AWH-2014.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
Form 10-Q
(Mark One)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2014
OR
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¨ | 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)
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Switzerland | 98-0681223 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | 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):
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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 14, 2014, 96,823,713 common shares were outstanding.
TABLE OF CONTENTS
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PART I | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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PART I
FINANCIAL INFORMATION
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Item 1. | Financial Statements. |
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2014 and December 31, 2013
(Expressed in thousands, except share and per share amounts)
|
| | | | | | | |
| As of | | As of |
| June 30, 2014 | | December 31, 2013 |
ASSETS: | | | |
Fixed maturity investments trading, at fair value (amortized cost: 2014: $6,062,758; 2013: $6,065,350) | $ | 6,157,084 |
| | $ | 6,100,798 |
|
Equity securities trading, at fair value (cost: 2014: $885,861; 2013: $647,301) | 938,117 |
| | 699,846 |
|
Other invested assets | 932,639 |
| | 911,392 |
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Total investments | 8,027,840 |
| | 7,712,036 |
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Cash and cash equivalents | 635,138 |
| | 531,936 |
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Restricted cash | 127,755 |
| | 149,393 |
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Insurance balances receivable | 976,441 |
| | 664,731 |
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Funds held | 414,445 |
| | 632,430 |
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Prepaid reinsurance | 390,414 |
| | 340,992 |
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Reinsurance recoverable | 1,301,742 |
| | 1,234,504 |
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Accrued investment income | 30,968 |
| | 32,236 |
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Net deferred acquisition costs | 163,259 |
| | 126,661 |
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Goodwill | 277,761 |
| | 268,376 |
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Intangible assets | 47,564 |
| | 48,831 |
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Balances receivable on sale of investments | 164,713 |
| | 76,544 |
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Net deferred tax assets | 35,867 |
| | 37,469 |
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Other assets | 75,740 |
| | 89,691 |
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Total assets | $ | 12,669,647 |
| | $ | 11,945,830 |
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LIABILITIES: | | | |
Reserve for losses and loss expenses | $ | 5,935,678 |
| | $ | 5,766,529 |
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Unearned premiums | 1,703,684 |
| | 1,396,256 |
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Reinsurance balances payable | 224,182 |
| | 173,023 |
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Balances due on purchases of investments | 180,378 |
| | 104,740 |
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Senior notes | 798,648 |
| | 798,499 |
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Dividends payable | 21,870 |
| | 16,732 |
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Accounts payable and accrued liabilities | 122,445 |
| | 170,225 |
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Total liabilities | $ | 8,986,885 |
| | $ | 8,426,004 |
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Commitments and contingencies |
| |
|
SHAREHOLDERS’ EQUITY: | | | |
Common shares: 2014: par value CHF 4.10 per share and 2013: par value CHF 4.10 per share (2014: 99,515,760; 2013: 103,477,452 shares issued and 2014: 96,929,091; 2013: 100,253,646 shares outstanding) | 402,907 |
| | 418,988 |
|
Treasury shares, at cost (2014: 2,586,669; 2013: 3,223,806) | (65,258 | ) | | (79,992 | ) |
Retained earnings | 3,345,113 |
| | 3,180,830 |
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Total shareholders’ equity | 3,682,762 |
| | 3,519,826 |
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Total liabilities and shareholders’ equity | $ | 12,669,647 |
| | $ | 11,945,830 |
|
See accompanying notes to the consolidated financial statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the three and six months ended June 30, 2014 and 2013
(Expressed in thousands, except share and per share amounts)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
REVENUES: | | | | | | | |
Gross premiums written | $ | 760,405 |
| | $ | 765,200 |
| | $ | 1,661,798 |
| | $ | 1,602,281 |
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Premiums ceded | (206,481 | ) | | (183,978 | ) | | (336,260 | ) | | (326,007 | ) |
Net premiums written | 553,924 |
| | 581,222 |
| | 1,325,538 |
| | 1,276,274 |
|
Change in unearned premiums | (16,677 | ) | | (73,951 | ) | | (258,006 | ) | | (305,775 | ) |
Net premiums earned | 537,247 |
| | 507,271 |
| | 1,067,532 |
| | 970,499 |
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Net investment income | 36,793 |
| | 37,635 |
| | 84,412 |
| | 71,023 |
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Net realized investment gains (losses) | 85,217 |
| | (115,198 | ) | | 139,422 |
| | (35,561 | ) |
| 659,257 |
| | 429,708 |
| | 1,291,366 |
| | 1,005,961 |
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EXPENSES: | | | | | | | |
Net losses and loss expenses | 314,855 |
| | 275,128 |
| | 590,141 |
| | 530,306 |
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Acquisition costs | 74,279 |
| | 64,617 |
| | 142,001 |
| | 121,302 |
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General and administrative expenses | 96,188 |
| | 80,585 |
| | 176,528 |
| | 163,265 |
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Amortization of intangible assets | 634 |
| | 634 |
| | 1,267 |
| | 1,267 |
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Interest expense | 14,592 |
| | 14,188 |
| | 29,126 |
| | 28,322 |
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Foreign exchange loss | 651 |
| | 490 |
| | 700 |
| | 3,008 |
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| 501,199 |
| | 435,642 |
| | 939,763 |
| | 847,470 |
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Income (loss) before income taxes | 158,058 |
| | (5,934 | ) | | 351,603 |
| | 158,491 |
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Income tax expense (benefit) | 6,195 |
| | (4,072 | ) | | 22,768 |
| | 1,361 |
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NET INCOME (LOSS) | 151,863 |
| | (1,862 | ) | | 328,835 |
| | 157,130 |
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| | | | | | | |
Other comprehensive income | — |
| | — |
| | — |
| | — |
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COMPREHENSIVE INCOME (LOSS) | $ | 151,863 |
| | $ | (1,862 | ) | | $ | 328,835 |
| | $ | 157,130 |
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PER SHARE DATA | | | | | | | |
Basic earnings (loss) per share | $ | 1.55 |
