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, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32938
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland | 98-0681223 | |
(State or Other Jurisdiction of | (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
(Registrants 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 26, 2013, 34,087,192 common shares were outstanding.
PART I FINANCIAL INFORMATION | ||||||
Item 1. |
Financial Statements | 1 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 29 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 63 | ||||
Item 4. | Controls and Procedures | 65 | ||||
PART II OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 66 | ||||
Item 1A. | Risk Factors | 66 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 66 | ||||
Item 3. | Defaults Upon Senior Securities | 66 | ||||
Item 4. | Mine Safety Disclosures | 67 | ||||
Item 5. | Other Information | 67 | ||||
Item 6. | Exhibits | 67 | ||||
SIGNATURES | 68 | |||||
EXHIBIT INDEX | 69 |
-i-
FINANCIAL INFORMATION
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2013 and December 31, 2012
(Expressed in thousands, except share and per share amounts)
As of | As of | |||||||
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
ASSETS: |
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Fixed maturity investments trading, at fair value (amortized cost: 2013: $6,264,343; 2012: $6,473,429) |
$ | 6,285,778 | $ | 6,626,454 | ||||
Equity securities trading, at fair value (cost: 2013: $594,025; 2012: $480,312) |
640,925 | 523,949 | ||||||
Other invested assets |
849,100 | 783,534 | ||||||
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Total investments |
7,775,803 | 7,933,937 | ||||||
Cash and cash equivalents |
674,103 | 681,879 | ||||||
Restricted cash |
194,046 | 183,485 | ||||||
Insurance balances receivable |
814,620 | 510,532 | ||||||
Funds held |
387,599 | 336,368 | ||||||
Prepaid reinsurance |
339,936 | 277,406 | ||||||
Reinsurance recoverable |
1,179,525 | 1,141,110 | ||||||
Accrued investment income |
24,112 | 29,135 | ||||||
Net deferred acquisition costs |
153,812 | 108,010 | ||||||
Goodwill |
268,376 | 268,376 | ||||||
Intangible assets |
50,098 | 51,365 | ||||||
Balances receivable on sale of investments |
277,025 | 418,879 | ||||||
Net deferred tax assets |
40,550 | 25,580 | ||||||
Other assets |
85,272 | 63,884 | ||||||
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Total assets |
$ | 12,264,877 | $ | 12,029,946 | ||||
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LIABILITIES: |
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Reserve for losses and loss expenses |
$ | 5,696,865 | $ | 5,645,549 | ||||
Unearned premiums |
1,586,327 | 1,218,021 | ||||||
Reinsurance balances payable |
205,884 | 136,264 | ||||||
Balances due on purchases of investments |
487,063 | 759,934 | ||||||
Senior notes |
798,355 | 798,215 | ||||||
Dividends payable |
17,127 | | ||||||
Accounts payable and accrued liabilities |
100,027 | 145,628 | ||||||
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Total liabilities |
$ | 8,891,648 | $ | 8,703,611 | ||||
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Commitments and contingencies |
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SHAREHOLDERS EQUITY: |
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Common shares: 2013: par value CHF 12.30 per share and 2012: par value CHF 12.64 per share (2013: 35,429,423; 2012: 36,369,868 shares issued and 2013: 34,175,831; 2012: 34,797,781 shares outstanding) |
430,397 | 454,980 | ||||||
Treasury shares, at cost (2013: 1,253,592; 2012: 1,572,087) |
(91,661 | ) | (113,818 | ) | ||||
Retained earnings |
3,034,493 | 2,985,173 | ||||||
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Total shareholders equity |
3,373,229 | 3,326,335 | ||||||
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Total liabilities and shareholders equity |
$ | 12,264,877 | $ | 12,029,946 | ||||
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See accompanying notes to the consolidated financial statements.
1
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
for the three and six months ended June 30, 2013 and 2012
(Expressed in thousands, except share and per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
REVENUES: |
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Gross premiums written |
$ | 765,200 | $ | 646,870 | $ | 1,602,281 | $ | 1,327,799 | ||||||||
Premiums ceded |
(183,978 | ) | (152,160 | ) | (326,007 | ) | (244,136 | ) | ||||||||
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Net premiums written |
581,222 | 494,710 | 1,276,274 | 1,083,663 | ||||||||||||
Change in unearned premiums |
(73,951 | ) | (64,963 | ) | (305,775 | ) | (252,026 | ) | ||||||||
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Net premiums earned |
507,271 | 429,747 | 970,499 | 831,637 | ||||||||||||
Net investment income |
37,635 | 42,451 | 71,023 | 89,660 | ||||||||||||
Net realized investment (losses) gains |
(115,198 | ) | 8,663 | (35,561 | ) | 142,244 | ||||||||||
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429,708 | 480,861 | 1,005,961 | 1,063,541 | |||||||||||||
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EXPENSES: |
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Net losses and loss expenses |
275,128 | 240,380 | 530,306 | 465,582 | ||||||||||||
Acquisition costs |
64,617 | 51,588 | 121,302 | 98,726 | ||||||||||||
General and administrative expenses |
80,585 | 73,979 | 163,265 | 144,345 | ||||||||||||
Amortization of intangible assets |
634 | 634 | 1,267 | 1,267 | ||||||||||||
Interest expense |
14,188 | 14,001 | 28,322 | 27,757 | ||||||||||||
Foreign exchange loss (gain) |
490 | (1,019 | ) | 3,008 | (1,100 | ) | ||||||||||
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435,642 | 379,563 | 847,470 | 736,577 | |||||||||||||
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(Loss) income before income taxes |
(5,934 | ) | 101,298 | 158,491 | 326,964 | |||||||||||
Income tax (benefit) expense |
(4,072 | ) | 4,947 | 1,361 | 12,457 | |||||||||||
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NET (LOSS) INCOME |
(1,862 | ) | 96,351 | 157,130 | 314,507 | |||||||||||
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Other comprehensive loss: |
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Unrealized gains on investments arising during the period net of applicable deferred income tax benefit for the three and six months ended June 30, 2012: $68 and $96, respectively |
| 231 | | 179 | ||||||||||||
Reclassification adjustment for net realized investment gains included in net (loss) income, net of applicable income tax |
| (1,142 | ) | | (13,249 | ) | ||||||||||
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Other comprehensive loss |
| (911 | ) | | (13,070 | ) | ||||||||||
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COMPREHENSIVE (LOSS) INCOME |
$ | (1,862 | ) | $ | 95,440 | $ | 157,130 | $ | 301,437 | |||||||
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PER SHARE DATA |
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Basic (loss) earnings per share |
$ | (0.05 | ) | $ | 2.66 | $ | 4.55 | $ | 8.56 | |||||||
Diluted (loss) earnings per share |
$ | (0.05 | ) | $ | 2.59 | $ | 4.45 | $ | 8.41 | |||||||
Weighted average common shares outstanding |
34,422,553 | 36,288,596 | 34,517,552 | 36,746,881 | ||||||||||||
Weighted average common shares and common share equivalents outstanding |
34,422,553 | 37,189,722 | 35,316,595 | 37,395,559 | ||||||||||||
Dividends paid per share |
$ | | $ | 0.375 | $ | 0.375 | $ | 0.750 |
See accompanying notes to the consolidated financial statements.
