XNYS:AWH Allied World Assurance Co Holdings AG Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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: June 30, 2012

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 July 30, 2012, 35,773,639 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

     30   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     64   

Item 4.

  

Controls and Procedures

     66   
PART II   

Item 1.

  

Legal Proceedings

     67   

Item 1A.

  

Risk Factors

     67   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     67   

Item 3.

  

Defaults Upon Senior Securities

     67   

Item 4.

  

Mine Safety Disclosures

     67   

Item 5.

  

Other Information

     67   

Item 6.

  

Exhibits

     68   

SIGNATURES

     69   

EXHIBIT INDEX

  

 

-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 June 30, 2012 and December 31, 2011

(Expressed in thousands of United States dollars, except share and per share amounts)

 

     As of
June 30,
2012
    As of
December 31,
2011
 

ASSETS:

    

Fixed maturity investments available for sale, at fair value (amortized cost: 2012: $28,038; 2011: $226,397)

   $ 30,214     $ 244,016  

Fixed maturity investments trading, at fair value (amortized cost: 2012: $6,705,210; 2011: $6,207,991)

     6,796,109       6,254,686  

Equity securities trading, at fair value (cost: 2012: $419,366; 2011: $356,370)

     454,205       367,483  

Other invested assets trading, at fair value

     520,890       540,409  
  

 

 

   

 

 

 

Total investments

     7,801,418       7,406,594  

Cash and cash equivalents

     864,450       633,996  

Restricted cash

     239,376       82,608  

Insurance balances receivable

     845,663       652,158  

Prepaid reinsurance

     259,289       226,721  

Reinsurance recoverable

     1,073,612       1,002,919  

Accrued investment income

     30,117       38,263  

Net deferred acquisition costs

     129,818       100,334  

Goodwill

     268,376       268,376  

Intangible assets

     52,631       53,898  

Balances receivable on sale of investments

     635,727       580,443  

Net deferred tax assets

     28,477       22,646  

Other assets

     48,697       53,202  
  

 

 

   

 

 

 

Total assets

   $ 12,277,651     $ 11,122,158  
  

 

 

   

 

 

 

LIABILITIES:

    

Reserve for losses and loss expenses

   $ 5,377,518     $ 5,225,143  

Unearned premiums

     1,363,006       1,078,412  

Reinsurance balances payable

     128,306       124,539  

Balances due on purchases of investments

     1,220,246       616,728  

Senior notes

     798,080       797,949  

Dividends payable

            14,302  

Accounts payable and accrued liabilities

     106,594       116,063  
  

 

 

   

 

 

 

Total liabilities

   $ 8,993,750     $ 7,973,136  
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY:

    

Common shares: 2012: par value CHF 13.69 per share and 2011: par value CHF 14.03 per share (2012: 40,003,642; 2011: 40,003,642 shares issued and 2012: 35,942,964; 2011: 37,742,131 shares outstanding)

     543,452       557,153  

Additional paid-in capital

     52,815       78,225  

Treasury shares, at cost (2012: 4,060,678; 2011: 2,261,511)

     (264,037     (136,590

Retained earnings

     2,950,257       2,635,750  

Accumulated other comprehensive income: net unrealized gains on investments, net of tax

     1,414       14,484  
  

 

 

   

 

 

 

Total shareholders’ equity

     3,283,901       3,149,022  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 12,277,651     $ 11,122,158  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

1


Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

for the three and six months ended June 30, 2012 and 2011

(Expressed in thousands of United States dollars, except share and per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

REVENUES:

        

Gross premiums written

   $ 646,870     $ 519,598     $ 1,327,799     $ 1,080,286  

Premiums ceded

     (152,160     (123,795     (244,136     (203,612
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

     494,710       395,803       1,083,663       876,674  

Change in unearned premiums

     (64,963     (40,496     (252,026     (186,491
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     429,747       355,307       831,637       690,183  

Net investment income

     42,451       52,368       89,660       102,576  

Net realized investment gains

     8,663       58,878       142,244       109,254  
  

 

 

   

 

 

   

 

 

   

 

 

 
     480,861       466,553       1,063,541       902,013  
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES:

        

Net losses and loss expenses

     240,380       235,813       465,582       540,265  

Acquisition costs

     51,588       42,971       98,726       81,053  

General and administrative expenses

     73,979       67,201       144,345       135,157  

Amortization and impairment of intangible assets

     634       766       1,267       1,533  

Interest expense

     14,001       13,745       27,757       27,487  

Foreign exchange (gain) loss

     (1,019     1,184       (1,100     742  
  

 

 

   

 

 

   

 

 

   

 

 

 
     379,563       361,680       736,577       786,237  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     101,298       104,873       326,964       115,776  

Income tax expense

     4,947       11,073       12,457       13,356  
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

     96,351       93,800       314,507       102,420  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss:

        

Unrealized gains on investments arising during the period net of applicable deferred income tax (benefit) expense for the three months ended June 30, 2012: ($68); 2011:$1,461 and six months ended June 30, 2012:($96); 2011: $2,425

     231       13,680       179       5,636  

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

     (1,142     (23,548     (13,249     (39,676
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (911     (9,868     (13,070     (34,040
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 95,440     $ 83,932     $ 301,437     $ 68,380  
  

 

 

   

 

 

   

 

 

   

 

 

 

PER SHARE DATA

        

Basic earnings per share

   $ 2.66     $ 2.45     $ 8.56     $ 2.69  

Diluted earnings per share

   $ 2.59     $ 2.36     $ 8.41     $ 2.57  

Weighted average common shares outstanding

     36,288,596       38,346,489       36,746,881       38,061,724  

Weighted average common shares and common share equivalents outstanding

     37,189,722       39,800,753       37,395,559       39,873,418  

Dividends paid per share

   $ 0.375     $      $ 0.750     $   

See accompanying notes to the consolidated financial statements.