| | $ | (0.02 | ) | | $ | 3.33 |
| | $ | 1.52 |
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Diluted earnings (loss) per share | $ | 1.52 |
| | $ | (0.02 | ) | | $ | 3.27 |
| | $ | 1.48 |
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Weighted average common shares outstanding | 97,809,639 |
| | 103,267,659 |
| | 98,672,618 |
| | 103,552,656 |
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Weighted average common shares and common share equivalents outstanding | 99,724,802 |
| | 103,267,659 |
| | 100,691,568 |
| | 105,949,785 |
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Dividends paid per share | $ | 0.167 |
| | $ | — |
| | $ | 0.333 |
| | $ | 0.125 |
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See accompanying notes to the consolidated financial statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the six months ended June 30, 2014 and 2013
(Expressed in thousands)
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| | | | | | | | | | | | | | | |
| Share Capital | | Treasury Shares | | Retained Earnings | | Total |
December 31, 2013 | $ | 418,988 |
| | $ | (79,992 | ) | | $ | 3,180,830 |
| | $ | 3,519,826 |
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Net income | — |
| | — |
| | 328,835 |
| | 328,835 |
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Dividends | — |
| | — |
| | (38,345 | ) | | (38,345 | ) |
Stock compensation | — |
| | 14,734 |
| | (2,756 | ) | | 11,978 |
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Share repurchases | — |
| | (139,532 | ) | | — |
| | (139,532 | ) |
Shares cancelled | (16,081 | ) | | 139,532 |
| | (123,451 | ) | | — |
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June 30, 2014 | $ | 402,907 |
| | $ | (65,258 | ) | | $ | 3,345,113 |
| | $ | 3,682,762 |
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| | | | | | | |
December 31, 2012 | $ | 454,980 |
| | $ | (113,818 | ) | | $ | 2,985,173 |
| | $ | 3,326,335 |
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Net income | — |
| | — |
| | 157,130 |
| | 157,130 |
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Dividends — par value reduction | (12,981 | ) | | — |
| | — |
| | (12,981 | ) |
Dividends | — |
| | — |
| | (17,127 | ) | | (17,127 | ) |
Stock compensation | — |
| | 22,157 |
| | (19,714 | ) | | 2,443 |
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Share repurchases | — |
| | (82,571 | ) | | — |
| | (82,571 | ) |
Shares cancelled | (11,602 | ) | | 82,571 |
| | (70,969 | ) | | — |
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June 30, 2013 | $ | 430,397 |
| | $ | (91,661 | ) | | $ | 3,034,493 |
| | $ | 3,373,229 |
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See accompanying notes to the consolidated financial statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 2014 and 2013
(Expressed in thousands)
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| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: | | | |
Net income | $ | 328,835 |
| | $ | 157,130 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | |
Net realized gains on sales of investments | (99,781 | ) | | (62,921 | ) |
Mark to market adjustments | (59,113 | ) | | 95,698 |
|
Stock compensation expense | 7,631 |
| | 6,566 |
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Undistributed loss (income) of equity method investments | 13,744 |
| | (2,316 | ) |
Changes in: | | | |
Reserve for losses and loss expenses, net of reinsurance recoverables | 101,911 |
| | 12,901 |
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Unearned premiums, net of prepaid reinsurance | 258,006 |
| | 305,776 |
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Insurance balances receivable | (310,885 | ) | | (304,088 | ) |
Funds held | 217,985 |
| | (51,231 | ) |
Reinsurance balances payable | 51,159 |
| | 69,620 |
|
Net deferred acquisition costs | (36,598 | ) | | (45,802 | ) |
Net deferred tax assets | 1,934 |
| | (14,970 | ) |
Accounts payable and accrued liabilities | (53,397 | ) | | (45,601 | ) |
Other items, net | 27,507 |
| | 12,880 |
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Net cash provided by operating activities | 448,938 |
| | 133,642 |
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CASH FLOWS USED IN INVESTING ACTIVITIES: | | | |
Purchases of trading securities | (3,905,650 | ) | | (3,186,162 | ) |
Purchases of other invested assets | (181,419 | ) | | (141,805 | ) |
Sales of trading securities | 3,705,229 |
| | 3,171,977 |
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Sales of other invested assets | 184,166 |
| | 126,491 |
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Purchases of fixed assets | (5,601 | ) | | (3,363 | ) |
Change in restricted cash | 21,638 |
| | (10,561 | ) |
Net cash paid for acquisitions | (2,565 | ) | | — |
|
Net cash used in investing activities | (184,202 | ) | | (43,423 | ) |
CASH FLOWS USED IN FINANCING ACTIVITIES: | | | |
Dividends paid - partial par value reduction | — |
| | (12,981 | ) |
Dividends paid | (33,207 | ) | | — |
|
Proceeds from the exercise of stock options | 6,313 |
| | 5,293 |
|
Share repurchases | (137,810 | ) | | (82,571 | ) |
Net cash used in financing activities | (164,704 | ) | | (90,259 | ) |
Effect of exchange rate changes on foreign currency cash | 3,170 |
| | (7,736 | ) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 103,202 |
| | (7,776 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 531,936 |
| | 681,879 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 635,138 |
| | $ | 674,103 |
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Supplemental disclosure of cash flow information: | | | |
Cash paid for income taxes | $ | 18,061 |
| | $ | 12,671 |
|
Cash paid for interest expense | $ | 27,000 |
| | $ | 27,000 |
|
See accompanying notes to the consolidated financial statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
1. GENERAL
Allied World Assurance Company Holdings, AG, a Swiss holding company (“Allied World Switzerland”), through its wholly-owned subsidiaries (collectively, the “Company”), provides property and casualty insurance and reinsurance on a worldwide basis. References to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland.
2. BASIS OF PREPARATION AND CONSOLIDATION
These unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Company’s financial statements, including, but not limited to:
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• | The premium estimates for certain reinsurance agreements, |
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• | Recoverability of deferred acquisition costs, |
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• | The reserve for outstanding losses and loss expenses, |
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• | Valuation of ceded reinsurance recoverables, |
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• | Determination of impairment of goodwill and other intangible assets, and |
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• | Valuation of financial instruments. |
Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the unaudited condensed consolidated financial statements.
On May 1, 2014, the shareholders approved a 3-for-1 stock split of the Company's common shares. All historical share and per share amounts reflect the effect of the stock split.
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, 2013.
