Allied World Assurance Holdings, AG's CEO Discusses Q1 2012 Results - Earnings Call Transcript

 |  About: Allied World Assurance Company Holdings, AG (AWH)
by: SA Transcripts


Good day, and welcome to the Allied World Assurance Company First Quarter of 2012 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Keith Lennox, Investor Relations Officer. Mr. Lennox, the floor is yours, sir.

Keith J. Lennox

Thank you. Good morning, everyone. Our press release and financial supplements were issued last night after the market closed. If you’d like copies of either, please visit the Investor Relations section of our website at Today's call will also be available through May 17 on our website and as a teleconference replay. The dial-in information for this replay is included in our earnings press release.

Our speakers this morning are Scott Carmilani, Allied World's President and Chief Executive Officer; Joan Dillard, the company's Chief Financial Officer; and John Gauthier, the company's Chief Investment Officer. Also here to assist with questions are several other members of our management team.

Before we begin, I will note that statements made during the call may include forward-looking statements within the meanings of the U.S. Federal Securities Laws. Forward-looking statements are subject to a number of uncertainties and risks that could significantly affect the company's current plans, anticipated actions and its future financial condition and results. These uncertainties and risks include, but are not limited to, those disclosed in the company's filings with the Securities and Exchange Commission. Forward-looking statements speak only to the date they are made, and the company assumes no obligation to update or revise any forward-looking statements in light of new information, future events or otherwise.

Additionally, during the call, management will discuss certain non-GAAP measures within the meaning of the U.S. Federal Security Laws. For more information and a reconciliation of these measures to the most directly comparable GAAP financial measures, please refer to our earnings press release, which was issued last night and is available on our website.

With that complete, I'd like to turn the call over to Scott.

Scott A. Carmilani

Thank you, Keith. Sorry for preempting. And good morning, everybody. As we said in our press release last night, the company is now operating with significant positive momentum in virtually all aspects of our business. We had a very strong quarter in terms of production, investments and bottom line results. Joan and John will provide the detailed financial highlights for the quarter in a few minutes, but I'm going to steal a little bit of their thunder by reporting that our diluted book value per share grew by an impressive 6.7% for the quarter. Growing shareholder value remains top of our priority.

In 2011, we weathered a year of significant global catastrophes as well as turmoil in the capital markets, but we were still able to grow book value per share by almost 8% for the full year. Fortunately, and for the first time in a while, there was not a lot of noise in this quarter, and our company's results reflect that.

The $218 million net income we are reporting for the quarter resulted from our investment portfolio positioning within an improved investment environment, benign cat losses and strong underwriting performances across all of our segments.

This quarter more than ever, we are recognizing dividends from the operational investments we've made in recent years. Our $680 million in premiums was a record for the company, up over $120 million from the prior year. Gross premiums were up for all of our segments, led by the reinsurance unit, which was up $97 million over prior year.

Premiums in our U.S. -- in our international or non-U.S. insurance segment have grown now for the fourth straight quarter, up a mere 2% this quarter. As you'll recall, we purposely downsized some of the less profitable, high-capacity-driven lines several years ago as we built out our more specialty primary franchise. At the same time, we've made investments in our global capabilities, and the majority of the recent growth, this 2% growth I'm talking about, has come from our new businesses such as the small, professional SME-type business and the international trade credit operations.

In our U.S. insurance segment, premiums are up over $200 million for the quarter and up 11.4% from last year. This growth was spread fairly evenly across all of our platforms in the U.S. And our General, Property and Specialty Casualty business is experiencing the greatest percentage of increases.

New business commissions continued to be strong in the U.S., and retention ratios have averaged over 80% across all product lines, demonstrating our ability to keep stronger and better price accounts, but also some discipline in allowing accounts to walk away when underpriced.

Our U.S. strategy has been centered around the providing products and services to our healthcare, construction and public entity-related clients. Our environmental and cyber liability offerings are recent examples of complementary coverages to offer to our existing product sets.

Also of some significance, we are starting to see for the first time in years increased inquiry from the construction industry, which is showing some signs of recovery. Finally, our latest investment in the U.S. is our recently launched unit that underwrites solutions focused on M&A transactions.