 

2


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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

for the six months ended June 30, 2012 and 2011

(Expressed in thousands of United States dollars)

 

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

December 31, 2011

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

Net income

                                 314,507        314,507  

Dividends — par value reduction

     (13,701                                  (13,701

Other comprehensive loss

                          (13,070             (13,070

Stock compensation

            (25,410     32,011                      6,601  

Share repurchases

                   (159,458                    (159,458
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2012

   $ 543,452     $ 52,815     $ (264,037   $ 1,414     $ 2,950,257      $ 3,283,901  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

December 31, 2010

   $ 600,055     $ 170,239     $ (112,811   $ 57,135     $ 2,361,202      $ 3,075,820  

Net income

                                 102,420        102,420  

Other comprehensive loss

                          (34,040             (34,040

Stock compensation

            (34,582     48,419                      13,837  

Share repurchase

                   (60,000                    (60,000

Repurchase of founder warrants

            (53,620                           (53,620
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2011

   $ 600,055     $ 82,037     $ (124,392   $ 23,095     $ 2,463,622      $ 3,044,417  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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 CASH FLOWS

for the six months ended June 30, 2012 and 2011

(Expressed in thousands of United States dollars)

 

     Six Months Ended
June 30,
 
     2012     2011  

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

    

Net income

   $ 314,507     $ 102,420  

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

    

Net realized gains on sales of investments

     (46,834     (52,906

Mark to market adjustments

     (94,732     (77,318

Stock compensation expense

     9,294       12,112  

Changes in:

    

Reserve for losses and loss expenses, net of reinsurance recoverables

     81,682       285,753  

Unearned premiums, net of prepaid reinsurance

     252,026       186,491  

Insurance balances receivable

     (193,505     (123,075

Reinsurance balances payable

     3,767       32,929  

Net deferred acquisition costs

     (29,484     (15,280

Net deferred tax assets

     (3,458     2,339  

Accounts payable and accrued liabilities

     (19,978     (18,629

Other items, net

     28,488       27,010  
  

 

 

   

 

 

 

Net cash provided by operating activities

     301,773       361,846  
  

 

 

   

 

 

 

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:

    

Purchases of available for sale securities

            (352

Purchases of trading securities

     (4,005,352     (4,194,787

Purchases of other invested assets

     (17,778     (240,410

Sales of available for sale securities

     214,015       560,794  

Sales of trading securities

     3,959,204       3,540,053  

Sales of other invested assets

     108,759       36,067  

Purchases of fixed assets

     (879     (2,316

Change in restricted cash

     (156,768     29,520  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     101,201       (271,431
  

 

 

   

 

 

 

CASH FLOWS USED IN FINANCING ACTIVITIES:

    

Dividends paid — partial par value reduction

     (28,003       

Proceeds from the exercise of stock options

     6,697       4,824  

Share repurchases

     (148,949     (60,000

Repurchase of founder warrants

            (53,620
  

 

 

   

 

 

 

Net cash used in financing activities

     (170,255     (108,796
  

 

 

   

 

 

 

Effect of exchange rate changes on foreign currency cash

     (2,265     2,190  

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     230,454       (16,191

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     633,996       756,995  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 864,450     $ 740,804  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

— Cash paid for income taxes

   $ 8,257     $ 433  

— Cash paid for interest expense

   $ 27,000     $ 27,000  

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, 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.

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.

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, 2011.

3. NEW ACCOUNTING PRONOUNCEMENTS

In October 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”). ASU 2010-26 clarifies what costs associated with acquiring or renewing insurance contracts can be deferred and amortized over the coverage period. Under the revised guidance of ASU 2010-26, incremental direct costs that result directly from and are essential to the insurance contract and would not have been incurred had the insurance contract not been written are costs that may be capitalized, including costs relating to activities specifically performed by the Company such as underwriting, policy issuance and processing. The Company adopted ASU 2010-26 retrospectively on January 1, 2012. The adoption of ASU 2010-26 did not have an impact on consolidated shareholders’ equity or net income as the Company had not previously capitalized costs that did not meet the requirement for capitalization of the revised standard.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 provides a consistent meaning for the term “fair value” between the FASB and International Accounting Standards Board and establishes common requirements for measuring and disclosing information related thereto. The Company adopted ASU 2011-04 prospectively on January 1, 2012. The adoption of ASU 2011-04

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

did not have an impact on consolidated shareholders’ equity or net income or the Company’s fair value measurements. Refer to Note 6 for the Company’s related disclosures.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, requires consecutive presentation of the statement of net income and other comprehensive income, and requires the presentation of reclassification adjustments on the face of the financial statements from other comprehensive income to net income. In December 2011, ASU 2011-05 was updated by ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”) to defer the presentation requirements of reclassification adjustments required by ASU 2011-05. The Company adopted ASU 2011-05 on January 1, 2012. The adoption of ASU 2011-05 and the related updates from ASU 2011-12 did not have an impact on the presentation of the financial statements.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 simplifies how goodwill is tested for impairment by permitting entities to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of the qualitative assessment will determine if an entity needs to proceed with the two-step goodwill impairment test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 on January 1, 2012. The adoption of ASU 2011-08 did not have an impact on consolidated shareholders’ equity or net income.

