Allied World Reports Record Net Income in Third Quarter 2010; 21.6% Year to Date Increase in Diluted Book Value Per Share

PEMBROKE, Bermuda, Nov. 4, 2010 /PRNewswire-FirstCall/ -- Allied World Assurance Company Holdings, Ltd (NYSE: AWH) today reported net income of $254.5 million, or $5.21 per diluted share, for the third quarter of 2010 compared to net income of $200.6 million, or $3.83 per diluted share, for the third quarter of 2009.  Net income for the nine months ended September 30, 2010 was $572.2 million, or $11.03 per diluted share, compared to net income of $445.6 million, or $8.62 per diluted share, for the first nine months of 2009.

The company reported operating income of $143.6 million, or $2.94 per diluted share, for the third quarter of 2010 compared to operating income of $155.4 million, or $2.97 per diluted share, for the third quarter of 2009.  Operating income for the nine months ended September 30, 2010 was $300.5 million, or $5.79 per diluted share, compared to operating income of $405.8 million, or $7.85 per diluted share, for the first nine months of 2009.

President and Chief Executive Officer Scott Carmilani commented, "We are pleased to deliver this growth in shareholder value by reporting record net income for the quarter of $254.5 million.  Through good returns on our investment portfolio, recognizing redundancies in our underwriting portfolio from prior underwriting efforts, and solid operating results for this quarter and year, we are reporting a very strong annualized operating return on shareholders' equity of 17.5% for the quarter.  We also accelerated our share repurchases during the quarter which has proven to be very effective given the valuation of our stock.  Our diluted book value increased 11% for the quarter to $72.40 per share."

Mr. Carmilani continued, "We have achieved these impressive results while continuing to broaden the spectrum of our product offerings and expanding our international platform.  Our strategy to combat the difficult market environment has been to take steps to manage our business closer to its sources of distribution in areas where we see attractive opportunities.  Our recently announced redomestication to Switzerland is another important step consistent with this strategy."

Underwriting Results

Gross premiums written were $378.4 million in the third quarter of 2010, a 5.8% decrease compared to $401.8 million in the third quarter of 2009.  The decrease in gross premiums written was primarily due to the renewal timing of several large reinsurance treaties.  For the nine months ended September 30, 2010, gross premiums written totaled $1,376.5 million compared to $1,374.2 million in the first nine months of last year.  New business written in our reinsurance and U.S. insurance segments has been largely offset by the non-renewal of business that did not meet our underwriting requirements due to inadequate pricing and/or terms and conditions.  

Net premiums written were $302.2 million in the third quarter of 2010, a 5.9% decrease compared to $321.0 million in the third quarter of 2009, consistent with the reduction in gross premiums written.  For the nine months ended September 30, 2010, net premiums written totaled $1,105.3 million, a 1.6% increase compared to $1,087.4 million in the first nine months of 2009.  

The combined ratio was 70.3% in the third quarter of 2010 compared to 70.1% in the third quarter of 2009.  The loss and loss expense ratio was 37.4% in the third quarter of 2010 compared to 41.5% in the third quarter of 2009.  During the third quarter of 2010, the company recorded net favorable reserve development on prior loss years of $101.4 million, a benefit of 29.9 percentage points to the company's loss and loss expense ratio for the quarter.  This compares to the third quarter of 2009, where the company recorded net favorable reserve development on prior loss years of $73.5 million, a benefit of 22.4 percentage points to the company's loss and loss expense ratio for that quarter.  Absent prior year reserve adjustments, the loss and loss expense ratio for the third quarter of 2010 was 67.3%.  This ratio was impacted by $25.0 million of net losses, or 7.4 percentage points, from major loss driven events occurring during the third quarter of 2010.

For the nine months ended September 30, 2010, the combined ratio was 85.6% compared to 76.0% in the first nine months of 2009. The loss and loss expense ratio for the nine months ended September 30, 2010 was 53.9% compared to 46.9% for the nine months ended September 30, 2009.  For the first nine months of 2010, the company recorded net favorable reserve development on prior loss years of $230.6 million.  This net favorable reserve development benefited the company's loss and loss expense ratio by 22.7 points.  This compares to the first nine months of 2009, where the company recorded net favorable reserve development on prior loss years of $170.3 million, a benefit of 17.3 percentage points to the company's loss and loss expense ratio for the first nine months of 2009.  Absent the favorable reserve development, the loss and loss expense ratio related to the current loss year was 76.6%.  This ratio was impacted by $141.5 million of net losses, or 13.9 percentage points, from major loss driven events occurring during the first nine months of 2010.

