UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Exact Name of Registrant as Specified in Its Charter)

Bermuda		98-0481737
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

27 Richmond Road, Pembroke HM 08, Bermuda
(Address of Principal Executive Offices and Zip Code)

(441) 278-5400
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     The number of outstanding common shares, par value $0.03 per share, of Allied World Assurance Company Holdings, Ltd as of May 3, 2010 was 50,466,804.

 

 

Item 1. Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 2010 and December 31, 2009
(Expressed in thousands of United States dollars, except share and per share amounts)

		As of				As of
		March 31,				December 31,
		2010				2009
ASSETS
Fixed maturity investments available for sale, at fair value (amortized cost: 2010: $3,069,009; 2009: $4,260,844)		$	3,227,889			$	4,427,072
Fixed maturity investments trading, at fair value			3,868,044				2,544,322
Other invested assets trading, at fair value			261,930				184,869
Total investments			7,357,863				7,156,263
Cash and cash equivalents			452,134				292,188
Restricted cash			45,440				87,563
Insurance balances receivable			493,775				395,621
Prepaid reinsurance			170,948				186,610
Reinsurance recoverable			920,480				919,991
Accrued investment income			54,532				53,046
Net deferred acquisition costs			97,429				87,821
Goodwill			268,376				268,376
Intangible assets			59,467				60,359
Balances receivable on sale of investments			311,727				55,854
Net deferred tax assets			16,897				21,895
Other assets			75,386				67,566
Total assets		$	10,324,454			$	9,653,153
LIABILITIES
Reserve for losses and loss expenses		$	4,853,359			$	4,761,772
Unearned premiums			1,007,926				928,619
Reinsurance balances payable			82,541				102,837
Balances due on purchases of investments			484,524				55,670
Dividends payable			10,092				—
Senior notes			498,951				498,919
Accounts payable and accrued liabilities			48,254				92,041
Total liabilities		$	6,985,647			$	6,439,858
SHAREHOLDERS’ EQUITY
Common shares, par value $0.03 per share, issued and outstanding 2010: 50,459,000 shares and 2009: 49,734,487 shares		$	1,514			$	1,492
Additional paid-in capital			1,369,341				1,359,934
Retained earnings			1,825,668				1,702,020
Accumulated other comprehensive income: net unrealized gains on investments, net of tax			142,284				149,849
Total shareholders’ equity		$	3,338,807			$	3,213,295
Total liabilities and shareholders’ equity		$	10,324,454			$	9,653,153

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the three months ended March 31, 2010 and 2009
(Expressed in thousands of United States dollars, except share and per share amounts)

		Three Months Ended
		March 31,
		2010				2009
REVENUES:
Gross premiums written		$	504,163			$	479,597
Premiums ceded			(70,871	)			(74,559	)
Net premiums written			433,292				405,038
Change in unearned premiums			(94,968	)			(81,066	)
Net premiums earned			338,324				323,972
Net investment income			68,902				77,854
Net realized investment gains			77,487				36,602
Net impairment charges recognized in earnings:
Total other-than-temporary impairment charges			(168	)			(41,963	)
Portion of loss recognized in other comprehensive income, before taxes			—				—
Net impairment charges recognized in earnings			(168	)			(41,963	)
Other income			297				466
			484,842				396,931
EXPENSES:
Net losses and loss expenses			232,154				148,497
Acquisition costs			40,784				37,129
General and administrative expenses			63,463				57,365
Amortization and impairment of intangible assets			892				1,065
Interest expense			9,528				10,447
Foreign exchange loss			1,076				835
			347,897				255,338
Income before income taxes			136,945				141,593
Income tax expense			3,205				10,185
NET INCOME			133,740				131,408
Other comprehensive loss
Unrealized gains on investments arising during the period net of applicable deferred income tax benefit for the three months 2010: $219; 2009: $1,381			37,470				(64,060	)
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax			(45,035	)			6,632
Other comprehensive loss			(7,565	)			(57,428	)
COMPREHENSIVE INCOME		$	126,175			$	73,980
PER SHARE DATA
Basic earnings per share		$	2.67			$	2.67
Diluted earnings per share		$	2.52			$	2.57
Weighted average common shares outstanding			50,023,816				49,248,118
Weighted average common shares and common share equivalents outstanding			53,115,756				51,120,049
Dividends declared per share		$	0.20			$	0.18

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the three months ended March 31, 2010 and 2009
(Expressed in thousands of United States dollars)

						Additional				Accumulated Other
						Paid-in				Comprehensive				Retained
		Share Capital				Capital				Income				Earnings				Total
December 31, 2009		$	1,492			$	1,359,934			$	149,849			$	1,702,020			$	3,213,295
Net income			—				—				—				133,740				133,740
Dividends			—				—				—				(10,092	)			(10,092	)
Other comprehensive loss:
Net unrealized losses, net of deferred income tax			—				—				(7,565	)			—				(7,565	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax			—				—				—				—				—
Total other comprehensive loss			—				—				(7,565	)			—				(7,565	)
Stock compensation			22				9,407				—				—				9,429
March 31, 2010		$	1,514			$	1,369,341			$	142,284			$	1,825,668			$	3,338,807