4. INVESTMENTS

a) Available for Sale Securities

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of the Company’s available for sale investments by category are as follows:

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair Value  
June 30, 2012                           

U.S. Government and Government agencies

   $ 28,038      $ 2,176      $      $ 30,214  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity investments, available for sale

   $ 28,038      $ 2,176      $      $ 30,214  
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

U.S. Government and Government agencies

   $ 31,309      $ 2,321      $      $ 33,630  

States, municipalities and political subdivisions

     29,128        4,351               33,479  

Corporate debt:

          

Financial institutions

     17,431        348        (292     17,487  

Industrials

     73,539        4,268               77,807  

Utilities

     74,990        6,623               81,613  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity investments, available for sale

   $ 226,397      $ 17,911      $ (292   $ 244,016  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

b) 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 (loss) (“consolidated income statements”) by category are as follows:

 

     June 30, 2012      December 31, 2011  
     Fair Value      Amortized Cost      Fair Value      Amortized Cost  

U.S. Government and Government agencies

   $ 1,715,141      $ 1,701,706      $ 1,278,265      $ 1,263,948  

Non-U.S. Government and Government agencies

     315,493        309,350        256,756        251,784  

States, municipalities and political subdivisions

     39,741        38,584        133,902        128,633  

Corporate debt:

           

Financial institutions

     961,728        946,999        1,161,904        1,174,308  

Industrials

     1,019,043        1,013,026        987,006        974,731  

Utilities

     58,173        56,718        105,564        103,262  

Residential mortgage-backed:

           

Non-agency residential

     298,355        283,739        302,827        314,077  

Agency residential

     1,710,596        1,686,022        1,183,893        1,156,913  

Commercial mortgage-backed

     260,420        252,193        331,371        326,697  

Asset-backed

     417,419        416,873        513,198        513,638  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity investments, trading

   $ 6,796,109      $ 6,705,210      $ 6,254,686      $ 6,207,991  
  

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2012      December 31, 2011  
     Fair Value      Original Cost      Fair Value      Original Cost  

Equity securities

   $ 454,205      $ 419,366      $ 367,483      $ 356,370  

Other invested assets (1)

     520,890        487,938        540,409        529,851  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 975,095      $ 907,304      $ 907,892      $ 886,221  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Within the Company’s financial statements and footnotes “other invested assets” include the Company’s investments in both hedge funds and private equity funds.

c) Contractual Maturity Dates

The contractual maturity dates of available for sale fixed maturity investments are as follows:

 

     June 30, 2012  
     Amortized Cost      Fair Value  

Due within one year

   $ 7,001      $ 7,056  

Due after one year through five years

     16,958        18,111  

Due after five years through ten years

     1,077        1,180  

Due after ten years

     3,002        3,867  
  

 

 

    

 

 

 
   $ 28,038      $ 30,214  
  

 

 

    

 

 

 

Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

d) Other Invested Assets

Included in other invested assets are the Company’s hedge fund and private equity investments. As of the balance sheet date, the Company held interests in 22 funds with a total fair value of $520,890, which comprised 5.8% of the total fair value of its investments and cash and cash equivalents. 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 1 to 3 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 that allows for redemption requests to be

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

executed in a timely manner to reduce the possibility of adversely affecting the remaining 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.

Details regarding the redemption characteristics of the other invested assets portfolio as of June 30, 2012 were as follows:

 

Fund Type

   Fair Value as of
June 30, 2012
     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)

   $ 78,199      $ 78,199        4 - 10 Years       $           $ 167,013  

Mezzanine debt

     21,756        21,756        10 Years                     94,022  

Distressed

     9,559        9,559        <6 Years                     8,699  
  

 

 

    

 

 

       

 

 

        

 

 

 

Total private equity

     109,514        109,514                       269,734  
  

 

 

    

 

 

       

 

 

        

 

 

 

Distressed

     41,131        1,042        <2 Years         40,089        Quarterly        45 - 65 Days          

Equity long/short

     165,482                   165,482        Quarterly        30 - 60 Days          

Multi-strategy

     136,160        25,830        <2 Years         110,330        Quarterly        45 - 90 Days          

Event driven

     68,603                   68,603        Annual        45 - 60 Days          
  

 

 

    

 

 

       

 

 

        

 

 

 

Total hedge funds

     411,376        26,872           384,504              
  

 

 

    

 

 

       

 

 

        

 

 

 

Total other invested assets

   $ 520,890      $ 136,386         $ 384,504          $ 269,734  
  

 

 

    

 

 

       

 

 

        

 

 

 

 

(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 invest primarily in privately negotiated mezzanine investments. The funds’ strategies will focus primarily 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 target 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.

 

   

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.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

e) Net Investment Income

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Fixed maturity investments

   $ 37,219     $ 50,648     $ 84,105     $ 101,594  

Equity securities and other invested assets

     8,644       5,015       12,718       7,211  

Cash and cash equivalents

     550       127       1,157       445  

Expenses

     (3,962     (3,422     (8,320     (6,674
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 42,451     $ 52,368     $ 89,660     $ 102,576  
  

 

 

   

 

 

   

 

 

   

 

 

 

f) Components of Realized Gains and Losses

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Gross realized gains on sale of invested assets

   $ 52,775     $ 34,611     $ 91,944     $ 78,168  

Gross realized losses on sale of invested assets

     (14,762     (3,330     (36,669     (25,262

Net realized and unrealized (losses) gains on derivatives

     (5,914     (10,040     770       (15,536

Mark-to-market changes:

        

Debt securities, trading

     (24,287     31,872       44,203       45,336  

Other invested assets and equity securities

     851       5,765       41,996       26,548  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized investment gains

   $ 8,663     $ 58,878     $ 142,244     $ 109,254  
  

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds from sale of available for sale securities

   $ 14,308     $ 202,671     $ 213,716     $ 546,191  

g) Pledged Assets

As of June 30, 2012 and December 31, 2011, $2,161,733 and $2,029,138, 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 and insurance laws.

