Allied World Assurance Company Holdings, AG ( AWH ) is a Swiss-based
insurer and reinsurer with branches in Bermuda, Europe, Hong Kong,
Singapore and the United States. It was originally formed in 2001
in Bermuda. Beginning in 2007, Allied World started to actively
develop its U.S. insurance business to decrease its reliance on
Bermuda -- and in 2010 it changed its domicile to Switzerland. The
company is well diversified across product lines, well reserved,
and its stock is well priced offering an average earnings yield of
some 15%. Let us take a look at Allied World Assurance.
Allied has three main operating segments:
Let's break this down further, however, so you can see the
diversification. Below is a outline of the U.S. insurance segment,
its largest exposure is to casualty:
Check out the International insurance segment:
And the Reinsurance segment:
From this we can see that the largest line of business is
property reinsurance, closely followed by U.S. general casualty.
With the two largest lines making up 26.7% of premiums, we clearly
have an insurer, which is not overly reliant on any one line of
Of the $2329m premiums written in 2012, 15% were from the
catastrophe reinsurance market -- this is much different than, say,
Everest Re ( RE ) or
Montpelier ( MRH ),
both of whom are heavily concentrated in the cat market. A combined
picture of this diversification was supplied by a recent investor
presentation (found here (pdf)):
This is to say that Allied's business is hardly dependent on any
one line of business. This diversification of risk is probably why
the corporation has suffered only one loss in the last 12 years: in
2005, due to the Hurricanes Katrina , Rita and Wilma. This avoidance of loss has
resulted in enormous cash flows, handsome earnings, and growing
tangible book. Let us, then, take a look at earnings.
Operating History -- Earnings
When we take a bird's eye view of Allied World's earnings, and
separate its earnings into averages, we have a table as
(click to enlarge)
The average earnings over the 11-year period above is $326m.
Against the current market cap of $3160m, this is an earnings yield
of 10.3%. Not bad at all .
Of course, the corporation has grown revenues, so we would be
wise to use a shorter and more recent average to better approximate
earning power. Check out the recent revenue growth:
Therefore, using the 5-year average earnings of $444m, we would
have an earnings yield of 14% -- quite handsome indeed. The 3-year
average would be a 15% yield. Therefore, on an earnings basis only,
this corporation is already attractive. Since we are talking about
an insurer, let us take a look at how Allied has reserved for
losses in the past.
Operating History -- Reserves
Allied has historically been more than adequate with its
(click to enlarge)
( Allied World 2012 10-K, p. 14 )
The loss and reserve development table above is read as follows:
"In 2007, Allied World Assurance estimated its loss reserves at
about $3,624,872. As of December 2012, Allied World has
re-estimated losses downwards, thereby decreasing reserves to
$2,326,535. We can then say retrospectively that Allied World had a
2007 reserve redundancy of $1,298,337." In other words, in December
2007, book value would have been understated by some $1.2 billion
-- although, we did not know that at the time.
Since the corporation has typically "over" reserved prudently we
could hypothesize that they are still currently over reserving.
That could mean that the current tangible book value of $2976 (as
of March 31st, 2013) is understated. Since the corporation is
selling at $3160m (or a price to tangible book of 1.06) it is
possible, given the size of past reserve redundancy, that the
corporation is actually not at a premium to book but is,
assuming future reserve releases , selling at a slight
discount to book.
This fact adds to the attraction of this stock, in my opinion.
How do our rating agencies view Allied World?
It is highly rated:
- "A" or "Excellent" at A.M. Best
- "A" or "Strong" by Standard and Poor's
- "A2" or "Good" by Moody's
- "A+" or "Good" by Fitch
Conclusion - Bull Thesis
The groundwork has been laid to be bullish: (1) the company is
diversified across business lines, (2) it is selling at a PE-3 of 6
and (3) it is selling at a slight discount to book. But there are a
few additional distinctions, which can be made between Allied World
and its competitors. For instance, it is in the top of its class
when it comes to five-year average operating ROE:
(click to enlarge)
Further, the fact that the business is so near its tangible book
represents a backstop should there be a large decline in the share
price. And since it is already attractively priced, a fall in price
would make the stock increasingly attractive. Many stocks, which
offer an earnings yield of some 15%, lack the sort of downside
protection, which is offered to some extent here. Allied World is
strong, well managed, and cheap relative to earnings.
Disclosure: I have no positions in any stocks
mentioned, but may initiate a long position in [[AWH]] over the
next 72 hours. I wrote this article myself, and it expresses my own
opinions. I am not receiving compensation for it (other than from
Seeking Alpha). I have no business relationship with any company
whose stock is mentioned in this article.
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