						Additional				Accumulated Other
						Paid-in				Comprehensive				Retained
		Share Capital				Capital				Income				Earnings				Total
December 31, 2008		$	1,471			$	1,314,785			$	105,632			$	994,974			$	2,416,862
Net income			—				—				—				131,408				131,408
Dividends			—				—				—				(8,914	)			(8,914	)
Net unrealized losses, net of deferred income tax			—				—				(57,428	)			—				(57,428	)
Stock compensation			15				9,917				—				—				9,932
March 31, 2009		$	1,486			$	1,324,702			$	48,204			$	1,117,468			$	2,491,860

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2010 and 2009
(Expressed in thousands of United States dollars)

		Three Months Ended
		March 31,
		2010				2009
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	133,740			$	131,408
Adjustments to reconcile net income to cash provided by operating activities:
Net realized gains on sales of investments			(45,261	)			(36,694	)
Mark to market adjustments			(32,226	)			92
Net impairment charges recognized in earnings			168				41,963
Stock compensation expense			9,527				8,154
Insurance balances receivable			(98,154	)			(69,753	)
Prepaid reinsurance			15,662				15,666
Reinsurance recoverable			(489	)			7,924
Accrued investment income			(1,486	)			164
Net deferred acquisition costs			(9,608	)			(7,196	)
Net deferred tax assets			4,779				(11,312	)
Other assets			(6,073	)			857
Reserve for losses and loss expenses			91,587				26,250
Unearned premiums			79,307				65,401
Reinsurance balances payable			(20,296	)			(3,470	)
Accounts payable and accrued liabilities			(33,695	)			(24,039	)
Other items, net			(2,182	)			(1,896	)
Net cash provided by operating activities			85,300				143,519
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchases of fixed maturity investments — available for sale			(85,767	)			(3,249,818	)
Purchases of fixed maturity investments — trading			(2,075,196	)			—
Purchases of other invested assets			(71,802	)			(124,659	)
Sales of fixed maturity investments — available for sale			1,304,598				3,422,483
Sales of fixed maturity investments — trading			960,823				—
Sales of other invested assets			884				56,688
Changes in securities lending collateral received			—				171,026
Purchases of fixed assets			(3,168	)			(2,351	)
Change in restricted cash			42,123				(8,910	)
Net cash provided by investing activities			72,495				264,459
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from the exercise of stock options			2,735				2,221
Repayment of syndicated loan			—				(243,750	)
Changes in securities lending collateral			—				(177,010	)
Net cash provided by (used in) financing activities			2,735				(418,539	)
Effect of exchange rate changes on foreign currency cash			(584	)			(197	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			159,946				(10,758	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			292,188				655,828
CASH AND CASH EQUIVALENTS, END OF YEAR		$	452,134			$	645,070
Supplemental disclosure of cash flow information:
— Cash paid for income taxes		$	3,627			$	11,879
— Cash paid for interest expense			18,750				20,365

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

1. GENERAL

     Allied World Assurance Company Holdings, Ltd (“Holdings”) was incorporated in Bermuda on November 13, 2001. Holdings, through its wholly-owned subsidiaries (collectively, the “Company”), provides property and casualty insurance and reinsurance on a worldwide basis through operations in Bermuda, the United States, Europe, Hong Kong and Singapore.

2. BASIS OF PREPARATION AND CONSOLIDATION

     These unaudited condensed consolidated financial statements include the accounts of Holdings and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Company’s financial statements include, but are not limited to:

	•		The premium estimates for certain reinsurance agreements,
	•		Recoverability of deferred acquisition costs,
	•		The reserve for outstanding losses and loss expenses,
	•		Valuation of ceded reinsurance recoverables,
	•		Determination of impairment of goodwill and other intangible assets,
	•		Valuation of financial instruments, and
	•		Determination of other-than-temporary impairment of investments.

     Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the consolidation. Certain immaterial reclassifications in the unaudited condensed consolidated statements of operations and comprehensive income (“consolidated income statements”) and consolidated statements of cash flows and notes to the unaudited condensed consolidated financial statements have been made to prior years’ amounts to conform to the current year’s presentation.

     These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

3. NEW ACCOUNTING PRONOUNCEMENTS

     In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-06 “Fair Value Measurements and Disclosures” (“ASU 2010-06”). ASU 2010-06 updated section ASC 820-10 to require a greater level of disaggregated information and more robust disclosure about valuation techniques and inputs to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measures which are effective for interim and annual reporting periods beginning after December 15, 2010. See Note 6 “Fair Value of Financial Instruments” for the Company’s disclosures about the fair value of financial instruments.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     In March 2010, the FASB issued ASU 2010-11 “Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”). ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements, specifically one that is related only to the subordination of one financial instrument to another. ASU 2010-11 is effective for interim and annual periods beginning after June 15, 2010. The Company is currently evaluating the provisions of ASU 2010-11 and its potential impact on future financial statements.