3. NEW ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). ASU 2014-08 changes the requirements for reporting discontinued operations, such that a disposal of a component of the Company's operations is required to be reported as discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on the Company's operations and financial results. Examples of strategic shifts that could have a major effect on the Company's operations could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of the Company. ASU 2014-08 is effective for all disposals that occur after January 1, 2015. The Company is currently assessing the impact the adoption of ASU 2014-08 will have on future financial statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
In May 2014, the FASB issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a framework, through a five-step process, for recognizing revenue from customers, improves comparability and consistency of recognizing revenue across entities, industries, jurisdictions and capital markets, and requires enhanced disclosures. Certain contracts with customers are specifically excluded from the scope of ASU 2014-09, including amongst others, insurance contracts accounted for under Accounting Standard Codification 944, Financial Services - Insurance. ASU 2014-09 is effective on January 1, 2017 with retrospective adoption required for the comparative periods. The Company is currently assessing the impact the adoption of ASU 2014-09 will have on future financial statements.
4. INVESTMENTS
a) Trading Securities
Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive income (“consolidated income statements”) by category are as follows:
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| | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
U.S. Government and Government agencies | $ | 1,274,331 |
| | $ | 1,273,469 |
| | $ | 1,676,788 |
| | $ | 1,684,832 |
|
Non-U.S. Government and Government agencies | 185,071 |
| | 186,142 |
| | 191,776 |
| | 197,082 |
|
States, municipalities and political subdivisions | 261,267 |
| | 256,698 |
| | 231,555 |
| | 234,406 |
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Corporate debt: | | | | | | | |
Financial institutions | 1,168,937 |
| | 1,149,005 |
| | 958,794 |
| | 943,518 |
|
Industrials | 1,167,470 |
| | 1,152,858 |
| | 1,174,047 |
| | 1,165,448 |
|
Utilities | 98,878 |
| | 97,457 |
| | 69,426 |
| | 69,658 |
|
Mortgage-backed | 1,323,763 |
| | 1,272,824 |
| | 1,292,502 |
| | 1,267,863 |
|
Asset-backed | 677,367 |
| | 674,305 |
| | 505,910 |
| | 502,543 |
|
Total fixed maturity investments | $ | 6,157,084 |
| | $ | 6,062,758 |
| | $ | 6,100,798 |
| | $ | 6,065,350 |
|
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| | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| Fair Value | | Original Cost | | Fair Value | | Original Cost |
Equity securities | $ | 938,117 |
| | $ | 885,861 |
| | $ | 699,846 |
| | $ | 647,301 |
|
Other invested assets | 804,505 |
| | 693,370 |
| | 764,081 |
| | 658,683 |
|
| $ | 1,742,622 |
| | $ | 1,579,231 |
| | $ | 1,463,927 |
| | $ | 1,305,984 |
|
Other invested assets, included in the table above, include investments in private equity funds, hedge funds and a high yield loan fund that are accounted for at fair value, but excludes other private securities described below in Note 4(b) that are accounted for using the equity method of accounting.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
b) Other Invested Assets
Details regarding the carrying value, redemption characteristics and unfunded investment commitments of the other invested assets portfolio as of June 30, 2014 and December 31, 2013 were as follows:
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| | | | | | | | | | | | | | | | | | | | | |
Investment Type | Carrying Value as of June 30, 2014 | | Investments with Redemption Restrictions | | Estimated Remaining Restriction Period | | Investments without Redemption Restrictions | | Redemption Frequency(1) | | Redemption Notice Period(1) | | Unfunded Commitments |
Private equity | $ | 161,667 |
| | $ | 161,667 |
| | 2 - 9 Years | | $ | — |
| | | | | | $ | 239,697 |
|
Mezzanine debt | 95,162 |
| | 95,162 |
| | 5 - 9 Years | | — |
| | | | | | 206,856 |
|
Distressed | 10,008 |
| | 10,008 |
| | 4 Years | | — |
| | | | | | 4,941 |
|
Total private equity | 266,837 |
| | 266,837 |
| | | | — |
| | | | | | 451,494 |
|
Distressed | 165,253 |
| | 165,253 |
| | 1 Year | | — |
| | | | | | — |
|
Equity long/short | 134,036 |
| | 58,568 |
| | 1 Year | | 75,468 |
| | Quarterly | | 30 -60 Days | | — |
|
Multi-strategy | 100,263 |
| | — |
| | | | 100,263 |
| | Quarterly | | 45 -90 Days | | — |
|
Relative value credit | 105,624 |
| | — |
| | | | 105,624 |
| | Quarterly | | 60 Days | | — |
|
Total hedge funds | 505,176 |
| | 223,821 |
| | | | 281,355 |
| | | | | | — |
|
High yield loan fund | 32,492 |
| | — |
| | | | 32,492 |
| | Monthly | | 30 days | | — |
|
Total other invested assets at fair value | 804,505 |
| | 490,658 |
| | | | 313,847 |
| | | | | | 451,494 |
|
Other private securities | 128,134 |
| | — |
| | | | 128,134 |
| | | | | | — |
|
Total other invested assets | $ | 932,639 |
| | $ | 490,658 |
| | | | $ | 441,981 |
| | | | | | $ | 451,494 |
|
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| | | | | | | | | | | | | | | | | | | | | |
Investment Type | Carrying Value as of December 31, 2013 | | Investments with Redemption Restrictions | | Estimated Remaining Restriction Period | | Investments without Redemption Restrictions | | Redemption Frequency(1) | | Redemption Notice Period(1) | | Unfunded Commitments |
Private equity | $ | 144,422 |
| | $ | 144,422 |
| | 2 - 9 Years | | $ | — |
| | | | | | $ | 263,519 |
|
Mezzanine debt | 64,627 |
| | 64,627 |
| | 8 - 9 Years | | — |
| | | | | | 198,756 |
|
Distressed | 7,776 |
| | 7,776 |
| | 4 Years | | — |
| | | | | | 5,249 |
|
Total private equity | 216,825 |
| | 216,825 |
| | | | — |
| | | | | | 467,524 |
|
Distressed | 151,227 |
| | 151,227 |
| | 1 - 2 Years | | — |
| | | | | | — |
|
Equity long/short | 99,365 |
| | — |
| | | | 99,365 |
| | Quarterly | | 30 -60 Days | | — |
|
Multi-strategy | 136,958 |
| | — |
| | | | 136,958 |
| | Quarterly | | 45 -90 Days | | — |
|
Event driven | 14,018 |
| | — |
| | | | 14,018 |
| | Annual | | 60 Days | | — |
|
Relative value credit | 113,730 |
| | — |
| | | | 113,730 |
| | Quarterly | | 60 Days | | — |
|
Total hedge funds | 515,298 |
| | 151,227 |
| | | | 364,071 |
| | | | | | — |
|
High yield loan fund | 31,958 |
| | — |
| | | | 31,958 |
| | Monthly | | 30 days | | — |
|
Total other invested assets at fair value | 764,081 |
| | 368,052 |
| | | | 396,029 |
| | | | | | 467,524 |
|
Other private securities | 147,311 |
| | — |
| | | | 147,311 |
| | | | | | — |
|
Total other invested assets | $ | 911,392 |
| | $ | 368,052 |
| | | | $ | 543,340 |
| | | | | | $ | 467,524 |
|
_______________________
| |
(1) | The redemption frequency and notice periods only apply to the investments without redemption restrictions. Some or all of these investments may be subject to a gate as described below. |
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-
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
up periods ranging from one to three years from initial investment. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, called a “gate.” The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the fund’s net assets. The gate is a method for executing an orderly redemption process to reduce the possibility of adversely affecting investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash sometime after the redemption date. Certain funds may impose a redemption fee on early redemptions. Interests in private equity funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.