In addition, as of June 30, 2012 and December 31, 2011, a further $1,270,757 and $1,044,236, respectively, of cash and cash equivalents and investments were pledged as collateral for the Company’s letter of credit facility. See Note 11 to these Condensed Consolidated Financial Statements and Note 9 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for details on the credit facility.

h) Analysis of Unrealized Losses

The following table summarizes the market value of those available for sale investments in an unrealized loss position for periods less than and greater than 12 months:

 

     June 30, 2012      December 31, 2011  
     Gross Fair
Value
     Unrealized
Loss
     Gross Fair
Value
     Unrealized
Loss
 

Less than 12 months

           

Corporate debt:

           

Financial institutions

   $       $       $ 9,440      $ (292
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity investments, available for sale

   $       $       $ 9,440      $ (292
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2012 and December 31, 2011, there were nil and three securities, respectively, in an unrealized loss position.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

i) Other-than-temporary impairment charges

Following the Company’s review of the securities in the investment portfolio during the three and six months ended June 30, 2012 and 2011, no securities were considered to be other-than-temporarily impaired.

5. DERIVATIVE INSTRUMENTS

As of June 30, 2012 and December 31, 2011, none of the Company’s derivatives were designated as hedges. The following table summarizes information on the location and amounts of derivative fair values in the unaudited condensed consolidated balance sheets (“consolidated balance sheets”):

 

     June 30, 2012      December 31, 2011  
     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 (1)

   $       $       $       $       $ 4,461       $ 336       $       $   

Foreign exchange contracts (2)

     113,828         1,964         217,588         4,317         91,162         2,030         339,533         8,934   

Interest rate futures (2)

     197,000         943         216,700         265         680,650         977         292,000         3,467   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 310,828       $ 2,907       $ 434,288       $ 4,582       $ 776,273       $ 3,343       $ 631,533       $ 12,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Asset and liability derivatives relating to the put options are classified within “equity securities trading, at fair value” on the consolidated balance sheets.

 

(2) 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 in the consolidated income statements:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Foreign exchange contracts

   $ (359   $ 1,345      $ 580      $ 2,601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in foreign exchange (loss) gain

     (359     1,345        580        2,601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Put options

                   (336       

Foreign exchange contracts

     4,415        723        2,110        723   

Interest rate futures

     (10,329     (10,763     (1,004     (16,259
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in net realized investment gains

     (5,914     (10,040     770        (15,536
  

 

 

   

 

 

   

 

 

   

 

 

 

Total realized and unrealized (losses) gains on derivatives

   $ (6,273   $ (8,695   $ 1,350      $ (12,935
  

 

 

   

 

 

   

 

 

   

 

 

 

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. The Company entered into foreign currency forward contracts to manage the effect of this foreign currency risk. 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

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

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

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:

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

                   Fair value measurement using:  

June 30, 2012

   Carrying
amount
     Total fair value      Quoted prices in
active markets for
identical assets
(Level 1)
     Significant other
observable inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Available for sale securities:

              

U.S. Government and Government agencies

   $ 30,214      $ 30,214      $ 30,214      $       $   
  

 

 

    

 

 

          

Total available for sale fixed maturity investments

     30,214        30,214           
  

 

 

    

 

 

          

Trading securities:

              

U.S. Government and Government agencies

   $ 1,715,141      $ 1,715,141      $ 1,231,823      $ 483,318      $   

Non-U.S. Government and Government agencies

     315,493        315,493                315,493          

States, municipalities and political subdivisions

     39,741        39,741                39,741          

Corporate debt

     2,038,944        2,038,944                2,038,944          

Mortgage-backed

     2,269,371        2,269,371                2,111,412        157,959  

Asset-backed

     417,419        417,419                299,833        117,586  
  

 

 

    

 

 

          

Total trading fixed maturity investments

     6,796,109        6,796,109           
  

 

 

    

 

 

          

Total fixed maturity investments

     6,826,323        6,826,323           
  

 

 

    

 

 

          

Equity securities

     454,205        454,205        454,205                  

Other invested assets

     520,890        520,890                        520,890  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 7,801,418      $ 7,801,418      $ 1,716,242      $ 5,288,741      $ 796,435  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets: (1)

              

Foreign exchange contracts

   $ 1,964      $ 1,964      $       $ 1,964      $   

Interest rate futures

     943        943                943          
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities: (1)

              

Foreign exchange contracts

   $ 4,317      $ 4,317      $       $ 4,317      $   

Interest rate futures

     265        265                265          
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Senior notes

   $ 798,080      $ 890,373      $       $ 890,373      $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 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.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

                   Fair value measurement using:  

December 31, 2011

   Carrying
amount
     Total fair value      Quoted prices in
active markets for
identical assets
(Level 1)
     Significant other
observable inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

Available for sale securities:

              

U.S. Government and Government agencies

   $ 33,630      $ 33,630      $ 33,630      $       $   

States, municipalities and political subdivisions

     33,479        33,479                33,479          

Corporate debt

     176,907        176,907                176,907          
  

 

 

    

 

 

          

Total available for sale fixed maturity investments

     244,016        244,016           
  

 

 

    

 

 

          

Trading securities:

              

U.S. Government and Government agencies

   $ 1,278,265      $ 1,278,265      $ 1,054,003      $ 224,262      $   

Non-U.S. Government and Government agencies

     256,756        256,756                256,756          

States, municipalities and political subdivisions

     133,902        133,902                133,902          

Corporate debt

     2,254,474        2,254,474                2,254,474          

Mortgage-backed

     1,818,091        1,818,091                1,568,887        249,204  

Asset-backed

     513,198        513,198                418,453        94,745  
  

 

 

    

 

 

          

Total trading fixed maturity investments

     6,254,686        6,254,686           
  

 

 

    

 

 

          

Total fixed maturity investments

     6,498,702        6,498,702           
  

 

 

    

 

 

          

Equity securities

     367,483        367,483        367,483                  

Other invested assets

     540,409        540,409                        540,409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 7,406,594      $ 7,406,594      $ 1,455,116      $ 5,067,120      $ 884,358  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative assets: (1)

              

Foreign exchange contracts

   $ 2,030      $ 2,030      $       $ 2,030      $   

Interest rate futures

     977        977                977          
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities: (1)

              

Foreign exchange contracts

   $ 8,934      $ 8,934      $       $ 8,934      $   

Interest rate futures

     3,467        3,467                3,467          
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Senior notes

   $ 797,949      $ 872,731      $       $ 872,731      $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 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

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

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.