4. INVESTMENTS

a) Available for Sale Securities

     The amortized cost, gross unrealized gains, unrealized losses, other-than-temporary-impairments (“OTTI”) recorded through other comprehensive income (“OCI”) and fair value of the Company’s available for sale investments by category as of March 31, 2010 and December 31, 2009 are as follows:

						Gross
						Unrealized				Unrealized
		Cost				Gains				Losses				OTTI OCI				Fair Value
March 31, 2010
U.S. Government and Government agencies		$	397,646			$	20,292			$	(708	)		$	—			$	417,230
Non-U.S. Government and Government agencies			139,947				7,219				(3,444	)			—				143,722
States, municipalities and political subdivisions			171,054				14,740				(19	)			—				185,775
Corporate debt:
Financial institutions			367,904				20,232				(723	)			—				387,413
Industrials			763,965				49,324				(212	)			—				813,077
Utilities			178,595				14,558				—				—				193,153
Residential mortgage-backed:
Non-agency residential			161,025				5,558				(7,368	)			(1,761	)			157,454
Agency residential			634,002				28,894				(327	)			—				662,569
Commercial mortgage-backed			167,620				9,031				(22	)			—				176,629
Asset-backed			87,251				3,714				(98	)			—				90,867
Total fixed maturity investments, available for sale		$	3,069,009			$	173,562			$	(12,921	)		$	(1,761	)		$	3,227,889
December 31, 2009
U.S. Government and Government agencies		$	689,858			$	34,831			$	(1,389	)		$	—			$	723,300
Non-U.S. Government and Government agencies			271,528				13,752				(1,590	)			—				283,690
States, municipalities and political subdivisions			210,315				17,429				(336	)			—				227,408
Corporate debt:
Financial institutions			684,386				27,695				(1,751	)			—				710,330
Industrials			879,905				46,489				(184	)			—				926,210
Utilities			143,773				10,479				—				—				154,252
Residential mortgage-backed:
Non-agency residential			172,000				4,206				(11,517	)			(1,856	)			162,833
Agency residential			708,652				28,882				(1,095	)			—				736,439
Commercial mortgage-backed			406,236				6,482				(7,915	)			—				404,803
Asset-backed			94,191				3,762				(146	)			—				97,807
Total fixed maturity investments, available for sale		$	4,260,844			$	194,007			$	(25,923	)		$	(1,856	)		$	4,427,072

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

b) Trading Securities

     Securities accounted for at fair value with changes in fair value recognized in the consolidated income statements by category as of March 31, 2010 and December 31, 2009 are as follows:

		March 31, 2010				December 31, 2009
U.S. Government and Government agencies		$	1,648,683			$	655,266
Non-U.S. Government and Government agencies			251,836				227,310
States, municipalities and political subdivisions			45,919				15,810
Corporate debt
Financial institutions			708,254				590,130
Industrials			196,621				191,729
Utilities			38,654				11,934
Residential mortgage-backed
Non-agency residential			301,299				259,055
Agency residential			262,588				139,858
Commercial mortgage-backed			29,494				18,266
Asset-backed			384,696				434,964
Total fixed maturity investments, trading			3,868,044				2,544,322
Hedge funds			242,135				184,725
Equity securities			19,795				144
Total		$	4,129,974			$	2,729,191

c) Contractual Maturity Dates

     The contractual maturity dates of fixed maturity investments (available for sale and trading) as of March 31, 2010 are as follows:

		Amortized Cost				Fair Value
Due within one year		$	131,512			$	133,852
Due after one year through five years			3,012,382				3,099,795
Due after five years through ten years			1,600,882				1,629,652
Due after ten years			157,503				167,038
Mortgage-backed			1,527,147				1,590,033
Asset-backed			467,292				475,563
		$	6,896,718			$	7,095,933

     Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

d) Other Invested Assets

     As of March 31, 2010, the Company held sixteen hedge fund investments with a total fair value of $242,135, which comprised 3.1% of the total fair value of its investments and cash and cash equivalents and are summarized as follows by type of investment strategy:

										Long				Short
Hedge Fund		Fair Value as of				Unfunded				Exposure(1)				Exposure(2)				Gross				Net
Type		March 31, 2010				Commitments				(% of funded)				(% of funded)				Exposure(3)				Exposure(4)
Secondary private equity funds		$	14,035			$	47,071				100	%			0	%			100	%			100	%
Distressed			68,149				42,492				70	%			18	%			88	%			52	%
Equity long/short			63,695				—				96	%			52	%			148	%			44	%
Multi-strategy			76,087				—				109	%			72	%			181	%			37	%
Event driven			20,169				—				97	%			83	%			180	%			14	%
Total		$	242,135