The company's expense ratio was 32.9% for the third quarter of 2010 compared to 28.6% for the third quarter of 2009.  The expense ratio was 31.7% for the nine months ended September 30, 2010 compared to 29.1% in the first nine months of 2009.  These increases were primarily due to increases in our overall staff count and increases in variable incentive compensation expenses related to our record earnings and the increase in our share price.

Investment Results

The total return on the company's investment portfolio for the three and nine months ended September 30, 2010 was approximately 2.4% and 6.3%, respectively.  Net investment income in the third quarter of 2010 was $59.5 million, a decrease of 18.6% from the $73.0 million of net investment income in the third quarter of 2009.  For the nine months ended September 30, 2010, net investment income was $194.0 million, a decrease of 14.7% from the $227.4 million of net investment income in the first nine months of 2009.  These decreases were primarily the result of lower yields on our fixed maturity securities and an increased allocation to hedge funds, which contribute to our total return but carry no current yield.  Annualized book yield through September 30, 2010 was 3.4%, versus the annualized book yield through September 30, 2009 of 4.3%.

The company recorded net realized investment gains of $116.9 million and $289.4 million, respectively, for the three and nine months ended September 30, 2010.  

As of September 30, 2010 and December 31, 2009, net accumulated unrealized gains were $111.8 million and $149.8 million, respectively.

Shareholders' Equity

As of September 30, 2010, our total shareholders' equity was $3.3 billion, a 4.0% increase compared to $3.2 billion as of December 31, 2009, primarily driven by strong investment returns, offset by the company's share repurchase initiatives through September 2010.

The company's annualized net income return on average shareholders' equity for the three and nine months ended September 30, 2010 was 31.0% and 24.2%, respectively.  The company's annualized operating return on average shareholders' equity for the three and nine months ended September 30, 2010 was 17.5% and 12.7%, respectively.  

Share Repurchases

As of September 30, 2010, diluted book value per share was $72.40, an increase of 21.6% compared to $59.56 as of December 31, 2009.  

In May 2010, the company announced a $500 million share repurchase program.  During the third quarter 2010, the company repurchased 2,318,285 of its common shares in the open market at an average repurchase price of $50.00 per share for an aggregate cost of $115.9 million.  For the nine months ended September 30, 2010, the company repurchased 3,399,326 of its common shares in the open market at an average repurchase price of $48.54 per share for an aggregate cost of $165.0 million.    

On August 6, 2010, we repurchased 5,000,000 of our common shares for $250 million, or $50.00 per share, in a privately negotiated transaction from GS Capital Partners and other investment funds, which are affiliates of The Goldman Sachs Group, Inc ("Goldman Sachs"), and founding shareholders of our company.  The shares repurchased were not cancelled and were classified as treasury shares.  On August 13, 2010, we repurchased a warrant owned by The Chubb Corporation ("Chubb") in a privately negotiated transaction.  The warrant entitled Chubb to purchase 2,000,000 common shares for $34.20 per share.  We repurchased the warrant for an aggregate purchase price of $32.8 million.  After this repurchase, Chubb has no warrants remaining and no other disclosed equity interest in the company.  The repurchase of the warrant was recognized as a reduction in shareholders' equity.  Both of the aforementioned transactions were funded using available cash on hand and were executed separately from the Company's $500 million share repurchase program.

Through September 30, 2010, the share repurchases related to our share repurchase program and repurchases from the affiliates of Goldman Sachs have had an estimated $3.54 net accretive impact on diluted book value per share.

Quarterly and Special Dividends

Allied World announced today that its Board of Directors declared a quarterly dividend of $0.20 per common share. The dividend will be payable on November 26, 2010 to shareholders of record on November 15, 2010.  In addition, the company's Board of Directors also declared a contingent special dividend of $0.25 per share related to the company's redomestication to Switzerland which is expected to take place before the end of the calendar year 2010.  Under Swiss law, the company does not expect to be able to pay a dividend until two months after the company's next annual meeting which is expected to take place in early May 2011.  This special dividend will provide a dividend to shareholders for the interim period.  This special dividend will be payable on November 26, 2010 to shareholders of record on November 15, 2010.  The company will only pay the special dividend if it receives the requisite shareholder approval of its proposed redomestication to Switzerland and the other closing conditions set forth in the definitive proxy statement filed with the U.S. Securities and Exchange Commission on October 14, 2010 are either waived or satisfied.  Any holders of the company's common shares who sell their shares regular way after the record date and prior to the payment date for the special dividend will also be selling their right to receive this dividend.  Investors are encouraged to consult with their financial advisers regarding the specific implications of buying or selling the company's common shares on or before these dates.

Investment Supplement

Allied World will be providing additional information on its investment portfolio as of September 30, 2010.  This information will be available at the "Investor Relations" section of the company's website at www.awac.com.

Financial Supplement

A financial supplement relating to the third quarter of 2010 will be available at the "Investor Relations" section of the company's website at www.awac.com.

