Allied World wins Wall Street favour
Allied World shares surged last week amid a flurry of favourable analyst notes after the company smashed second quarter earnings forecasts.
Operating profits of $82.7mn, or $0.91 a share, were more than twice the $0.39 a share consensus of Wall Street analysts, as the (re)insurer reported improved underwriting across its platform and a better-than-expected investment result.
The biggest difference between expectations and actual results was in reserve releases, where the median estimated by analysts covering Allied World was around $20mn while the company announced $38mn of favourable development.
There was also a positive swing from the prior-year period in the carrier's North America business, with $10mn added to reserves in Q2 2015 but $16mn released in the current reporting period.
The outcome is likely to have given investors some confidence that the reserving issues in healthcare that arose in the fourth quarter of 2015 are in the past.
Speaking to The Insurance Insider, Allied World CFO Tom Bradley said: "It was the first time in the company's history as a public company that we had a quarter with adverse reserve development and that was a bit of a shock to the system.
"We were still reporting a reserve position that was 3.5 percent above our mid-point estimate... but we wanted to come up with a number that truly put the problem behind us. We needed to build some of that credibility back and maybe we did some of that today."
Bradley pointed to other factors in the outperformance, including a strategy of significantly lowering probable maximum losses (PMLs) on its insurance and reinsurance books.
The result was cat losses for the quarter of $20.9mn - modest in a period where the broader sector has been reporting elevated losses from a string of cat and weather-related events.
The executive revealed that with the reduction in PMLs the carrier had actually bought less corporate cat cover at renewal - a benefit that would drop to the bottom line over the next year.
There was also strong investment performance that Bradley attributed to a de-risking of Allied World's portfolio, including moves away from public equities and below-investment-grade credit.
"That moved a lot of the assets into the core fixed income bucket, which translated into operating income, which a lot of the sell-side analysts seem to like," he said.
Net investment income was up 30.6 percent to $55.8mn compared to Q2 2015, while its total financial statement portfolio return increased from $22.6mn to $130.3mn as net realised investment losses turned to gains in the period.
Although there were improved underwriting results across the firm's insurance and reinsurance platforms, global markets insurance remained in the red with a combined ratio of 115.7 percent.
Speaking on Allied World's earnings call, chairman, president and CEO Scott Carmilani said the carrier was in the process of "de-emphasising" a number of lines in global markets, including aviation and marine hull.
He added there was also a change in how the company is writing property business in global markets.
"We are shifting some of the business we write and how we write it, and that should improve the profitability of the underwriting components of that segment," said Carmilani.
The executive highlighted expense reduction efforts in global markets, which drove a decline in the division's expense ratio of around 3 percentage points.
A number of analysts upgraded full-year profits projections for Allied World in response to the earnings result.