ in millions)  

Revenues

    

Gross premiums written

   $ 837.1      $ 680.9   
  

 

 

   

 

 

 

Net premiums written

   $ 695.1      $ 588.9   
  

 

 

   

 

 

 

Net premiums earned

   $ 463.2      $ 401.9   

Net investment income

     33.4        47.2   

Net realized investment gains

     79.6        133.6   
  

 

 

   

 

 

 
   $ 576.2      $ 582.7   
  

 

 

   

 

 

 

Expenses

    

Net losses and loss expenses

   $ 255.1      $ 225.2   

Acquisition costs

     56.7        47.1   

General and administrative expenses

     82.7        70.4   

Amortization of intangible assets

     0.6        0.6   

Interest expense

     14.1        13.8   

Foreign exchange loss (gain)

     2.6        (0.1
  

 

 

   

 

 

 
   $ 411.8      $ 357.0   
  

 

 

   

 

 

 

Income before income taxes

     164.4        225.7   

Income tax expense

     5.4        7.5   
  

 

 

   

 

 

 

Net income

   $ 159.0      $ 218.2   
  

 

 

   

 

 

 

Ratios

    

Loss and loss expense ratio

     55.1     56.0

Acquisition cost ratio

     12.2     11.7

General and administrative expense ratio

     17.8     17.5
  

 

 

   

 

 

 

Expense ratio

     30.0     29.2
  

 

 

   

 

 

 

Combined ratio

     85.1     85.2
  

 

 

   

 

 

 

Comparison of Three Months Ended March 31, 2013 and 2012

Premiums

Gross premiums written increased by $156.2 million, or 22.9%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The overall increase in gross premiums written was primarily the result of the following:

 

   

Gross premiums written in our U.S. insurance segment increased by $51.8 million, or 25.4%. The increase in gross premiums written was primarily due to new business across existing lines that added $91.8 million during the quarter combined with premium rate increases in all lines of business and a further $3.9 million from new lines of business. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition;

 

   

Gross premiums written in our international insurance segment increased by $14.9 million, or 13.1%. We saw continued growth from new products combined with strong new business writings. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition; and

 

   

Gross premiums written in our reinsurance segment increased by $89.5 million, or 24.6%. The increase was driven by new business, from both new products and new regions, combined with increased participations on renewing business and rate increases for certain lines of business. This was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

 

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The table below illustrates our gross premiums written by underwriter location for each of the periods indicated.

 

     Three Months Ended March 31,      Dollar
Change
     Percentage
Change
 
     2013      2012        
            ($ in millions)                

United States

   $   478.4       $ 389.0       $ 89.4         23.0

Bermuda

     228.7         182.1         46.6         25.6

Europe

     86.5         75.4         11.1         14.7

Singapore

     38.1         29.2         8.9         30.5

Hong Kong

     5.4         5.2         0.2         3.8
  

 

 

    

 

 

    

 

 

    
   $ 837.1       $ 680.9       $ 156.2         22.9
  

 

 

    

 

 

    

 

 

    

Net premiums written increased by $106.2 million, or 18.0%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase in net premiums written was due to the increase in gross premiums written. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 17.0% of gross premiums written for the three months ended March 31, 2013 compared to 13.5% for the same period in 2012. The increase was primarily due to our purchase of a new collateralized retrocessional catastrophe cover for $27.5 million in our reinsurance segment, which increased the ceded percentage by 3.3 percentage points.

Net premiums earned increased by $61.3 million, or 15.3%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 as a result of higher net premiums written in 2013 and 2012.

We evaluate our business by segment, distinguishing between U.S. insurance, international insurance and reinsurance. The following table illustrates the mix of our business on both a gross premiums written and net premiums earned basis.

 

     Gross  Premiums
Written
    Net Premiums
Earned
 
     Three Months Ended March 31,     Three Months Ended March 31,  
     2013     2012     2013     2012  

U.S. insurance

     30.5     30.0     40.7     38.1

International insurance

     15.4     16.7     18.2     19.9

Reinsurance

     54.1     53.3     41.1     42.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross premiums written by our reinsurance segment typically accounts for the largest portion of gross premiums written during the first quarter of a calendar year as many reinsurance contracts have January 1st renewal dates.

Net Investment Income

Net investment income decreased by $13.8 million, or 29.2%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease was due to lower yields on our fixed maturity investments as well as an increased allocation to other invested assets that contribute to our total return but carry little or no current yield. The annualized period book yield of the investment portfolio for the three months ended March 31, 2013 and 2012 was 1.6% and 2.4%, respectively.

As of March 31, 2013, we held 9.7% of our total investments and cash equivalents in other invested assets compared to 6.2% as of March 31, 2012.

 

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Investment management expenses of $4.3 million and $4.4 million were incurred during the three months ended March 31, 2013 and 2012, respectively. Investment expenses have decreased as we have renegotiated investment management agreements with our investment advisors, or changed advisors, to manage our expenses.

As of March 31, 2013, approximately 88.5% of our fixed income investments consisted of investment grade securities. As of March 31, 2013 and December 31, 2012, the average credit rating of our fixed income portfolio was AA- as rated by Standard & Poor’s and Aa3 as rated by Moody’s.

Realized Investment Gains

Net realized investment gains were comprised of the following:

 

     Three Months Ended
March 31,
 
     2013     2012  
     ($ in millions)  

Net realized gains (losses) on sale:

    

Debt securities, trading

   $ 21.9      $ 39.2   

Equity securities

     9.8        (21.9

Other invested assets: hedge funds and private equity

     5.6        17.3   
  

 

 

   

 

 

 

Total net realized gains on sale

     37.3        34.6   
  

 

 

   

 

 

 

Net realized and unrealized (losses) gains on derivatives

     (1.0     6.7   

Mark-to-market gains (losses):

    

Debt securities, trading

     (16.5     68.5   

Equity securities

     33.0        19.8   

Other invested assets: hedge funds and private equity

     26.8        4.0   
  

 

 

   

 

 

 

Total mark-to-market gains

     43.3        92.3   
  

 

 

   

 

 

 

Net realized investment gains

   $ 79.6      $ 133.6   
  

 

 

   

 

 

 

During the three months ended March 31, 2013 and 2012, we did not recognize any net impairment charges. The total return of our investment portfolio was 1.3% and 2.0% for the three months ended March 31, 2013 and 2012, respectively.

During the three months ended March 31, 2012, we benefited from spread tightening on our fixed income portfolio which generated $107.7 million of net realized gains from sales and mark-to-market changes, compared to $5.5 million for the three months ended March 31, 2013. This decrease in the 2013 period was partially offset by the $44.9 million increase in net realized gains from sales and mark-to-market changes on our equity securities driven by the strong performance of the equity markets in the first quarter of 2013, with the S&P 500 up 12%. Net realized gains from our investments in private equity and hedge funds also increased by $11.1 million.

Net Losses and Loss Expenses

Net losses and loss expenses increased by $29.9 million, or 13.3%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The loss and loss expense ratio decreased by 0.9 percentage points for the same period. The increase in net loss and loss expenses was due to growth in net premiums earned, partially offset by higher net favorable prior year reserve development.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 64.6% and 65.8% for the three months ended March 31, 2013 and 2012, respectively. The decrease was due to $5.3 million of large reported losses for the U.S. insurance segment in 2012 that increased the loss and loss expense ratio by 1.1 percentage points.

 

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     Three Months Ended
March 31, 2013
    Three Months Ended
March 31, 2012
    Dollar     Change in
Percentage
 
     Amount     % of  NPE(1)