2
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
for the six months ended June 30, 2013 and 2012
(Expressed in thousands)
Share Capital |
Additional Paid-in Capital |
Treasury Shares |
Accumulated Other Comprehensive Income |
Retained Earnings |
Total | |||||||||||||||||||
December 31, 2012 |
$ | 454,980 | $ | | $ | (113,818 | ) | $ | | $ | 2,985,173 | $ | 3,326,335 | |||||||||||
Net income |
| | | | 157,130 | 157,130 | ||||||||||||||||||
Dividends par value reduction |
(12,981 | ) | | | | | (12,981 | ) | ||||||||||||||||
Dividends |
| | | | (17,127 | ) | (17,127 | ) | ||||||||||||||||
Stock compensation (1) |
| | 22,157 | | (19,714 | ) | 2,443 | |||||||||||||||||
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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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 (1) |
| (25,410 | ) | 32,011 | | | 6,601 | |||||||||||||||||
Share repurchases |
| | (159,458 | ) | | | (159,458 | ) | ||||||||||||||||
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June 30, 2012 |
$ | 543,452 | $ | 52,815 | $ | (264,037 | ) | $ | 1,414 | $ | 2,950,257 | $ | 3,283,901 | |||||||||||
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(1) | Includes stock compensation expense for the period and shares issued out of treasury for awards exercised or vested. |
See accompanying notes to the consolidated financial statements.
3
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 2013 and 2012
(Expressed in thousands)
Six Months Ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: |
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Net income |
$ | 157,130 | $ | 314,507 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
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Net realized gains on sales of investments |
(62,921 | ) | (46,834 | ) | ||||
Mark to market adjustments |
95,698 | (94,732 | ) | |||||
Stock compensation expense |
6,566 | 9,294 | ||||||
Undistributed income of equity method investments |
(2,316 | ) | | |||||
Changes in: |
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Reserve for losses and loss expenses, net of reinsurance recoverables |
12,901 | 81,682 | ||||||
Unearned premiums, net of prepaid reinsurance |
305,776 | 252,026 | ||||||
Insurance balances receivable |
(304,088 | ) | (187,038 | ) | ||||
Funds held |
(51,231 | ) | (6,467 | ) | ||||
Reinsurance balances payable |
69,620 | 3,767 | ||||||
Net deferred acquisition costs |
(45,802 | ) | (29,484 | ) | ||||
Net deferred tax assets |
(14,970 | ) | (3,458 | ) | ||||
Accounts payable and accrued liabilities |
(45,601 | ) | (19,978 | ) | ||||
Other items, net |
12,880 | 28,488 | ||||||
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Net cash provided by operating activities |
133,642 | 301,773 | ||||||
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CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES: |
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Purchases of trading securities |
(3,186,162 | ) | (4,005,352 | ) | ||||
Purchases of other invested assets |
(141,805 | ) | (17,778 | ) | ||||
Sales of available for sale securities |
| 214,015 | ||||||
Sales of trading securities |
3,171,977 | 3,959,204 | ||||||
Sales of other invested assets |
126,491 | 108,759 | ||||||
Purchases of fixed assets |
(3,363 | ) | (879 | ) | ||||
Change in restricted cash |
(10,561 | ) | (156,768 | ) | ||||
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Net cash (used in) provided by investing activities |
(43,423 | ) | 101,201 | |||||
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CASH FLOWS USED IN FINANCING ACTIVITIES: |
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Dividends paid partial par value reduction |
(12,981 | ) | (28,003 | ) | ||||
Proceeds from the exercise of stock options |
5,293 | 6,697 | ||||||
Share repurchases |
(82,571 | ) | (148,949 | ) | ||||
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Net cash used in financing activities |
(90,259 | ) | (170,255 | ) | ||||
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Effect of exchange rate changes on foreign currency cash |
(7,736 | ) | (2,265 | ) | ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(7,776 | ) | 230,454 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
681,879 | 633,996 | ||||||
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 674,103 | $ | 864,450 | ||||
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes |
$ | 12,671 | $ | 8,257 | ||||
Cash paid for interest expense |
$ | 27,000 | $ | 27,000 |
See accompanying notes to the consolidated financial statements.
4
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
1. GENERAL
Allied World Assurance Company Holdings, AG, a Swiss holding company (Allied World Switzerland), through its wholly-owned subsidiaries (collectively, the Company), provides property and casualty insurance and reinsurance on a worldwide basis through operations in Bermuda, the United States, Europe, Hong Kong and Singapore. References to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland.
2. BASIS OF PREPARATION AND CONSOLIDATION
These unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Companys financial statements include, but are not limited to:
| The premium estimates for certain reinsurance agreements, |
| Recoverability of deferred acquisition costs, |
| The reserve for outstanding losses and loss expenses, |
| Valuation of ceded reinsurance recoverables, |
| Determination of impairment of goodwill and other intangible assets, and |
| Valuation of financial instruments. |
Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the consolidation. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current years presentation.
These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Companys audited consolidated financial statements, and related notes thereto, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
3. NEW ACCOUNTING PRONOUNCEMENTS
In December 2011 (with a clarification amendment issued in January 2013), the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-11, Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The objective of ASU 2011-11 was to enhance disclosures about derivatives, repurchase agreements and reverse repurchase agreements, securities borrowing and securities lending transactions to the extent they are subject to master netting arrangements or similar agreements. The Company adopted ASU 2011-11 on January 1, 2013. The adoption of ASU 2011-11 did not have an impact on the presentation of the financial statements.