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

	•		Secondary private equity funds: These funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. The Company has invested in two secondary funds to purchase those primary limited partnership interests. The fair values of the investments in this class have been estimated using the net asset value per share of the investments. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. The remaining restriction period for these funds ranges from eight to nine years.
	•		Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in five distressed funds, four of which are not currently eligible for redemption due to imposed lock-up periods with remaining periods ranging from five months to eight years. Funds representing approximately 29% of the value of the funds in this class will be eligible for redemption in August 2010. Funds representing approximately 23% of the value of the funds in this class are currently eligible for quarterly redemption with a 45-day notification period and redemption fee if redeemed prior to January 2012.
	•		Equity long/short funds: In long/short equities, managers take positions in companies they deem to be undervalued and short stocks they believe to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and target net long position. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in three equity long/short funds, two of which are not currently eligible for redemption due to imposed lock-up periods with remaining periods ranging from five to nine months at which time the funds will be eligible for quarterly redemption with a 60-day notification period. Funds representing approximately 16% of the value of the funds in this class are currently eligible for quarterly redemption with a 30-day notification period or monthly redemption with a 30-day notification period and redemption fee.
	•		Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger, convertible and fixed income arbitrage and macro trading. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in four multi-strategy funds. Funds representing approximately 73% of the value of the funds in this class are currently eligible for quarterly redemption with either a 60 or 65-day notification period. Funds representing approximately 14% of the value of the funds in this class are currently eligible for quarterly redemption with a 45-day notification period and redemption fee if redeemed prior to December 2010. Funds representing approximately 13% of the value of the funds in this class are currently eligible for quarterly redemption with a 90-day notification period and lock up period of ten months.
	•		Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one of more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include merger and acquisitions (arbitrage), corporate restructurings and spin-offs and capital structure arbitrage. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in two event driven funds. Approximately 50% of the value of the funds are not currently eligible for redemption due to an imposed two year lock-up period. The remaining 50% of the value of the funds in this class are currently eligible for quarterly redemption, but are subject to redemption fees and limitations.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     Three of the Company’s hedge funds, including a multi-strategy fund, an equity fund and an event driven fund, had long exposure greater than 100% of the funds’ net asset value (179.5%, 101% and 117%, respectively as of March 31, 2010). None of the secondary private equity, distressed or equity long/short funds in which the Company invests have used explicit leverage as of March 31, 2010.

e) Net Investment Income

		For the Three Months Ended
		March 31,
		2010				2009
Fixed maturities and other investments		$	71,098			$	78,878
Other invested assets			306				607
Cash and cash equivalents			52				626
Expenses			(2,554	)			(2,257	)
Net investment income		$	68,902			$	77,854

f) Components of Realized Gains and Losses

     The proceeds from sales of available for sale securities for the three months ended March 31, 2010 and 2009 were $1,306,625 and $3,479,171, respectively. Components of realized gains for the three months ended March 31, 2010 and 2009 are summarized in the following table:

		For the Three Months Ended
		March 31,
		2010				2009
Gross realized gains on sale of securities		$	51,667			$	47,654
Gross realized losses on sale of securities			(6,406	)			(10,960	)
Mark-to-market changes: debt securities trading			27,731				—
Mark-to-market changes: hedge funds and equity securities			4,495				(92	)
Net realized investment gains		$	77,487			$	36,602

g) Pledged Assets

     As of March 31, 2010 and December 31, 2009, $344,838 and $323,681, respectively, of cash and cash equivalents and investments were on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with relevant insurance regulations. In addition, the Company has set up trust accounts to meet security requirements for inter-company reinsurance transactions. These trusts contained assets of $973,628 and $701,843 as of March 31, 2010 and December 31, 2009, respectively, and are included in fixed maturity investments.

     The Company also has facilities available for the issuance of letters of credit collateralized against the Company’s investment portfolio. The collateralized portion of these facilities is up to $1,300,000 as of March 31, 2010 and December 31, 2009. (See Note 7, “Debt and Financing Arrangements” for details on the facilities).

     The following table shows the Company’s trust accounts on deposit, as well as outstanding and remaining letters of credit facilities, and the collateral committed to support the letters of credit facilities as of March 31, 2010 and December 31, 2009:

		As of				As of
		March 31,				December 31,
		2010				2009
Total trust accounts on deposit		$	1,318,466			$	1,025,524
Total letters of credit facilities:
Citibank Europe plc			900,000				900,000
Credit Facility			800,000				800,000
Total letters of credit facilities			1,700,000				1,700,000

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

		As of				As of
		March 31,				December 31,
		2010				2009
Total letters of credit facilities outstanding:
Citibank Europe plc			707,789				794,609
Credit Facility			206,452				376,658
Total letters of credit facilities outstanding			914,241				1,171,267
Total letters of credit facilities remaining:
Citibank Europe plc			192,211				105,391
Credit Facility			593,548				423,342
Total letters of credit facilities remaining			785,759				528,733
Collateral committed to support the letter of credit facilities		$	1,142,148			$	1,208,359

     Total trust accounts on deposit includes available for sale securities, trading securities and cash and cash equivalents. The fair values of the combined total cash and cash equivalents and investments held under trust were $2,460,614 and $2,233,883 as of March 31, 2010 and December 31, 2009, respectively. Of the total letters of credit facilities outstanding as of March 31, 2010 and December 31, 2009, $19,026 and $263,297 was used to meet security requirements for inter-company transactions and the remaining letter of credit facilities outstanding of $895,215 and $907,970 was used for third-party ceding companies, respectively. Trust accounts were substituted for inter-company letters of credit during the first quarter of 2010.

