Table of Contents

 
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
For the quarterly period ended: JuneSeptember 30, 2014
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to              
Commission file number: 001-32938
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland98-0681223
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification No.)
Lindenstrasse 8
6340 Baar
Zug, Switzerland
(Address of Principal Executive Offices and Zip Code)

41-41-768-1080
(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 ¨

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 þ No ¨

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 ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(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 ¨ No þ
As of July 14,October 13, 2014, 96,823,71396,409,738 common shares were outstanding.


Table of Contents

TABLE OF CONTENTS
PART I 
   
Item 1.
   
Item 2.
   
Item 3.
   
Item 4.
   
PART II 
   
Item 1.        
   
Item 1A.
   
Item 2.
   
Item 3.
   
Item 4.
   
Item 5.
   
Item 6.
   
   
 

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PART I
FINANCIAL INFORMATION
Item 1.Financial Statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of JuneSeptember 30, 2014 and December 31, 2013
(Expressed in thousands, except share and per share amounts)
As of As ofAs of As of
June 30,
2014
 December 31,
2013
September 30,
2014
 December 31,
2013
ASSETS:      
Fixed maturity investments trading, at fair value (amortized cost: 2014: $6,062,758; 2013: $6,065,350)$6,157,084
 $6,100,798
Equity securities trading, at fair value (cost: 2014: $885,861; 2013: $647,301)938,117
 699,846
Fixed maturity investments trading, at fair value (amortized cost: 2014: $6,074,752; 2013: $6,065,350)$6,128,237
 $6,100,798
Equity securities trading, at fair value (cost: 2014: $901,300; 2013: $647,301)945,076
 699,846
Other invested assets932,639
 911,392
929,201
 911,392
Total investments8,027,840
 7,712,036
8,002,514
 7,712,036
Cash and cash equivalents635,138
 531,936
831,270
 531,936
Restricted cash127,755
 149,393
178,958
 149,393
Insurance balances receivable976,441
 664,731
926,183
 664,731
Funds held414,445
 632,430
405,703
 632,430
Prepaid reinsurance390,414
 340,992
376,651
 340,992
Reinsurance recoverable1,301,742
 1,234,504
1,349,009
 1,234,504
Accrued investment income30,968
 32,236
30,554
 32,236
Net deferred acquisition costs163,259
 126,661
171,827
 126,661
Goodwill277,761
 268,376
278,085
 268,376
Intangible assets47,564
 48,831
46,931
 48,831
Balances receivable on sale of investments164,713
 76,544
60,122
 76,544
Net deferred tax assets35,867
 37,469
41,312
 37,469
Other assets75,740
 89,691
110,449
 89,691
Total assets$12,669,647
 $11,945,830
$12,809,568
 $11,945,830
LIABILITIES:      
Reserve for losses and loss expenses$5,935,678
 $5,766,529
$6,052,263
 $5,766,529
Unearned premiums1,703,684
 1,396,256
1,716,927
 1,396,256
Reinsurance balances payable224,182
 173,023
203,428
 173,023
Balances due on purchases of investments180,378
 104,740
166,026
 104,740
Senior notes798,648
 798,499
798,725
 798,499
Dividends payable21,870
 16,732
21,686
 16,732
Accounts payable and accrued liabilities122,445
 170,225
176,914
 170,225
Total liabilities$8,986,885
 $8,426,004
$9,135,969
 $8,426,004
Commitments and contingencies
 

 
SHAREHOLDERS’ EQUITY:      
Common shares: 2014: par value CHF 4.10 per share and 2013: par value CHF 4.10 per share (2014: 99,515,760; 2013: 103,477,452 shares issued and 2014: 96,929,091; 2013: 100,253,646 shares outstanding)402,907
 418,988
Treasury shares, at cost (2014: 2,586,669; 2013: 3,223,806)(65,258) (79,992)
Common shares: 2014: par value CHF 4.10 per share and 2013: par value CHF 4.10 per share (2014: 100,775,256; 2013: 103,477,452 shares issued and 2014: 96,382,238; 2013: 100,253,646 shares outstanding)407,990
 418,988
Treasury shares, at cost (2014: 4,393,018; 2013: 3,223,806)(134,633) (79,992)
Retained earnings3,345,113
 3,180,830
3,400,242
 3,180,830
Total shareholders’ equity3,682,762
 3,519,826
3,673,599
 3,519,826
Total liabilities and shareholders’ equity$12,669,647
 $11,945,830
$12,809,568
 $11,945,830

See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the three and sixnine months ended JuneSeptember 30, 2014 and 2013
(Expressed in thousands, except share and per share amounts)
 
Three Months Ended   June 30, Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
REVENUES:              
Gross premiums written$760,405
 $765,200
 $1,661,798
 $1,602,281
$707,884
 $580,893
 $2,369,682
 $2,183,174
Premiums ceded(206,481) (183,978) (336,260) (326,007)(139,142) (127,816) (475,402) (453,823)
Net premiums written553,924
 581,222
 1,325,538
 1,276,274
568,742
 453,077
 1,894,280
 1,729,351
Change in unearned premiums(16,677) (73,951) (258,006) (305,775)(27,005) 57,696
 (285,011) (248,079)
Net premiums earned537,247
 507,271
 1,067,532
 970,499
541,737
 510,773
 1,609,269
 1,481,272
Net investment income36,793
 37,635
 84,412
 71,023
43,412
 39,271
 127,824
 110,294
Net realized investment gains (losses)85,217
 (115,198) 139,422
 (35,561)
Net realized investment (losses) gains(35,136) 27,487
 104,286
 (8,074)
Other income1,032
 
 1,032
 
659,257
 429,708
 1,291,366
 1,005,961
551,045
 577,531
 1,842,411
 1,583,492
EXPENSES:              
Net losses and loss expenses314,855
 275,128
 590,141
 530,306
336,090
 276,970
 926,231
 807,276
Acquisition costs74,279
 64,617
 142,001
 121,302
72,403
 65,114
 214,404
 186,416
General and administrative expenses96,188
 80,585
 176,528
 163,265
88,294
 88,553
 264,822
 251,818
Other expense6,575
 
 6,575
 
Amortization of intangible assets634
 634
 1,267
 1,267
633
 633
 1,900
 1,900
Interest expense14,592
 14,188
 29,126
 28,322
14,325
 14,094
 43,451
 42,416
Foreign exchange loss651
 490
 700
 3,008
278
 4,353
 978
 7,361
501,199
 435,642
 939,763
 847,470
518,598
 449,717
 1,458,361
 1,297,187
Income (loss) before income taxes158,058
 (5,934) 351,603
 158,491
Income tax expense (benefit)6,195
 (4,072) 22,768
 1,361
NET INCOME (LOSS)151,863
 (1,862) 328,835
 157,130
Income before income taxes32,447
 127,814
 384,050
 286,305
Income tax expense1,532
 4,971
 24,300
 6,332
NET INCOME30,915
 122,843
 359,750
 279,973
              
Other comprehensive income
 
 
 

 
 
 
COMPREHENSIVE INCOME (LOSS)$151,863
 $(1,862) $328,835
 $157,130
COMPREHENSIVE INCOME$30,915
 $122,843
 $359,750
 $279,973
PER SHARE DATA              
Basic earnings (loss) per share$1.55
 $(0.02) $3.33
 $1.52
Diluted earnings (loss) per share$1.52
 $(0.02) $3.27
 $1.48
Basic earnings per share$0.32
 $1.20
 $3.67
 $2.72
Diluted earnings per share$0.31
 $1.18
 $3.60
 $2.66
Weighted average common shares outstanding97,809,639
 103,267,659
 98,672,618
 103,552,656
96,458,231
 101,974,077
 97,926,378
 103,020,681
Weighted average common shares and common share equivalents outstanding99,724,802
 103,267,659
 100,691,568
 105,949,785
98,444,238
 104,184,579
 99,965,296
 105,393,276
Dividends paid per share$0.167
 $
 $0.333
 $0.125
$0.225
 $0.167
 $0.559
 $0.292

See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the sixnine months ended JuneSeptember 30, 2014 and 2013
(Expressed in thousands)
 
Share
Capital
 
Treasury
Shares
 
Retained
Earnings
 Total
Share
Capital
 
Treasury
Shares
 
Retained
Earnings
 Total
December 31, 2013$418,988
 $(79,992) $3,180,830
 $3,519,826
$418,988
 $(79,992) $3,180,830
 $3,519,826
Net income
 
 328,835
 328,835

 
 359,750
 359,750
Dividends
 
 (38,345) (38,345)
 
 (60,017) (60,017)
Stock compensation
 14,734
 (2,756) 11,978

 17,235
 1,333
 18,568
Share repurchases
 (139,532) 
 (139,532)
 (164,528) 
 (164,528)
Shares cancelled(16,081) 139,532
 (123,451) 
(10,998) 92,652
 (81,654) 
June 30, 2014$402,907
 $(65,258) $3,345,113
 $3,682,762
September 30, 2014$407,990
 $(134,633) $3,400,242
 $3,673,599
              
December 31, 2012$454,980
 $(113,818) $2,985,173
 $3,326,335
$454,980
 $(113,818) $2,985,173
 $3,326,335
Net income
 
 157,130
 157,130

 
 279,973
 279,973
Dividends — par value reduction(12,981) 
 
 (12,981)(12,981) 
 
 (12,981)
Dividends
 
 (17,127) (17,127)
 
 (34,069) (34,069)
Stock compensation
 22,157
 (19,714) 2,443

 26,093
 (18,278) 7,815
Share repurchases
 (82,571) 
 (82,571)
 (123,145) 
 (123,145)
Shares cancelled(11,602) 82,571
 (70,969) 
(17,162) 125,025
 (107,863) 
June 30, 2013$430,397
 $(91,661) $3,034,493
 $3,373,229
September 30, 2013$424,837
 $(85,845) $3,104,936
 $3,443,928
 
See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the sixnine months ended JuneSeptember 30, 2014 and 2013
(Expressed in thousands)
Six Months Ended 
 June 30,
Nine Months Ended 
 September 30,
2014 20132014 2013
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:      
Net income$328,835
 $157,130
$359,750
 $279,973
Adjustments to reconcile net income to cash provided by operating activities:      
Net realized gains on sales of investments(99,781) (62,921)(118,640) (76,104)
Mark to market adjustments(59,113) 95,698
(5,634) 80,136
Stock compensation expense7,631
 6,566
10,822
 9,282
Undistributed loss (income) of equity method investments13,744
 (2,316)10,452
 (4,313)
Changes in:      
Reserve for losses and loss expenses, net of reinsurance recoverables101,911
 12,901
171,229
 50,308
Unearned premiums, net of prepaid reinsurance258,006
 305,776
285,012
 248,079
Insurance balances receivable(310,885) (304,088)(260,627) (229,580)
Funds held217,985
 (51,231)226,727
 (38,763)
Reinsurance balances payable51,159
 69,620
30,405
 57,379
Net deferred acquisition costs(36,598) (45,802)(45,166) (37,941)
Net deferred tax assets1,934
 (14,970)(3,511) (16,252)
Accounts payable and accrued liabilities(53,397) (45,601)4,473
 (18,540)
Other items, net27,507
 12,880
4,441
 34,508
Net cash provided by operating activities448,938
 133,642
669,733
 338,172
CASH FLOWS USED IN INVESTING ACTIVITIES:   
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:   
Purchases of trading securities(3,905,650) (3,186,162)(5,608,594) (4,955,817)
Purchases of other invested assets(181,419) (141,805)(242,227) (211,501)
Sales of trading securities3,705,229
 3,171,977
5,500,176
 5,137,280
Sales of other invested assets184,166
 126,491
243,123
 189,155
Purchases of fixed assets(5,601) (3,363)(14,490) (4,171)
Change in restricted cash21,638
 (10,561)(29,565) (74,032)
Net cash paid for acquisitions(2,565) 
(2,565) 
Net cash used in investing activities(184,202) (43,423)
Net cash (used in) provided by investing activities(154,142) 80,914
CASH FLOWS USED IN FINANCING ACTIVITIES:      
Dividends paid - partial par value reduction
 (12,981)
 (12,981)
Dividends paid(33,207) 
(55,064) (17,117)
Proceeds from the exercise of stock options6,313
 5,293
7,640
 8,465
Share repurchases(137,810) (82,571)(166,207) (120,163)
Net cash used in financing activities(164,704) (90,259)(213,631) (141,796)
Effect of exchange rate changes on foreign currency cash3,170
 (7,736)(2,626) (6,122)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS103,202
 (7,776)
NET INCREASE IN CASH AND CASH EQUIVALENTS299,334
 271,168
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD531,936
 681,879
531,936
 681,879
CASH AND CASH EQUIVALENTS, END OF PERIOD$635,138
 $674,103
$831,270
 $953,047
Supplemental disclosure of cash flow information:      
Cash paid for income taxes$18,061
 $12,671
$18,052
 $17,249
Cash paid for interest expense$27,000
 $27,000
$45,750
 $45,750
See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)
1. GENERAL

Allied World Assurance Company Holdings, AG, a Swiss holding company (“Allied World Switzerland”), through its wholly-owned subsidiaries (collectively, the “Company”), provides property and casualty insurance and reinsurance on a worldwide basis. References to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland.