5
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
4. INVESTMENTS
a) Trading Securities
Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive (loss) income (consolidated income statements) by category are as follows:
June 30, 2013 | December 31, 2012 | |||||||||||||||
Fair Value | Amortized Cost | Fair Value | Amortized Cost | |||||||||||||
U.S. Government and Government agencies |
$ | 2,049,212 | $ | 2,060,490 | $ | 1,865,913 | $ | 1,854,198 | ||||||||
Non-U.S. Government and Government agencies |
233,301 | 242,487 | 261,627 | 253,657 | ||||||||||||
States, municipalities and political subdivisions |
33,621 | 33,328 | 40,444 | 39,342 | ||||||||||||
Corporate debt: |
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Financial institutions |
794,552 | 781,788 | 866,140 | 835,587 | ||||||||||||
Industrials |
1,089,904 | 1,087,425 | 1,153,909 | 1,139,706 | ||||||||||||
Utilities |
66,684 | 66,684 | 69,153 | 67,463 | ||||||||||||
Mortgage-backed |
1,589,021 | 1,564,838 | 1,958,373 | 1,877,854 | ||||||||||||
Asset-backed |
429,483 | 427,303 | 410,895 | 405,622 | ||||||||||||
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Total fixed maturity investments |
$ | 6,285,778 | $ | 6,264,343 | $ | 6,626,454 | $ | 6,473,429 | ||||||||
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June 30, 2013 | December 31, 2012 | |||||||||||||||
Fair Value | Original Cost | Fair Value | Original Cost | |||||||||||||
Equity securities |
$ | 640,925 | $ | 594,025 | $ | 523,949 | $ | 480,312 | ||||||||
Other invested assets |
714,391 | 635,632 | 655,888 | 606,521 | ||||||||||||
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$ | 1,355,316 | $ | 1,229,657 | $ | 1,179,837 | $ | 1,086,833 | |||||||||
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Other invested assets 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.
b) Other Invested Assets
In general, the Company has invested in hedge funds that require at least 30 days notice of redemption and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending on the fund. Certain hedge funds have lock-up periods ranging from one to three years from initial investment. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that provide for periodic redemptions may, depending on the funds governing documents, have the ability to deny or delay a redemption request, called a gate. The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the funds 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.
6
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Details regarding the carrying value, redemption characteristics and unfunded investment commitments of the other invested assets portfolio as of June 30, 2013 were as follows:
Fund Type |
Carrying Value as
of June 30, 2013 |
Investments with Redemption Restrictions |
Estimated Remaining Restriction Period |
Investments without Redemption Restrictions(1) |
Redemption Frequency (1) |
Redemption Notice Period(1) |
Unfunded Commitments |
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Private equity |
$ | 125,950 | $ | 125,950 | 3 - 10 Years | $ | | $ | 160,490 | |||||||||||||||||||
Mezzanine debt |
55,232 | 55,232 | 8 - 10 Years | | 209,623 | |||||||||||||||||||||||
Distressed |
8,890 | 8,890 | 4 - 5 Years | | 6,174 | |||||||||||||||||||||||
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Total private equity structures |
190,072 | 190,072 | | 376,287 | ||||||||||||||||||||||||
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Distressed |
136,779 | 112,119 | 1 - 2 Years | 24,660 | Quarterly | 45 - 65 Days | | |||||||||||||||||||||
Equity long/short |
110,889 | | 110,889 | Quarterly | 30 - 60 Days | | ||||||||||||||||||||||
Multi-strategy |
127,107 | | 127,107 | Quarterly | 45 - 90 Days | | ||||||||||||||||||||||
Global macro |
19,842 | | 19,842 | Monthly | 3 Days | | ||||||||||||||||||||||
Event driven |
22,430 | | 22,430 | Annual | 60 Days | | ||||||||||||||||||||||
Relative value credit |
75,109 | | 75,109 | Quarterly | 60 Days | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total hedge funds |
492,156 | 112,119 | 380,037 | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Other private securities |
134,709 | | 134,709 | 5,000 | ||||||||||||||||||||||||
High yield loan fund |
32,163 | | 32,163 | Monthly | 30 Days | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total other invested assets |
$ | 849,100 | $ | 302,191 | $ | 546,909 | $ | 381,287 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
(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. |
| Private equity funds: Primary funds may invest in companies and general partnership interests. Secondary funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| Mezzanine debt funds: Mezzanine debt funds primarily focus on providing capital to upper middle market and middle market companies and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity; however, the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. Certain funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. |
| Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and by their targeted net long position. |
| Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading. |
| Global macro funds: These funds focus on a top-down analysis of global markets as influenced by major political and economic trends or events. Global macro managers develop investment strategies that aim to forecast movements in interest rates, fund flows, political changes and other wide-ranging systematic factors. The portfolios of these funds can include long or short positions in equities, fixed-income securities, currencies and commodities in the form of cash or derivatives instruments. |
7
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
| Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one or more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include mergers and acquisitions (arbitrage), corporate restructurings and spin-offs, and capital structure arbitrage. |
| 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. |
| Other private securities: These securities include strategic non-controlling minority investments in private asset management companies and other insurance related investments that are accounted for using the equity method of accounting. |
| High yield loan fund: A long-only private mutual fund that invests in high yield fixed income securities. |
c) Net Investment Income
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Fixed maturity investments |
$ | 32,662 | $ | 37,219 | $ | 65,187 | $ | 84,105 | ||||||||
Equity securities |
4,409 | 4,963 | 7,608 | 8,495 | ||||||||||||
Other invested assets |
3,843 | 3,681 | 5,307 | 4,223 | ||||||||||||
Cash and cash equivalents |
529 | 550 | 1,017 | 1,157 | ||||||||||||
Expenses |
(3,808 | ) | (3,962 | ) | (8,096 | ) | (8,320 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income |
$ | 37,635 | $ | 42,451 | $ | 71,023 | $ | 89,660 | ||||||||
|
|
|
|
|
|
|
|
Net investment income from other invested assets included the distributed and undistributed net income from investments accounted for using the equity method of accounting for the three and six months ended June 30, 2013.
d) Components of Realized Gains and Losses
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Gross realized gains on sale of invested assets |
$ | 58,223 | $ | 52,775 | $ | 102,472 | $ | 91,944 | ||||||||
Gross realized losses on sale of invested assets |
(35,077 | ) | (14,762 | ) | (42,042 | ) | (36,669 | ) | ||||||||
Net realized and unrealized gains (losses) on derivatives |
8,538 | (5,914 | ) | 7,561 | 770 | |||||||||||
Mark-to-market gains (losses): |
||||||||||||||||
Fixed maturity investments, trading |
(115,113 | ) | (24,287 | ) | (131,588 | ) | 44,203 | |||||||||
Equity securities, trading |
(34,330 | ) | (182 | ) | (1,357 | ) | 19,603 | |||||||||
Other invested assets, trading |
2,561 | 1,033 | 29,393 | 22,393 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized investment (losses) gains |
$ | (115,198 | ) | $ | 8,663 | $ | (35,561 | ) | $ | 142,244 | ||||||
|
|
|
|
|
|
|
|
|||||||||
Proceeds from sale of available for sale securities |
$ | | $ | 14,308 | $ | | $ | 213,716 |
8
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
e) Pledged Assets
As of June 30, 2013 and December 31, 2012, $2,226,680 and $2,141,249, respectively, of cash and cash equivalents and investments were deposited, pledged or held in trust accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.
