Investment performance boosts Alleghany results as TransRe shrinks

Strong investment results helped boost an otherwise tepid set of first quarter results for Alleghany Corporation, which owns TransRe, in which its profits dipped because of lower underwriting profits less reserve developments and the business also shrank slightly.

The company posted a net profit of $149.2 million in the first three months, a 3.4 percent decrease on the $154.5 million it posted in the same period a year earlier. Its underwriting profit fell to $101.4 million, a decrease of 32.5 percent on the year before.

This was partly offset by better investment income which reached $115.5 million, an increase of 10.1 percent from the first quarter of 2016, primarily reflecting higher income from other invested assets, partially offset by lower dividend and interest income. It said the increase in other invested assets primarily reflects higher returns on its equity investment in Ares Management, and higher returns on investment in certain Ares’ managed funds.

The company’s overall net premiums written decreased by 6.7 percent to $1.23 billion but this was a tale of two halves with most of the decreases on the reinsurance side. This segment shrank by 10.1 percent to $1.05 billion; in contrast, the insurance segment increased its net premiums written by 6.5 percent to $283.7 million.

The company said the decrease in TransRe’s net premiums written reflects $190.2 million of premiums in the first quarter of 2017 related to a large whole account quota share treaty, compared with $244.8 million of such premiums in the first quarter of 2016.

It said the decrease in the quota share treaty reflects elevated premiums written in the first quarter of 2016 due to differences between initial premium estimates at contract inception, which were recorded in the fourth quarter of 2015, and actual data subsequently reported.

In addition, the decrease also reflects a decrease in international premiums written, the impact of changes in foreign currency exchange rates and higher ceded premiums written due to an increase in retrocessional coverage purchased in 2017.

TransRe’s 2017 first quarter combined ratio was 94.3 percent, compared with 89.8 percent for the 2016 first quarter. It noted that TransRe’s lower underwriting profit and higher combined ratio for the 2017 first quarter primarily reflects less favorable prior accident year loss reserve development primarily due to the impact of the Ogden rate change and, to a lesser extent, the impact of lower net premiums earned.

Weston Hicks, chief executive officer of Alleghany, said: “Our first quarter results reflect strong investment performance, particularly by Alleghany’s equity portfolio, and solid underwriting discipline at each of our (re)insurance businesses. Financial statement total return before tax was 1.7 percent, and net investment income increased 10.1 percent in the first quarter, primarily due to higher returns from our equity investment in Ares and investment returns in Ares-managed funds.

The consolidated combined ratio for our (re)insurance businesses was 91.6 percent in the 2017 first quarter, compared with 87.7 percent in the prior year first quarter. The 2017 first quarter underwriting results reflect favorable prior accident year reserve development of $47.7 million, primarily at TransRe and RSUI, compared with $85.3 million of favorable prior accident year reserve development in the first quarter of 2016.

The 2017 first quarter favorable prior accident year reserve development is net of an unfavorable adjustment of $24.4 million arising from the UK Ministry of Justice’s decision to significantly reduce the discount rate, referred to as the Ogden rate, used to calculate lump-sum bodily injury payouts in personal injury insurance claims in the UK.

“RSUI, CapSpecialty and PacificComp all performed well in the quarter and selectively expanded their net premiums written despite competitive pressures.”

Hicks added: “Alleghany Capital had acceptable results in a seasonally slow quarter generating a pre-tax operating loss of $8.2 million compared with a loss of $7.2 million in the first quarter of 2016. Adjusted EBITDA in the quarter was $2.1 million compared to $1.9 million in the first quarter of 2016.

“Alleghany Capital’s manufacturing and services businesses generated Adjusted EBITDA of $8.9 million in the first quarter of 2017, an increase from $7.0 million in the first quarter of 2016, and SORC reduced its operating loss. Operating results were negatively impacted in the quarter due to some one-time, long-term compensation plan true-ups and the impact of a rise in price of Alleghany common stock on the plans.

“In the first quarter of 2017, Alleghany Capital’s manufacturing and services businesses included ownership of Kentucky Trailer, IPS, Bourn & Koch and Jazwares. Alleghany Capital’s investment in its operating businesses, including SORC, was $584.9 million as of March 31, 2017.”

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