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China explosions, investments drive Allied World's third-quarter losses

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The explosions that rocked the port of Tianjin, China, in August led to a major catastrophic loss for Allied World Assurance Co. Holdings A.G. that, along with significant losses in its equities portfolio, negatively affected its third-quarter earnings.

The Zug, Switzerland-based company reported a net loss of $51.6 million for the third quarter of 2015 compared to net income of $30.9 million in the same period of 2014, according to the company’s third-quarter earnings release. Net income was reduced by net catastrophe losses of $28.9 million caused by the explosions in the port of Tianjin, the release stated.

“This is a very large loss to that city,” President and CEO Scott Carmilani said during the company’s third-quarter earnings conference call on Thursday morning. “Our estimate is based on individual treaties that we expect will have some exposure and those limits that we have on those treaties and, of course, some direct property exposures we may have in our insurance portfolio. Except for this event, we had a rather mild or quiet cat experience for the quarter and, for that matter, this whole year.”

Net realized investment losses of $113.6 million also negatively impacted the company’s earnings in the third quarter, the company said in the release. These were driven mostly by the market volatility causing losses in the company’s $650 million globally-focused equity portfolio, which has led to the trimming of some of its positions to better allocate risk, John Gauthier, Allied World’s chief investment officer, said during the call.

“For the past few years, Allied World has had a sizeable allocation to equities, as much as 10% of our portfolio,” he said. “Our equity portfolio has been a meaningful contributor for total returns for many quarters, but was a distractor in this past quarter.”

Operating income was $51.4 million in the third quarter of 2015 compared to operating income of $60.6 million for the third quarter of last year, according to the release.

The combined ratio was 95.8% this past quarter compared to 91.7% in the third quarter of 2014, according to the release.

Allied World experienced record net premiums earned of $650.7 million, a 20.1% increase compared to the prior year quarter, driven by organic growth and its recently acquired Asian operations. In April, Allied World completed the acquisitions of the Hong Kong and Singapore operations of Royal & Sun Alliance Insurance P.L.C. — transactions the company valued at about $193 million.

The company’s reinsurance segment decreased 9% in the quarter, driven by the nonrenewal of several casualty and property treaties, according to the release.

“The declines reflect a shift towards lower volatility business in this current rate and market environment, complemented with what I think is better and more appropriate reinsurance buying and uses thereof, also due to market conditions,” Mr. Carmilani said.

The rate environment “remains a challenge,” with property rates down across the board and worldwide by double digits and casualty rates “all over the place,” Mr. Carmilani said.

“I think the ups and downs from line to line and within the business segments, while a mixed bag, really gives some insight to the picture and challenges the industry is facing today,” he said.