In addition, as of June 30, 2013 and December 31, 2012, a further $1,135,658 and $1,225,155, respectively, of cash and cash equivalents and investments were pledged as collateral for the Companys letter of credit facilities. See Note 8(d) to the Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012 for details on the Companys credit facilities.
5. DERIVATIVE INSTRUMENTS
As of June 30, 2013 and December 31, 2012, none of the Companys derivatives were designated as hedges. The following table summarizes information on the location and amounts of derivative fair values on the unaudited condensed consolidated balance sheets (consolidated balance sheets):
June 30, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||||||||||||||||||
Derivative | Asset | Derivative | Liability | Derivative | Asset | Derivative | Liability | |||||||||||||||||||||||||
Notional | Derivative | Notional | Derivative | Notional | Derivative | Notional | Derivative | |||||||||||||||||||||||||
Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | |||||||||||||||||||||||||
Put options |
$ | | $ | | $ | | $ | | $ | 5,152 | $ | 532 | $ | | $ | | ||||||||||||||||
Foreign exchange contracts |
307,191 | 9,248 | 171,906 | 4,612 | 127,712 | 1,713 | 194,566 | 2,656 | ||||||||||||||||||||||||
Interest rate swaps |
| | 33,000 | 161 | | | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivatives |
$ | 307,191 | $ | 9,248 | $ | 204,906 | $ | 4,773 | $ | 132,864 | $ | 2,245 | $ | 194,566 | $ | 2,656 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets and derivative liabilities relating to the put options are classified within equity securities trading, at fair value on the consolidated balance sheets. All other asset and liability derivatives are classified within other assets or accounts payable and accrued liabilities on the consolidated balance sheets.
The following table provides the net realized and unrealized gains (losses) on derivatives not designated as hedges recorded on the consolidated income statements:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Foreign exchange contracts |
$ | 1,989 | $ | (359 | ) | $ | 1,245 | $ | 580 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total included in foreign exchange (loss) gain |
1,989 | (359 | ) | 1,245 | 580 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Put options |
(90 | ) | | (3,822 | ) | (336 | ) | |||||||||
Foreign exchange contracts |
4,274 | 4,415 | 6,089 | 2,110 | ||||||||||||
Interest rate futures and swaps |
4,354 | (10,329 | ) | 5,294 | (1,004 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total included in net realized investment gains |
8,538 | (5,914 | ) | 7,561 | 770 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total realized and unrealized gains (losses) on derivatives |
$ | 10,527 | $ | (6,273 | ) | $ | 8,806 | $ | 1,350 | |||||||
|
|
|
|
|
|
|
|
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 Companys 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.
9
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 Companys insurance and reinsurance subsidiaries and branches operate in various foreign countries and consequently the Companys 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 the Companys 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. |
10
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The following table shows the fair value of the Companys financial instruments and where in the fair value hierarchy the fair value measurements are included as of the dates indicated below:
June 30, 2013 |
Carrying Amount |
Total Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Fixed maturity investments: |
||||||||||||||||||||
U.S. Government and Government agencies |
$ | 2,049,212 | $ | 2,049,212 | $ | 1,709,513 | $ | 339,699 | $ | | ||||||||||
Non-U.S. Government and Government agencies |
233,301 | 233,301 | | 233,301 | | |||||||||||||||
States, municipalities and political subdivisions |
33,621 | 33,621 | | 33,621 | | |||||||||||||||
Corporate debt |
1,951,140 | 1,951,140 | | 1,951,140 | | |||||||||||||||
Mortgage-backed |
1,589,021 | 1,589,021 | | 1,391,018 | 198,003 | |||||||||||||||
Asset-backed |
429,483 | 429,483 | | 368,198 | 61,285 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturity investments |
6,285,778 | 6,285,778 | 1,709,513 | 4,316,977 | 259,288 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities |
640,925 | 640,925 | 587,426 | | 53,499 | |||||||||||||||
Other invested assets |
714,391 | 714,391 | | | 714,391 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investments |
$ | 7,641,094 | $ | 7,641,094 | $ | 2,296,939 | $ | 4,316,977 | $ | 1,027,178 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative assets: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 9,248 | $ | 9,248 | $ | | $ | 9,248 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative liabilities: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 4,612 | $ | 4,612 | $ | | $ | 4,612 | $ | | ||||||||||
Interest rate swaps |
161 | 161 | | 161 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Senior notes |
$ | 798,355 | $ | 903,660 | $ | | $ | 903,660 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2012 |
Carrying Amount |
Total Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Fixed maturity investments: |
||||||||||||||||||||
U.S. Government and Government agencies |
$ | 1,865,913 | $ | 1,865,913 | $ | 1,529,158 | $ | 336,755 | $ | | ||||||||||
Non-U.S. Government and Government agencies |
261,627 | 261,627 | | 261,627 | | |||||||||||||||
States, municipalities and political subdivisions |
40,444 | 40,444 | | 40,444 | | |||||||||||||||
Corporate debt |
2,089,202 | 2,089,202 | | 2,089,202 | | |||||||||||||||
Mortgage-backed |
1,958,373 | 1,958,373 | | 1,790,548 | 167,825 | |||||||||||||||
Asset-backed |
410,895 | 410,895 | | 348,649 | 62,246 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturity investments |
6,626,454 | 6,626,454 | 1,529,158 | 4,867,225 | 230,071 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities |
523,949 | 523,949 | 469,269 | | 54,680 | |||||||||||||||
Other invested assets |
655,888 | 655,888 | | | 655,888 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investments |
$ | 7,806,291 | $ | 7,806,291 | $ | 1,998,427 | $ | 4,867,225 | $ | 940,639 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative assets: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 1,713 | $ | 1,713 | $ | | $ | 1,713 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivative liabilities: |
||||||||||||||||||||
Foreign exchange contracts |
$ | 2,656 | $ | 2,656 | $ | | $ | 2,656 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Senior notes |
$ | 798,215 | $ | 918,627 | $ | | $ | 918,627 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
Other invested assets excluded assets that the Company did not measure at fair value related to the Companys investments that 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.
11
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The following 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 Companys U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
Non-U.S. Government and Government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.
States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.
Corporate debt: Comprised of bonds issued by corporations that are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-term are priced using spread above the London Interbank Offered Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
Mortgage-backed: Primarily comprised of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agencies. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market or broker-dealer quotes. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
Equity securities: Comprised of common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Non-U.S. mutual funds where the net asset value is not provided on a daily basis are included in the Level 3 fair value hierarchy.
Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value of the funds as reported by the fund manager that the Company believes is an unobservable input, and as such, the fair values of those funds are included in the Level 3 fair value hierarchy. The Company does not measure investments that are accounted for using the equity method of accounting at fair value.
Derivative instruments: The fair value of foreign exchange contracts, 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.
12
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Senior notes: The fair value of the senior notes is based on reported trades. The fair value of the senior notes is included in the Level 2 fair value hierarchy.
The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, goodwill and intangible assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:
Investments accounted for using the equity method: When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using discounted cash flow models.
Goodwill and intangible assets: The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but at least annually for goodwill and indefinite-lived intangibles. If the Company determines that goodwill and intangible assets may be impaired, the Company uses techniques, including discounted expected future cash flows and market multiple models, to measure fair value.
The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3):
Other invested assets | Mortgage-backed | Asset-backed | Equities | |||||||||||||
Three Months Ended 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 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended June 30, 2012 |
||||||||||||||||
Opening balance |
$ | 522,065 | $ | 178,374 | $ | 242,394 | $ | | ||||||||
Realized and unrealized (losses) gains 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 | $ | | ||||||||
|
|
|
|
|
|
|
|
13
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Other invested assets | Mortgage-backed | Asset-backed | Equities | |||||||||||||
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 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
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 | $ | | ||||||||
|
|
|
|
|
|
|
|
(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.
The Companys 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 Companys 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
14
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
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 Companys 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 Companys 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 portfolios structure and performance.
7. RESERVE FOR LOSSES AND LOSS EXPENSES
The reserve for losses and loss expenses consists of the following:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Outstanding loss reserves |
$ | 1,509,350 | $ | 1,539,114 | ||||
Reserves for losses incurred but not reported |
4,187,515 | 4,106,435 | ||||||
|
|
|
|
|||||
Reserve for losses and loss expenses |
$ | 5,696,865 | $ | 5,645,549 | ||||
|
|
|
|
The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Gross liability at beginning of period |
$ | 5,673,220 | $ | 5,331,418 | $ | 5,645,549 | $ | 5,225,143 | ||||||||
Reinsurance recoverable at beginning of period |
(1,163,503 | ) | (1,056,780 | ) | (1,141,110 | ) | (1,002,919 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net liability at beginning of period |
4,509,717 | 4,274,638 | 4,504,439 | 4,222,224 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net losses incurred related to: |
||||||||||||||||
Current year |
323,556 | 282,302 | 622,804 | 546,986 | ||||||||||||
Prior years |
(48,428 | ) | (41,922 | ) | (92,498 | ) | (81,404 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total incurred |
275,128 | 240,380 | 530,306 | 465,582 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net paid losses related to: |
||||||||||||||||
Current year |
21,003 | 18,226 | 24,584 | 19,840 | ||||||||||||
Prior years |
241,764 | 186,891 | 482,885 | 362,411 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total paid |
262,767 | 205,117 | 507,469 | 382,251 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Foreign exchange revaluation |
(4,738 | ) | (5,995 | ) | (9,936 | ) | (1,649 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net liability at end of period |
4,517,340 | 4,303,906 | 4,517,340 | 4,303,906 | ||||||||||||
Reinsurance recoverable at end of period |
1,179,525 | 1,073,612 | 1,179,525 | 1,073,612 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross liability at end of period |
$ | 5,696,865 | $ | 5,377,518 | $ | 5,696,865 | $ | 5,377,518 | ||||||||
|
|
|
|
|
|
|
|
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 errors and omissions and directors and officers classes of business.
15
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
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.
While the Company 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 appropriate to extrapolate future redundancies based on prior years development. The methodology of estimating loss reserves is periodically reviewed to ensure that the key assumptions used in the actuarial models continue to be appropriate.
8. INCOME TAXES
Under Swiss law, a resident company is subject to income tax at the federal, cantonal and communal levels that is levied on net income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. Allied World Switzerland is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, Allied World Switzerland is subject to Swiss income tax only at the federal level. Allied World Switzerland is a resident of the Canton of Zug and, as such, is subject to an annual cantonal and communal capital tax on the taxable equity of Allied World Switzerland. Allied World Switzerland has a Swiss operating company resident in the Canton of Zug. The operating company is subject to federal, cantonal and communal income tax and to annual cantonal and communal capital tax.
Under current Bermuda law, Allied World Assurance Company Holdings, Ltd (Allied World Bermuda) and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Allied World Bermuda and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Allied World Bermuda and Allied World Assurance Company, Ltd will be exempted until March 2035.
Certain subsidiaries of Allied World Switzerland file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom, Ireland, Switzerland, Hong Kong and Singapore. To the best of the Companys 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, 2013.
9. SHAREHOLDERS EQUITY
a) Authorized shares
The issued share capital consists of the following:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Common shares issued and fully paid, 2013: CHF 12.30 per share; 2012: CHF 12.64 per share |
35,429,423 | 36,369,868 | ||||||
|
|
|
|
|||||
Share capital at end of period |
$ | 430,397 | $ | 454,980 | ||||
|
|
|
|
16
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Six Months Ended June 30, 2013 |
||||
Shares issued at beginning of period |
36,369,868 | |||
Shares cancelled |
(940,445 | ) | ||
|
|
|||
Total shares issued at end of period |
35,429,423 | |||
|
|
|||
Treasury shares issued at beginning of period |
1,572,087 | |||
Shares repurchased |
940,445 | |||
Shares issued out of treasury |
(318,495 | ) | ||
Shares cancelled |
(940,445 | ) | ||
|
|
|||
Total treasury shares at end of period |
1,253,592 | |||
|
|
|||
Total shares outstanding at end of period |
34,175,831 | |||
|
|
During the six months ended June 30, 2013, 940,445 voting shares repurchased and designated for cancellation were constructively retired and cancelled.
Allied World Switzerlands articles of association authorized its Board of Directors to increase the share capital by a maximum of up to CHF 92,259 or 7,500,728 voting shares.
b) Dividends
The Company paid the following dividend during the six months ended June 30, 2013:
Dividend Paid | Partial Par Value Reduction Per Share |
Dividend Per Share |
Total Amount Paid |
|||||||||
March 12, 2013 |
CHF 0.34 | $ | 0.375 | $ | 12,981 |
On May 3, 2012, the shareholders approved the Companys proposal to pay cash dividends in the form of a distribution by way of par value reductions. The aggregate reduction amount was paid to shareholders in four installments of $0.375 per share, with the last of such quarterly dividend payments being made on March 12, 2013.