h) Analysis of Unrealized Losses

     The Company’s primary investment objective is the preservation of capital. Although the Company has been successful in meeting this objective, shifts in interest rates and credit spreads affecting valuation can temporarily place some investments in an unrealized loss position.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     The following table summarizes the market value of those investments in an unrealized loss position for periods less than and greater than 12 months as of March 31, 2010 and December 31, 2009:

		March 31, 2010												December 31, 2009
		Gross				Unrealized								Gross				Unrealized
		Fair Value				Loss				OTTI OCI				Fair Value				Loss				OTTI OCI
Less than 12 months
U.S. Government and Government agencies		$	67,058			$	(691	)		$	—			$	112,349			$	(1,367	)		$	—
Non-U.S. Government and Government agencies			41,384				(2,791	)			—				40,450				(1,079	)			—
States, municipalities and political subdivisions			5,324				(19	)			—				7,637				(336	)			—
Corporate debt
Financial institutions			32,813				(489	)			—				45,697				(560	)			—
Industrials			16,752				(212	)			—				18,409				(184	)			—
Residential mortgage-backed
Non-agency residential			91,538				(7,077	)			(1,349	)			82,544				(8,797	)			(1,527	)
Agency residential			11,231				(327	)			—				70,525				(1,057	)			—
Commercial mortgage-backed			701				(22	)			—				56,396				(511	)			—
Asset-backed			5,552				(70	)			—				8,516				(120	)			—
		$	272,353			$	(11,698	)		$	(1,349	)		$	442,523			$	(14,011	)		$	(1,527	)
More than 12 months
U.S. Government and Government agencies		$	273			$	(17	)		$	—			$	271			$	(22	)		$	—
Non-U.S. Government and Government agencies			2,744				(653	)			—				3,700				(511	)			—
Corporate debt
Financial institutions			21,515				(234	)			—				23,462				(1,191	)			—
Residential mortgage-backed
Non-agency residential			11,447				(291	)			(412	)			27,265				(2,720	)			(329	)
Agency residential			—				—				—				214				(38	)			—
Commercial mortgage-backed			—				—				—				149,074				(7,404	)			—
Asset-backed			341				(28	)			—				419				(26	)			—
		$	36,320			$	(1,223	)		$	(412	)		$	204,405			$	(11,912	)		$	(329	)
		$	308,673			$	(12,921	)		$	(1,761	)		$	646,928			$	(25,923	)		$	(1,856	)

     As of March 31, 2010 and December 31, 2009, there were approximately 100 and 159 securities, respectively, in an unrealized loss position. The gross unrealized loss of $12,921 as of March 31, 2010 was primarily the result of widening credit spreads related to increases in market risk premium and reduced market liquidity since the acquisition of these securities. The decrease in the gross unrealized loss from December 31, 2009 to March 31, 2010 is primarily due to selling available for sale debt securities and reinvesting proceeds in trading debt securities thereby reducing unrealized gains/losses recognized in accumulated other comprehensive income.

i) Other-than-temporary impairment charges

     Following the Company’s review of the securities in the investment portfolio during the three months ended March 31, 2010, one mortgage-backed security was considered to be other-than-temporarily impaired due to the present value of the expected cash flows being lower than the amortized cost. The $168 of OTTI was recognized through earnings due to credit related losses.

     For the mortgage-backed security for which OTTI was recognized due to credit loss during the three months ended March 31, 2010, the significant inputs utilized to determine a credit loss were the estimated frequency and severity of losses of the underlying mortgages that comprise the mortgage-backed security. The frequency of losses was measured as the credit default rate, which includes such factors such as loan-to-value ratios and credit scores of borrowers. The severity of losses includes such factors as trends in overall housing prices and house prices that are obtained at foreclosure. The frequency and severity inputs were used in projecting the future cash flows of the mortgage backed security. For the security in which we recognized an OTTI due to credit loss the credit default rate was 10.3% and the severity rate was 49.0%.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     The following table summarizes the amounts related to credit losses on debt securities for which a portion of the OTTI was recognized in other comprehensive income in the consolidated income statements for the three months ended March 31, 2010:

		For the Three Months
		Ended March 31, 2010
Beginning balance of credit losses		$	1,096
Additions for credit loss for which OTTI was not previously recognized			168
Reductions for securities sold during the period (realized)			—
Reductions for OTTI previously recognized due to intent to sell			—
Additions resulting from the increase in credit losses			—
Reductions resulting from the improvement in expected cash flows			—
Ending balance of credit losses		$	1,264

     During the three months ended March 31, 2009, the Company recognized OTTI through earnings of $41,963 for those securities in an unrealized loss position where the Company’s investment managers had the discretion to sell.