The following describes each investment type:
| |
• | Private equity funds: Primary funds may invest in companies and general partnership interests. Secondary funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| |
• | Mezzanine debt funds: Mezzanine debt funds primarily focus on providing capital to upper middle market and middle market companies and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity; however, the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| |
• | Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. Certain funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| |
• | Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and by their targeted net long position. |
| |
• | Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading. |
| |
• | 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. |
| |
• | Relative value credit funds: These funds seek to take exposure to credit-sensitive securities, long and/or short, based upon credit analysis of issuers and securities and credit market views. |
| |
• | High yield loan fund: A long-only private mutual fund that invests in high yield fixed income securities. |
| |
• | Other private securities: These securities include strategic non-controlling minority investments in private asset management companies and other insurance related investments that are accounted for using the equity method of accounting. |
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
c) Net Investment Income
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Fixed maturity investments | $ | 35,936 |
| | $ | 32,662 |
| | $ | 72,235 |
| | $ | 65,187 |
|
Equity securities | 5,912 |
| | 4,409 |
| | 9,165 |
| | 7,608 |
|
Other invested assets | (890 | ) | | 3,843 |
| | 10,518 |
| | 5,307 |
|
Cash and cash equivalents | 571 |
| | 529 |
| | 1,010 |
| | 1,017 |
|
Expenses | (4,736 | ) | | (3,808 | ) | | (8,516 | ) | | (8,096 | ) |
Net investment income | $ | 36,793 |
| | $ | 37,635 |
| | $ | 84,412 |
| | $ | 71,023 |
|
Net investment income from other invested assets included the distributed and undistributed net income from investments accounted for using the equity method of accounting. The loss reported for other invested assets for the three months ended June 30, 2014 was due to a loss of $9,348 recorded for an equity method investment due to impairment charges that it recorded.
d) Components of Realized Gains and Losses
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Gross realized gains on sale of invested assets | $ | 55,714 |
| | $ | 58,223 |
| | $ | 118,006 |
| | $ | 102,472 |
|
Gross realized losses on sale of invested assets | (4,025 | ) | | (35,077 | ) | | (16,273 | ) | | (42,042 | ) |
Net realized and unrealized (losses) gains on derivatives | (13,720 | ) | | 8,538 |
| | (26,640 | ) | | 7,561 |
|
Mark-to-market gains (losses): | | | | | | | |
Fixed maturity investments, trading | 36,426 |
| | (115,113 | ) | | 58,882 |
| | (131,588 | ) |
Equity securities, trading | 21,316 |
| | (34,330 | ) | | (289 | ) | | (1,357 | ) |
Other invested assets, trading | (10,494 | ) | | 2,561 |
| | 5,736 |
| | 29,393 |
|
Net realized investment gains (losses) | $ | 85,217 |
| | $ | (115,198 | ) | | $ | 139,422 |
| | $ | (35,561 | ) |
e) Pledged Assets
As of June 30, 2014 and December 31, 2013, $2,745,352 and $2,894,401, respectively, of cash and cash equivalents and investments were deposited, pledged or held in trust accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.
In addition, as of June 30, 2014 and December 31, 2013, a further $886,220 and $1,053,632, respectively, of cash and cash equivalents and investments were pledged as collateral for the Company’s letter of credit facilities. See Note 10(d) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for details on the Company’s credit facilities.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
5. DERIVATIVE INSTRUMENTS
As of June 30, 2014 and December 31, 2013, none of the Company’s derivatives were designated as hedges for accounting purposes. The following table summarizes information on the location and amounts of derivative fair values on the unaudited condensed consolidated balance sheets (“consolidated balance sheets”):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| 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 |
Foreign exchange contracts | $ | 57,761 |
| | $ | 430 |
| | $ | 158,762 |
| | $ | 1,996 |
| | $ | 294,788 |
| | $ | 6,254 |
| | $ | 122,439 |
| | $ | 1,176 |
|
Interest rate swaps | 105,000 |
| | 87 |
| | 664,500 |
| | 1,126 |
| | 491,400 |
| | 6,829 |
| | 40,000 |
| | 4,214 |
|
Total derivatives | $ | 162,761 |
| | $ | 517 |
| | $ | 823,262 |
| | $ | 3,122 |
| | $ | 786,188 |
| | $ | 13,083 |
| | $ | 162,439 |
| | $ | 5,390 |
|
Derivative assets and derivative liabilities are classified within “other assets” or “accounts payable and accrued liabilities” on the consolidated balance sheets.