On May 2, 2013, the shareholders approved the Companys 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 $0.50 per share. The first installment of the dividend was paid on July 3, 2013. The Company expects to distribute the remaining installments of the dividend in October 2013, January 2014 and April 2014.
c) Share Repurchases
In May 2012, the Company established a new share repurchase program in order to repurchase up to $500,000 of its common shares. Repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Companys capital position, legal requirements and other factors. Under the terms of this new share repurchase program, common shares repurchased shall be designated for cancellation at acquisition and shall be cancelled upon shareholder approval.
Shares repurchased by the Company and not designated for cancellation are classified as Treasury shares, at cost on the consolidated balance sheets. The Company will issue shares out of treasury principally related to the Companys employee benefit plans. Shares repurchased and designated for cancellation are constructively retired and recorded as a share cancellation.
17
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 Companys share repurchases were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Common shares repurchased |
508,328 | 905,383 | 940,445 | 2,336,187 | ||||||||||||
Total cost of shares repurchased |
$ | 46,326 | $ | 66,435 | $ | 82,571 | $ | 159,458 | ||||||||
Average price per share |
$ | 91.13 | $ | 73.38 | $ | 87.80 | $ | 68.26 |
10. EARNINGS PER SHARE
The following table sets forth the comparison of basic and diluted earnings per share:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Basic (loss) earnings per share: |
||||||||||||||||
Net (loss) income |
$ | (1,862 | ) | $ | 96,351 | $ | 157,130 | $ | 314,507 | |||||||
Weighted average common shares outstanding |
34,422,553 | 36,288,596 | 34,517,552 | 36,746,881 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic (loss) earnings per share |
$ | (0.05 | ) | $ | 2.66 | $ | 4.55 | $ | 8.56 | |||||||
|
|
|
|
|
|
|
|
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Diluted (loss) earnings per share: |
||||||||||||||||
Net (loss) income |
$ | (1,862 | ) | $ | 96,351 | $ | 157,130 | $ | 314,507 | |||||||
Weighted average common shares outstanding |
34,422,553 | 36,288,596 | 34,517,552 | 36,746,881 | ||||||||||||
Share equivalents: |
||||||||||||||||
Options |
| 440,811 | 493,225 | 413,702 | ||||||||||||
Restricted stock units and performance-based equity awards |
| 460,315 | 304,529 | 234,976 | ||||||||||||
Employee share purchase plan |
| | 1,289 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares and common share equivalents outstanding diluted |
34,422,553 | 37,189,722 | 35,316,595 | 37,395,559 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted (loss) earnings per share |
$ | (0.05 | ) | $ | 2.59 | $ | 4.45 | $ | 8.41 | |||||||
|
|
|
|
|
|
|
|
For the three months ended June 30, 2013, there were no common share equivalents included in calculating diluted earnings per share as there was a net loss and any additional shares would be anti-dilutive. For the three months ended June 30, 2012, a weighted average of 337,153 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, 2013 and 2012, a weighted average of 0 and 343,726 employee stock options and RSUs were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share, respectively.
11. SEGMENT INFORMATION
The determination of reportable segments is based on how senior management monitors the Companys underwriting operations. Management monitors the performance of its direct underwriting operations based on the geographic location of the Companys 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 Companys 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.
18
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 international insurance segment includes the Companys direct insurance operations in Bermuda, Europe, Singapore and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts from the Bermuda office and direct property and specialty casualty insurance to our non-North American domiciled accounts from the European, Singapore and Hong Kong offices. The reinsurance segment includes the Companys reinsurance operations in the United States, Bermuda, Europe, Singapore and Hong Kong. This segment provides reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. The Company presently writes reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.
Responsibility and accountability for the results of underwriting operations are assigned by major line of business within each segment. Because the Company does not manage its assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segments 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.
19
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The following tables provide a summary of the segment results:
International | ||||||||||||||||
Three Months Ended June 30, 2013 |
U.S. Insurance | Insurance | Reinsurance | Total | ||||||||||||
Gross premiums written |
$ | 307,297 | $ | 192,593 | $ | 265,310 | $ | 765,200 | ||||||||
Net premiums written |
221,419 | 106,394 | 253,409 | 581,222 | ||||||||||||
Net premiums earned |
197,436 | 87,041 | 222,794 | 507,271 | ||||||||||||
Net losses and loss expenses |
(124,364 | ) | (30,968 | ) | (119,796 | ) | (275,128 | ) | ||||||||
Acquisition costs |
(27,270 | ) | 358 | (37,705 | ) | (64,617 | ) | |||||||||
General and administrative expenses |
(38,302 | ) | (24,135 | ) | (18,148 | ) | (80,585 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting income |
7,500 | 32,296 | 47,145 | 86,941 | ||||||||||||
Net investment income |
37,635 | |||||||||||||||
Net realized investment losses |
(115,198 | ) | ||||||||||||||
Amortization of intangible assets |
(634 | ) | ||||||||||||||
Interest expense |
(14,188 | ) | ||||||||||||||
Foreign exchange loss |
(490 | ) | ||||||||||||||
|
|
|||||||||||||||
Loss before income taxes |
$ | (5,934 | ) | |||||||||||||
|
|
|||||||||||||||
Loss and loss expense ratio |
63.0 | % | 35.6 | % | 53.8 | % | 54.2 | % | ||||||||
Acquisition cost ratio |
13.8 | % | (0.4 | %) | 16.9 | % | 12.7 | % | ||||||||
General and administrative expense ratio |
19.4 | % | 27.7 | % | 8.1 | % | 15.9 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
96.2 | % | 62.9 | % | 78.8 | % | 82.8 | % | ||||||||
|
|
|
|
|
|
|
|
International | ||||||||||||||||
Three Months Ended June 30, 2012 |
U.S. Insurance | 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 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 | % | 62.4 | % | 55.9 | % | ||||||||
Acquisition cost ratio |