The Company has reached definitive agreements to acquire the Hong Kong and Singapore operations of Royal & Sun Alliance Insurance plc for approximately $211,000, at current exchange rates, subject to adjustments at closing. In addition to the purchase price, the Company expects to contribute an additional $90,000 to capitalize the business on an ongoing basis. Subject to regulatory approvals in both Hong Kong and Singapore, as well as court approval in Singapore, the acquisition is expected to be completed in the first half of 2015.

2. BASIS OF PREPARATION AND CONSOLIDATION

These unaudited condensed consolidated financial statements include the accounts of the Company 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, including,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, and
Valuation of financial instruments.

Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the unaudited condensed consolidated financial statements.

On May 1, 2014, the shareholders approved a 3-for-1 stock split of the Company's common shares. All historical share and per share amounts reflect the effect of the stock split.

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, 2013.
3. NEW ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). ASU 2014-08 changes the requirements for reporting discontinued operations, such that a disposal of a component of the Company's operations is required to be reported as discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on the Company's operations and financial results. Examples of strategic shifts that could have a major effect on

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


the Company's operations could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of the Company. ASU 2014-08 is effective for all disposals that occur after January 1, 2015. The Company is currently assessing the impactdoes not believe the adoption of ASU 2014-08 will have a material impact on future financial statements.


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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentagestatements and ratio information)related disclosures.


In May 2014, the FASB issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a framework, through a five-step process, for recognizing revenue from customers, improves comparability and consistency of recognizing revenue across entities, industries, jurisdictions and capital markets, and requires enhanced disclosures. Certain contracts with customers are specifically excluded from the scope of ASU 2014-09, includingincluding; amongst others, insurance contracts accounted for under Accounting Standard Codification 944, Financial Services - Insurance. ASU 2014-09 is effective on January 1, 2017 with retrospective adoption required for the comparative periods. The Company is currently assessing the impact the adoption of ASU 2014-09 will have on future financial statements.statements and related disclosures.
In August 2014, the FASB issued Accounting Standards Update 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"). Currently, there is no guidance under U.S. GAAP regarding management's responsibility to assess whether there is substantial doubt about an entity's ability to continue as a going concern. Under ASU 2014-15, the Company will be required to assess its ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity's ability to continue as a going concern, including management's plan to alleviate the substantial doubt. ASU 2014-15 is effective on January 1, 2017 and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2014-15 will have on future financial statements and related disclosures.

4. INVESTMENTS

a) Trading Securities

Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive income (“consolidated income statements”) by category are as follows:
June 30, 2014 December 31, 2013September 30, 2014 December 31, 2013
Fair Value Amortized Cost Fair Value Amortized CostFair Value Amortized Cost Fair Value Amortized Cost
U.S. Government and Government agencies$1,274,331
 $1,273,469
 $1,676,788
 $1,684,832
$1,184,115
 $1,186,185
 $1,676,788
 $1,684,832
Non-U.S. Government and Government agencies185,071
 186,142
 191,776
 197,082
219,287
 229,792
 191,776
 197,082
States, municipalities and political subdivisions261,267
 256,698
 231,555
 234,406
260,690
 251,628
 231,555
 234,406
Corporate debt:              
Financial institutions1,168,937
 1,149,005
 958,794
 943,518
1,194,949
 1,185,637
 958,794
 943,518
Industrials1,167,470
 1,152,858
 1,174,047
 1,165,448
1,202,906
 1,201,341
 1,174,047
 1,165,448
Utilities98,878
 97,457
 69,426
 69,658
125,513
 125,202
 69,426
 69,658
Mortgage-backed1,323,763
 1,272,824
 1,292,502
 1,267,863
1,240,362
 1,196,683
 1,292,502
 1,267,863
Asset-backed677,367
 674,305
 505,910
 502,543
700,415
 698,284
 505,910
 502,543
Total fixed maturity investments$6,157,084
 $6,062,758
 $6,100,798
 $6,065,350
$6,128,237
 $6,074,752
 $6,100,798
 $6,065,350
June 30, 2014 December 31, 2013September 30, 2014 December 31, 2013
Fair Value Original Cost Fair Value Original CostFair Value Original Cost Fair Value Original Cost
Equity securities$938,117
 $885,861
 $699,846
 $647,301
$945,076
 $901,300
 $699,846
 $647,301
Other invested assets804,505
 693,370
 764,081
 658,683
806,124
 701,794
 764,081
 658,683
$1,742,622
 $1,579,231
 $1,463,927
 $1,305,984
$1,751,200
 $1,603,094
 $1,463,927
 $1,305,984

Other invested assets, included in the table above, include investments in private equity funds, hedge funds and a high yield loan fund that are accounted for at fair value, but excludes other private securities described below in Note 4(b) that are accounted for using the equity method of accounting.


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


b) Other Invested Assets

Details regarding the carrying value, redemption characteristics and unfunded investment commitments of the other invested assets portfolio as of JuneSeptember 30, 2014 and December 31, 2013 were as follows:

Investment TypeCarrying Value as of June 30, 2014 Investments
with
Redemption
Restrictions
 Estimated
Remaining
Restriction
Period
 Investments
without
Redemption
Restrictions
 Redemption
Frequency(1)
 Redemption
Notice
Period(1)
 Unfunded
Commitments
Carrying Value as of September 30, 2014 Investments
with
Redemption
Restrictions
 Estimated
Remaining
Restriction
Period
 Investments
without
Redemption
Restrictions
 Redemption
Frequency(1)
 Redemption
Notice
Period(1)
 Unfunded
Commitments
Private equity$161,667
 $161,667
 2 - 9 Years $
 $239,697
$179,196
 $179,196
 2 - 9 Years $
 $223,030
Mezzanine debt95,162
 95,162
 5 - 9 Years 
 206,856
114,399
 114,399
 5 - 9 Years 
 251,486
Distressed10,008
 10,008
 4 Years 
 4,941
9,516
 9,516
 4 Years 
 5,119
Total private equity266,837
 266,837
 
 451,494
303,111
 303,111
 
 479,635
Distressed165,253
 165,253
 1 Year 
 
173,111
 173,111
 1 Year 
 
Equity long/short134,036
 58,568
 1 Year 75,468
 Quarterly 30 -60 Days 
111,627
 86,721
 1 Year 24,906
 Quarterly 30 -60 Days 
Multi-strategy100,263
 
 100,263
 Quarterly 45 -90 Days 
81,576
 
 81,576
 Quarterly 45 -90 Days 
Relative value credit105,624
 
 105,624
 Quarterly 60 Days 
105,155
 
 105,155
 Quarterly 60 Days 
Total hedge funds505,176
 223,821
 281,355
 
471,469
 259,832
 211,637
 
High yield loan fund32,492
 
 32,492
 Monthly 30 days 
31,544
 
 31,544
 Monthly 30 days 
Total other invested assets at fair value804,505
 490,658
 313,847
 451,494
806,124
 562,943
 243,181
 479,635
Other private securities128,134
 
 128,134
 
123,077
 
 123,077
 
Total other invested assets$932,639
 $490,658
 $441,981
 $451,494
$929,201
 $562,943
 $366,258
 $479,635

Investment TypeCarrying Value as of December 31, 2013 Investments
with
Redemption
Restrictions
 Estimated
Remaining
Restriction
Period
 Investments
without
Redemption
Restrictions
 Redemption
Frequency(1)
 Redemption
Notice
Period(1)
 Unfunded
Commitments
Private equity$144,422
 $144,422
 2 - 9 Years $
     $263,519
Mezzanine debt64,627
 64,627
 8 - 9 Years 
     198,756
Distressed7,776
 7,776
 4 Years 
     5,249
Total private equity216,825
 216,825
   
     467,524
Distressed151,227
 151,227
 1 - 2 Years 
     
Equity long/short99,365
 
   99,365
 Quarterly 30 -60 Days 
Multi-strategy136,958
 
   136,958
 Quarterly 45 -90 Days 
Event driven14,018
 
   14,018
 Annual 60 Days 
Relative value credit113,730
 
   113,730
 Quarterly 60 Days 
Total hedge funds515,298
 151,227
   364,071
     
High yield loan fund31,958
 
   31,958
 Monthly 30 days 
Total other invested assets at fair value764,081
 368,052
   396,029
     467,524
Other private securities147,311
 
   147,311
     
Total other invested assets$911,392
 $368,052
   $543,340
     $467,524
_______________________
(1)The redemption frequency and notice periods only apply to the investments without redemption restrictions. Some or all of these investments may be subject to a gate as described below.

In general, the Company has invested in hedge funds that require at least 30 days’ notice of redemption and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending on the fund. Certain hedge funds have lock-

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


up periods ranging from one to three years from initial investment. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, called a “gate.” The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the fund’s net assets. The gate is a method for executing an orderly redemption process to reduce the possibility of adversely affecting investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash sometime after the redemption date. Certain funds may impose a redemption fee on early redemptions. Interests in private equity funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

The following describes each investment type:

Private equity funds: Primary funds may invest in companies and general partnership interests. Secondary 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. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.
Mezzanine debt funds: Mezzanine debt funds primarily focus on providing capital to upper middle market and middle market companies and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity; however, the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.
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. Certain funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.
Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and by their targeted net long position.
Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading.
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 or 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 mergers and acquisitions (arbitrage), corporate restructurings and spin-offs, and capital structure arbitrage.
Relative value credit funds: These funds seek to take exposure to credit-sensitive securities, long and/or short, based upon credit analysis of issuers and securities and credit market views.
High yield loan fund: A long-only private mutual fund that invests in high yield fixed income securities.
Other private securities: These securities include strategic non-controlling minority investments in private asset management companies and other insurance related investments that are accounted for using the equity method of accounting.


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



c) Net Investment Income
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
Fixed maturity investments$35,936
 $32,662
 $72,235
 $65,187
$38,762
 $31,179
 $110,998
 $96,366
Equity securities5,912
 4,409
 9,165
 7,608
3,711
 6,110
 12,876
 13,718
Other invested assets(890) 3,843
 10,518
 5,307
Other invested assets: hedge funds and private equity2,249
 3,812
 8,767
 6,001
Other invested assets: other private securities3,292
 1,997
 7,291
 5,115
Cash and cash equivalents571
 529
 1,010
 1,017
552
 302
 1,562
 1,319
Expenses(4,736) (3,808) (8,516) (8,096)(5,154) (4,129) (13,670) (12,225)
Net investment income$36,793
 $37,635
 $84,412
 $71,023
$43,412
 $39,271
 $127,824
 $110,294

Net investment income from other invested assetsassets: other private securities included the distributed and undistributed net income from investments accounted for using the equity method of accounting. The lossincome reported for other invested assetsassets: other private securities for the threenine months ended JuneSeptember 30, 2014 was due toincluded a loss of $9,348 recorded for an equity method investment due to impairment charges that it recorded.

d) Components of Realized Gains and Losses

Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
Gross realized gains on sale of invested assets$55,714
 $58,223
 $118,006
 $102,472
$28,773
 $51,915
 $146,780
 $154,387
Gross realized losses on sale of invested assets(4,025) (35,077) (16,273) (42,042)(9,955) (40,770) (26,228) (82,812)
Net realized and unrealized (losses) gains on derivatives(13,720) 8,538
 (26,640) 7,561
Mark-to-market gains (losses):       
Net realized and unrealized gains (losses) on derivatives2,171
 (4,169) (24,469) 3,392
Mark-to-market (losses) gains:       
Fixed maturity investments, trading36,426
 (115,113) 58,882
 (131,588)(40,843) 30,383
 18,039
 (101,205)
Equity securities, trading21,316
 (34,330) (289) (1,357)(8,479) (17,198) (8,768) (18,555)
Other invested assets, trading(10,494) 2,561
 5,736
 29,393
(6,803) 7,326
 (1,068) 36,719
Net realized investment gains (losses)$85,217
 $(115,198) $139,422
 $(35,561)
Net realized investment (losses) gains$(35,136) $27,487
 $104,286
 $(8,074)

e) Pledged Assets

As of JuneSeptember 30, 2014 and December 31, 2013, $2,745,352$3,082,601 and $2,894,401, respectively, of cash and cash equivalents and investments were deposited, pledged or held in trust accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.

In addition, as of JuneSeptember 30, 2014 and December 31, 2013, a further $886,220$543,828 and $1,053,632, respectively, of cash and cash equivalents and investments were pledged as collateral for the Company’s letter of credit facilities. See Note 10(d) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for details on the Company’s credit facilities.


