Exclusive Interview With The Chief Investment Officer: Allied World Assurance Company Holdings, AG (AWH) - John J. Gauthier

Wall Street Transcript

67 WALL STREET, New York - July 10, 2012 - The Wall Street Transcript has just published its Insurance Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Insurance Reserves Adequacy, Low Profitability and Interest Rates, Commercial Line Brokers and Underwriters, Life and Property/Casualty Insurers

Companies include: CNO Financial (CNO); Fortegra Financial (FRF); Protective Life (PL); A.J. Gallagher (AJG); Aflac (AFL); and many more.

In the following brief excerpt from the Insurance Report, expert analysts discuss the outlook for the sector and for investors.

John J. Gauthier, CFA, has served as Executive Vice President and Chief Investment Officer of Allied World Assurance Company Holdings, AG, since October 2008. In this role, he manages the company's investment portfolio and oversees the investor relations team. Before joining Allied World, Mr. Gauthier was Global Head of the Insurance Fixed Income Portfolio Management at Goldman Sachs Asset Management from February 2005 to September 2008. From 1997 to January 2005, he was Managing Director and Portfolio Manager at Conning Asset Management, where he was responsible for the investment strategy for all property and casualty insurance company clients. Mr. Gauthier also served as Vice President at General Reinsurance/New England Asset Management as well as a Portfolio Manager at General Reinsurance.

TWST: Would you begin with a brief introduction to Allied World, including some highlights from its history and an overview of its product lines and geographic footprint?

Mr. Gauthier: Yes. So Allied World was a post-9/11 startup. The original founders included Goldman Sachs, Chubb and AIG. The company was formed in late 2001. We started out principally as a Bermuda excess writer for most of its early years and went public in 2006. And for most of our history, we've been roughly two-thirds of insurance versus reinsurance, with roughly three-quarters casualty business versus property.We now have 17 offices in the U.S., Bermuda, Europe and Asia. Our U.S. insurance platform is roughly 42% of our business and operates out of our 10 regional branch offices. Our international segment is roughly 26% of our business. These amounts are for the 12-month period ending March 31, 2012. The international segment operates in Bermuda, London, Dublin, Singapore, Hong Kong, and our headquarters is Zug, Switzerland.And our reinsurance segment is roughly 32% of our business, has a strong presence in the U.S. and is growing internationally. As far as our scale, in 2011, we wrote about $1.9 billion of premiums. As of March 2012, we had over $4 billion of total capital and the investment portfolio I oversee is over $8 billion.

TWST: Please tell us about Allied World's investment philosophy and what you believe makes it unique.

Mr. Gauthier: Over the last several years, we've really transitioned from a traditional income-focused, more-buy-and hold strategy to a more total return-focused, active management strategy. So if you think about insurance companies in general, they mostly will account for their assets by held to maturity or available for sale. We actually moved the accounting over the last several years to a mark to market, so all the changes in the principal, the price appreciation or depreciation flow through our income statement.And this means we focus more than just on the income component. We focus on both the income component and the capital appreciation or depreciation component. That's also helped us transition the portfolio from once a predominantly fixed-income-only to a much more broadly diversified portfolio, where interest rates, we think, make sense for the future returns of the portfolio.We were fortunate that during 2008 we had a very risk-averse portfolio. We had mostly a core fixed income portfolio, a fair amount of Treasuries and agencies, not much in the way of equities or alternatives at all. So we came through 2008 in pretty good shape, and actually had a positive return, which is different than most of our peer group. Beginning in early 2009, given the opportunities, we began decreasing some of that fixed income portfolio and adding risk and diversification to the portfolio, and we were rewarded very well in 2009 and 2010 with very attractive returns - 2011 turned out to be a little less-than-stellar year for our investment portfolio, although we still posted a positive 2%.So we've moved from a fixed-income-only portfolio - our quarterly investor presentation can give you all the details - to a portfolio that includes distressed residential mortgage-backed securities, bank loans, loan-only equities, hedge funds and some private equity assets as well.

TWST: Would you give us an overview of and commentary on Allied World's most recent investment performance? And to the extent you can share with us, what's the outlook for the remainder of 2012?

Mr. Gauthier: Yes. We had a very attractive first quarter. All components of the portfolio did well. The spread product in our core fixed-income portfolio rallied, giving us a positive return of 1.5% in that meaningful portfolio allocation. The rest of the portfolio actually did better than that, bringing our total return for the entire portfolio to 2% for the quarter. So obviously for the first quarter, a very attractive return in this environment.

We don't give earnings guidance, but the only insight, I guess, I'm willing to provide that we've counseled both internal and external constituents: not to expect 2% a quarter for every quarter for the rest of the year.

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