13.1 | % | (0.7 | %) | 16.8 | % | 12.0 | % | ||||||||
General and administrative expense ratio |
21.3 | % | 26.2 | % | 9.5 | % | 17.2 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
97.7 | % | 52.4 | % | 88.7 | % | 85.1 | % | ||||||||
|
|
|
|
|
|
|
|
20
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
International | ||||||||||||||||
Six Months Ended June 30, 2013 |
U.S. Insurance | Insurance | Reinsurance | Total | ||||||||||||
Gross premiums written |
$ | 563,315 | $ | 321,109 | $ | 717,857 | $ | 1,602,281 | ||||||||
Net premiums written |
413,672 | 184,139 | 678,463 | 1,276,274 | ||||||||||||
Net premiums earned |
385,875 | 171,255 | 413,369 | 970,499 | ||||||||||||
Net losses and loss expenses |
(257,688 | ) | (59,903 | ) | (212,715 | ) | (530,306 | ) | ||||||||
Acquisition costs |
(50,398 | ) | 1,207 | (72,111 | ) | (121,302 | ) | |||||||||
General and administrative expenses |
(77,898 | ) | (48,924 | ) | (36,443 | ) | (163,265 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting (loss) income |
(109 | ) | 63,635 | 92,100 | 155,626 | |||||||||||
Net investment income |
71,023 | |||||||||||||||
Net realized investment losses |
(35,561 | ) | ||||||||||||||
Amortization of intangible assets |
(1,267 | ) | ||||||||||||||
Interest expense |
(28,322 | ) | ||||||||||||||
Foreign exchange loss |
(3,008 | ) | ||||||||||||||
|
|
|||||||||||||||
Income before income taxes |
$ | 158,491 | ||||||||||||||
|
|
|||||||||||||||
Loss and loss expense ratio |
66.8 | % | 35.0 | % | 51.5 | % | 54.6 | % | ||||||||
Acquisition cost ratio |
13.1 | % | (0.7 | %) | 17.4 | % | 12.5 | % | ||||||||
General and administrative expense ratio |
20.2 | % | 28.6 | % | 8.8 | % | 16.8 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Combined ratio |
100.1 | % | 62.9 | % | 77.7 | % | 83.9 | % | ||||||||
|
|
|
|
|
|
|
|
International | ||||||||||||||||
Six Months Ended June 30, 2012 |
U.S. Insurance | 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 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 | % | ||||||||
|
|
|
|
|
|
|
|
21
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
The following table shows an analysis of the Companys gross premiums written by geographic location of the Companys subsidiaries. All intercompany premiums have been eliminated.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
United States |
$ | 440,151 | $ | 349,577 | $ | 918,594 | $ | 738,548 | ||||||||
Bermuda |
211,040 | 193,195 | 439,712 | 375,358 | ||||||||||||
Europe |
60,234 | 60,008 | 146,743 | 135,384 | ||||||||||||
Singapore |
48,918 | 40,128 | 87,031 | 69,311 | ||||||||||||
Hong Kong |
4,857 | 3,962 | 10,201 | 9,198 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total gross premiums written |
$ | 765,200 | $ | 646,870 | $ | 1,602,281 | $ | 1,327,799 | ||||||||
|
|
|
|
|
|
|
|
Europe includes gross premiums written attributable to Switzerland of $5,868 and $4,071 for the three months ended June 30, 2013 and 2012, respectively, and $46,674 and $33,435 for the six months ended June 30, 2013 and 2012, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. These legal proceedings generally relate to claims asserted by or against the Company in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under these proceedings are included in the reserve for losses and loss expenses in the Companys consolidated balance sheets. As of June 30, 2013, the Company was not a party to any material legal proceedings arising outside the ordinary course of business that management believes will have a material adverse effect on the Companys results of operations, financial position or cash flow.
13. CONDENSED CONSOLIDATED GUARANTOR FINANCIAL STATEMENTS
The following tables present unaudited condensed consolidating financial information as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 for Allied World Switzerland (the Parent Guarantor) and Allied World Bermuda (the Subsidiary Issuer). The Subsidiary Issuer is a direct, 100%-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantors investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees the senior notes issued by the Subsidiary Issuer.
22
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Unaudited Condensed Consolidating Balance Sheet:
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
As of June 30, 2013 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Investments |
$ | | $ | | $ | 7,775,803 | $ | | $ | 7,775,803 | ||||||||||
Cash and cash equivalents |
3,676 | 8,299 | 662,128 | | 674,103 | |||||||||||||||
Insurance balances receivable |
| | 814,620 | | 814,620 | |||||||||||||||
Funds held |
| | 387,599 | | 387,599 | |||||||||||||||
Reinsurance recoverable |
| | 1,179,525 | | 1,179,525 | |||||||||||||||
Net deferred acquisition costs |
| | 153,812 | | 153,812 | |||||||||||||||
Goodwill and intangible assets |
| | 318,474 | | 318,474 | |||||||||||||||
Balances receivable on sale of investments |
| | 277,025 | | 277,025 | |||||||||||||||
Investments in subsidiaries |
3,357,144 | 4,480,926 | | (7,838,070 | ) | | ||||||||||||||
Due (to) from subsidiaries |
29,968 | (2,234 | ) | (27,734 | ) | | | |||||||||||||
Other assets |
1,144 | 5,410 | 677,362 | | 683,916 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 3,391,932 | $ | 4,492,401 | $ | 12,218,614 | $ | (7,838,070 | ) | $ | 12,264,877 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES: |
||||||||||||||||||||
Reserve for losses and loss expenses |
$ | | $ | | $ | 5,696,865 | $ | | $ | 5,696,865 | ||||||||||
Unearned premiums |
| | 1,586,327 | | 1,586,327 | |||||||||||||||
Reinsurance balances payable |
| | 205,884 | | 205,884 | |||||||||||||||
Balances due on purchases of investments |
| | 487,063 | | 487,063 | |||||||||||||||
Senior notes |
| 798,355 | | | 798,355 | |||||||||||||||
Other liabilities |
18,703 | 18,246 | 80,205 | | 117,154 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
18,703 | 816,601 | 8,056,344 | | 8,891,648 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total shareholders equity |
3,373,229 | 3,675,800 | 4,162,270 | (7,838,070 | ) | 3,373,229 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 3,391,932 | $ | 4,492,401 | $ | 12,218,614 | $ | (7,838,070 | ) | $ | 12,264,877 | |||||||||
|
|
|
|
|
|
|
|
|
|
23
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
As of December 31, 2012 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
ASSETS: |
||||||||||||||||||||
Investments |
$ | | $ | | $ | 7,933,937 | $ | | $ | 7,933,937 | ||||||||||
Cash and cash equivalents |
19,997 | 11,324 | 650,558 | | 681,879 | |||||||||||||||
Insurance balances receivable |
| | 510,532 | | 510,532 | |||||||||||||||
Funds held |
| | 336,368 | | 336,368 | |||||||||||||||
