Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

(Mark One)

 

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

For the quarterly period ended: 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

(Registrant’s Telephone Number, Including Area Code)

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

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

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

 

Large accelerated filer þ

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

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

As of July 26, 2013, 34,087,192 common shares were outstanding.


Table of Contents

TABLE OF CONTENTS

 

PART I    FINANCIAL INFORMATION   

Item 1.

  Financial Statements      1   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      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-


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

as of June 30, 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:

    

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   
  

 

 

   

 

 

 

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   
  

 

 

   

 

 

 

Total assets

   $ 12,264,877      $ 12,029,946   
  

 

 

   

 

 

 

LIABILITIES:

    

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   
  

 

 

   

 

 

 

Total liabilities

   $ 8,891,648      $ 8,703,611   
  

 

 

   

 

 

 

Commitments and contingencies

    

SHAREHOLDERS’ EQUITY:

    

Common shares: 2013: par value CHF 12.30 per share and 2012: par value CHF 12.64 per share (2013: 35,429,423; 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   
  

 

 

   

 

 

 

Total shareholders’ equity

     3,373,229        3,326,335   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 12,264,877      $ 12,029,946   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE (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:

        

Gross premiums written

   $ 765,200      $ 646,870      $ 1,602,281      $ 1,327,799   

Premiums ceded

     (183,978     (152,160     (326,007     (244,136
  

 

 

   

 

 

   

 

 

   

 

 

 

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
  

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

 
     429,708        480,861        1,005,961        1,063,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES:

        

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
  

 

 

   

 

 

   

 

 

   

 

 

 
     435,642        379,563        847,470        736,577   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME

     (1,862     96,351        157,130        314,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss:

        

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
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

           (911           (13,070
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE (LOSS) INCOME

   $ (1,862   $ 95,440      $ 157,130      $ 301,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

PER SHARE DATA

        

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.

 

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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      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013

   $ 430,397      $     $ (91,661   $     $ 3,034,493      $ 3,373,229   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

See accompanying notes to the consolidated financial statements.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the six months ended June 30, 2013 and 2012

(Expressed in thousands)

 

     Six Months Ended  
     June 30,  
     2013     2012  

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:

    

Net income

   $ 157,130      $ 314,507   

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

    

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:

    

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   
  

 

 

   

 

 

 

Net cash provided by operating activities

     133,642        301,773   
  

 

 

   

 

 

 

CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:

    

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
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (43,423     101,201   
  

 

 

   

 

 

 

CASH FLOWS USED IN FINANCING ACTIVITIES:

    

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
  

 

 

   

 

 

 

Net cash used in financing activities

     (90,259     (170,255
  

 

 

   

 

 

 

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   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 674,103      $ 864,450   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

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.

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1. GENERAL

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

2. BASIS OF PREPARATION AND CONSOLIDATION

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

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

 

   

The premium estimates for certain reinsurance agreements,

 

   

Recoverability of deferred acquisition costs,

 

   

The reserve for outstanding losses and loss expenses,

 

   

Valuation of ceded reinsurance recoverables,

 

   

Determination of impairment of goodwill and other intangible assets, and

 

   

Valuation of financial instruments.

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

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

3. NEW ACCOUNTING PRONOUNCEMENTS

In December 2011 (with a clarification amendment issued in January 2013), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 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.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

4. INVESTMENTS

a) Trading Securities

Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive (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:

           

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

   $ 6,285,778       $ 6,264,343       $ 6,626,454       $ 6,473,429   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,355,316       $ 1,229,657       $ 1,179,837       $ 1,086,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 fund’s net assets. The gate is a method for executing an orderly redemption process to reduce the possibility of adversely affecting investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash sometime after the redemption date. Certain funds may impose a redemption fee on early redemptions. Interests in private equity funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Details regarding the carrying value, redemption characteristics and unfunded investment commitments of the other invested assets portfolio as of 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
 

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   
  

 

 

    

 

 

       

 

 

          

 

 

 

Total private equity structures

     190,072         190,072                         376,287   
  

 

 

    

 

 

       

 

 

          

 

 

 

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.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

   

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

 

   

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


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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 Company’s letter of credit facilities. See Note 8(d) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for details on the Company’s credit facilities.

5. DERIVATIVE INSTRUMENTS

As of June 30, 2013 and December 31, 2012, none of the Company’s derivatives were designated as hedges. The following table summarizes information on the location and amounts of derivative fair values on the unaudited condensed consolidated balance sheets (“consolidated balance sheets”):

 

     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 Company’s investment portfolio are partially influenced by the change in foreign exchange rates. These foreign currency hedging activities have not been designated as specific hedges for financial reporting purposes.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

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

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

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

   

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

 

   

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

 

   

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

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

June 30, 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 Company’s 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.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

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

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

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

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

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.

 

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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


Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

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

The Company records the unadjusted price provided and validates this price through a process that includes, but is not limited to, monthly and/or quarterly: (i) comparison of prices between two independent sources, with significant differences requiring additional price sources; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to their target benchmark, with

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value, including a review of the inputs used for pricing; (iv) comparing the price to the Company’s knowledge of the current investment market; and (v) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company’s external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 report) in conjunction with regular discussion and analysis of the investment portfolio’s structure and performance.

7. RESERVE FOR LOSSES AND LOSS EXPENSES

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

 

     June 30,      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 director’s and officers’ classes of business.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 Company’s knowledge, there are no income tax examinations pending by any tax authority.

Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12 months of June 30, 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   
  

 

 

    

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

On May 2, 2013, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution 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 Company’s capital position, legal requirements and other factors. Under the terms of this new share repurchase program, common shares repurchased shall be designated for cancellation at acquisition and shall be cancelled upon shareholder approval.

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

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

The U.S. insurance segment includes the Company’s direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

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

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

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following 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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

           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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

     Three Months Ended      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 Company’s 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 Company’s 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 Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees the senior notes issued by the Subsidiary Issuer.

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

     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


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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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


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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

     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