The following table provides the net realized and unrealized gains (losses) on derivatives not designated as hedges recorded on the consolidated income statements:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Foreign exchange contracts | $ | (1,598 | ) | | $ | 1,989 |
| | $ | (2,466 | ) | | $ | 1,245 |
|
Total included in foreign exchange loss | (1,598 | ) | | 1,989 |
| | (2,466 | ) | | 1,245 |
|
Put options | — |
| | (90 | ) | | — |
| | (3,822 | ) |
Foreign exchange contracts | (286 | ) | | 4,274 |
| | (844 | ) | | 6,089 |
|
Interest rate futures and swaps | (13,434 | ) | | 4,354 |
| | (25,796 | ) | | 5,294 |
|
Total included in net realized investment gains (losses) | (13,720 | ) | | 8,538 |
| | (26,640 | ) | | 7,561 |
|
Total realized and unrealized (losses) gains on derivatives | $ | (15,318 | ) | | $ | 10,527 |
| | $ | (29,106 | ) | | $ | 8,806 |
|
The losses related to interest rate future and swap contracts for the three and six months ended June 30, 2014 were the result of selling interest rate future and swap contracts to reduce the duration of the investment portfolio. Given the decrease in interest rates during the year, the Company recorded a loss related to these interest rate future and swap contracts.
Derivative Instruments Not Designated as Hedging Instruments
The Company is exposed to foreign currency risk in its investment portfolio. Accordingly, the fair values of the Company’s investment portfolio are partially influenced by the change in foreign exchange rates. These foreign currency hedging activities have not been designated as specific hedges for financial reporting purposes.
The Company’s insurance and reinsurance subsidiaries and branches operate in various foreign countries and consequently the Company’s underwriting portfolio is exposed to foreign currency risk. The Company manages foreign currency risk by seeking to match liabilities under the insurance policies and reinsurance contracts that it writes and that are payable in foreign currencies with cash and investments that are denominated in such currencies. When necessary, the Company may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts and currency options.
The Company also purchases and sells interest rate future and interest rate swap contracts to actively manage the duration and yield curve positioning of its fixed income portfolio. Interest rate futures and interest rate swaps can efficiently increase or decrease the overall duration of the portfolio. Additionally, interest rate future and interest rate swap contracts can be utilized to obtain the desired position along the yield curve in order to protect against certain future yield curve shapes.
The Company also purchases options to actively manage its equity portfolio.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
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:
|
| | | | | | | | | | | | | | | | | | | | |
June 30, 2014 | | Carrying Amount | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
Fixed maturity investments: | | | | | | | | | | |
U.S. Government and Government agencies | | $ | 1,274,331 |
| | $ | 1,274,331 |
| | $ | 1,058,607 |
| | $ | 215,724 |
| | $ | — |
|
Non-U.S. Government and Government agencies | | 185,071 |
| | 185,071 |
| |
|
| | 185,071 |
| | — |
|
States, municipalities and political subdivisions | | 261,267 |
| | 261,267 |
| | — |
| | 261,267 |
| | — |
|
Corporate debt | | 2,435,285 |
| | 2,435,285 |
| | — |
| | 2,435,285 |
| | — |
|
Mortgage-backed | | 1,323,763 |
| | 1,323,763 |
| | — |
| | 1,176,962 |
| | 146,801 |
|
Asset-backed | | 677,367 |
| | 677,367 |
| | — |
| | 606,135 |
| | 71,232 |
|
Total fixed maturity investments | | 6,157,084 |
| | 6,157,084 |
| | 1,058,607 |
| | 4,880,444 |
| | 218,033 |
|
Equity securities | | 938,117 |
| | 938,117 |
| | 903,254 |
| | — |
| | 34,863 |
|
Other invested assets | | 804,505 |
| | 804,505 |
| | — |
| | — |
| | 804,505 |
|
Total investments | | $ | 7,899,706 |
| | $ | 7,899,706 |
| | $ | 1,961,861 |
| | $ | 4,880,444 |
| | $ | 1,057,401 |
|
Derivative assets: | | | | | | | | | | |
Foreign exchange contracts | | $ | 430 |
| | $ | 430 |
| | $ | — |
| | $ | 430 |
| | $ | — |
|
Interest rate swaps | | 87 |
| | 87 |
| | — |
| | 87 |
| | — |
|
Derivative liabilities: | | | | | | | | | | |
Foreign exchange contracts | | $ | 1,996 |
| | $ | 1,996 |
| | $ | — |
| | $ | 1,996 |
| | $ | — |
|
Interest rate swaps | | 1,126 |
| | 1,126 |
| | — |
| | 1,126 |
| | — |
|
Senior notes | | $ | 798,648 |
| | $ | 907,005 |
| | $ | — |
| | $ | 907,005 |
| | $ | — |
|
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | | Carrying Amount | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
Fixed maturity investments: | | | | | | | | | | |
U.S. Government and Government agencies | | $ | 1,676,788 |
| | $ | 1,676,788 |
| | $ | 1,370,088 |
| | $ | 306,700 |
| | $ | — |
|
Non-U.S. Government and Government agencies | | 191,776 |
| | 191,776 |
| | — |
| | 191,776 |
| | — |
|
States, municipalities and political subdivisions | | 231,555 |
| | 231,555 |
| | — |
| | 231,555 |
| | — |
|
Corporate debt | | 2,202,267 |
| | 2,202,267 |
| | — |
| | 2,202,267 |
| | — |
|
Mortgage-backed | | 1,292,502 |
| | 1,292,502 |
| | — |
| | 1,145,164 |
| | 147,338 |
|
Asset-backed | | 505,910 |
| | 505,910 |
| | — |
| | 412,497 |
| | 93,413 |
|
Total fixed maturity investments | | 6,100,798 |
| | 6,100,798 |
| | 1,370,088 |
| | 4,489,959 |
| | 240,751 |
|
Equity securities | | 699,846 |
| | 699,846 |
| | 625,942 |
| | — |
| | 73,904 |
|
Other invested assets | | 764,081 |
| | 764,081 |
| | — |
| | — |
| | 764,081 |
|
Total investments | | $ | 7,564,725 |
| | $ | 7,564,725 |
| | $ | 1,996,030 |
| | $ | 4,489,959 |
| | $ | 1,078,736 |
|
Derivative assets: | | | | | | | | | | |
Foreign exchange contracts | | $ | 6,254 |
| | $ | 6,254 |
| | $ | — |
| | $ | 6,254 |
| | $ | — |
|
Interest rate swaps | | 6,829 |
| | 6,829 |
| | — |
| | 6,829 |
| | — |
|
Derivative liabilities: | | | | | | | | | | |
Foreign exchange contracts | | $ | 1,176 |
| | $ | 1,176 |
| | $ | — |
| | $ | 1,176 |
| | $ | — |
|
Interest rate swaps | | $ | 4,214 |
| | $ | 4,214 |
| | $ | — |
| | $ | 4,214 |
| | $ | — |
|
Senior notes | | $ | 798,499 |
| | $ | 897,601 |
| | $ | — |
| | $ | 897,601 |
| | $ | — |
|
“Other invested assets” excluded other private securities that the Company did not measure at fair value, but are accounted for using the equity method of accounting. Derivative assets and derivative liabilities relating to foreign exchange contracts and interest rate swaps 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.