Reinsurance recoverable |
| | 1,141,110 | | 1,141,110 | |||||||||||||||
Net deferred acquisition costs |
| | 108,010 | | 108,010 | |||||||||||||||
Goodwill and intangible assets |
| | 319,741 | | 319,741 | |||||||||||||||
Balances receivable on sale of investments |
| | 418,879 | | 418,879 | |||||||||||||||
Investments in subsidiaries |
3,337,446 | 4,768,769 | | (8,106,215 | ) | | ||||||||||||||
Due (to) from subsidiaries |
(23,864 | ) | (7,173 | ) | 31,037 | | | |||||||||||||
Other assets |
1,499 | 6,081 | 571,910 | | 579,490 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 3,335,078 | $ | 4,779,001 | $ | 12,022,082 | $ | (8,106,215 | ) | $ | 12,029,946 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES: |
||||||||||||||||||||
Reserve for losses and loss expenses |
$ | | $ | | $ | 5,645,549 | $ | | $ | 5,645,549 | ||||||||||
Unearned premiums |
| | 1,218,021 | | 1,218,021 | |||||||||||||||
Reinsurance balances payable |
| | 136,264 | | 136,264 | |||||||||||||||
Balances due on purchases of investments |
| | 759,934 | | 759,934 | |||||||||||||||
Senior notes |
| 798,215 | | | 798,215 | |||||||||||||||
Other liabilities |
8,743 | 17,727 | 119,158 | | 145,628 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
8,743 | 815,942 | 7,878,926 | | 8,703,611 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total shareholders equity |
3,326,335 | 3,963,059 | 4,143,156 | (8,106,215 | ) | 3,326,335 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 3,335,078 | $ | 4,779,001 | $ | 12,022,082 | $ | (8,106,215 | ) | $ | 12,029,946 | |||||||||
|
|
|
|
|
|
|
|
|
|
24
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Unaudited Condensed Consolidating Income Statement:
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
Three Months Ended June 30, 2013 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
Net premiums earned |
$ | | $ | | $ | 507,271 | $ | | $ | 507,271 | ||||||||||
Net investment income |
1 | 2 | 37,632 | | 37,635 | |||||||||||||||
Net realized investment losses |
| | (115,198 | ) | | (115,198 | ) | |||||||||||||
Net losses and loss expenses |
| | (275,128 | ) | | (275,128 | ) | |||||||||||||
Acquisition costs |
| | (64,617 | ) | | (64,617 | ) | |||||||||||||
General and administrative expenses |
(8,566 | ) | (455 | ) | (71,564 | ) | | (80,585 | ) | |||||||||||
Amortization of intangible assets |
| | (634 | ) | | (634 | ) | |||||||||||||
Interest expense |
| (13,835 | ) | (353 | ) | | (14,188 | ) | ||||||||||||
Foreign exchange gain (loss) |
2 | (628 | ) | 136 | | (490 | ) | |||||||||||||
Income tax (expense) benefit |
| | 4,072 | | 4,072 | |||||||||||||||
Equity in earnings of consolidated subsidiaries |
6,701 | 21,147 | | (27,848 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | (1,862 | ) | $ | 6,231 | $ | 21,617 | $ | (27,848 | ) | $ | (1,862 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | (1,862 | ) | $ | 6,231 | $ | 21,617 | $ | (27,848 | ) | $ | (1,862 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
Three Months Ended June 30, 2012 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
Net premiums earned |
$ | | $ | | $ | 429,747 | $ | | $ | 429,747 | ||||||||||
Net investment income |
5 | 8 | 42,438 | | 42,451 | |||||||||||||||
Net realized investment gains |
| | 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 benefit of $68 |
231 | | 231 | (231 | ) | 231 | ||||||||||||||
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax |
(1,142 | ) | | (1,142 | ) | 1,142 | (1,142 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive loss |
(911 | ) | | (911 | ) | 911 | (911 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | 95,440 | $ | 99,765 | $ | 114,963 | $ | (214,728 | ) | $ | 95,440 | |||||||||
|
|
|
|
|
|
|
|
|
|
25
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
Six Months Ended June 30, 2013 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
Net premiums earned |
$ | | $ | | $ | 970,499 | $ | | $ | 970,499 | ||||||||||
Net investment income |
8 | 4 | 71,011 | | 71,023 | |||||||||||||||
Net realized investment losses |
| | (35,561 | ) | | (35,561 | ) | |||||||||||||
Net losses and loss expenses |
| | (530,306 | ) | | (530,306 | ) | |||||||||||||
Acquisition costs |
| | (121,302 | ) | | (121,302 | ) | |||||||||||||
General and administrative expenses |
(19,552 | ) | (912 | ) | (142,801 | ) | | (163,265 | ) | |||||||||||
Amortization of intangible assets |
| | (1,267 | ) | | (1,267 | ) | |||||||||||||
Interest expense |
| (27,665 | ) | (657 | ) | | (28,322 | ) | ||||||||||||
Foreign exchange loss (gain) |
274 | (723 | ) | (2,559 | ) | | (3,008 | ) | ||||||||||||
Income tax (expense) benefit |
| | (1,361 | ) | | (1,361 | ) | |||||||||||||
Equity in earnings of consolidated subsidiaries |
176,400 | 202,627 | | (379,027 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | 157,130 | $ | 173,331 | $ | 205,696 | $ | (379,027 | ) | $ | 157,130 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
COMPREHENSIVE INCOME (LOSS) |
$ | 157,130 | $ | 173,331 | $ | 205,696 | $ | (379,027 | ) | $ | 157,130 | |||||||||
|
|
|
|
|
|
|
|
|
|
Allied World | Allied World | |||||||||||||||||||
Switzerland | Bermuda | Other Allied | Allied World | |||||||||||||||||
(Parent | (Subsidiary | World | Consolidating | Switzerland | ||||||||||||||||
Six Months Ended June 30, 2012 |
Guarantor) | Issuer) | Subsidiaries | Adjustments | Consolidated | |||||||||||||||
Net premiums earned |
$ | | $ | | $ | 831,637 | $ | | $ | 831,637 | ||||||||||
Net investment income |
14 | 11 | 89,635 | | 89,660 | |||||||||||||||
Net realized investment gains |
| | 142,244 | | 142,244 | |||||||||||||||
Net losses and loss expenses |
| | (465,582 | ) | | (465,582 | ) | |||||||||||||
Acquisition costs |
| | (98,726 | ) | | (98,726 | ) | |||||||||||||
General and administrative expenses |
(8,234 | ) | (2,454 | ) | (133,657 | ) | | (144,345 | ) | |||||||||||
Amortization of intangible assets |
| | (1,267 | ) | | (1,267 | ) | |||||||||||||
Interest expense |
| (27,757 | ) | | | (27,757 | ) | |||||||||||||
Foreign exchange gain (loss) |
549 | (67 | ) | 618 | | 1,100 | ||||||||||||||
Income tax (expense) benefit |
71 | | (12,528 | ) | | (12,457 | ) | |||||||||||||
Equity in earnings of consolidated subsidiaries |
322,107 | 349,409 | | (671,516 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | 314,507 | $ | 319,142 | $ | 352,374 | $ | (671,516 | ) | $ | 314,507 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Unrealized gains on investments arising during the period net of applicable deferred income tax expense of $3,051 |
179 | | 179 | (179 | ) | 179 | ||||||||||||||
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax |