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Q4 Earnings at Allied World Miss Ests, Surge Y/Y

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Allied World Assurance Company Holdings, AG’s reported fourth-quarter 2013 operating net income of $2.17 per share, missing the Zacks Consensus Estimate of $2.40 by 10.4%. However, the results surged from the year-ago quarter operating net loss of $1.58 a share.

Allied World’s net income, including net realized investment gains of $1.86 per share and net foreign exchange loss of 2 cents per share, jumped to $4.01 per share, rebounding from a net loss of $1.17 per share reported in the fourth quarter of 2012.

The year-over-year bottom-line improvement came on the back of top-line growth, better prior-year reserve development and lower catastrophe losses.

Operational Update

Allied World’s total revenue, excluding net realized investment gains, grossed $571.8 million in the quarter, almost in line with the Zacks Consensus Estimate of $572 million. However, the results improved 11.1% year over year. Top-line growth was attributable to higher net earned premiums as well as higher net investment income.

Net earned premiums improved 10.1% from the year-ago period.

The increase in earned premiums and lower losses drove underwriting income to $41.9 million from $78.8 million of underwriting loss reported in the prior-year quarter.

Allied World’s total expenses narrowed 12.7% year over year to $498.1 million in the quarter, primarily due to lower net losses and loss expenses. However, the decrease was partially offset by higher acquisition costs and general and administrative expenses.

Lower loss ratio drove a year-over-year improvement of 2450 basis points (bps) in combined ratio. The figure stood at 92% in the reported quarter.

Segment Update

US Insurance: Gross premiums written climbed 11.7% year over year to $291.1 million on the back of new business across present lines, new lines of business and increased premium rates across all business lines.

The segment incurred an underwriting loss of $45.7 million propelled by higher net losses and loss expenses compared with underwriting loss of $35.1 million reported a year ago.

Combined ratio deteriorated 250 bps to 121.8% in the reported quarter.

International Insurance: Gross premiums written increased 19.9% year over year to $187.8 million, driven by inclusion of new aviation business and better performances at small professional liability lines in the U.K.

Underwriting income of $25.7 million during the reported quarter improved significantly from the year-ago quarter’s underwriting loss number. The increase was primarily supported by lower net losses and loss expenses.

Substantially lower loss ratio led to 5690 bps improvement in the combined ratio that stood at 70.7% in the fourth quarter.

Reinsurance: Gross premium written during the quarter under review decreased 4.1% year over year to $76.6 million.

Lower net losses and loss expenses and higher net earned premiums guided the segment to achieve an underwriting income of $61.8 million compared with an underwriting loss of $19.2 million in the prior-year quarter.

Combined ratio in this segment improved 3650 bps year over year to 72.9%.

Full-Year 2013 Highlights

Allied World’s net operating income for full year 2013 was $10.41 per share, surging 90.3% from the prior-year number. Growth was boosted by better results across all the segments.

Including net realized investment gains of $1.77 per share, and foreign exchange loss of 23 cents, Allied World’s net income for 2013 came in at $11.95 per share, decreasing 10.1% from the 2012 number.

Excluding net realized investment gains, Allied World reported total revenue of $2.16 billion, up 12.9% year over year. The revenue growth was catalyzed by increase in net earned premiums.

Financial Updates

Allied World exited the reported quarter with cash and cash equivalents of $681.3 million that dropped 43.7% from the end of third-quarter 2013.

Total assets of Allied World also decreased 3.5% to $11.94 billion as of Dec 31, 2013 from the end of the sequentially prior quarter.

Allied World’s long-term debt of $798.5 million was almost in line with the third-quarter end level.

Share Repurchase and Dividend Updates

Allied World spent $51.5 million to buy back 0.48 million shares in the quarter.

Allied World paid three of the four quarterly dividends during 2013 and the remaining one is expected to be paid on Apr 3, 2014.

Zacks Rank

Allied World presently bears a Zacks Rank #3 (Hold). Some better-ranked stocks in the property and casualty insurance industry include Greenlight Capital Re, Ltd. (GLRE - Free Report) , Navigators Group Inc. (NAVG - Free Report) and RLI Corp. (RLI - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).

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