On our last quarter's call, we talked about the transaction we are gaining in our -- in our traction we've been gaining in the Global Marine and Specialty Reinsurance division. That traction is transforming into a full head of steam as we continue to add market expertise and enhanced capabilities in that arena.

Collectively, premium in our crop and Marine business, the Reinsurance business in particular, have grown to almost $80 million in the first quarter of the year, up $17 million in the first quarter of 2011 and from nothing in 2010.

Before turning over the call to Joan, let me make a few comments on the pricing environment. Rates overall on our insurance portfolio, and I say overall, now, are finally up and are up over 3.5% for the quarter over prior year. Well, that doesn't really tell the whole story, so let me break it down a little bit more by geography and product line so you get an all-in picture and some flavor.

Starting with properties, since that's the easiest and most urgently needs some rate improvement, we're starting to get it. Our Bermuda and U.S. platforms are up over 17% for the quarter. And while Europe is up 11%, it's still less than half of what it needs to be and should be, but we're getting some rate improvement, nevertheless.

Professional liability. We can draw some conclusions as follows: for our primary and small business, it's up about 5% and accelerating, actually, post first quarter. In our large account coverage, particularly in Bermuda and the excess layers, we're seeing flat to 2% for our full-blown D&O insurance coverage. What we're still seeing are negative 4% to 5% in the large excess layers where entities only buy entity coverage.

And finally, for casualty, this is a general statement, the rates are up a healthy 6.4% in the U.S., and we're excited about that. In Bermuda, they're relatively flat, and in Europe, they're pretty flat as well, where we tend to play in higher excess limits, and the attachments tend to prevail there.

Now let me turn it over to Joan to discuss some of the more financial aspects for the quarter.

Joan H. Dillard

Thanks, Scott. Good morning. As Scott mentioned, results for the first quarter were very strong with net income of $218 million or $5.70 per diluted share. This is up significantly from the $9 million in net income that we reported after the cat events of the first quarter 2011. We recorded operating income of $92 million or $2.39 per diluted share for the first quarter of 2012, up from a $41 million operating loss that we reported in the first quarter 2011.

We recorded $59.2 million of underwriting income for the quarter, with each of our segments reporting positive underwriting income. Our reported loss ratio was 56% for the first quarter 2012, which benefited from $39.5 million or 9.8 points of net positive reserve development. Absent these items, our accident year loss ratio for the quarter was 65.8%.

The company recorded $69 million of favorable development from the 2007 and prior accident years, primarily for casualty lines, but that was offset by a $20 million limit loss for a large general casualty claim written by our international insurance segment and $9 million of loss emergence in our reinsurance book, stemming primarily from the New Zealand earthquake. And both of these items were from the 2011 accident year. Our combined ratio for the first quarter of 2012 was 85.2% compared to 122.6% for the same period last year, with the major differences being the cat activity.

Our expense ratio declined in the first quarter of 2012 to 29.2%, a reduction of 2.5 points when compared to the 31.7% in the same quarter last year, and that's largely driven by the 20% increase in earned premiums.

Our results for the quarter also benefited from a 2% total investment return, which included $133.6 million of net realized gains and $47.2 million of net investment income.

John Gauthier, our Chief Investment Officer, is here to give us some color on the markets and on the investment results. John?

John J. Gauthier

Thanks, Joan. Good morning, everyone. As Joan mentioned, the investment portfolio provided a total return of just over 2% for the quarter. This return was generated in an environment where the 10-year treasury moved 33 basis points higher in yield and the yield curve steepened. We have positive returns from all segments of our portfolio. Our core fixed income returns were up 1.5% with spread tightening offsetting the move higher in rates. Our backbone portfolio is up 3.3%, and our equity portfolio, while underperforming the broader market, provided us with a positive with 4.1% return.

Within our hedge fund portfolio, we had positive returns in every individual fund, and the portfolio as a whole provided 4% return. Within our smaller grown private equity portfolio, we had market appreciation of almost $7 million on a funded basis of just $108 million. And lastly, our distressed residential mortgage-backed portfolio, which had a difficult 2011, returned 13% for the quarter and has now provided over 16% annually since our initial investment in 2009.

