With hurricane season under way, many observers are tracking an event that originated in Bermuda and reached New York earlier this week. Bermuda property and casualty ("P&C") insurer Allied World Assurance Company Holdings (NYSE:AWH) began trading on the NYSE in an 8.8-million-share initial offering that raised nearly $300 million, based on a price of $34 per share -- the low end of the indicative range. Allied World is one of several insurers and re-insurers established with partial funding from hedge funds or private equity groups to fill a capital vacuum in the industry following the terrorist attacks of Sept. 11, 2001. These investors have had a wild ride through last year's hurricane season, and they'll surely be following this IPO to gauge the market's appetite for insurance companies.
Allied World Assurance was formed in November 2001 by a group of investors including AIG (NYSE:AIG), the Chubb Corporation (NYSE:CB), and several Goldman Sachs (NYSE:GS) private equity funds. (In passing, I must tip my hat to Goldman for its "finger in every pie" performance -- it is at once an original investor, an advisor on managing the firm's investment portfolio, and the lead underwriter on the IPO.) Allied World focuses on the direct insurance markets (insuring the insurers, basically) in the property and casualty segments, representing 26% and 41% of total gross premiums in 2005, respectively. The company also provides re-insurance to other insurance companies, comprising 33% of Allied World's premiums.
Insurers such as Inside Value pick Endurance Specialty Holdings (NYSE:ENH) paid a heavy toll for 2005's severe hurricane season. Allied World was no exception, with a 2005 loss of $3.19 per share. However, in its first three years, the company displayed strong operating and financial performance, and first-quarter results are consistent with that record. Let's look at where its peer group is trading:
|
Est. 5-Yr. Earnings Growth |
P/ BV |
Forward P/ E | |
|---|---|---|---|
|
Endurance Specialty |
12% |
1.1 |
5.9 |
|
Peer Group Average* |
11.75 |
1.45 |
9.51 |
At $34.80 per share (Tuesday's closing price), Allied World is valued at 1.2 times book value. If we assume that Allied World earns $5 per share this year (which certainly seems achievable), the implied forward P/ E would be 7. Evaluated on this limited basis, Allied World looks cheap relative to its peer group.
Insured catastrophe losses exceeded $60 billion in 2005, which has ushered in a "hard" pricing environment. According to reports, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has been able to charge premiums that, in certain cases, are greater than half the maximum payout! Barring another series of catastrophic losses, strong earnings this year could spur a revaluation of the entire sector. For investors who get in at the proposed offering price, the risk-reward ratio of owning Allied World looks compelling.
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Fool contributor Alex Dumortier has a beneficial interest in Endurance Specialty Holdings, but no financial interest in any of the other companies mentioned in this article. He welcomes your (constructive) feedback. The Motley Fool has a strict disclosure policy.