     The following table shows the net impairment charges recognized in earnings for the Company’s fixed maturity investments by category for the three months ended March 31, 2010 and 2009:

		2010				2009
Mortgage-backed		$	168			$	11,998
Corporate			—				29,960
U.S. government and government agencies			—				5
Total net impairment charges recognized in earnings		$	168			$	41,963

5. DERIVATIVE INSTRUMENTS

     The Company uses currency forward contracts to manage currency exposure, which are the only derivative instruments used for risk management purposes. The U.S. dollar is the Company’s reporting currency and the functional currency of its operating subsidiaries. The Company enters into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, the Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar, primarily the Canadian dollar, Euro and British Sterling. For liabilities incurred in currencies other than U.S. dollars, U.S. dollars are converted to the currency of the loss at the time of claim payment. As a result, the Company has an exposure to foreign currency risk resulting from fluctuations in exchange rates. The Company has developed a hedging strategy using currency forward contracts to minimize the potential loss of value caused by currency fluctuations. These currency forward contracts are not designated as hedges and accordingly are carried at fair value on the consolidated balance sheets as a part of “other assets” or “accounts payable and accrued liabilities,” with the corresponding realized and unrealized gains and losses included in “foreign exchange loss” in the unaudited condensed consolidated statements of operations and comprehensive income. The fair value of our currency forward contracts as of March 31, 2010 and December 31, 2009 was a net payable of $2,343 and $1,650, respectively, and was included in “accounts payable and accrued expenses” in the unaudited condensed consolidated balance sheet.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

     In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

	•		Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•		Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

•

Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

     The following table shows the fair value of the Company’s financial instruments and where in the fair value hierarchy the fair value measurements are included as of March 31, 2010.

										Fair value measurement using:
										Quoted prices
										in active								Significant
										markets for				Significant other				unobservable
		Carrying				Total fair				identical assets				observable inputs				inputs
		amount				value				(Level 1)				(Level 2)				(Level 3)
Available for sale securities:
U.S. Government and Government agencies		$	417,230			$	417,230			$	205,096			$	212,134			$	—
Non-U.S. Government and Government agencies			143,722				143,722								143,722
States, municipalities and political			185,775				185,775								185,775
Corporate debt			1,393,643				1,393,643								1,393,643
Mortgage-backed			996,652				996,652								860,954				135,698
Asset-backed			90,867				90,867								84,764				6,103
Total available for sale fixed maturity investments			3,227,889				3,227,889
Trading securities:
U.S. Government and Government agencies		$	1,648,683			$	1,648,683			$	1,539,451			$	109,232			$	—
Non-U.S. Government and Government agencies			251,836				251,836								251,836
States, municipalities and political subdivisions			45,919				45,919								45,919
Corporate debt			943,529				943,529								943,529
Mortgage-backed			593,381				593,381								495,412				97,969
Asset-backed			384,696				384,696								354,267				30,429
Total trading fixed maturity investments			3,868,044				3,868,044
Total fixed maturity investments			7,095,933				7,095,933
Hedge funds			242,135				242,135												242,135
Equity securities			19,795				19,795				19,795
Total investments			7,357,863				7,338,068
Senior notes			498,951				546,250								546,250

     The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of March 31, 2010.

     U.S. government and U.S. government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company’s U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     Non-U.S. government and government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.

     States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.

     Corporate debt: Comprised of bonds issued by corporations that are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-term are priced using spread above the London Interbank Offered Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.

     Mortgage-backed: Primarily comprised of pools of residential and commercial mortgages originated by both agency (such as the Federal National Mortgage Association) and non-agency originators. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

     Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

     Hedge funds: Comprised of hedge funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager, and as such, the fair values of those hedge funds are included in the Level 3 fair value hierarchy.

     Equity securities: The fair value of the equity securities are prices from market exchanges and therefore included in the Level 1 fair value hierarchy.

     Senior notes: The fair value of the senior notes is based on trades as reported in Bloomberg, which was 109.3% of their principal amount, providing an effective yield of 5.73% as of March 31, 2010. The fair value of the senior notes is included in the Level 2 fair value hierarchy.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3) for the year ended March 31, 2010.

		Fair value measurement using significant
		unobservable inputs (Level 3):
		Hedge funds				Mortgage-backed				Asset-backed
Three Months Ended March 31, 2010
Opening balance		$	184,725			$	253,979			$	104,871
Total gains or losses included in earnings:
Realized losses			—				(1,358	)			—
Change in fair value of investments			4,362				4,646				142
Total unrealized gains included in OCI			—				3,696				23
Purchases or sales			53,048				(69,687	)			1,044
Transfers in and/or out of Level 3			—				42,391				(69,548	)
Ending balance		$	242,135			$	233,667			$	36,532
Three Months Ended March 31, 2009
Opening balance		$	48,573			$	—			$	—
Total gains or losses included in earnings:
Realized losses			(1,751	)			—				—
Change in fair value of investments			2,567				—				—
Total unrealized gains (losses) included in OCI							—				—
Purchases or sales			71,319				—				—
Transfers in and/or out of Level 3			—				—				—
Ending balance		$	120,708			$	—			$	—

     The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs such securities have been transferred to Level 3 fair value hierarchy. The Company believes the prices obtained from the broker-dealers are the best estimate of fair value of the securities being priced as the broker-dealers are typically involved in the initial pricing of the security and the Company has compared the price per the broker-dealer to other pricing sources and noted no material differences.