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


5. DERIVATIVE INSTRUMENTS

As of JuneSeptember 30, 2014 and December 31, 2013, none of the Company’s derivatives were designated as hedges for accounting purposes. The following table summarizes information on the location and amounts of derivative fair values on the unaudited condensed consolidated balance sheets (“consolidated balance sheets”):
 

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


June 30, 2014 December 31, 2013September 30, 2014 December 31, 2013
Asset
Derivative 
Notional
Amount
 
Asset
Derivative 
Fair Value 
 
Liability
Derivative 
Notional
Amount
 
Liability
Derivative 
Fair Value
 
Asset
Derivative 
Notional
Amount
 
Asset
Derivative 
Fair Value
 
Liability
Derivative 
Notional
Amount
 
Liability
Derivative
Fair Value 
Asset
Derivative 
Notional
Amount
 
Asset
Derivative 
Fair Value 
 
Liability
Derivative 
Notional
Amount
 
Liability
Derivative 
Fair Value
 
Asset
Derivative 
Notional
Amount
 
Asset
Derivative 
Fair Value
 
Liability
Derivative 
Notional
Amount
 
Liability
Derivative
Fair Value 
Foreign exchange contracts$57,761
 $430
 $158,762
 $1,996
 $294,788
 $6,254
 $122,439
 $1,176
$38,940
 $814
 $2,355
 $22
 $294,788
 $6,254
 $122,439
 $1,176
Interest rate swaps105,000
 87
 664,500
 1,126
 491,400
 6,829
 40,000
 4,214
565,600
 414
 
 
 491,400
 6,829
 40,000
 4,214
Total derivatives$162,761
 $517
 $823,262
 $3,122
 $786,188
 $13,083
 $162,439
 $5,390
$604,540
 $1,228
 $2,355
 $22
 $786,188
 $13,083
 $162,439
 $5,390

Derivative assets and derivative liabilities are classified within “other assets” or “accounts payable and accrued liabilities” on the consolidated balance sheets.

The following table provides the net realized and unrealized gains (losses) on derivatives not designated as hedges recorded on the consolidated income statements:
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
Foreign exchange contracts$(1,598) $1,989
 $(2,466) $1,245
$1,886
 $(2,336) $(580) $(1,091)
Total included in foreign exchange loss(1,598) 1,989
 (2,466) 1,245
1,886
 (2,336) (580) (1,091)
Put options
 (90) 
 (3,822)
 
 
 (3,822)
Foreign exchange contracts(286) 4,274
 (844) 6,089
1,701
 (4,164) 857
 1,925
Interest rate futures and swaps(13,434) 4,354
 (25,796) 5,294
470
 (5) (25,325) 5,289
Total included in net realized investment gains (losses)(13,720) 8,538
 (26,640) 7,561
2,171
 (4,169) (24,468) 3,392
Total realized and unrealized (losses) gains on derivatives$(15,318) $10,527
 $(29,106) $8,806
Total realized and unrealized gains (losses) on derivatives$4,057
 $(6,505) $(25,048) $2,301

The lossesloss related to interest rate future and swap contracts for the three and sixnine months ended JuneSeptember 30, 2014 werewas the result of selling interest rate future and swap contracts to reduce the duration of the investment portfolio. Given the decrease in interest rates during the year, the Company recorded a loss related to these interest rate future and swap contracts.

Derivative Instruments Not Designated as Hedging Instruments

The Company is exposed to foreign currency risk in its investment portfolio. Accordingly, the fair values of the Company’s investment portfolio are partially influenced by the change in foreign exchange rates. These foreign currency hedging activities have not been designated as specific hedges for financial reporting purposes.

The Company’s insurance and reinsurance subsidiaries and branches operate in various foreign countries and consequently the Company’s underwriting portfolio is exposed to foreign currency risk. The Company manages foreign currency risk by seeking to match liabilities under the insurance policies and reinsurance contracts that it writes and that are payable in foreign currencies with cash and investments that are denominated in such currencies. When necessary, the Company may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts and currency options.

The Company also purchases and sells interest rate future and interest rate swap contracts to actively manage the duration and yield curve positioning of its fixed income portfolio. Interest rate futures and interest rate swaps can efficiently increase or decrease the overall duration of the portfolio. Additionally, interest rate future and interest rate swap contracts can be utilized to obtain the desired position along the yield curve in order to protect against certain future yield curve shapes.

The Company also purchases options to actively manage its equity portfolio.

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


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 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 the dates indicated below:
June 30, 2014 
Carrying
Amount
 
Total
Fair Value
 Level 1 Level 2 Level 3
September 30, 2014 
Carrying
Amount
 
Total
Fair Value
 Level 1 Level 2 Level 3
Fixed maturity investments:                    
U.S. Government and Government agencies $1,274,331
 $1,274,331
 $1,058,607
 $215,724
 $
 $1,184,115
 $1,184,115
 $998,487
 $185,628
 $
Non-U.S. Government and Government agencies 185,071
 185,071
 

 185,071
 
 219,287
 219,287
 
 219,287
 
States, municipalities and political subdivisions 261,267
 261,267
 
 261,267
 
 260,690
 260,690
 
 260,690
 
Corporate debt 2,435,285
 2,435,285
 
 2,435,285
 
 2,523,368
 2,523,368
 
 2,523,368
 
Mortgage-backed 1,323,763
 1,323,763
 
 1,176,962
 146,801
 1,240,362
 1,240,362
 
 1,120,454
 119,908
Asset-backed 677,367
 677,367
 
 606,135
 71,232
 700,415
 700,415
 
 609,045
 91,370
Total fixed maturity investments 6,157,084
 6,157,084
 1,058,607
 4,880,444
 218,033
 6,128,237
 6,128,237
 998,487
 4,918,472
 211,278
Equity securities 938,117
 938,117
 903,254
 
 34,863
 945,076
 945,076
 907,041
 
 38,035
Other invested assets 804,505
 804,505
 
 
 804,505
 806,124
 806,124
 
 
 806,124
Total investments $7,899,706
 $7,899,706
 $1,961,861
 $4,880,444
 $1,057,401
 $7,879,437
 $7,879,437
 $1,905,528
 $4,918,472
 $1,055,437
Derivative assets:                    
Foreign exchange contracts $430
 $430
 $
 $430
 $
 $814
 $814
 $
 $814
 $
Interest rate swaps 87
 87
 
 87
 
 414
 414
 
 414
 
Derivative liabilities:                    
Foreign exchange contracts $1,996
 $1,996
 $
 $1,996
 $
 $22
 $22
 $
 $22
 $
Interest rate swaps 1,126
 1,126
 
 1,126
 
 
 
 
 
 
Senior notes $798,648
 $907,005
 $
 $907,005
 $
 $798,725
 $888,370
 $
 $888,370
 $

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


December 31, 2013 
Carrying
Amount
 
Total
Fair Value
 Level 1 Level 2 Level 3
Fixed maturity investments:          
U.S. Government and Government agencies $1,676,788
 $1,676,788
 $1,370,088
 $306,700
 $
Non-U.S. Government and Government agencies 191,776
 191,776
 
 191,776
 
States, municipalities and political subdivisions 231,555
 231,555
 
 231,555
 
Corporate debt 2,202,267
 2,202,267
 
 2,202,267
 
Mortgage-backed 1,292,502
 1,292,502
 
 1,145,164
 147,338
Asset-backed 505,910
 505,910
 
 412,497
 93,413
Total fixed maturity investments 6,100,798
 6,100,798
 1,370,088
 4,489,959
 240,751
Equity securities 699,846
 699,846
 625,942
 
 73,904
Other invested assets 764,081
 764,081
 
 
 764,081
Total investments $7,564,725
 $7,564,725
 $1,996,030
 $4,489,959
 $1,078,736
Derivative assets:          
Foreign exchange contracts $6,254
 $6,254
 $
 $6,254
 $
Interest rate swaps 6,829
 6,829
 
 6,829
 
Derivative liabilities:          
Foreign exchange contracts $1,176
 $1,176
 $
 $1,176
 $
Interest rate swaps $4,214
 $4,214
 $
 $4,214
 $
Senior notes $798,499
 $897,601
 $
 $897,601
 $

“Other invested assets” excluded other private securities that the Company did not measure at fair value, but are accounted for using the equity method of accounting. Derivative assets and derivative liabilities relating to foreign exchange contracts and interest rate swaps are classified within “other assets” or “accounts payable and accrued liabilities” on the consolidated balance sheets.

The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of the balance sheet date.

Recurring Fair Value of Financial Instruments

U.S. Government and 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.

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 or loan obligations of corporations that are diversified across a wide range of issuers and industries. The fair values of corporate debt that are short-term are priced using spread above the LIBOR yield curve, and the fair values of corporate debt that are long-term are priced using the spread above the risk-free yield curve. The

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


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 debt are included in the Level 2 fair value hierarchy.

Mortgage-backed: Primarily comprised of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agencies. 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 the 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 or broker-dealer quotes. 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.

Equity securities: Comprised of common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Non-U.S. mutual funds where the net asset value is not provided on a daily basis are included in the Level 3 fair value hierarchy.

Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value ("NAV") of the funds as reported by the fund manager that the Company believes is an unobservable input, and as such, themanager. The fair valuesvalue of those fundsthese investments are included in the Level 3 fair value hierarchy.hierarchy as the Company believes NAV is an unobservable input and these securities are not redeemable in the near term.

Derivative instruments: The fair value of foreign exchange contracts, interest rate futures and interest rate swaps are priced from quoted market prices for similar exchange-traded derivatives and pricing valuation models that utilize independent market data inputs. The fair value of derivatives are included in the Level 2 fair value hierarchy.

Senior notes: The fair value of the senior notes is based on reported trades. The fair value of the senior notes is included in the Level 2 fair value hierarchy.

Non-recurring Fair Value of Financial Instruments

The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, goodwill and intangible assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:

Investments accounted for using the equity method: When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using discounted cash flow models and market multiple models.

Goodwill and intangible assets: The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but at least annually for goodwill and indefinite-lived intangibles. If the Company determines that goodwill and intangible assets may be impaired, the Company uses techniques, including discounted expected future cash flows and market multiple models, to measure fair value.

 

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


Rollforward of Level 3 Financial Instruments

The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3):
Three Months Ended June 30, 2014
Other invested
assets
 Mortgage-backed Asset-backed Equities
Three Months Ended September 30, 2014
Other invested
assets
 Mortgage-backed Asset-backed Equities
Opening balance$839,986
 $134,061
 $81,234
 $34,786
$804,505
 $146,801
 $71,232
 $34,863
Realized and unrealized gains (losses) included in net income22,498
 2,721
 450
 77
6,797
 (882) (253) 3,172
Purchases99,722
 20,928
 9,409
 
78,629
 16,311
 18,021
 
Sales(157,701) (26,734) (3,743) 
(83,807) (28,761) (9,970) 
Transfers into Level 3 from Level 2
 17,437
 
 

 1,628
 17,863
 
Transfers out of Level 3 into Level 2 (1)
 (1,612) (16,118) 

 (15,189) (5,523) 
Ending balance$804,505
 $146,801
 $71,232
 $34,863
$806,124
 $119,908
 $91,370
 $38,035
Three Months Ended June 30, 2013       
Three Months Ended September 30, 2013       
Opening balance$710,140
 $155,420
 $40,903
 $57,787
$714,391
 $198,003
 $61,285
 $53,499
Realized and unrealized gains (losses) included in net income11,709
 (6,188) (289) (4,288)9,403
 464
 (313) 3,972
Purchases96,742
 72,261
 23,527
 
67,554
 69,775
 16,969
 10,000
Sales(104,200) (27,887) (1,727) 
(24,277) (79,001) (1,302) 
Transfers into Level 3 from Level 2
 11,197
 
 

 13
 3,394
 
Transfers out of Level 3 into Level 2 (1)
 (6,800) (1,129) 

 
 
 
Ending balance$714,391
 $198,003
 $61,285
 $53,499
$767,071
 $189,254
 $80,033
 $67,471
Six Months Ended June 30, 2014
Other invested
assets
 Mortgage-backed Asset-backed Equities
Nine Months Ended September 30, 2014
Other invested
assets
 Mortgage-backed Asset-backed Equities
Opening balance$764,081
 $147,338
 $93,413
 $73,904
$764,081
 $147,338
 $93,413
 $73,904
Realized and unrealized gains (losses) included in net income45,124
 4,479
 (355) (9,744)51,921
 3,654
 (659) (6,572)
Purchases188,920
 50,840
 16,938
 
267,549
 34,187
 35,526
 
Sales(193,620) (54,419) (8,225) (29,297)(277,427) (65,038) (19,871) (29,297)
Transfers into Level 3 from Level 2
 103
 
 

 1,253
 13,923
 
Transfers out of Level 3 into Level 2 (1)
 (1,540) (30,539) 

 (1,486) (30,962) 
Ending balance$804,505
 $146,801
 $71,232
 $34,863
$806,124
 $119,908
 $91,370
 $38,035
Six Months Ended June 30, 2013       
Nine Months Ended September 30, 2013       
Opening balance$655,888
 $167,825
 $62,246
 $54,680
$655,888
 $167,825
 $62,246
 $54,680
Realized and unrealized gains (losses) included in net income43,962
 (7,613) (382) (1,181)53,365
 (5,910) (791) 2,791
Purchases169,952
 71,752
 24,782
 
237,506
 102,369
 42,956
 10,000
Sales(155,411) (29,864) (18,478) 
(179,688) (69,968) (26,728) 
Transfers into Level 3 from Level 2
 7,109
 
 

 5,073
 2,350
 
Transfers out of Level 3 into Level 2 (1)
 (11,206) (6,883) 

 (10,135) 
 
Ending balance$714,391
 $198,003
 $61,285
 $53,499
$767,071
 $189,254
 $80,033
 $67,471
_______________________ 
(1)Transfers out of Level 3 are primarily attributable to the availability of market observable information.