Conference Call

Allied World will host a conference call on Friday, November 5, 2010 at 8:00 a.m. (Eastern Time) to discuss the third quarter 2010 financial results.  The public may access a live webcast of the conference call at the "Investor Relations" section of the company's website at www.awac.com.  In addition, the conference call can be accessed by dialing (866) 843-0890 (U.S. and Canada callers) or (412) 317-9250 (international callers) and entering the passcode 9988847 approximately ten minutes prior to the call.

Following the conclusion of the presentation, a replay of the call will be available through Friday, November 19, 2010 by dialing (877) 344-7529 (U.S. and Canada callers) or (412) 317-0088 (international callers) and entering the passcode 444951. In addition, the webcast will remain available online through Friday, November 19, 2010 at www.awac.com.

Non-GAAP Financial Measures

In presenting the company's results, management has included and discussed in this press release certain non generally accepted accounting principles ("non-GAAP") financial measures within the meaning of Regulation G as promulgated by the U.S. Securities and Exchange Commission. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the company's results of operations in a manner that allows for a more complete understanding of the underlying trends in the company's business. However, these measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles ("U.S. GAAP").

"Operating income" is an internal performance measure used in the management of the company's operations and represents after-tax operational results excluding, as applicable, net realized investment gains or losses, net impairment charges recognized in earnings, impairment of intangible assets and foreign exchange gain or loss. The company excludes net realized investment gains or losses, net impairment charges recognized in earnings and net foreign exchange gain or loss from the calculation of operating income because the amount of these gains or losses is heavily influenced by and fluctuates in part according to the availability of market opportunities and other factors. The company excludes impairment of intangible assets as these are non-recurring charges. The company believes these amounts are largely independent of our business and underwriting process and including them distorts the analysis of trends in operations. In addition to presenting net income determined in accordance with U.S. GAAP, the company believes that showing operating income enables investors, analysts, rating agencies and other users of the company's financial information to more easily analyze our results of operations and underlying business performance. Operating income should not be viewed as a substitute for U.S. GAAP net income.

The company has included "diluted book value per share" because it takes into account the effect of dilutive securities; therefore, the company believes it is an important measure of calculating shareholder returns.

"Annualized net income return on average shareholders' equity" ("ROAE") is calculated using average shareholders' equity, excluding the average after tax unrealized gains (or losses) on investments. Unrealized gains (losses) on investments are primarily the result of interest rate and credit spread movements and the resultant impact on fixed income securities. Such gains (losses) are not related to management actions or operational performance, nor are they likely to be realized. Therefore, the company believes that excluding these unrealized gains (losses) provides a more consistent and useful measurement of operating performance, which supplements GAAP information. In calculating ROAE, the net income (loss) available to shareholders for the period is multiplied by the number of such periods in a calendar year in order to arrive at annualized net income (loss) available to shareholders. The company presents ROAE as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of its financial information.

"Annualized operating return on average shareholders' equity" is calculated using operating income (as defined above and annualized in the manner described for net income (loss) available to shareholders under ROAE above), and average shareholders' equity, excluding the average after tax unrealized gains (losses) on investments. Unrealized gains (losses) are excluded from equity for the reasons outlined in the annualized net income return on average shareholders' equity explanation above.

Reconciliations of these financial measures to their most directly comparable GAAP measures are included in the attached tables.

About Allied World Assurance Company

Allied World Assurance Company Holdings, Ltd, through its subsidiaries, is a global provider of innovative property, casualty and specialty insurance and reinsurance solutions, offering superior client service through a global network of branches and affiliates. Our insurance and reinsurance subsidiaries are rated A (Excellent) by A.M. Best Company, and our Lloyd's Syndicate 2232 is rated A+ (Strong) by Standard & Poor's and Fitch. Please visit our website at www.awac.com for further information on Allied World.

Cautionary Statement Regarding Forward-Looking Statements

Any forward-looking statements made in this press release reflect our current views with respect to future events and financial performance and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements involve risks and uncertainties, which may cause actual results to differ materially from those set forth in these statements.  For example, our forward-looking statements could be affected by pricing and policy term trends; increased competition; the impact of acts of terrorism and acts of war; greater frequency or severity of unpredictable catastrophic events; negative rating agency actions; the adequacy of our loss reserves; the company or its subsidiaries becoming subject to significant income taxes in the United States or elsewhere; changes in regulations or tax laws; changes in the availability, cost or quality of reinsurance or retrocessional coverage; adverse general economic conditions; and judicial, legislative, political and other governmental developments, as well as management's response to these factors, and other factors identified in our filings with the U.S. Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We are under no obligation (and expressly disclaim any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.

SOURCE Allied World Assurance Company Holdings, Ltd