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Why Allied World Assurance Co. Holdings, A.G. Stock Is Soaring Today

By Jordan Wathen – Jul 20, 2016 at 12:45PM

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Shares of Allied World Assurance rallied as its combined ratio improved in the second quarter due to lower losses and favorable reserve developments.

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What: Shares of Allied World Assurance Co Holdings (NYSE: AWH) are soaring by more than 13% at 11:30 a.m. EDT as the company beat analyst expectations in the second quarter.

So what: Allied World Assurance reported operating income of $153.4 million, or $1.70 per diluted share for the second quarter of 2016, a substantial improvement over the $25.8 million in operating income it recorded in the same quarter last year.

Aiding the company's earnings beat were lower costs and insurance losses. The company reported a combined ratio of 92.5%, a figure that shows the percentage of earned premiums an insurer forfeited to insurance losses and operating expenses. A lower combined ratio is better. Ideally, an insurance company would consistently report a combined ratio below 100%.

A portion of Allied World Assurance's improvements in its loss ratio were due to favorable reserve developments that occur when estimated losses in prior years prove to be too conservative. This quarter, favorable reserve developments resulted in an improvement of 6.3 percentage points to its loss ratio.

Now what: Going forward, investors will want to see that the company continue benefiting from favorable reserve developments and lower losses in its insurance lines. Importantly, the company reported that gross written premiums for all three of its segments -- North America, global markets, and reinsurance -- shrank compared to the prior-year period.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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