     During the three months ended March 31, 2010, the Company transferred $24,571 of mortgage-backed and $87,669 of asset-backed securities from Level 3 to Level 2 in the fair value hierarchy. The Company transferred those securities as they no longer utilized broker-dealer quotes and instead used other pricing sources that have significant observable inputs. The Company recognizes transfers between levels at the end of the reporting period.

7. DEBT AND FINANCING ARRANGEMENTS

     On July 21, 2006, the Company issued $500,000 aggregate principal amount of 7.50% Senior Notes due August 1, 2016 (“Senior Notes”), with interest on the notes payable on August 1 and February 1 of each year, commencing on February 1, 2007. The Senior Notes were offered by the underwriters at a price of 99.71% of their principal amount, providing an effective yield to investors of 7.54%.

     The Senior Notes can be redeemed by the Company prior to maturity subject to payment of a “make-whole” premium. The Company has no current expectations of calling the notes prior to maturity.

     The Company has a collateralized amended letter of credit facility (the “Credit Facility”) with Citibank Europe plc. that has been has been and will continue to be used to issue standby letters of credit. The Credit Facility was amended in December 2008 to provide the Company with greater flexibility in the types of securities that are eligible to be posted as collateral and to increase the maximum aggregate amount available under the Credit Facility from $750,000 to $900,000 on an uncommitted basis.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     In November 2007, the Company entered into a $800,000 five-year senior credit facility (the “Facility”) with a syndication of lenders. The Facility consists of a $400,000 secured letter of credit facility for the issuance of standby letters of credit (the “Secured Facility”) and a $400,000 unsecured facility for the making of revolving loans and for the issuance of standby letters of credit (the “Unsecured Facility”). Both the Secured Facility and the Unsecured Facility have options to increase the aggregate commitments by up to $200,000, subject to approval of the lenders. The Facility will be used for general corporate purposes and to issue standby letters of credit. The Facility contains representations, warranties and covenants customary for similar bank loan facilities, including a covenant to maintain a ratio of consolidated indebtedness to total capitalization as of the last day of each fiscal quarter or fiscal year of not greater than 0.35 to 1.0 and a covenant under the Unsecured Facility to maintain a certain consolidated net worth. In addition, each material insurance subsidiary must maintain a financial strength rating from A.M Best Company of at least A- under the Unsecured Facility and of at least B++ under the Secured Facility. Concurrent with this new Facility, the Company terminated the Letter of Credit Facility with Barclays Bank Plc and all outstanding letters of credit issued thereunder were transferred to the Secured Facility. The Company is in compliance with all covenants under the Facility as of March 31, 2010 and December 31, 2009.

     There are a total of 13 lenders that make up the Credit Facility syndication and that have varying commitments ranging from $20,000 to $87,500. Of the 13 lenders, four have commitments of $87,500 each, four have commitments of $62,500 each, four have commitments of $45,000 each and one has a commitment of $20,000. The one lender in the Credit Facility with a $20,000 commitment has declared bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. This lender will not meet its commitment under the Credit Facility.

     In November 2008, Holdings requested a $250,000 borrowing under its Unsecured Facility. The borrowing requested was to ensure the preservation of the Company’s financial flexibility in light of the uncertainty in the credit markets at that time. On November 21, 2008, the Company received $243,750 of loan proceeds from the borrowing, as $6,250 was not received from the lender in bankruptcy. On February 23, 2009, the Company repaid in full the $243,750 borrowing under its Unsecured Facility.

8. GOODWILL AND INTANGIBLE ASSETS

     The following table shows an analysis of goodwill and intangible assets for the three months ended March 31, 2010 and the year ended December 31, 2009:

						Intangible
						assets with				Intangible
						indefinite				assets with
		Goodwill				lives				finite lives				Total
Net balance at December 31, 2008		$	268,532			$	23,920			$	47,490			$	339,942
Additions			—				—				—				—
Amortization			—				—				(4,185	)			(4,185	)
Impairments			(156	)			—				(6,866	)			(7,022	)
Net balance at December 31, 2009			268,376				23,920				36,439				328,735
Additions			—				—				—				—
Amortization			—				—				(892	)			(892	)
Net balance at March 31, 2010			268,376				23,920				35,547				327,843
Gross balance			268,532				23,920				48,200				340,652
Accumulated amortization			—				—				(5,787	)			(5,787	)
Impairments			(156	)			—				(6,866	)			(7,022	)
Net balance		$	268,376			$	23,920			$	35,547			$	327,843

     The amortization of the intangible assets with definite lives for the remainder of 2010 and for the years ended December 31, 2011, 2012, 2013, 2014 and thereafter will be $2,592, $2,978, $2,533, $2,533, $2,533 and $22,378, respectively. The intangible assets will be amortized over a weighted average useful life of 13.2 years.