Overall, the diversified non-core fixed income portfolio returned almost 5% for the quarter, bringing the overall portfolio return up to the 2% Joan mentioned. As far as changes to the portfolio, there are only a few. We extended our duration modestly given the backup in rates but remained short, and we decreased our corporate bond exposure as spreads contracted. We completed the initial funding of our broadly-syndicated bank loan mandate. And lastly, we continued the transition of our portfolio from available for sale to trading. And we now have only $44 million remaining in the available-for-sale bucket. All in all, a very good quarter.

And with that, I'll hand it back to Joan.

Joan H. Dillard

Thanks, John. Our diluted book value per share at the end of the first quarter is $85.48, which is up 6.7% for the year. During the quarter, we continued with our share buyback strategy and purchased 1.4 million of our common shares in the open market at an average price of $65.01 per share for a total cost of $93 million. This $65 average per share price represents a 24% discount to our ending diluted book value per share of $85.48. The first quarter buybacks had a $0.74 accretive per-share impact on our diluted book value per share.

And finally, before turning it back to Scott, I'm pleased to report that today, at our annual general meeting, our shareholders have just approved a new $500 million 2-year share repurchase plan. And you know, although we continue to have strong performance, our stock trades at a valuation that's discounted to our book value. We still believe that repurchasing our shares at this level represents a compelling investment.

With that, let me turn it back to Scott.

Scott A. Carmilani

Thanks, Joan. In closing, we're happy with the quarter and the shareholder value we've been able to deliver. We are very confident that the businesses that we have and continue to build are profitable, sustainable and accretive to our franchise. We're paying off on our financial results. Over the last several years, we've added depth and breadth to our management team, and that continues. To that end, I'm happy to welcome our newest senior management addition, Lou Iglesias, who has joined the lead as President of our U.S. Property and Casualty Division. Continuing to build out our senior management ranks with people we respect, and we will continue to allow the company to prosper as we move forward into our second decade of operations.

With that, I'm going to open it up to questions. Operator?

Question-and-Answer Session


[Operator Instructions] The first question we have comes from Dan Farrell of Sterne Agee.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

I was wondering if you could just talk a little bit about the Reinsurance segment. Obviously, a lot of growth there, but I think a fair amount of mix change, too, and sort of new areas that you've been building out. Can you talk a little bit about sort of how accident-year loss ratio might trend going forward with some of that mix change?

Scott A. Carmilani

I don't expect it to change much. And when you say mix change, there are different businesses. $50-odd million of that increase is crop and hail treaty book. So that does act a bit differently than traditional property or traditional casualty -- or traditional cat, I should say, as well as there is about $14 million coming out of increased writings in the Asia-Pac area, mostly because of rate, not because of more -- not so much more because of exposure, so that's rate in our Asia-Pac territories, where I'm sure you're well aware that there's been lots of calamities. So that's not going to change accident year rate, although since the rates were up so substantially, we were hoping the action of the near-loss ratio performs better, much better. And then another $12 million to $14 million, I believe, is coming from the Marine portfolio, excess Marine portfolio, which we write out of the U.S. and London. And that shouldn't dramatically change the accident year reporting ratios for the treaty book either.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Okay, that's helpful. And I apologize if I missed the update. Did you guys mention your PMLs at the end of the quarter?

Scott A. Carmilani

We did not. I don't know if it's in the supplement.

Marshall J. Grossack

No, this is Marshall Grossack, and I can go ahead and walk through that really quickly. It's a little bit longer answer than usual because we're still looking at RMS 11 a little bit. But when we use RMS 11, our 1:250 PML is now $684 million for wind, and our 1:250 earthquake PML is $398 million. But I think it's important to note that we're in the process of switching or looking at switching to a blended model approach and incorporating multiple models along with our own proprietary data. We do anticipate that this change could reduce our wind PMLs by maybe 10% to 15%. So given the revised blended analysis, which isn't complete yet, we do expect to have capacity to write additional cat-exposed business during the second quarter if margins are attractive and still stay within our risk cap tight statement.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Okay. Which region win represents your largest PML in the U.S.? Is it Northeast, Southeast?

Marshall J. Grossack

No, it's the Gulf in Florida.