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, then such securities have been transferred to the 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. The Company recognizes transfers between levels at the end of the reporting period. There were no transfers between Level 1 and Level 2 during the period.

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


The Company’s external investment accounting service provider receives prices from internationally recognized independent pricing services to measure the fair values of its fixed maturity investments. Pricing sources are evaluated and selected in a manner to ensure that the most reliable sources are used. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. The Company obtains multiple quotes for the majority of its securities. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each pricing service has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing service uses observable market inputs, including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value.

All of the Company’s securities classified as Level 3, other than investments in other invested assets, are valued based on unadjusted broker-dealer quotes. This includes less liquid securities such as lower quality asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The primary valuation inputs include monthly payment information, the probability of default, loss severity rates and estimated prepayment rates. Significant changes in these inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity in an event of default and prepayment rates.

The Company records the unadjusted price provided and validates this price through a process that includes, but is not limited to, monthly and/or quarterly: (i) comparison of prices between two independent sources, with significant differences requiring additional price sources; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to their target benchmark, with significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value, including a review of the inputs used for pricing; (iv) comparing the price to the Company’s knowledge of the current investment market; and (v) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company’s external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 report) in conjunction with regular discussion and analysis of the investment portfolio’s structure and performance.

7. RESERVE FOR LOSSES AND LOSS EXPENSES

The reserve for losses and loss expenses consists of the following:
June 30,
2014
 December 31,
2013
September 30,
2014
 December 31,
2013
Outstanding loss reserves$1,543,506
 $1,520,867
$1,585,900
 $1,520,867
Reserves for losses incurred but not reported4,392,172
 4,245,662
4,466,363
 4,245,662
Reserve for losses and loss expenses$5,935,678
 $5,766,529
$6,052,263
 $5,766,529

















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


The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
Gross liability at beginning of period$5,856,798
 $5,673,220
 $5,766,529
 $5,645,549
$5,935,678
 $5,696,865
 $5,766,529
 $5,645,549
Reinsurance recoverable at beginning of period(1,280,525) (1,163,503) (1,234,504) (1,141,110)(1,301,742) (1,179,525) (1,234,504) (1,141,110)
Net liability at beginning of period4,576,273
 4,509,717
 4,532,025
 4,504,439
4,633,936
 4,517,340
 4,532,025
 4,504,439
Net losses incurred related to:              
Current year359,994
 323,556
 684,141
 622,804
382,970
 338,420
 1,067,111
 961,224
Prior years(45,139) (48,428) (94,000) (92,498)(46,880) (61,450) (140,880) (153,948)
Total incurred314,855
 275,128
 590,141
 530,306
336,090
 276,970
 926,231
 807,276
Net paid losses related to:              
Current year23,065
 21,003
 26,808
 24,584
53,596
 30,399
 80,401
 54,983
Prior years235,335
 241,764
 463,929
 482,885
202,626
 213,252
 666,555
 696,137
Total paid258,400
 262,767
 490,737
 507,469
256,222
 243,651
 746,956
 751,120
Foreign exchange revaluation1,208
 (4,738) 2,507
 (9,936)(10,550) 4,088
 (8,046) (5,848)
Net liability at end of period4,633,936
 4,517,340
 4,633,936
 4,517,340
4,703,254
 4,554,747
 4,703,254
 4,554,747
Reinsurance recoverable at end of period1,301,742
 1,179,525
 1,301,742
 1,179,525
1,349,009
 1,226,034
 1,349,009
 1,226,034
Gross liability at end of period$5,935,678
 $5,696,865
 $5,935,678
 $5,696,865
$6,052,263
 $5,780,781
 $6,052,263
 $5,780,781

For the three months ended JuneSeptember 30, 2014, the Company had net recognized unfavorable prior year reserve development in its U.S. insurance segment and net favorable reserve development in its international insurance and reinsurance segments. The net unfavorable prior year reserve development for the U.S. insurance segment primarily related to the 2011 through 2013 loss years was due to a higher level of reported claims in the healthcare line of business and recordednet unfavorable prior year reserve development for the 2005 loss year primarily related to the professional liability line of business. The net favorable reserve development in the international insurance segment was primarily due to lower than expected loss emergence across most lines of business and loss years partially offset by unfavorable prior reserve development for the 2012 loss year related to adverse development on two reported claims in our professional liability line of business. The net favorable reserve development in the reinsurance segment was primarily due to lower than expected loss activity in the property reinsurance line of business for the 2013 loss year.

For the nine months ended September 30, 2014, the Company recognized unfavorable prior year reserve development in theits U.S. insurance segment and net favorable reserve development in its international insurance and reinsurance segments. The net unfavorable prior year reserve development in the U.S. insurance segment primarily related primarily to the 2011 through 2013 loss years in our healthcare linelines of business as well as adverse development on reported claims in the lawyers errors and omissions ("E&O")was due to higher than expected loss frequency and primary casualty classes of business.severity. The net favorable prior year reserve development in the international insurance segment was primarily due to favorable reserve development for the 2007 loss year in the professional liability line of business, net favorable development for the 2009 and reinsurance segments was2010 loss years due to actual loss emergence being lower than initially expectedanticipated across several lines of business, net unfavorable development for the 2012 loss year in the professional liability line of business and the unfavorable reserve development for the 2013 loss year in the healthcare line of business. .T

For the six months ended June 30, 2014, the Company hadhe net unfavorable prior yearfavorable reserve development in the U.S. insurancereinsurance segment and recorded net favorable prior year reserve developmentwas primarily due to lower than expected loss activity in the international insurance andproperty reinsurance segments. The net unfavorable prior year reserve development in the U.S. insurance segment related to the healthcare line of business due to higher than expected loss frequency and severity in the medical malpractice class of business. The U.S. insurance segment also experienced adverse development on reported claims in the lawyers E&O class of business and the primary casualty class of business infor the 2013 loss year.The net favorable prior year reserve development in the international insurance and reinsurance segments was due to actual loss emergence being lower than initially expected.

For the three months ended JuneSeptember 30, 2013, the Company had net favorable reserve development in each of its international insurance and reinsurance segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the 2007 through 20102011 loss years across most lines of business. In addition, the reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverseunfavorable development in the U.S. insurance segment in the 2011 and 2012 loss years.years primarily due to a higher level of reported claims for certain healthcare, errors and omissions and private/not for profit directors’ and officers’ lines of business.


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


For the sixnine months ended JuneSeptember 30, 2013, the Company had net favorable reserve development in its international insurance and reinsurance segments due to actual loss emergence being lower than initially expected primarily for most loss years 2004 to 2008.years. The reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years for certain E&Ohealthcare, errors and director’somissions and not-for-profit directors’ and officers’ classes of business.

While the Company at times has experienced favorable reserve development in its insurance and reinsurance lines, there is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. It is not

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


appropriate to extrapolate future redundancies based on prior years’ development. The methodology of estimating loss reserves is periodically reviewed to ensure that the key assumptions used in the actuarial models continue to be appropriate.

8. INCOME TAXES

Under Swiss law, a resident company is subject to income tax at the federal, cantonal and communal levels that is levied on net income. Income attributable to permanent establishments or real estate located abroad is excluded from the Swiss tax base. Allied World Switzerland is a holding company and, therefore, is exempt from cantonal and communal income tax. As a result, Allied World Switzerland is subject to Swiss income tax only at the federal level. Allied World Switzerland is a resident of the Canton of Zug and, as such, is subject to an annual cantonal and communal capital tax on theits taxable equityequity. One of Allied World Switzerland. Allied World Switzerland hasSwitzerland's subsidiaries is a Swiss operating company, which is a resident in the Canton of Zug. The operating company is subject to federal, cantonal and communal income tax and to annual cantonal and communal capital tax.

Under current Bermuda law, Allied World Assurance Company Holdings, Ltd (“Allied World Bermuda”) and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Allied World Bermuda 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, Allied World Bermuda and Allied World Assurance Company, Ltd will be exempted until March 2035.

Certain subsidiaries of Allied World Switzerland file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in Canada, Hong Kong, Ireland, Labuan, the United Kingdom, Singapore and Switzerland. To the best of the Company’s knowledge, there are no income tax examinations pending by any tax authority.

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 JuneSeptember 30, 2014.
9. SHAREHOLDERS’ EQUITY

a) Authorized shares

The issued share capital consists of the following:
 June 30,
2014
 December 31,
2013
Common shares issued and fully paid, 2014: CHF 4.10 per share; 2013: CHF 4.10 per share99,515,760
 103,477,452
Share capital at end of period$402,907
 $418,988
Six Months Ended June 30, 2014
Shares issued at beginning of period103,477,452
Shares cancelled(3,961,692)
Total shares issued at end of period99,515,760
Treasury shares issued at beginning of period3,223,806
Shares repurchased3,961,692
Shares issued out of treasury(637,137)
Shares cancelled(3,961,692)
Total treasury shares at end of period2,586,669
Total shares outstanding at end of period96,929,091

During the six months ended June 30, 2014, 3,961,692 shares repurchased and designated for cancellation were constructively retired and cancelled.

 September 30,
2014
 December 31,
2013
Common shares issued and fully paid, 2014: CHF 4.10 per share; 2013: CHF 4.10 per share100,775,256
 103,477,452
Share capital at end of period$407,990
 $418,988

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


Nine Months Ended September 30, 2014
Shares issued at beginning of period103,477,452
Shares cancelled(2,702,196)
Total shares issued at end of period100,775,256
Treasury shares issued at beginning of period3,223,806
Shares repurchased4,616,543
Shares issued out of treasury(745,135)
Shares cancelled(2,702,196)
Total treasury shares at end of period4,393,018
Total shares outstanding at end of period96,382,238

During the nine months ended September 30, 2014, 2,702,196 shares repurchased and designated for cancellation were constructively retired and cancelled.

b) Dividends

The Company paid the following dividends during the sixnine months ended JuneSeptember 30, 2014:
Dividend Paid 
Dividend
Per
Share
 
Total
Amount
Paid
 
Dividend
Per
Share
 
Total
Amount
Paid
January 2, 2014 $0.167
 $16,732
 $0.167
 $16,732
April 3, 2014 $0.167
 $16,495
 $0.167
 $16,495
July 2, 2014 $0.225
 $21,870

On May 2, 2013, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution amounts were paid to shareholders in quarterly dividends of $0.167 per share in July 2013, October 2013, January 2014 and April 2014.

On May 1, 2014, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution amount will be paid to shareholders in quarterly installmentsdividends of $0.225 per share. The first installment of the dividend was on July 2, 2014 and the second dividend was on October 2, 2014. The Company expects to distribute the remaining installments of the dividenddividends in October 2014, January 2015 and April 2015.

c) Share Repurchases

On May 1, 2014, the shareholders approved a new share repurchase program in order for the Company to repurchase up to $500,000 of its common shares. This new share repurchase program supersedes the 2012 share repurchase program and no further repurchases will be made under the 2012 share repurchase program. Repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position, legal requirements and other factors. Under the terms of this share repurchase program, the first three million of common shares repurchased will remain in treasury and will be used by the Company to satisfy share delivery obligations under its equity-based compensation plans. Any additional common shares repurchased will be designated for cancellation at acquisition and will be canceled upon shareholder approval. Shares repurchased and designated for cancellation are constructively retired and recorded as a share cancellation.






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


The Company’s share repurchases were as follows:
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
Common shares repurchased1,949,496
 1,524,984
 3,961,692
 2,821,335
654,851
 1,282,164
 4,616,543
 4,103,499
Total cost of shares repurchased$70,874
 $46,326
 $139,532
 $82,571
$24,996
 $40,574
 $164,528
 $123,145
Average price per share$36.36
 $30.38
 $35.22
 $29.27
$38.17
 $31.64
 $35.64
 $30.01

10. EMPLOYEE BENEFIT PLANS

a) Restricted stock units and performance-based equity awards

Restricted stock units ("RSUs") vest pro-rata over four years from the date of grant. The compensation expense for the RSUs is based on the fair market value of Allied World Switzerland’s common shares at the date of grant. The Company estimates the expected forfeitures of RSUs at the date of grant and recognizes compensation expense only for those awards that the Company expects to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate.