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: The fair value of the equity securities are priced from market exchanges and therefore included in the Level 1 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.

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. As of June 30, 2012, the 7.50% Senior Notes and 5.50% Senior Notes (each as defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011) were traded at 114.6% and 105.8% of their principal amount, providing an effective yield of 3.6% and 4.7%, respectively. The fair value of the senior notes is 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 of United States dollars, 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):

 

    

Fair value measurement using significant

unobservable inputs (Level 3):

 
     Other invested assets     Mortgage-backed     Asset-backed  

Three Months Ended June 30, 2012

      

Opening balance

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

Realized and unrealized gains (losses) included in net income

     (641     1,780       (220

Purchases

     16,728       40,352       23,267  

Sales

     (17,262     (34,755     (47,537

Transfers into Level 3 from Level 2

            3,707       8,654  

Transfers out of Level 3 into Level 2 (1)

            (31,499     (108,972
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 520,890     $ 157,959     $ 117,586  
  

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2011

      

Opening balance

   $ 469,999     $ 234,087     $ 143,829  

Realized and unrealized gains included in net income

     814       1,680       494  

Purchases

     94,290       29,827       32,408  

Sales

     (2,836     (34,329     (2,800

Transfers into Level 3 from Level 2

            24,389       20,246  

Transfers out of Level 3 into Level 2 (1)

            (38,994     (80,867
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 562,267     $ 216,660     $ 113,310  
  

 

 

   

 

 

   

 

 

 

 

    

Fair value measurement using significant

unobservable inputs (Level 3):

 
     Other invested assets     Mortgage-backed     Asset-backed  

Six Months Ended June 30, 2012

      

Opening balance

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

Realized and unrealized gains included in net income

     14,882       4,324       904  

Purchases

     17,778       41,376       31,580  

Sales

     (52,179     (108,165     (48,133

Transfers into Level 3 from Level 2

            4,495       55,498  

Transfers out of Level 3 into Level 2 (1)

            (33,275     (17,008
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 520,890     $ 157,959     $ 117,586  
  

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011

      

Opening balance

   $ 347,632     $ 172,558     $ 48,707  

Realized and unrealized gains included in net income

     12,493       3,227       587  

Purchases

     245,340       62,604       115,417  

Sales

     (43,198     (43,287     (3,226

Transfers into Level 3 from Level 2

            86,085       32,801  

Transfers out of Level 3 into Level 2 (1)

            (64,527     (80,976
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 562,267     $ 216,660     $ 113,310  
  

 

 

   

 

 

   

 

 

 

 

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

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio 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 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.

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:

 

     June 30,
2012
     December 31,
2011
 

Outstanding loss reserves

   $ 1,431,802      $ 1,366,466  

Reserves for losses incurred but not reported

     3,945,716        3,858,677  
  

 

 

    

 

 

 

Reserve for losses and loss expenses

   $ 5,377,518      $ 5,225,143  
  

 

 

    

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

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
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Gross liability at beginning of period

   $ 5,331,418     $ 5,100,643     $ 5,225,143     $ 4,879,188  

Reinsurance recoverable at beginning of period

     (1,056,780     (975,523     (1,002,919     (927,588
  

 

 

   

 

 

   

 

 

   

 

 

 

Net liability at beginning of period

     4,274,638       4,125,120       4,222,224       3,951,600  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net losses incurred related to:

        

Commutation of variable-rated reinsurance contracts

            11,529              11,529  

Current year

     282,302       279,513       546,986       628,315  

Prior years

     (41,922     (55,229     (81,404     (99,579
  

 

 

   

 

 

   

 

 

   

 

 

 

Total incurred

     240,380       235,813       465,582       540,265  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net paid losses related to:

        

Current year

     18,226       19,579       19,840       21,279  

Prior years

     186,891       109,238       362,411       243,596  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total paid

     205,117       128,817       382,251       264,875  
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange revaluation

     (5,995     5,237       (1,649     10,363  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net liability at end of period

     4,303,906       4,237,353       4,303,906       4,237,353  

Reinsurance recoverable at end of period

     1,073,612       1,013,951       1,073,612       1,013,951  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross liability at end of period

   $ 5,377,518     $ 5,251,304     $ 5,377,518     $ 5,251,304  
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2012, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized by each segment in the 2004 through 2009 loss years across most lines of business.

For the six months ended June 30, 2012, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the international insurance and reinsurance segments in the 2004 through 2008 loss years.

During the three and six months ended June 30, 2011, the Company commuted certain variable-rated reinsurance contracts that have swing-rated provisions, reducing ceded losses by $11,529 in accordance with the terms of the contracts resulting in a net gain of $865.

For the three months ended June 30, 2011, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the reinsurance segment related to the 2004 through 2007 loss years for casualty reinsurance lines and in the international insurance segment related to the 2004 through 2007 loss years for casualty lines of business.

For the six months ended June 30, 2011, the Company had net favorable reserve development in its international and reinsurance segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the international insurance and reinsurance segments in the 2004 through 2007 loss years related to casualty insurance and reinsurance lines of business. The Company had net unfavorable reserve development in its U.S. insurance segment due to actual loss emergence being higher than initially expected. The majority of the net unfavorable reserve development was recognized in the 2006 through 2010 loss years related to the professional liability line of business.

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.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

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 in 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 January 2012.