The next question we have comes from Ray Iardella of Macquarie.

Christopher Maimone

This is Chris Maimone calling on behalf of Ray. Just had a couple of quick questions for you guys. Regarding the investment portfolio, could you please talk a little bit more about your decision to reduce the allocation of corporates? And also, we saw that cash moved up marginally quarter-over-quarter. Do you guys plan on putting that cash to work over the near term? And if so, where?

John J. Gauthier

Yes. So the answer is they're somewhat related. Part of the corporate downsizing was due to some significant spread tightening, and we took a little bit of the risk off the table. We also had a couple of hundred million of portfolios in transition at the end of the quarter, kind of switching managers. So that cash will get redeployed back into the market, and it will mostly go into kind of the core fixed income and a blend of mortgages, treasuries and agencies.

Scott A. Carmilani

And that's already started.

John J. Gauthier


Unknown Analyst

Great. That's really helpful. And then just 2 more small ones. Do you think that the duration of the book is going to continue to move higher from here, given that you guys have been in roughly in the 2-year range for a few quarters now?

Scott A. Carmilani


Unknown Analyst

Okay. And last one, you guys mentioned that Global Marine and Specialty drove the year-over-year premium growth in the Reinsurance segment. Just curious how the expected loss ratios for this year in Global Marine and Specialty businesses compared to the legacy reinsurance book? Basically, in other words, will the change in business mix result in a different loss ratio in the Reinsurance segment?

Scott A. Carmilani

Well, I hope we have a lower loss ratio in totality in Reinsurance segment this year. There were 4 or 5 different cat events that plagued us and the industry last year, ending with the Thailand flood towards the end of last year, and that Concordia marine disaster that sank off the coast of Italy, as you might recall. So 3 months into it, there's been relatively benign cat activity. So we're off to at least 3 months into it, you can call it 4 months into it, no cats. So by proxy, we've got a lower loss ratio already. Whether that continues between now and then, I'm not an accu-weather forecaster. But it's a little bit of a wise guy answer. Does it change purely the loss pick? Let me ask Marshall if he could make a comment.

Marshall J. Grossack

Yes. I think it's fair to say that we'll increase our reinsurance loss a bit -- a little bit, because there's no doubt that, that business comes on with a slightly higher loss ratio than our property cat business that we write. So the mix is going to shift to the overall reinsurance, a little bit less property cat, because obviously, we make it less volatile as well. So I think it's fair to say loss ratio could be up a point or so. But I've not done the actual calculation.

Scott A. Carmilani

Yes. The important point is, we're trading volatility there quite a bit.


[Operator Instructions] And the next question we have comes from Court Dignan of Fidelity.

Court Dignan - Fidelity Investments

Just real quickly, I jumped on late. I'm not sure if you covered this or not. But could you quantify any sort of large losses in the quarter that maybe didn't trip the cat definition? So I'm thinking sort of property-related tornado losses or, for that matter, quantifying any exposure to the cost of Marine situation? Just trying to...

Scott A. Carmilani

Yes. We have a couple of large losses which we did not cover during the call, of course...

Joan H. Dillard

Yes. Although they are small large losses, if you will. In the U.S. tornadoes, it really didn't hit the level of -- what we would really think of, as terms of nature, cat losses. I mean, the losses were $1 million or less overall. We did have one loss in our DBA book of about $3 million. We took $2 million on the Costa Concordia. And then we had 2 fire losses, each of which were about $1.8 million. So in -- each loss in itself was not a major event. But those were all the larger losses of the quarter.


[Operator Instructions] The next question we have comes from Eric Fraser of Goldman Sachs.

Eric J. Fraser - Goldman Sachs Group Inc., Research Division

Just a quick one on the reinsurance premiums this quarter. How should we think about the earn-in on the premiums written going forward?

Scott A. Carmilani

The earned -- well, the same as the regular Reinsurance premium. Reinsurance premium, because of its risk attaching in treaty-based, earns slower than direct premium, typically on a 24-month cycle.


[Operator Instructions]

Scott A. Carmilani

Okay. Well, thank you very much for your time, and have a great day and great weekend. See you next quarter.


And we thank you, sir, and to the rest of management for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a nice day.

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