Performance-based equity awards represent the right to receive a number of common shares in the future, based upon the achievement of established performance criteria during an applicable performance period. For the performance-based equity awards granted in 2014, 2013 and 2012, the Company anticipates that the performance goals are likely to be achieved. Based on the performance goals, the performance-based equity awards granted in 2014, 2013 and 2012 are expensed at 100%, 100%

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


and 135%, respectively, of the fair value of Allied World Switzerland's common shares on the date of grant. The expense is recognized over the performance period.

The activity related to the Company’s RSUs awards is as follows:
Six Months Ended June 30, 2014Nine Months Ended September 30, 2014
Number of Awards 
Weighted
Average
Grant Date
Fair Value
Number of Awards 
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of period143,697
 $21.69
143,697
 $21.69
RSUs granted454,176
 33.56
454,176
 33.56
RSUs forfeited(5,097) (30.64)(8,061) (31.71)
RSUs fully vested(76,230) (21.75)(77,700) (21.68)
Outstanding at end of period516,546
 $32.03
512,112
 $32.06

The activity related to the Company’s performance-based equity awards is as follows:
Six Months Ended June 30, 2014Nine Months Ended September 30, 2014
Number of Awards 
Weighted
Average
Grant Date
Fair Value
Number of Awards 
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of period804,519
 $23.21
804,519
 $23.21
Performance-based equity awards granted166,302
 33.56
166,302
 33.56
Additional awards granted due to achievement of performance criteria104,895
 (20.50)104,895
 20.50
Performance-based equity awards forfeited(1,848) (25.28)(1,848) (25.28)
Performance-based equity awards fully vested(454,440) (20.50)(454,440) (20.50)
Outstanding at end of period619,428
 $27.51
619,428
 $27.51



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


b) Cash-equivalent stock awards

As part of the Company’s annual year-end compensation awards, the Company granted both awards classified as equity and cash-equivalent stock awards. The cash-equivalent awards were granted to employees who received RSUs and performance-based equity awards in tandem with stock-based awards. The cash-equivalent RSU awards vest pro-rata over four years from the date of grant. The cash-equivalent performance-based equity awards vest after a three-year performance period. The amount payable per unit awarded will be equal to the price per share of Allied World Switzerland’s common shares, and as such the Company measures the value of the award each reporting period based on the period-ending share price. The effects of changes in the share price at each period-end during the service period are recognized as changes in compensation expense ratably over the service period. The liability is included in “accounts payable and accrued liabilities” in the consolidated balance sheets and changes in the liability are recorded in “general and administrative expenses” in the consolidated income statements.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


The activity related to the Company's cash-equivalent RSUs and performance-based awards is as follows:
RSU's Performance-based AwardsRSU's Performance-based Awards
Six Months Ended June 30, 2014Number of Awards Weighted Average Grant Date Fair Value Number of Awards Weighted Average Grant Date Fair Value
Nine Months Ended September 30, 2014Number of Awards Weighted Average Grant Date Fair Value Number of Awards Weighted Average Grant Date Fair Value
Outstanding at beginning of period2,049,084
 $24.69
 1,031,961
 23.67
2,049,084
 $24.69
 1,031,961
 23.67
Granted438,162
 33.56
 249,438
 33.56
438,162
 33.56
 249,438
 33.56
Additional awards granted due to achievement of performance criteria
 
 104,895
 20.50

 
 104,895
 20.50
Forfeited(38,886) (26.36) (2,769) (25.28)(50,106) (26.75) (2,769) (25.28)
Fully vested(751,920) (22.47) (454,440) (20.50)(752,668) (22.51) (454,440) (20.50)
Outstanding at end of period1,696,440
 $27.93
 929,085
 $27.51
1,684,472
 $27.98
 929,085
 $27.51

c) Total Stock Related Compensation Expense

The following table shows the total stock-related compensation expense relating to the stock options, RSUs and cash equivalent awards.
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
Stock options$413
 $679
 $1,140
 $2,014
$424
 $647
 $1,564
 $2,662
RSUs and performance-based equity awards2,977
 1,891
 6,490
 4,551
2,767
 2,070
 9,258
 6,621
Cash-equivalent stock awards12,868
 8,212
 17,497
 20,968
8,433
 13,699
 25,930
 34,666
Total$16,258
 $10,782
 $25,127
 $27,533
$11,624
 $16,416
 $36,752
 $43,949

11. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share:
 Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
 2014 2013 2014 2013
Basic earnings (loss) per share:       
Net income (loss)$151,863
 $(1,862) $328,835
 $157,130
Weighted average common shares outstanding97,809,639
 103,267,659
 98,672,618
 103,552,656
Basic earnings (loss) per share$1.55
 $(0.02) $3.33
 $1.52
 Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
 2014 2013 2014 2013
Diluted earnings (loss) per share:       
Net income (loss)$151,863
 $(1,862) $328,835
 $157,130
Weighted average common shares outstanding97,809,639
 103,267,659
 98,672,618
 103,552,656
Share equivalents:       
Stock options1,448,071
 
 1,456,439
 1,479,675
RSUs and performance-based equity awards455,744
 
 550,224
 913,587
Employee share purchase plan11,348
 
 12,287
 3,867
Weighted average common shares and common share equivalents outstanding - diluted99,724,802
 103,267,659
 100,691,568
 105,949,785
Diluted earnings (loss) per share$1.52
 $(0.02) $3.27
 $1.48
 Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
 2014 2013 2014 2013
Basic earnings per share:       
Net income$30,915
 $122,843
 $359,750
 $279,973
Weighted average common shares outstanding96,458,231
 101,974,077
 97,926,378
 103,020,681
Basic earnings per share$0.32
 $1.20
 $3.67
 $2.72

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


 Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
 2014 2013 2014 2013
Diluted earnings per share:       
Net income$30,915
 $122,843
 $359,750
 $279,973
Weighted average common shares outstanding96,458,231
 101,974,077
 97,926,378
 103,020,681
Share equivalents:       
Stock options1,430,243
 1,500,342
 1,449,641
 1,492,374
RSUs and performance-based equity awards541,711
 708,399
 575,675
 877,107
Employee share purchase plan14,053
 1,761
 13,602
 3,114
Weighted average common shares and common share equivalents outstanding - diluted98,444,238
 104,184,579
 99,965,296
 105,393,276
Diluted earnings per share$0.31
 $1.18
 $3.60
 $2.66

For the three months ended JuneSeptember 30, 2014, and 2013, there were no common shares considered anti-dilutive and therefore excluded from the calculation of the diluted earnings per share. For the three months ended June 30, 2013, there were no common share equivalents included in calculating diluted earnings per share as there was a net loss and any additional shares would be anti-dilutive.

For the sixnine months ended JuneSeptember 30, 2014 and 2013, there were no common shares considered anti-dilutive and therefore excluded from the calculation of the diluted earnings per share.

12. SEGMENT INFORMATION

The determination of reportable segments is based on how senior management monitors the Company’s underwriting operations. Management monitors the performance of its direct underwriting operations based on the geographic location of the Company’s offices, the markets and customers served and the type of accounts written. The Company is currently organized into three operating segments: U.S. insurance, international insurance and reinsurance. All lines of business fall within these classifications.

The U.S. insurance segment includes the Company’s direct specialty insurance operations in the United States and Canada, as well as the Company's claim administration services operations. The Company acquired the remaining interest in a claims administration services company it did not own in May 2014 and recorded goodwill of $9,385$9,709 related to the transaction. The U.S. insurance segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts, as well as third-party claims administration services.

The international insurance segment includes the Company’s direct insurance operations in Bermuda, Europe, and Asia Pacific, which includes offices in Australia, Hong Kong and Singapore. This segment primarily provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts from the Bermuda office and direct property and specialty casualty insurance to non-North American domiciled accounts from the European and Asia Pacific offices.

The reinsurance segment includes the Company’s reinsurance operations in the United States, Bermuda, Europe and Singapore. This segment provides reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. The Company presently writes reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.

Responsibility and accountability for the results of underwriting operations are assigned by major line of business within each segment. Because the Company does not manage its assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written.

The Company measures its segment profit or loss as underwriting income or loss plus other insurance-related income and expenses, which may include the net earnings from our claims administration services operations and other income or expense that is not directly related to our underwriting operations. Management measures results for each segmentsegment's underwriting income or loss on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio”, “expense ratio” and the “combined ratio.” The “loss and loss expense ratio” is derived by dividing net losses and loss

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


expenses by net premiums earned. The “acquisition cost ratio” is derived by dividing acquisition costs by net premiums earned. The “general and administrative expense ratio” is derived by dividing general and administrative expenses by net premiums earned. The expense ratio is the sum of the acquisition cost ratio and the general and administrative expense ratio. The “combined ratio” is the sum of the “loss and loss expense ratio,” the “acquisition cost ratio” and the “general and administrative expense ratio.”



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


The following tables provide a summary of the segment results:
Three Months Ended June 30, 2014 U.S. Insurance 
International
Insurance
 Reinsurance Total
Gross premiums written $341,426
 $204,478
 $214,501
 $760,405
Net premiums written 221,950
 122,171
 209,803
 553,924
Net premiums earned 214,593
 89,205
 233,449
 537,247
Net losses and loss expenses (145,485) (35,920) (133,450) (314,855)
Acquisition costs (29,677) (575) (44,027) (74,279)
General and administrative expenses (46,593) (29,411) (20,184) (96,188)
Underwriting (loss) income (7,162) 23,299
 35,788
 51,925
Net investment income       36,793
Net realized investment gains       85,217
Amortization of intangible assets       (634)
Interest expense       (14,592)
Foreign exchange loss       (651)
Income before income taxes       $158,058
         
Loss and loss expense ratio 67.8% 40.3% 57.2% 58.6%
Acquisition cost ratio 13.8% 0.6% 18.9% 13.8%
General and administrative expense ratio 21.7% 33.0% 8.6% 17.9%
Expense ratio 35.5% 33.6% 27.5% 31.7%
Combined ratio 103.3% 73.9% 84.7% 90.3%
Three Months Ended June 30, 2013 U.S. Insurance 
International
Insurance
 Reinsurance Total
Three Months Ended September 30, 2014 U.S. Insurance 
International
Insurance
 Reinsurance Total
Gross premiums written $307,297
 $192,593
 $265,310
 $765,200
 $386,681
 $144,236
 $176,967
 $707,884
Net premiums written 221,419
 106,394
 253,409
 581,222
 321,713
 87,820
 159,209
 568,742
Net premiums earned 197,436
 87,041
 222,794
 507,271
 224,764
 94,013
 222,960
 541,737
Net losses and loss expenses (124,364) (30,968) (119,796) (275,128) (153,010) (55,814) (127,266) (336,090)
Acquisition costs (27,270) 358
 (37,705) (64,617) (31,131) (1,209) (40,063) (72,403)
General and administrative expenses (38,302) (24,135) (18,148) (80,585) (41,730) (27,993) (18,571) (88,294)
Underwriting income 7,500
 32,296
 47,145
 86,941
Underwriting (loss) income (1,107) 8,997
 37,060
 44,950
Other insurance-related income 1,032
 
 
 1,032
Other insurance-related expenses (1,270) (5,305) 
 (6,575)
Segment (loss) income $(1,345) $3,692
 $37,060
 $39,407
Net investment income       37,635
       43,412
Net realized investment losses       (115,198)       (35,136)
Amortization of intangible assets       (634)       (633)
Interest expense       (14,188)       (14,325)
Foreign exchange loss       (490)       (278)
Loss before income taxes       $(5,934)
Income before income taxes       $32,447
                
Loss and loss expense ratio 63.0% 35.6 % 53.8% 54.2% 68.1% 59.4% 57.1% 62.0%
Acquisition cost ratio 13.8% (0.4)% 16.9% 12.7% 13.9% 1.3% 18.0% 13.4%
General and administrative expense ratio 19.4% 27.7 % 8.1% 15.9% 18.6% 29.8% 8.3% 16.3%
Expense ratio 33.2% 27.3 % 25.0% 28.6% 32.5% 31.1% 26.3% 29.7%
Combined ratio 96.2% 62.9 % 78.8% 82.8% 100.6% 90.5% 83.4% 91.7%

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


Six Months Ended June 30, 2014 U.S. Insurance 
International
Insurance
 Reinsurance Total
Gross premiums written $611,371
 $338,842
 $711,585
 $1,661,798
Net premiums written 424,690
 197,630
 703,218
 1,325,538
Net premiums earned 426,716
 177,544
 463,272
 1,067,532
Net losses and loss expenses (287,480) (59,486) (243,175) (590,141)
Acquisition costs (57,180) 374
 (85,195) (142,001)
General and administrative expenses (84,030) (54,171) (38,327) (176,528)
Underwriting (loss) income (1,974) 64,261
 96,575
 158,862
Net investment income       84,412
Net realized investment gains       139,422
Amortization of intangible assets       (1,267)
Interest expense       (29,126)
Foreign exchange loss       (700)
Income before income taxes       $351,603
         