Recurring Fair Value of Financial Instruments
U.S. Government and Government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company’s U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
Non-U.S. Government and Government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.
States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S.-domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.
Corporate debt: Comprised of bonds issued by or loan obligations of corporations that are diversified across a wide range of issuers and industries. The fair values of corporate debt that are short-term are priced using spread above the LIBOR yield curve, and the fair values of corporate debt that are long-term are priced using the spread above the risk-free yield curve. The
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
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 debt 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 the appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market or broker-dealer quotes. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
Equity securities: Comprised of common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Non-U.S. mutual funds where the net asset value is not provided on a daily basis are included in the Level 3 fair value hierarchy.
Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value of the funds as reported by the fund manager that the Company believes is an unobservable input, and as such, the fair values of those funds are included in the Level 3 fair value hierarchy.
Derivative instruments: The fair value of foreign exchange contracts, interest rate futures and interest rate swaps are priced from quoted market prices for similar exchange-traded derivatives and pricing valuation models that utilize independent market data inputs. The fair value of derivatives are included in the Level 2 fair value hierarchy.
Senior notes: The fair value of the senior notes is based on reported trades. The fair value of the senior notes is included in the Level 2 fair value hierarchy.
Non-recurring Fair Value of Financial Instruments
The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, goodwill and intangible assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:
Investments accounted for using the equity method: When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using discounted cash flow models.
Goodwill and intangible assets: The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but at least annually for goodwill and indefinite-lived intangibles. If the Company determines that goodwill and intangible assets may be impaired, the Company uses techniques, including discounted expected future cash flows and market multiple models, to measure fair value.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Rollforward of Level 3 Financial Instruments
The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3):
|
| | | | | | | | | | | | | | | |
Three Months Ended June 30, 2014 | Other invested assets | | Mortgage-backed | | Asset-backed | | Equities |
Opening balance | $ | 839,986 |
| | $ | 134,061 |
| | $ | 81,234 |
| | $ | 34,786 |
|
Realized and unrealized gains (losses) included in net income | 22,498 |
| | 2,721 |
| | 450 |
| | 77 |
|
Purchases | 99,722 |
| | 20,928 |
| | 9,409 |
| | — |
|
Sales | (157,701 | ) | | (26,734 | ) | | (3,743 | ) | | — |
|
Transfers into Level 3 from Level 2 | — |
| | 17,437 |
| | — |
| | — |
|
Transfers out of Level 3 into Level 2 (1) | — |
| | (1,612 | ) | | (16,118 | ) | | — |
|
Ending balance | $ | 804,505 |
| | $ | 146,801 |
| | $ | 71,232 |
| | $ | 34,863 |
|
Three Months Ended June 30, 2013 | | | | | | | |
Opening balance | $ | 710,140 |
| | $ | 155,420 |
| | $ | 40,903 |
| | $ | 57,787 |
|
Realized and unrealized gains (losses) included in net income | 11,709 |
| | (6,188 | ) | | (289 | ) | | (4,288 | ) |
Purchases | 96,742 |
| | 72,261 |
| | 23,527 |
| | — |
|
Sales | (104,200 | ) | | (27,887 | ) | | (1,727 | ) | | — |
|
Transfers into Level 3 from Level 2 | — |
| | 11,197 |
| | — |
| | — |
|
Transfers out of Level 3 into Level 2 (1) | — |
| | (6,800 | ) | | (1,129 | ) | | — |
|
Ending balance | $ | 714,391 |
| | $ | 198,003 |
| | $ | 61,285 |
| | $ | 53,499 |
|
|
| | | | | | | | | | | | | | | |
Six Months Ended June 30, 2014 | Other invested assets | | Mortgage-backed | | Asset-backed | | Equities |
Opening balance | $ | 764,081 |
| | $ | 147,338 |
| | $ | 93,413 |
| | $ | 73,904 |
|
Realized and unrealized gains (losses) included in net income | 45,124 |
| | 4,479 |
| | (355 | ) | | (9,744 | ) |
Purchases | 188,920 |
| | 50,840 |
| | 16,938 |
| | — |
|
Sales | (193,620 | ) | | (54,419 | ) | | (8,225 | ) | | (29,297 | ) |
Transfers into Level 3 from Level 2 | — |
| | 103 |
| | — |
| | — |
|
Transfers out of Level 3 into Level 2 (1) | — |
| | (1,540 | ) | | (30,539 | ) | | — |
|
Ending balance | $ | 804,505 |
| | $ | 146,801 |
| | $ | 71,232 |
| | $ | 34,863 |
|
Six Months Ended June 30, 2013 | | | | | | | |
Opening balance | $ | 655,888 |
| | $ | 167,825 |
| | $ | 62,246 |
| | $ | 54,680 |
|
Realized and unrealized gains (losses) included in net income | 43,962 |
| | (7,613 | ) | | (382 | ) | | (1,181 | ) |
Purchases | 169,952 |
| | 71,752 |
| | 24,782 |
| | — |
|
Sales | (155,411 | ) | | (29,864 | ) | | (18,478 | ) | | — |
|
Transfers into Level 3 from Level 2 | — |
| | 7,109 |
| | — |
| | — |
|
Transfers out of Level 3 into Level 2 (1) | — |
| | (11,206 | ) | | (6,883 | ) | | — |
|
Ending balance | $ | 714,391 |
| | $ | 198,003 |
| | $ | 61,285 |
| | $ | 53,499 |
|
_______________________
| |
(1) | Transfers out of Level 3 are primarily attributable to the availability of market observable information. |
The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs, then 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.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The Company’s external investment accounting service provider receives prices from internationally recognized independent pricing services to measure the fair values of its fixed maturity investments. Pricing sources are evaluated and selected in a manner to ensure that the most reliable sources are used. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. The Company obtains multiple quotes for the majority of its securities. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each pricing service has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing service uses observable market inputs, including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value.
