Allied World prepared to shrink to protect profits; won’t rule out M&A

Allied World is shrinking its business in P&C, aviation and marine in order to protect profitability – but its CEO has not ruled out growth via mergers & acquisitions (M&A).

In the third quarter, the Switzerland-based re/insurer reported gross premiums written 3.2 percent lower year-on-year at $730.2 million. The company focuses on property, casualty and specialty insurance and reinsurance solutions.

The reinsurance segment shrank most, decreasing 14.9 percent to $137 million, driven by continued strategic non-renewal of several property and casualty treaties.

The Global Markets Insurance segment dropped 4.5 percent to $126.7 million, driven by reductions in several lines of business across Europe and Asia.

If the environment remained the same during the next two to three years, Allied World would have to continue contracting the business, said CEO Scott Carmilani during the company’s third quarter results presentation.

“We are a growth oriented company…but we have to be disciplined,” Carmilani said.

The re/insurance sector is experiencing a prolonged soft market driven by overcapacity, which is expected to remain in place for some time.

For Allied World, the pressure is being particularly felt in its primary insurance business in Global Markets, which delivered an underwriting loss of $26.9 million in the third quarter, worse than the negative $12.7 million recorded in the same period a year ago.

The company is reacting to the challenging operating environment by reducing business for example in aviation and some parts of the marine book, Carmilani said.

The fact that Allied World has been more disciplined in underwriting has had positive effects on its profitability as it avoided losses, Carmilani noted. He pointed to storms in China in the summer and events taking place in the aviation market which could have had a much stronger impact on the company’s results.

Allied World's combined ratio was 96.2 percent in the third quarter, up 0.4 percentage points year-on-year. The company reported a net income for the three-month period ending September 30 of $68.6 million, helped by investment returns, compared with a net loss of $51.6 million for the same period in 2015.

The re/insurer is growing in some lines such as in healthcare, professional liability, primary specialty businesses like casualty and retail property, and in the binder business book, Carmilani noted. “We are just not growing fast enough on a quarter by quarter basis,” he said.

The North American insurance segment, for example, grew by 1.3 percent to $466.5 million over the period, led by increases in programmes and other specialty lines.

Overall, Allied World is focussing on smaller clients and targeting a middle market below Fortune 500 companies.

But, as an analyst pointed out during the results presentation, the discussion on ‘bigger is better’ is back on the re/insurance industry’s agenda.

Sompo Holdings, for example, in October entered into a definitive agreement for the acquisition of 100 percent of the outstanding ordinary shares of Endurance Specialty Holdings for an aggregate purchasing price of ¥637.5 billion ($6.3 billion).

Allied World itself has been rumoured to have been in advanced takeover talks with Markel, which supposedly ended unsuccessfully.

While Carmilani declined to comment specifically on the company’s M&A strategy, he said that Allied World’s “mindset has always been open and we have a very strategic view of what’s the short term and what are the key points in long term value creation.”

His colleague, CFO Thomas Bradley added that as a public company Allied World acts “in the best interest of our shareholders.”