9. SHAREHOLDERS’ EQUITY

a) Authorized shares

The issued share capital consists of the following:

 

     June 30,
2012
     December 31,
2011
 

Common shares issued and fully paid, 2012: CHF 13.69 per share; 2011: CHF 14.03 per share

     40,003,642        40,003,642  
  

 

 

    

 

 

 

Share capital at end of period

   $ 543,452      $ 557,153  
  

 

 

    

 

 

 

 

     Six Months Ended
June 30, 2012
 

Total shares issued at beginning and end of period

     40,003,642  
  

 

 

 

Treasury shares issued at beginning of period

     2,261,511  

Shares repurchased

     2,336,187  

Shares issued out of treasury

     (537,020
  

 

 

 

Total treasury shares at end of period

     4,060,678  
  

 

 

 

Total shares outstanding at end of period

     35,942,964  
  

 

 

 

As of June 30, 2012, there were outstanding 35,942,964 voting common shares and nil non-voting common shares.

Effective July 30, 2012, the Company cancelled 2,326,900 voting shares and 173,100 non-voting shares held in treasury, upon completing a required filing with the Swiss Commercial Register in Zug.

As of June 30, 2012, 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 102,685 or 7,500,728 voting shares, and create conditional capital of 5,200,000 voting shares.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

b) Share Warrants

In conjunction with the private placement offering at the formation of Allied World Bermuda, Allied World Bermuda granted warrant agreements to certain founding shareholders to acquire up to 5,500,000 common shares at an exercise price of $34.20 per share. These warrants were exercisable in certain limited conditions, including a public offering of common shares. All warrants granted were repurchased by the Company.

In February 2011, the Company repurchased the last outstanding warrant owned by American International Group, Inc. (“AIG”) in a privately negotiated transaction. The warrant entitled AIG to purchase 2,000,000 of the Company’s common shares for $34.20 per share. The Company repurchased the warrant for an aggregate purchase price of $53,620. The repurchase of the warrant was recognized as a reduction in “additional paid-in capital” on the consolidated balance sheets. The repurchase was executed separately from the share repurchase program discussed in Note 9(d) below. After this repurchase, AIG has no warrants remaining and no other disclosed equity interest in the Company.

c) Dividends

Under Swiss law, distributions to shareholders may be paid only if the Company has sufficient distributable profits from previous fiscal years, or if the Company has freely distributable reserves, each as presented on the audited stand-alone statutory balance sheet. Distributions to shareholders out of the share and participation capital may be made by way of a capital reduction in the form of a reduction to par value to achieve a similar result as the payment of a dividend.

On May 5, 2011, 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 quarterly installments of $0.375 per share, with the last of such quarterly dividend payments being made on April 6, 2012 to shareholders of record in the amount of $13,795.

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 is expected to be paid to shareholders in quarterly installments of $0.375 per share. The Company expects to distribute such dividends in August 2012, September 2012, December 2012 and March 2013.

d) Share repurchase

In May 2012, the Company established a new share repurchase program in order to repurchase up to $500 million 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. Shares repurchased have been 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. Under the terms of this new share repurchase program, common shares repurchased shall be designated for cancellation and shall be cancelled upon shareholder approval. The Company’s share repurchases were as follows:

 

                                                                                   
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Common shares repurchased

     905,383                2,336,187        969,163  

Total cost of shares repurchased

   $ 66,435      $       $ 159,458      $ 60,000  

Average price per share

   $ 73.38      $       $ 68.26      $ 61.91  

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

10. EARNINGS PER SHARE

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Basic earnings per share:

           

Net income

   $ 96,351      $ 93,800      $ 314,507      $ 102,420  

Weighted average common shares outstanding

     36,288,596        38,346,489        36,746,881        38,061,724  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 2.66      $ 2.45      $ 8.56      $ 2.69  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Diluted earnings per share:

           

Net income

   $ 96,351      $ 93,800      $ 314,507      $ 102,420  

Weighted average common shares outstanding

     36,288,596        38,346,489        36,746,881        38,061,724  

Share equivalents:

           

Warrants and options

     440,811        333,837        413,702        503,529  

RSUs and long-term incentive plan (“LTIP”) awards

     460,315        1,120,427        234,976        1,308,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares and common share equivalents outstanding — diluted

     37,189,722        39,800,753        37,395,559        39,873,418  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 2.59      $ 2.36      $ 8.41      $ 2.57  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2012 and 2011, a weighted average of 337,153 and 662,835 employee stock options and restricted stock units (“RSUs”) were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share, respectively.

For the six months ended June 30, 2012 and 2011, a weighted average of 343,726 and 687,713 employee stock options and RSUs were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share, respectively.

11. CREDIT AGREEMENTS

In the normal course of its operations, the Company enters into agreements with financial institutions to obtain secured and unsecured credit facilities.

On June 7, 2012, Allied World Bermuda amended its existing secured credit facility. The amended $450,000 four-year secured credit facility (the “Amended Secured Credit Facility”) is primarily used for the issuance of standby letters of credit to support obligations in connection with the insurance and reinsurance business of Allied World Bermuda and its subsidiaries. A portion of the facility may also be used for revolving loans for general corporate and working capital purposes, up to a maximum of $150,000. Allied World Bermuda may request that existing lenders under the Amended Secured Credit Facility make additional commitments from time to time, up to $150,000, subject to approval by the lenders. The Amended Secured Credit Facility contains representations, warranties and covenants customary for similar bank loan facilities, including certain covenants that, among other things, require the Company to maintain a certain leverage ratio and financial strength rating.

On June 7, 2012, upon entering into the Amended Secured Credit Facility, Allied World Bermuda terminated its $400,000 unsecured facility.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, 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 and non-North American domiciled accounts. The reinsurance segment includes the Company’s reinsurance operations in the U.S., Bermuda, Europe and Asia. 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.”