All of the Company’s securities classified as Level 3, other than investments in other invested assets, are valued based on unadjusted broker-dealer quotes. This includes less liquid securities such as lower quality asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The primary valuation inputs include monthly payment information, the probability of default, loss severity rates and estimated prepayment rates. Significant changes in these inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity in an event of default and prepayment rates.
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, 2014 | | December 31, 2013 |
Outstanding loss reserves | $ | 1,543,506 |
| | $ | 1,520,867 |
|
Reserves for losses incurred but not reported | 4,392,172 |
| | 4,245,662 |
|
Reserve for losses and loss expenses | $ | 5,935,678 |
| | $ | 5,766,529 |
|
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The 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, |
| 2014 | | 2013 | | 2014 | | 2013 |
Gross liability at beginning of period | $ | 5,856,798 |
| | $ | 5,673,220 |
| | $ | 5,766,529 |
| | $ | 5,645,549 |
|
Reinsurance recoverable at beginning of period | (1,280,525 | ) | | (1,163,503 | ) | | (1,234,504 | ) | | (1,141,110 | ) |
Net liability at beginning of period | 4,576,273 |
| | 4,509,717 |
| | 4,532,025 |
| | 4,504,439 |
|
Net losses incurred related to: | | | | | | | |
Current year | 359,994 |
| | 323,556 |
| | 684,141 |
| | 622,804 |
|
Prior years | (45,139 | ) | | (48,428 | ) | | (94,000 | ) | | (92,498 | ) |
Total incurred | 314,855 |
| | 275,128 |
| | 590,141 |
| | 530,306 |
|
Net paid losses related to: | | | | | | | |
Current year | 23,065 |
| | 21,003 |
| | 26,808 |
| | 24,584 |
|
Prior years | 235,335 |
| | 241,764 |
| | 463,929 |
| | 482,885 |
|
Total paid | 258,400 |
| | 262,767 |
| | 490,737 |
| | 507,469 |
|
Foreign exchange revaluation | 1,208 |
| | (4,738 | ) | | 2,507 |
| | (9,936 | ) |
Net liability at end of period | 4,633,936 |
| | 4,517,340 |
| | 4,633,936 |
| | 4,517,340 |
|
Reinsurance recoverable at end of period | 1,301,742 |
| | 1,179,525 |
| | 1,301,742 |
| | 1,179,525 |
|
Gross liability at end of period | $ | 5,935,678 |
| | $ | 5,696,865 |
| | $ | 5,935,678 |
| | $ | 5,696,865 |
|
For the three months ended June 30, 2014, the Company had net unfavorable prior year reserve development in the U.S. insurance segment and recorded net favorable prior year reserve development in the international insurance and reinsurance segments. The net unfavorable prior year reserve development in the U.S. insurance segment related primarily to the healthcare line of business, as well as adverse development on reported claims in the lawyers errors and omissions ("E&O") and primary casualty classes of business. The net favorable prior year reserve development in the international insurance and reinsurance segments was due to actual loss emergence being lower than initially expected.
For the six months ended June 30, 2014, the Company had net unfavorable prior year reserve development in the U.S. insurance segment and recorded net favorable prior year reserve development in the international insurance and reinsurance segments. The net unfavorable prior year reserve development in the U.S. insurance segment related to the healthcare line of business due to higher than expected loss frequency and severity in the medical malpractice class of business. The U.S. insurance segment also experienced adverse development on reported claims in the lawyers E&O class of business and the primary casualty class of business in the 2013 loss year. The net favorable prior year reserve development in the international insurance and reinsurance segments was due to actual loss emergence being lower than initially expected.
For the three months ended June 30, 2013, 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 2007 through 2010 loss years across most lines of business. In addition, the reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years.
For the six months ended June 30, 2013, the Company had net favorable reserve development in its international and reinsurance segments due to actual loss emergence being lower than initially expected, primarily for loss years 2004 to 2008. The reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years for certain E&O and director’s and officers’ classes of business.
While the Company at times has experienced favorable reserve 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
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
appropriate to extrapolate future redundancies based on prior years’ development. The methodology of estimating loss reserves is periodically reviewed to ensure that the key assumptions used in the actuarial models continue to be appropriate.
8. INCOME TAXES
Under Swiss law, a resident company is subject to income tax at the federal, cantonal and communal levels that is levied on net income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. Allied World Switzerland is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, Allied World Switzerland is subject to Swiss income tax only at the federal level. Allied World Switzerland is a resident of the Canton of Zug and, as such, is subject to an annual cantonal and communal capital tax on the taxable equity of Allied World Switzerland. Allied World Switzerland has a Swiss operating company resident in the Canton of Zug. The operating company is subject to federal, cantonal and communal income tax and to annual cantonal and communal capital tax.
Under current Bermuda law, Allied World Assurance Company Holdings, Ltd (“Allied World Bermuda”) and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Allied World Bermuda and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Allied World Bermuda and Allied World Assurance Company, Ltd will be exempted until March 2035.
Certain subsidiaries of Allied World Switzerland file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in Canada, Hong Kong, Ireland, Labuan, the United Kingdom, Singapore and Switzerland. 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 June 30, 2014.
9. SHAREHOLDERS’ EQUITY
a) Authorized shares
The issued share capital consists of the following:
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Common shares issued and fully paid, 2014: CHF 4.10 per share; 2013: CHF 4.10 per share | 99,515,760 |
| | 103,477,452 |
|
Share capital at end of period | $ | 402,907 |
| | $ | 418,988 |
|
|
| | |
| Six Months Ended June 30, 2014 |
Shares issued at beginning of period | 103,477,452 |
|
Shares cancelled | (3,961,692 | ) |
Total shares issued at end of period | 99,515,760 |
|
Treasury shares issued at beginning of period | 3,223,806 |
|
Shares repurchased | 3,961,692 |
|
Shares issued out of treasury | (637,137 | ) |
Shares cancelled | (3,961,692 | ) |
Total treasury shares at end of period | 2,586,669 |
|
Total shares outstanding at end of period | 96,929,091 |
|
During the six months ended June 30, 2014, 3,961,692 shares repurchased and designated for cancellation were constructively retired and cancelled.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
b) Dividends
The Company paid the following dividends during the six months ended June 30, 2014:
|
| | | | | | | | |
Dividend Paid | | Dividend Per Share | | Total Amount Paid |
January 2, 2014 | | $ | 0.167 |
| | $ | 16,732 |
|
April 3, 2014 | | $ | 0.167 |
| | $ | 16,495 |
|
On May 2, 2013, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution amounts were paid to shareholders in quarterly dividends of $0.167 per share in July 2013, October 2013, January 2014 and April 2014.