Loss and loss expense ratio 67.4% 33.5 % 52.5% 55.3%
Acquisition cost ratio 13.4% (0.2)% 18.4% 13.3%
General and administrative expense ratio 19.7% 30.5 % 8.3% 16.5%
Expense ratio 33.1% 30.3 % 26.7% 29.8%
Combined ratio 100.5% 63.8 % 79.2% 85.1%

Six Months Ended June 30, 2013 U.S. Insurance 
International
Insurance
 Reinsurance Total
Three Months Ended September 30, 2013 U.S. Insurance 
International
Insurance
 Reinsurance Total
Gross premiums written $563,315
 $321,109
 $717,857
 $1,602,281
 $308,709
 $132,881
 $139,303
 $580,893
Net premiums written 413,672
 184,139
 678,463
 1,276,274
 238,792
 75,632
 138,653
 453,077
Net premiums earned 385,875
 171,255
 413,369
 970,499
 207,602
 87,554
 215,617
 510,773
Net losses and loss expenses (257,688) (59,903) (212,715) (530,306) (141,222) (31,094) (104,654) (276,970)
Acquisition costs (50,398) 1,207
 (72,111) (121,302) (28,426) 282
 (36,970) (65,114)
General and administrative expenses (77,898) (48,924) (36,443) (163,265) (41,616) (26,450) (20,487) (88,553)
Underwriting (loss) income (109) 63,635
 92,100
 155,626
 (3,662) 30,292
 53,506
 80,136
Other insurance-related income 
 
 
 
Other insurance-related expenses 
 
 
 
Segment (loss) income $(3,662) $30,292
 $53,506
 $80,136
Net investment income       71,023
       39,271
Net realized investment losses       (35,561)
Net realized investment gains       27,487
Amortization of intangible assets       (1,267)       (633)
Interest expense       (28,322)       (14,094)
Foreign exchange loss       (3,008)       (4,353)
Income before income taxes       $158,491
       $127,814
                
Loss and loss expense ratio 66.8% 35.0 % 51.5% 54.6% 68.0% 35.5 % 48.5% 54.2%
Acquisition cost ratio 13.1% (0.7)% 17.4% 12.5% 13.7% (0.3)% 17.1% 12.7%
General and administrative expense ratio 20.2% 28.6 % 8.8% 16.8% 20.0% 30.2 % 9.5% 17.3%
Expense ratio 33.3% 27.9 % 26.2% 29.3% 33.7% 29.9 % 26.6% 30.0%
Combined ratio 100.1% 62.9 % 77.7% 83.9% 101.7% 65.4 % 75.1% 84.2%


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


Nine Months Ended September 30, 2014 U.S. Insurance 
International
Insurance
 Reinsurance Total
Gross premiums written $998,051
 $483,079
 $888,552
 $2,369,682
Net premiums written 746,403
 285,450
 862,427
 1,894,280
Net premiums earned 651,480
 271,557
 686,232
 1,609,269
Net losses and loss expenses (440,491) (115,299) (370,441) (926,231)
Acquisition costs (88,311) (835) (125,258) (214,404)
General and administrative expenses (125,760) (82,164) (56,898) (264,822)
Underwriting (loss) income (3,082) 73,259
 133,635
 203,812
Other insurance-related income 1,032
 
 
 1,032
Other insurance-related expenses (1,270) (5,305) 
 (6,575)
Segment (loss) income $(3,320) $67,954
 $133,635
 $198,269
Net investment income       127,824
Net realized investment gains       104,286
Amortization of intangible assets       (1,900)
Interest expense       (43,451)
Foreign exchange loss       (978)
Income before income taxes       $384,050
         
Loss and loss expense ratio 67.6% 42.5% 54.0% 57.6%
Acquisition cost ratio 13.6% 0.3% 18.3% 13.3%
General and administrative expense ratio 19.3% 30.3% 8.3% 16.5%
Expense ratio 32.9% 30.6% 26.6% 29.8%
Combined ratio 100.5% 73.1% 80.6% 87.4%


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(Expressed in thousands, except share, per share, percentage and ratio information)


Nine Months Ended September 30, 2013 U.S. Insurance 
International
Insurance
 Reinsurance Total
Gross premiums written $872,024
 $453,990
 $857,160
 $2,183,174
Net premiums written 652,464
 259,771
 817,116
 1,729,351
Net premiums earned 593,477
 258,809
 628,986
 1,481,272
Net losses and loss expenses (398,910) (90,997) (317,369) (807,276)
Acquisition costs (78,824) 1,489
 (109,081) (186,416)
General and administrative expenses (119,514) (75,374) (56,930) (251,818)
Underwriting (loss) income (3,771) 93,927
 145,606
 235,762
Other insurance-related income 
 
 
 
Other insurance-related expenses 
 
 
 
Segment (loss) income $(3,771) $93,927
 $145,606
 $235,762
Net investment income       110,294
Net realized investment losses       (8,074)
Amortization of intangible assets       (1,900)
Interest expense       (42,416)
Foreign exchange loss       (7,361)
Income before income taxes       $286,305
         
Loss and loss expense ratio 67.2% 35.2 % 50.5% 54.5%
Acquisition cost ratio 13.3% (0.6)% 17.3% 12.6%
General and administrative expense ratio 20.1% 29.1 % 9.1% 17.0%
Expense ratio 33.4% 28.5 % 26.4% 29.6%
Combined ratio 100.6% 63.7 % 76.9% 84.1%

The following table shows an analysis of the Company’s gross premiums written by geographic location of the Company’s subsidiaries and branches. All intercompany premiums have been eliminated.
 
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
United States$442,549
 $440,151
 $963,321
 $918,594
$483,992
 $377,618
 $1,447,652
 $1,296,212
Bermuda185,872
 211,040
 415,503
 439,712
109,503
 111,103
 525,005
 550,815
Europe77,985
 60,234
 181,321
 146,743
64,947
 52,004
 245,931
 198,747
Singapore45,375
 48,918
 87,316
 87,031
Hong Kong3,756
 4,857
 8,639
 10,201
Asia Pacific45,070
 40,168
 142,798
 137,400
Canada3,094
 
 3,924
 
4,372
 
 8,296
 
Australia1,774
 
 1,774
 
Total gross premiums written$760,405
 $765,200
 $1,661,798
 $1,602,281
$707,884
 $580,893
 $2,369,682
 $2,183,174

Europe includes gross premiums written attributable to Switzerland of $10,261$11,130 and $5,868$10,509 for the three months ended JuneSeptember 30, 2014 and 2013, respectively and $54,55465,684 and $46,674$57,183 for the sixnine months ended JuneSeptember 30, 2014 and 2013.

13. COMMITMENTS AND CONTINGENCIES

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. These legal proceedings generally relate to claims asserted by or against the Company in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under these proceedings are included in the reserve for losses and loss expenses in the Company’s consolidated balance sheets. As of JuneSeptember 30, 2014, the Company was not a

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


party to any material legal proceedings arising outside the ordinary course of business that management believes will have a material adverse effect on the Company’s results of operations, financial position or cash flow.

The Company entered into a 20-year mortgage commitment with a Swiss bank for a company-used office building in Zug, Switzerland. The total proceeds to be received under the mortgage are CHF 18,000 with a fixed annual interest rate of 3.2% payable quarterly. The mortgage payments will be CHF 300 per year, plus accrued interest, for the first 19 years with the remaining balance payable at the end of the mortgage. The Company will receive the proceeds from the bank during the fourth quarter of 2014 at which time the Company will recognize the mortgage loan liability in its consolidated balance sheets.

In conjunction with the above mortgage commitment, the Company entered into a three-year credit facility with a Swiss bank that provides up to CHF 5,000 for general corporate purposes; however, the Company will use the proceeds from the credit facility to fund the purchase of the office building in Zug, Switzerland. The interest rate for the credit facility is 2.5%.

14. CONDENSED CONSOLIDATED GUARANTOR FINANCIAL STATEMENTS

The following tables present unaudited condensed consolidating financial information as of JuneSeptember 30, 2014 and December 31, 2013 and for the three and sixnine months ended JuneSeptember 30, 2014 and 2013 for Allied World Switzerland (the “Parent Guarantor”) and Allied World Bermuda (the “Subsidiary Issuer”). The Subsidiary Issuer is a direct, 100%-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees the senior notes issued by the Subsidiary Issuer.








24

Table of Contents
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


Unaudited Condensed Consolidating Balance Sheet:
As of June 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
As of September 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
ASSETS:                  
Investments$
 $
 $8,027,840
 $
 $8,027,840
$
 $
 $8,002,514
 $
 $8,002,514
Cash and cash equivalents40,976
 1,286
 592,876
 
 635,138
38,196
 2,329
 790,745
 
 831,270
Insurance balances receivable
 
 976,441
 
 976,441

 
 926,183
 
 926,183
Funds held
 
 414,445
 
 414,445

 
 405,703
 
 405,703
Reinsurance recoverable
 
 1,301,742
 
 1,301,742

 
 1,349,009
 
 1,349,009
Net deferred acquisition costs
 
 163,259
 
 163,259

 
 171,827
 
 171,827
Goodwill and intangible assets
 
 325,325
 
 325,325

 
 325,016
 
 325,016
Balances receivable on sale of investments
 
 164,713
 
 164,713

 
 60,122
 
 60,122
Investments in subsidiaries3,600,731
 4,201,054
 
 (7,801,785) 
3,644,932
 4,255,136
 
 (7,900,068) 
Due from subsidiaries75,813
 18,859
 15,536
 (110,208) 
18,497
 407
 15,508
 (34,412) 
Other assets1,090
 4,026
 655,628
 
 660,744
2,009
 3,576
 732,339
 
 737,924
Total assets$3,718,610
 $4,225,225
 $12,637,805
 $(7,911,993) $12,669,647
$3,703,634
 $4,261,448
 $12,778,966
 $(7,934,480) $12,809,568
LIABILITIES:                  
Reserve for losses and loss expenses$
 $
 $5,935,678
 $
 $5,935,678
$
 $
 $6,052,263
 $
 $6,052,263
Unearned premiums
 
 1,703,684
 
 1,703,684

 
 1,716,927
 
 1,716,927
Reinsurance balances payable
 
 224,182
 ��
 224,182

 
 203,428
 
 203,428
Balances due on purchases of investments
 
 180,378
 
 180,378

 
 166,026
 
 166,026
Senior notes
 798,648
 
 
 798,648

 798,725
 
 
 798,725
Due to subsidiaries8,373
 7,163
 94,672
 (110,208) 
6,826
 8,682
 18,904
 (34,412) 
Other liabilities27,475
 17,976
 98,864
 
 144,315
23,209
 12,513
 162,878
 
 198,600
Total liabilities35,848
 823,787
 8,237,458
 (110,208) 8,986,885
30,035
 819,920
 8,320,426
 (34,412) 9,135,969
Total shareholders’ equity3,682,762
 3,401,438
 4,400,347
 (7,801,785) 3,682,762
3,673,599
 3,441,528
 4,458,540
 (7,900,068) 3,673,599
Total liabilities and shareholders’ equity$3,718,610
 $4,225,225
 $12,637,805
 $(7,911,993) $12,669,647
$3,703,634
 $4,261,448
 $12,778,966
 $(7,934,480) $12,809,568
 

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


As of December 31, 2013
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
ASSETS:         
Investments$
 $
 $7,712,036
 $
 $7,712,036
Cash and cash equivalents10,790
 2,775
 518,371
 
 531,936
Insurance balances receivable
 
 664,731
 
 664,731
Funds held
 
 632,430
 
 632,430
Reinsurance recoverable
 
 1,234,504
 
 1,234,504
Net deferred acquisition costs
 
 126,661
 
 126,661
Goodwill and intangible assets
 
 317,207
 
 317,207
Balances receivable on sale of investments
 
 76,544
 
 76,544
Investments in subsidiaries3,413,001
 4,018,619
 
 (7,431,620) 
Due from subsidiaries111,172
 122,846
 123,479
 (357,497) 
Other assets1,757
 4,671
 643,353
 
 649,781
Total assets$3,536,720
 $4,148,911
 $12,049,316
 $(7,789,117) $11,945,830
LIABILITIES:         
Reserve for losses and loss expenses$
 $
 $5,766,529
 $
 $5,766,529
Unearned premiums
 
 1,396,256
 
 1,396,256
Reinsurance balances payable
 
 173,023
 
 173,023
Balances due on purchases of investments
 
 104,740
 
 104,740
Senior notes
 798,499
 
 
 798,499
Due to subsidiaries12,945
 110,534
 234,018
 (357,497) 
Other liabilities3,949
 17,797
 165,211
 
 186,957
Total liabilities16,894
 926,830
 7,839,777
 (357,497) 8,426,004
Total shareholders’ equity3,519,826
 3,222,081
 4,209,539
 (7,431,620) 3,519,826
Total liabilities and shareholders’ equity$3,536,720
 $4,148,911
 $12,049,316
 $(7,789,117) $11,945,830

The investment in subsidiaries and total shareholders' equity balances reported above in the Unaudited Condensed Consolidating Balance Sheet for Allied World Bermuda (Subsidiary Issuer) as of December 31, 2013 were reduced by $776,000 from the previously reported amounts to properly record intercompany dividends as a reduction in the investment in subsidiaries balance due to a miscalculation. Since the intercompany dividends were eliminated in consolidation there was no impact to consolidated total shareholders' equity.