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

The following tables provide a summary of the segment results:

 

Three Months Ended June 30, 2012

   U.S. Insurance     International
Insurance
    Reinsurance     Total  

Gross premiums written

   $ 265,974     $ 183,593     $ 197,303     $ 646,870  

Net premiums written

     196,661       111,342       186,707       494,710  

Net premiums earned

     162,785       82,605       184,357       429,747  

Net losses and loss expenses

     (103,074     (22,233     (115,073     (240,380

Acquisition costs

     (21,250     582       (30,920     (51,588

General and administrative expenses

     (34,730     (21,648     (17,601     (73,979
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting income

     3,731       39,306       20,763       63,800  

Net investment income

           42,451  

Net realized investment gains

           8,663  

Amortization and impairment of intangible assets

           (634

Interest expense

           (14,001

Foreign exchange gain

           1,019  
        

 

 

 

Income before income taxes

         $ 101,298  
        

 

 

 

Loss and loss expense ratio

     63.3     26.9     53.0     55.9

Acquisition cost ratio

     13.1     (0.7 %)      16.4     12.0

General and administrative expense ratio

     21.3     26.2     10.0     17.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     97.7     52.4     79.4     85.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Three Months Ended June 30, 2011

   U.S. Insurance     International
Insurance
    Reinsurance     Total  

Gross premiums written

   $ 226,738     $ 178,593     $ 114,267     $ 519,598  

Net premiums written

     172,887       108,985       113,931       395,803  

Net premiums earned

     145,857       79,956       129,494       355,307  

Net losses and loss expenses

     (92,595     (72,082     (71,136     (235,813

Acquisition costs

     (18,876     747       (24,842     (42,971

General and administrative expenses

     (31,253     (20,653     (15,295     (67,201
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting income (loss)

     3,133       (12,032     18,221       9,322  

Net investment income

           52,368  

Net realized investment gains

           58,878  

Amortization and impairment of intangible assets

           (766

Interest expense

           (13,745

Foreign exchange loss

           (1,184
        

 

 

 

Income before income taxes

         $ 104,873  
        

 

 

 

Loss and loss expense ratio

     63.5     90.2     54.9     66.4

Acquisition cost ratio

     12.9     (0.9 %)      19.2     12.1

General and administrative expense ratio

     21.4     25.8     11.8     18.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     97.8     115.1     85.9     97.4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

Six Months Ended June 30, 2012

   U.S. Insurance     International
Insurance
    Reinsurance     Total  

Gross premiums written

   $ 470,185     $ 297,183     $ 560,431     $ 1,327,799  

Net premiums written

     350,507       183,951       549,205       1,083,663  

Net premiums earned

     316,143       162,476       353,018       831,637  

Net losses and loss expenses

     (200,778     (60,333     (204,471     (465,582

Acquisition costs

     (41,222     1,110       (58,614     (98,726

General and administrative expenses

     (65,774     (44,049     (34,522     (144,345
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting income

     8,369       59,204       55,411       122,984  

Net investment income

           89,660  

Net realized investment gains

           142,244  

Amortization and impairment of intangible assets

           (1,267

Interest expense

           (27,757

Foreign exchange gain

           1,100  
        

 

 

 

Income before income taxes

           326,964  
        

 

 

 

Loss and loss expense ratio

     63.5     37.1     57.9     56.0

Acquisition cost ratio

     13.0     (0.7 %)      16.6     11.9

General and administrative expense ratio

     20.8     27.1     9.8     17.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     97.3     63.5     84.3     85.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Six Months Ended June 30, 2011

   U.S. Insurance     International
Insurance
    Reinsurance     Total  

Gross premiums written

   $ 410,040     $ 289,918     $ 380,328     $ 1,080,286  

Net premiums written

     312,789       183,895       379,990       876,674  

Net premiums earned

     281,338       156,246       252,599       690,183  

Net losses and loss expenses

     (208,426     (143,266     (188,573     (540,265

Acquisition costs

     (36,978     2,603       (46,678     (81,053

General and administrative expenses

     (62,052     (41,381     (31,724     (135,157
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting loss

     (26,118     (25,798     (14,376     (66,292

Net investment income

           102,576  

Net realized investment gains

           109,254  

Amortization and impairment of intangible assets

           (1,533

Interest expense

           (27,487

Foreign exchange loss

           (742
        

 

 

 

Income before income taxes

         $ 115,776  
        

 

 

 

Loss and loss expense ratio

     74.1     91.7     74.7     78.3

Acquisition cost ratio

     13.1     (1.7 %)      18.5     11.7

General and administrative expense ratio

     22.1     26.5     12.6     19.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     109.3     116.5     105.8     109.6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

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
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

United States

   $ 349,577      $ 269,193      $ 738,548      $ 575,824  

Bermuda

     193,195        177,850        375,358        348,318  

Europe

     60,008        58,209        135,384        122,288  

Singapore

     40,128        10,331        69,311        25,567  

Hong Kong

     3,962        4,015        9,198        8,289  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross premiums written

   $ 646,870      $ 519,598      $ 1,327,799      $ 1,080,286  
  

 

 

    

 

 

    

 

 

    

 

 

 

13. COMMITMENTS AND CONTINGENCIES

In April 2006, a complaint entitled New Cingular Wireless Headquarters, LLC et al. v. Marsh & McLennan Companies, Inc., et al. was filed against numerous brokers and 78 insurers including Allied World Assurance Company, Ltd. Plaintiffs allege that the broker defendants used a variety of illegal schemes and anti-competitive practices that resulted in the plaintiffs either paying more for insurance products or receiving less beneficial terms than the competitive market would have produced. Plaintiffs seek equitable and legal remedies, including injunctive relief, consequential and punitive damages, treble damages and attorneys’ fees. Due to various pending procedural matters, the litigation has not progressed beyond the discovery phase. While it is not possible to predict the outcome of the litigation, the Company does not believe that the outcome will have a material effect on its operations or financial position.