On May 1, 2014, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution amount will be paid to shareholders in quarterly installments of $0.225 per share. The first installment of the dividend was on July 2, 2014. The Company expects to distribute the remaining installments of the dividend in October 2014, January 2015 and April 2015.
c) Share Repurchases
On May 1, 2014, the shareholders approved a new share repurchase program in order for the Company to repurchase up to $500,000 of its common shares. This new share repurchase program supersedes the 2012 share repurchase program and no further repurchases will be made under the 2012 share repurchase program. Repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position, legal requirements and other factors. Under the terms of this share repurchase program, the first three million of common shares repurchased will remain in treasury and will be used by the Company to satisfy share delivery obligations under its equity-based compensation plans. Any additional common shares repurchased will be designated for cancellation at acquisition and will be canceled upon shareholder approval. Shares repurchased and designated for cancellation are constructively retired and recorded as a share cancellation.
The Company’s share repurchases were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Common shares repurchased | 1,949,496 |
| | 1,524,984 |
| | 3,961,692 |
| | 2,821,335 |
|
Total cost of shares repurchased | $ | 70,874 |
| | $ | 46,326 |
| | $ | 139,532 |
| | $ | 82,571 |
|
Average price per share | $ | 36.36 |
| | $ | 30.38 |
| | $ | 35.22 |
| | $ | 29.27 |
|
10. EMPLOYEE BENEFIT PLANS
a) Restricted stock units and performance-based equity awards
Restricted stock units ("RSUs") vest pro-rata over four years from the date of grant. The compensation expense for the RSUs is based on the fair market value of Allied World Switzerland’s common shares at the date of grant. The Company estimates the expected forfeitures of RSUs at the date of grant and recognizes compensation expense only for those awards that the Company expects to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate.
Performance-based equity awards represent the right to receive a number of common shares in the future, based upon the achievement of established performance criteria during an applicable performance period. For the performance-based equity awards granted in 2014, 2013 and 2012, the Company anticipates that the performance goals are likely to be achieved. Based on the performance goals, the performance-based equity awards granted in 2014, 2013 and 2012 are expensed at 100%, 100%
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
and 135%, respectively, of the fair value of Allied World Switzerland's common shares on the date of grant. The expense is recognized over the performance period.
The activity related to the Company’s RSUs awards is as follows:
|
| | | | | | |
| Six Months Ended June 30, 2014 |
| Number of Awards | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of period | 143,697 |
| | $ | 21.69 |
|
RSUs granted | 454,176 |
| | 33.56 |
|
RSUs forfeited | (5,097 | ) | | (30.64 | ) |
RSUs fully vested | (76,230 | ) | | (21.75 | ) |
Outstanding at end of period | 516,546 |
| | $ | 32.03 |
|
The activity related to the Company’s performance-based equity awards is as follows: |
| | | | | | |
| Six Months Ended June 30, 2014 |
| Number of Awards | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of period | 804,519 |
| | $ | 23.21 |
|
Performance-based equity awards granted | 166,302 |
| | 33.56 |
|
Additional awards granted due to achievement of performance criteria | 104,895 |
| | (20.50 | ) |
Performance-based equity awards forfeited | (1,848 | ) | | (25.28 | ) |
Performance-based equity awards fully vested | (454,440 | ) | | (20.50 | ) |
Outstanding at end of period | 619,428 |
| | $ | 27.51 |
|
b) Cash-equivalent stock awards
As part of the Company’s annual year-end compensation awards, the Company granted both awards classified as equity and cash-equivalent stock awards. The cash-equivalent awards were granted to employees who received RSUs and performance-based equity awards in tandem with stock-based awards. The cash-equivalent RSU awards vest pro-rata over four years from the date of grant. The cash-equivalent performance-based equity awards vest after a three-year performance period. The amount payable per unit awarded will be equal to the price per share of Allied World Switzerland’s common shares, and as such the Company measures the value of the award each reporting period based on the period-ending share price. The effects of changes in the share price at each period-end during the service period are recognized as changes in compensation expense ratably over the service period. The liability is included in “accounts payable and accrued liabilities” in the consolidated balance sheets and changes in the liability are recorded in “general and administrative expenses” in the consolidated income statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The activity related to the Company's cash-equivalent RSUs and performance-based awards is as follows: |
| | | | | | | | | | | | | |
| RSU's | | Performance-based Awards |
Six Months Ended June 30, 2014 | Number of Awards | | Weighted Average Grant Date Fair Value | | Number of Awards | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of period | 2,049,084 |
| | $ | 24.69 |
| | 1,031,961 |
| | 23.67 |
|
Granted | 438,162 |
| | 33.56 |
| | 249,438 |
| | 33.56 |
|
Additional awards granted due to achievement of performance criteria | — |
| | — |
| | 104,895 |
| | 20.50 |
|
Forfeited | (38,886 | ) | | (26.36 | ) | | (2,769 | ) | | (25.28 | ) |
Fully vested | (751,920 | ) | | (22.47 | ) | | (454,440 | ) | | (20.50 | ) |
Outstanding at end of period | 1,696,440 |
| | $ | 27.93 |
| | 929,085 |
| | $ | 27.51 |
|
c) Total Stock Related Compensation Expense
The following table shows the total stock-related compensation expense relating to the stock options, RSUs and cash equivalent awards.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Stock options | $ | 413 |
| | $ | 679 |
| | $ | 1,140 |
| | $ | 2,014 |
|
RSUs and performance-based equity awards | 2,977 |
| | 1,891 |
| | 6,490 |
| | 4,551 |
|
Cash-equivalent stock awards | 12,868 |
| | 8,212 |
| | 17,497 |
| | 20,968 |
|
Total | $ | 16,258 |
| | $ | 10,782 |
| | $ | 25,127 |
| | $ | 27,533 |
|
11. 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, |
| 2014 | | 2013 | | 2014 | | 2013 |
Basic earnings (loss) per share: | | | | | | | |