9. INCOME TAXES

     Under current Bermuda law, Holdings and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Holdings and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Holdings and Allied World Assurance Company, Ltd will be exempted from such taxes until March 28, 2016.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

     Certain subsidiaries of Holdings file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom, Ireland, Switzerland and Hong Kong. The following tax years by jurisdiction are open to examination:

		Fiscal Years
U.S. Internal Revenue Service (“IRS”) for the U.S. subsidiaries			2006 – 2009
Inland Revenue for the U.K. branches			2008 – 2009
Irish Revenue Commissioners for the Irish subsidiaries			2005 – 2009
Swiss Federal Tax Administration for the Swiss branch			2008 – 2009
Inland Revenue Department for the Hong Kong branch			2009

     To the best of the Company’s knowledge, there are no examinations pending by the Inland Revenue or the Irish Revenue Commissioners. The IRS is currently completing an examination of the 2006 tax returns of Darwin Professional Underwriters, Inc. (“Darwin”).

     Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12 months of January 2010.

10. SHAREHOLDERS’ EQUITY

a) Authorized shares

     The authorized share capital of Holdings as at March 31, 2010 and December 31, 2009 was $10,000. The issued share capital consists of the following:

		March 31,				December 31,
		2010				2009
Common shares issued and fully paid, par value $0.03 per share			50,459,000				49,734,487
Share capital at end of period		$	1,514			$	1,492

     As of March 31, 2010, there were outstanding 41,979,907 voting common shares and 8,479,093 non-voting common shares.

b) Share Warrants

     In conjunction with the private placement offering at the formation of the Company, the Company granted warrants to certain founding shareholders to acquire up to 5,500,000 common shares at an exercise price of $34.20 per share. These warrants are exercisable in certain limited conditions, including a public offering of common shares, and expire November 21, 2011. Any cash dividends paid to shareholders do not impact the exercise price of $34.20 per share for these founder warrants. There are various restrictions on the ability of warrant holders to dispose of their shares. As of March 31, 2010, none of these founder warrants have been exercised.

c) Dividends

     In February 2010, the Company declared a dividend of $0.20 per common share payable on April 1, 2010 to shareholders of record on March 16, 2010. The total dividend payable amounted to $10,092 and has been included in the unaudited condensed consolidated balance sheets.

     In February 2009, the Company declared a quarterly dividend of $0.18 per common share on April 2, 2009 payable to shareholders of record on March 17, 2009.

     In 2001, the Company implemented the Allied World Assurance Company Holdings, Ltd Second Amended and Restated

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

2001 Employee Stock Option Plan (the “Plan”). Under the Plan, up to 4,000,000 common shares of Holdings may be issued. Holdings has filed a registration statement on Form S-8 under the Securities Act of 1933, as amended, to register common shares issued or reserved for issuance under the Plan. These options are exercisable in certain limited conditions, expire after 10 years, and generally vest pro-rata over four years from the date of grant. The exercise price of options issued are determined by the compensation committee of the board of directors but shall not be less than 100% of the fair market value of the common shares of Holdings on the date the option award is granted.

		Year Ended March 31, 2010
						Weighted Average
		Options				Exercise Price
Outstanding at beginning of period			1,314,907			$	35.54
Granted			311,610				46.05
Exercised			(97,048	)			28.18
Forfeited			(5,251	)			41.54
Expired			(5,062	)			45.72
Outstanding at end of period			1,519,156			$	38.11

     Assumptions used in the option-pricing model for the options granted during the three months ended March 31, 2010 are as follows:

		Options granted during
		the Three Months ended
		March 31, 2010
Expected term of option			5.47	years
Weighted average risk-free interest rate			2.65	%
Weighted average expected volatility			42.35	%
Dividend yield			1.25	%
Weighted average fair value on grant date		$	17.34

     The Company has assumed a weighted average annual forfeiture rate of 6.37% in determining the compensation expense over the service period.

     Compensation expense of $792 and $625 relating to the options has been included in “general and administrative expenses” in the Company’s consolidated income statements for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010 and December 31, 2009, the Company has recorded in “additional paid-in capital” on the consolidated balance sheets an amount of $32,259 and $28,699, respectively, in connection with all options granted.

     In 2004, the Company implemented the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2004 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for grants of restricted stock, restricted stock units (“RSUs”), dividend equivalent rights and other equity-based awards. A total of 2,000,000 common shares may be issued under the Stock Incentive Plan. To date, only RSUs have been granted. These RSUs generally vest in the fourth or fifth year from the original grant date, or pro-rata over four years from the date of the grant.

		Three Months Ended March 31, 2010
						Weighted Average
						Grant Date Fair
		RSUs				Value
Outstanding RSUs at beginning of period			915,432			$	36.51
RSUs granted			41,197				46.05
Performance based RSUs granted			279,900				46.05
RSUs fully vested			(141,764	)			41.00
RSUs forfeited			(2,038	)			37.59
Outstanding RSUs at end of period			1,092,727			$	38.73