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


Unaudited Condensed Consolidating Statement of Operations and Comprehensive Income:
 
Three Months Ended June 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Three Months Ended September 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Net premiums earned$
 $
 $537,247
 $
 $537,247
$
 $
 $541,737
 $
 $541,737
Net investment income2
 
 36,791
 
 36,793
2
 
 43,410
 
 43,412
Net realized investment gains (losses)
 
 85,217
 
 85,217

 
 (35,136) 
 (35,136)
Other income
 
 1,032
 
 1,032
Net losses and loss expenses
 
 (314,855) 
 (314,855)
 
 (336,090) 
 (336,090)
Acquisition costs
 
 (74,279) 
 (74,279)
 
 (72,403) 
 (72,403)
General and administrative expenses(10,813) 1,654
 (87,029) 
 (96,188)(8,285) (182) (79,827) 
 (88,294)
Other expense
 
 (6,575) 
 (6,575)
Amortization of intangible assets
 
 (634) 
 (634)
 
 (633) 
 (633)
Interest expense
 (13,853) (739) 
 (14,592)
 (13,855) (470) 
 (14,325)
Foreign exchange gain (loss)(2) (12) (637) 
 (651)16
 47
 (341) 
 (278)
Income tax (expense) benefit323
 
 (6,518) 
 (6,195)
 
 (1,532) 
 (1,532)
Equity in earnings of consolidated subsidiaries162,353
 170,796
 
 (333,149) 
39,182
 49,491
 
 (88,673) 
NET INCOME (LOSS)$151,863
 $158,585
 $174,564
 $(333,149) $151,863
$30,915
 $35,501
 $53,172
 $(88,673) $30,915
Other comprehensive income
 
 
 
 

 
 
 
 
COMPREHENSIVE INCOME (LOSS)$151,863
 $158,585
 $174,564
 $(333,149) $151,863
$30,915
 $35,501
 $53,172
 $(88,673) $30,915
Three Months Ended June 30, 2013
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Three Months Ended September 30, 2013
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Net premiums earned$
 $
 $507,271
 $
 $507,271
$
 $
 $510,773
 $
 $510,773
Net investment income1
 2
 37,632
 
 37,635
3
 
 39,268
 
 39,271
Net realized investment gains (losses)
 
 (115,198) 
 (115,198)
 
 27,487
 
 27,487
Other income
 
 
 
 
Net losses and loss expenses
 
 (275,128) 
 (275,128)
 
 (276,970) 
 (276,970)
Acquisition costs
 
 (64,617) 
 (64,617)
 
 (65,114) 
 (65,114)
General and administrative expenses(8,566) (455) (71,564) 
 (80,585)(7,323) (4,961) (76,269) 
 (88,553)
Other expense
 
 
 
 
Amortization of intangible assets
 
 (634) 
 (634)
 
 (633) 
 (633)
Interest expense
 (13,835) (353) 
 (14,188)
 (13,838) (256) 
 (14,094)
Foreign exchange gain (loss)2
 (628) 136
 
 (490)(13) (212) (4,128) 
 (4,353)
Income tax (expense) benefit
 
 4,072
 
 4,072

 
 (4,971) 
 (4,971)
Equity in earnings of consolidated subsidiaries6,701
 21,147
 
 (27,848) 
130,176
 150,653
 
 (280,829) 
NET INCOME (LOSS)$(1,862) $6,231
 $21,617
 $(27,848) $(1,862)$122,843
 $131,642
 $149,187
 $(280,829) $122,843
Other comprehensive income
 
 
 
 

 
 
 
 
COMPREHENSIVE INCOME (LOSS)$(1,862) $6,231
 $21,617
 $(27,848) $(1,862)$122,843
 $131,642
 $149,187
 $(280,829) $122,843


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands, except share, per share, percentage and ratio information)


Six Months Ended June 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Nine Months Ended September 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Net premiums earned$
 $
 $1,067,532
 $
 $1,067,532
$
 $
 $1,609,269
 $
 $1,609,269
Net investment income4
 
 84,408
 
 84,412
6
 
 127,818
 
 127,824
Net realized investment gains (losses)
 
 139,422
 
 139,422

 
 104,286
 
 104,286
Other income
 
 1,032
 
 1,032
Net losses and loss expenses
 
 (590,141) 
 (590,141)
 
 (926,231) 
 (926,231)
Acquisition costs
 
 (142,001) 
 (142,001)
 
 (214,404) 
 (214,404)
General and administrative expenses(19,727) (737) (156,064) 
 (176,528)(28,012) (919) (235,891) 
 (264,822)
Other expense
 
 (6,575) 
 (6,575)
Amortization of intangible assets
 
 (1,267) 
 (1,267)
 
 (1,900) 
 (1,900)
Interest expense
 (27,700) (1,426) 
 (29,126)
 (41,556) (1,895) 
 (43,451)
Foreign exchange gain (loss)(4) 21
 (717) 
 (700)12
 68
 (1,058) 
 (978)
Income tax (expense) benefit(86) 
 (22,682) 
 (22,768)(86) 
 (24,214) 
 (24,300)
Equity in earnings of consolidated subsidiaries348,648
 369,803
 
 (718,451) 
387,830
 419,294
 
 (807,124) 
NET INCOME (LOSS)$328,835
 $341,387
 $377,064
 $(718,451) $328,835
$359,750
 $376,887
 $430,237
 $(807,124) $359,750
Other comprehensive income
 
 
 
 

 
 
 
 
COMPREHENSIVE INCOME (LOSS)$328,835
 $341,387
 $377,064
 $(718,451) $328,835
$359,750
 $376,887
 $430,237
 $(807,124) $359,750

Six Months Ended June 30, 2013
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Nine Months Ended September 30, 2013
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Net premiums earned$
 $
 $970,499
 $
 $970,499
$
 $
 $1,481,272
 $
 $1,481,272
Net investment income8
 4
 71,011
 
 71,023
11
 4
 110,279
 
 110,294
Net realized investment gains (losses)
 
 (35,561) 
 (35,561)
 
 (8,074) 
 (8,074)
Other income
 
 
 
 
Net losses and loss expenses
 
 (530,306) 
 (530,306)
 
 (807,276) 
 (807,276)
Acquisition costs
 
 (121,302) 
 (121,302)
 
 (186,416) 
 (186,416)
General and administrative expenses(19,552) (912) (142,801) 
 (163,265)(26,875) (5,873) (219,070) 
 (251,818)
Other expense
 
 
 
 
Amortization of intangible assets
 
 (1,267) 
 (1,267)
 
 (1,900) 
 (1,900)
Interest expense
 (27,665) (657) 
 (28,322)
 (41,503) (913) 
 (42,416)
Foreign exchange gain (loss)274
 (723) (2,559) 
 (3,008)261
 (935) (6,687) 
 (7,361)
Income tax (expense) benefit
 
 (1,361) 
 (1,361)
 
 (6,332) 
 (6,332)
Equity in earnings of consolidated subsidiaries176,400
 202,627
 
 (379,027) 
306,576
 353,280
 
 (659,856) 
NET INCOME (LOSS)$157,130
 $173,331
 $205,696
 $(379,027) $157,130
$279,973
 $304,973
 $354,883
 $(659,856) $279,973
Other comprehensive income
 
 
 
 

 
 
 
 
COMPREHENSIVE INCOME (LOSS)$157,130
 $173,331
 $205,696
 $(379,027) $157,130
$279,973
 $304,973
 $354,883
 $(659,856) $279,973





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


Unaudited Condensed Consolidating Statement of Cash Flows:
Six Months Ended June 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Nine Months Ended September 30, 2014
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES$194,890
 $(1,489) $258,707
 $
 $452,108
$241,037
 $263,554
 $737,516
 $(575,000) $667,107
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:                  
Purchases trading securities
 
 (3,905,650) 
 (3,905,650)
 
 (5,608,594) 
 (5,608,594)
Purchases of other invested assets
 
 (181,419) 
 (181,419)
 
 (242,227) 
 (242,227)
Sales of trading securities
 
 3,705,229
 
 3,705,229

 
 5,500,176
 
 5,500,176
Sales of other invested assets
 
 184,166
 
 184,166

 
 243,123
 
 243,123
Other
 
 13,472
 
 13,472

 
 (46,620) 
 (46,620)
Net cash provided by (used in) investing activities
 
 (184,202) 
 (184,202)
 
 (154,142) 
 (154,142)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:        

        

Dividends paid(33,207) 
 
 
 (33,207)(55,064) 
 
 
 (55,064)
Intercompany dividends paid
 (264,000) (311,000) 575,000
 
Proceeds from the exercise of stock options6,313
 
 
 
 6,313
7,640
 
 
 
 7,640
Share repurchases(137,810) 
 
 
 (137,810)(166,207) 
 
 
 (166,207)
Net cash provided by (used in) financing activities(164,704) 
 
 
 (164,704)(213,631) (264,000) (311,000) 575,000
 (213,631)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS30,186
 (1,489) 74,505
 
 103,202
27,406
 (446) 272,374
 
 299,334
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD10,790
 2,775
 518,371
 
 531,936
10,790
 2,775
 518,371
 
 531,936
CASH AND CASH EQUIVALENTS, END OF PERIOD$40,976
 $1,286
 $592,876
 $
 $635,138
$38,196
 $2,329
 $790,745
 $
 $831,270

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


Six Months Ended June 30, 2013
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
Nine Months Ended September 30, 2013
Allied World
Switzerland
(Parent
Guarantor)
 
Allied World
Bermuda
(Subsidiary
Issuer)
 
Other Allied
World
Subsidiaries
 
Consolidating
Adjustments
 
Allied World
Switzerland
Consolidated
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:$73,938
 $(3,025) $54,993
 $
 $125,906
$177,859
 $226,564
 $431,127
 $(503,500) $332,050
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:                  
Purchases of trading securities
 
 (3,186,162) 
 (3,186,162)
 
 (4,955,817) 
 (4,955,817)
Purchases of other invested assets
 
 (141,805) 
 (141,805)
 
 (211,501) 
 (211,501)
Sales of trading securities
 
 3,171,977
 
 3,171,977

 
 5,137,280
 
 5,137,280
Sales of other invested assets
 
 126,491
 
 126,491

 
 189,155
 
 189,155
Other
 
 (13,924) 
 (13,924)
 
 (78,203) 
 (78,203)
Net cash provided by (used in) investing activities
 
 (43,423) 
 (43,423)
 
 80,914
 
 80,914
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:        

        

Partial par value reduction(12,981) 
 
 
 (12,981)
Dividends paid - partial par value reduction(12,981) 
 
 
 (12,981)
Dividends paid(17,117) 
 
 
 (17,117)
Intercompany dividends paid
 (229,500) (274,000) 503,500
 
Proceeds from the exercise of stock options5,293
 
 
 
 5,293
8,465
 
 
 
 8,465
Share repurchases(82,571) 
 
 
 (82,571)(120,163) 
 
 
 (120,163)
Net cash provided by (used in) financing activities(90,259) 
 
 
 (90,259)(141,796) (229,500) (274,000) 503,500
 (141,796)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(16,321) (3,025) 11,570
 
 (7,776)36,063
 (2,936) 238,041
 
 271,168
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD19,997
 11,324
 650,558
 
 681,879
19,997
 11,324
 650,558
 
 681,879
CASH AND CASH EQUIVALENTS, END OF PERIOD$3,676
 $8,299
 $662,128
 $
 $674,103
$56,060
 $8,388
 $888,599
 $
 $953,047

Notes to Parent Company Condensed Financial Information

a) Dividends

Allied World Switzerland received cash dividends from its subsidiaries of $205,000$264,000 and $155,000$229,500 for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. Such dividends are included in “cash flows provided by (used in) operating activities” in the unaudited condensed consolidating cash flows.

15. SUBSEQUENT EVENTS

On JulyOctober 2, 2014, the Company paid a quarterly dividend of $0.225 per share to shareholders of record on June 24,September 23, 2014.