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 such proceedings are included in the reserve for losses and loss expenses in the Company’s consolidated balance sheets. As of June 30, 2012, the Company was not a party to any material legal proceedings arising outside the ordinary course of business that is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.

14. CONDENSED CONSOLIDATED GUARANTOR FINANCIAL STATEMENTS

The following tables present unaudited condensed consolidating financial information as of June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011 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.

 

24


Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

Unaudited Condensed Consolidating Balance Sheet:

 

As of June 30, 2012

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

ASSETS:

           

Investments

   $      $      $ 7,801,418      $      $ 7,801,418  

Cash and cash equivalents

     24,319       19,212       820,919               864,450  

Insurance balances receivable

                   845,663               845,663  

Reinsurance recoverable

                   1,073,612               1,073,612  

Net deferred acquisition costs

                   129,818               129,818  

Goodwill and intangible assets

                   321,007               321,007  

Balances receivable on sale of investments

                   635,727               635,727  

Investments in subsidiaries

     3,283,286       4,220,504               (7,503,790       

Due (to) from subsidiaries

     (4,457     (7,361     11,818                 

Other assets

     880       6,817       598,259               605,956  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,304,028     $ 4,239,172     $ 12,238,241      $ (7,503,790   $ 12,277,651  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES:

           

Reserve for losses and loss expenses

   $      $      $ 5,377,518      $      $ 5,377,518  

Unearned premiums

                   1,363,006               1,363,006  

Reinsurance balances payable

                   128,306               128,306  

Balances due on purchases of investments

                   1,220,246               1,220,246  

Senior notes

            798,080                      798,080  

Other liabilities

     20,127       17,972       68,495               106,594  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     20,127       816,052       8,157,571               8,993,750  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     3,283,901       3,423,120       4,080,670        (7,503,790     3,283,901  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,304,028     $ 4,239,172     $ 12,238,241      $ (7,503,790   $ 12,277,651  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

As of December 31, 2011

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

ASSETS:

           

Investments

   $      $      $ 7,406,594      $      $ 7,406,594  

Cash and cash equivalents

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

Insurance balances receivable

                   652,158               652,158  

Reinsurance recoverable

                   1,002,919               1,002,919  

Net deferred acquisition costs

                   100,334               100,334  

Goodwill and intangible assets

                   322,274               322,274  

Balances receivable on sale of investments

                   580,443               580,443  

Investments in subsidiaries

     3,064,066       3,964,585               (7,028,651       

Due (to) from subsidiaries

     (4,853     (6,769     11,622                 

Other assets

     1,504       6,367       415,569               423,440  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,173,389     $ 3,973,069     $ 11,004,351      $ (7,028,651   $ 11,122,158  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES:

           

Reserve for losses and loss expenses

   $      $      $ 5,225,143      $      $ 5,225,143  

Unearned premiums

                   1,078,412               1,078,412  

Reinsurance balances payable

                   124,539               124,539  

Balances due on purchases of investments

                   616,728               616,728  

Senior notes

            797,949                      797,949  

Other liabilities

     24,367       17,688       88,310               130,365  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     24,367       815,637       7,133,132               7,973,136  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total shareholders’ equity

     3,149,022       3,157,432       3,871,219        (7,028,651     3,149,022  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,173,389     $ 3,973,069     $ 11,004,351      $ (7,028,651   $ 11,122,158  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

25


Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

Unaudited Condensed Consolidating Income Statement:

 

Three months ended June 30, 2012

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

Net premiums earned

   $      $      $ 429,747     $      $ 429,747  

Net investment income

     5       8       42,438              42,451  

Net realized investment losses

                   8,663              8,663  

Net losses and loss expenses

                   (240,380            (240,380

Acquisition costs

                   (51,588            (51,588

General and administrative expenses

     (4,278     (1,302     (68,399            (73,979

Amortization of intangible assets

                   (634            (634

Interest expense

            (14,001                   (14,001

Foreign exchange gain (loss)

     460       (42     601              1,019  

Income tax (expense) benefit

     (373            (4,574            (4,947

Equity in earnings of consolidated subsidiaries

     100,537       115,102              (215,639       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 96,351     $ 99,765     $ 115,874     $ (215,639   $ 96,351  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on investments arising during the period net of applicable deferred income tax expense of $68

                   231              231  

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

                   (1,142            (1,142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

                   (911            (911
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ 96,351     $ 99,765     $ 114,963     $ (215,639   $ 95,440  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2011

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

Net premiums earned

   $      $      $ 355,307     $      $ 355,307  

Net investment income

     15       8       52,345              52,368  

Net realized investment gains

                   58,878              58,878  

Net losses and loss expenses

                   (235,813            (235,813

Acquisition costs

                   (42,971            (42,971

General and administrative expenses

     (4,746     (1,483     (60,972            (67,201

Amortization of intangible assets

                   (766            (766

Interest expense

            (13,745                   (13,745

Foreign exchange gain (loss)

     (3     17       (1,198            (1,184

Income tax (expense) benefit

                   (11,073            (11,073

Equity in earnings of consolidated subsidiaries

     98,534       114,496              (213,030       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 93,800     $ 99,293     $ 113,737     $ (213,030   $ 93,800  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on investments arising during the period net of applicable deferred income tax expense of $1,461

                   13,680              13,680  

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

                   (23,548            (23,548
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

                   (9,868            (9,868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

   $ 93,800     $ 99,293     $ 103,869     $ (213,030   $ 83,932  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

 

Six Months Ended June 30, 2012

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

Net premiums earned

   $      $      $ 831,637     $      $ 831,637  

Net investment income

     14       11       89,635              89,660  

Net realized investment losses

                   142,244              142,244  

Net losses and loss expenses

                   (465,582            (465,582

Acquisition costs