In October 2014, the Company, through its subsidiary Allied World Financial Services, Inc., acquired a minority interest in Blue Vista Capital Management, LLC ("Blue Vista"). Blue Vista invests across real estate asset classes and capital structures through limited partnerships and separate accounts. As part of the acquisition, the Company has agreed to invest $225,000 to various funds managed by Blue Vista over the next several years.

Effective December 31, 2014, the Company will reorganize how it manages its business, and as a result it will realign its executive management team and change its reportable segments to correspond to the reorganization. The Company's Bermuda direct insurance operations, which had previously been included in the international insurance segment, will now be combined with the U.S. insurance segment and renamed North American Insurance. The remaining direct insurance operations of the international insurance segment will be renamed Global Markets Insurance. The reinsurance segment will remain unchanged.

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


The newly created segments will be presented in the Company's financial statements beginning with the period ended December 31, 2014 and prior periods will be recast to conform to the new presentation.




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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. References in this Form 10-Q to the terms “we,” “us,” “our,” the “Company” or other similar terms mean the consolidated operations of Allied World Assurance Company Holdings, AG, a Swiss holding company, and our consolidated subsidiaries, unless the context requires otherwise. References in this Form 10-Q to the term “Allied World Switzerland” or “Holdings” means only Allied World Assurance Company Holdings, AG. References to “Allied World Bermuda” mean only Allied World Assurance Company Holdings, Ltd, a Bermuda holding company. References to “our insurance subsidiaries” may include our reinsurance subsidiaries. References in this Form 10-Q to $ are to the lawful currency of the United States and to CHF are to the lawful currency of Switzerland. References in this Form 10-Q to Holdings’ “common shares” mean its registered voting shares.

Note on Forward-Looking Statement

This Form 10-Q and other publicly available documents may include, and our officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections and statements may address, among other things, our strategy for growth, product development, financial results and reserves. Actual results and financial condition may differ, possibly materially, from these projections and statements and therefore you should not place undue reliance on them. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in “Risk Factors” in Item 1A. of Part II of the Form 10-Q and Part I of our 2013 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 18, 2014 (the “2013 Form 10-K”). We are under no obligation (and expressly disclaim any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

Our Business

We write a diversified portfolio of property and casualty insurance and reinsurance internationally through our subsidiaries and branches based in Australia, Bermuda, Canada, Europe, Hong Kong, Singapore, and the United States as well as our Lloyd’s Syndicate 2232. We manage our business through three operating segments: U.S. insurance, international insurance and reinsurance. As of JuneSeptember 30, 2014, we had approximately $12.7$12.8 billion of total assets, $3.7 billion of total shareholders’ equity and $4.5 billion of total capital, which includes shareholders’ equity and senior notes.

During the three months ended JuneSeptember 30, 2014, we continued to grow our direct insurance business, in particular in the United States and Europe, as we entered new lines of business and added scale to our existing lines of business while our reinsurance operations had lower premiums mainly due to the timing of certain treaties renewing.segment grew its business by selectively writing accounts where pricing, terms and conditions met our underwriting requirements. During the quarter, we experienced positive rate improvements in certain lines of business, such as general casualty, primary casualty, healthcare and professional liability in our U.S. insurance segment, as well as positive rate changes in our international insurance segment for certain parts of our general casualty and healthcare lines of business. However also duringsegment. During the quarter, we did experiencealso experienced negative rate changes in our general property line of business in both our U.S. insurance and international insurance segments, as well as negative rate changes in our professional liability, linegeneral casualty and aviation lines of business in the international insurance segment. We believe going forward in the near-term, there will be pricing pressure across most lines of business, in particular in our international insurance segment.

Our consolidated gross premiums written decreasedincreased by $4.8$127.0 million, or 0.6%21.9%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013.2013 due to growth in each of our operating segments. Overall our combined ratio is higher by 7.5 percentage points, driven by increased property loss activity during the quarter, including $18.5 million related to Hurricane Odile, $8.0 million related to Windstorm Ela and higher expenses primarily caused$3.3 million related to Property Claims Services ("PCS") designated storm #45 in the Midwestern U.S. ("PCS storm #45").

Our net income decreased by increased headcount and employee stock-based compensation due primarily$91.9 million to an 11% increase in our stock price. As a result of the above factors, each of our operating segments reported lower underwriting income during the three months ended June 30, 2014$30.9 million compared to the three months ended JuneSeptember 30, 2013. AlsoThe decrease was primarily due to recording net realized losses on our investments of $35.1 million during the quarter, we opened a branch office of Allied World Assurance Company, Ltd in Sydney, Australia to further expand our distribution network in the Asia Pacific region. The branch will initially offer generalthree months ended

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casualty, healthcare, professional liability, mergers and acquisitions and trade credit insurance products. In May 2014, we acquired the remaining interest in a claims administration services company we did not own and recorded goodwill of $9.4 million related to the transaction. The results of the claims administration services company are included in our U.S. insurance segment.

Our net income increased by $153.8 million to $151.9 million compared to the three months ended June 30, 2013. The increase was primarily due to recording net realized gains on our investments of $85.2 million during the three months ended JuneSeptember 30, 2014 compared to recording net realized lossesgains of $115.2$27.5 million during the three months ended JuneSeptember 30, 2013 as a result of lowerhigher interest rates and widening credit spreads during the current quarter.quarter and recording $29.8 million in catastrophe losses.

Recent Developments

On May 1, 2014, the shareholders approved a 3-for-1 stock split of the Company approved the following proposals:

A cash dividend in the form of a distribution out of general legal reserve from capital contributions. The distribution amount will be paid to shareholders in quarterly installments of $0.225 per share. The first installment of the dividend was paid on July 2, 2014. We expect to distribute the remaining installments of the dividend in October 2014, January 2015 and April 2015.
A new share repurchase program in order to repurchase up to $500.0 million of our common shares. This supersedes the 2012 share repurchase program and no further repurchases will be made under the 2012 share repurchase program.
A three-for-one stock split for shareholders of record as of May 12, 2014. All historical share and per share amounts have been recast to reflect the effect of the stock split.

In August 2014, we reached definitive agreements to acquire the Hong Kong and Singapore operations of Royal & Sun Alliance Insurance plc ("RSA") for approximately $211.0 million, at current exchange rates, subject to adjustments at closing. In addition to the purchase price, we expect to contribute an additional $90.0 million to capitalize the business on an ongoing basis. Subject to regulatory approvals in both Hong Kong and Singapore, as well as court approval in Singapore, the acquisition is expected to be completed in the first half of 2015. We believe the acquisition of the Hong Kong and Singapore branches of RSA complements our global specialist insurance strategy by providing meaningful additional scale in the region.

In October 2014, we acquired, through our subsidiary Allied World Financial Services, Inc., a minority interest in Blue Vista Capital Management, LLC ("Blue Vista"). Blue Vista invests across real estate asset classes and capital structures through limited partnerships and separate accounts. As part of the acquisition, we have agreed to invest $225.0 million to various funds managed by Blue Vista over the next several years.

Effective December 31, 2014, we will reorganize how we manage our business, and as a result we will realign our executive management team and change our reportable segments to correspond to the reorganization. Our Bermuda direct insurance operations, which had previously been included in the international insurance segment, will now be combined with the U.S. insurance segment and renamed North American Insurance. The remaining direct insurance operations of the international insurance segment will be renamed Global Markets Insurance. The reinsurance segment will remain unchanged. The newly created segments will be presented in our financial statements beginning with the period ended December 31, 2014 and prior periods will be recast to conform to the new presentation.




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Financial Highlights
 
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
($ in millions except share, per share and percentage data)($ in millions except share, per share and percentage data)
Gross premiums written$760.4
 $765.2
 $1,661.8
 $1,602.3
$707.9
 $580.9
 $2,369.7
 $2,183.2
Net income (loss)151.9
 (1.9) 328.8
 157.1
Net income30.9
 122.8
 359.8
 280.0
Operating income76.1
 103.5
 205.9
 187.7
60.6
 101.8
 266.5
 289.5
Basic earnings (loss) per share:       
Net income (loss)$1.55
 $(0.02) $3.33
 $1.52
Basic earnings per share:       
Net income$0.32
 $1.20
 $3.67
 $2.72
Operating income$0.78
 $1.00
 $2.09
 $1.82
$0.62
 $0.99
 $2.72
 $2.81
Diluted earnings (loss) per share:       
Net income (loss)$1.52
 $(0.02) $3.27
 $1.48
Diluted earnings per share:       
Net income$0.31
 $1.18
 $3.60
 $2.66
Operating income$0.76
 $0.98
 $2.05
 $1.77
$0.61
 $0.98
 $2.67
 $2.75
Weighted average common shares outstanding:              
Basic97,809,639
 103,267,659
 98,672,618
 103,552,656
96,458,231
 101,974,077
 97,926,378
 103,020,681
Diluted99,724,802
 105,408,888
 100,691,568
 105,949,785
98,444,238
 104,184,579
 99,965,296
 105,393,276
Basic book value per common share$37.99
 $32.90
 $37.99
 $32.90
$38.11
 $33.95
 $38.11
 $33.95
Diluted book value per common share$36.98
 $32.06
 $36.98
 $32.06
$37.12
 $33.05
 $37.12
 $33.05
Annualized return on average equity (ROAE), net income (loss)16.6% (0.2)% 18.3% 9.4%
Annualized return on average equity (ROAE), net income3.4% 14.4% 13.2% 11.0%
Annualized ROAE, operating income8.3% 12.2 % 11.4% 11.2%6.6% 11.9% 9.7% 11.4%

Non-GAAP Financial Measures

In presenting the company’s results, management has included and discussed certain non-GAAP financial measures, as such term is defined in Item 10(e) of Regulation S-K promulgated by the SEC. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the company’s business. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

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Operating income and operating income per share

Operating income is an internal performance measure used in the management of our operations and represents after-tax operational results excluding, as applicable, net realized investment gains or losses, net foreign exchange gain or loss, and other non-recurring items. We exclude net realized investment gains or losses, net foreign exchange gain or loss and any other non-recurring items from our calculation of operating income because these amounts are heavily influenced by and fluctuate in part according to the availability of market opportunities and other factors. In addition to presenting net income determined in accordance with U.S. GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations and our underlying business performance. Operating income should not be viewed as a substitute for U.S. GAAP net income.










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The following is a reconciliation of operating income to its most closely related U.S. GAAP measure, net income.
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
($ in millions, except share, per share and percentage data)($ in millions, except share, per share and percentage data)
Net income (loss)$151.9
 $(1.9) $328.8
 $157.1
Net income$30.9
 $122.8
 $359.8
 $280.0
Add after tax effect of:              
Net realized investment (gains) losses(76.4) 104.9
 (123.6) 27.6
Net realized investment losses (gains)29.4
 (25.4) (94.2) 2.2
Foreign exchange loss0.6
 0.5
 0.7
 3.0
0.3
 4.4
 1.0
 7.3
Operating income$76.1
 $103.5
 $205.9
 $187.7
$60.6
 $101.8
 $266.5
 $289.5
Basic per share data:              
Net income (loss)$1.55
 $(0.02) $3.33
 $1.52
Net income$0.32
 $1.20
 $3.67
 $2.72
Add after tax effect of:              
Net realized investment (gains) losses(0.78) 1.02
 (1.25) 0.27
Net realized investment losses (gains)0.30
 (0.25) (0.96) 0.02
Foreign exchange loss0.01
 
 0.01
 0.03
0.00
 0.04
 0.01
 0.07
Operating income$0.78
 $1.00
 $2.09
 $1.82
$0.62
 $0.99
 $2.72
 $2.81
Diluted per share data:              
Net income (loss)$1.52
 $(0.02)* $3.27
 $1.48
Net income$0.31
 $1.18
 $3.60
 $2.66
Add after tax effect of:              
Net realized investment (gains) losses(0.77) 1.00
 (1.23) 0.26
Net realized investment losses (gains)0.30
 (0.24) (0.94) 0.02
Foreign exchange loss0.01
 
 0.01
 0.03
0.00
 0.04
 0.01
 0.07
Operating income$0.76
 $0.98
 $2.05
 $1.77
$0.61
 $0.98
 $2.67
 $2.75
___________
*Diluted weighted average common shares outstanding was only used in the calculation of diluted operating income per share. There were no common share equivalents included in calculating diluted earnings per share as there was a net loss and any additional shares would be anti-dilutive.
















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Diluted book value per share

We have included diluted book value per share because it takes into account the effect of dilutive securities; therefore, we believe it is an important measure of calculating shareholder returns. 
As of June 30,As of September 30,
2014 20132014 2013
($ in millions, except share and
per share data)
($ in millions, except share and
per share data)
Price per share at period end$38.02
 $30.50
$36.84
 $33.13
Total shareholders’ equity$3,682.8
 $3,373.2
$3,673.6
 $3,443.9
Basic common shares outstanding96,929,091
 102,527,493
96,382,238
 101,444,760
Add:      
Unvested restricted stock units516,546
 251,190
512,112
 249,720
Performance-based equity awards619,428
 812,559
619,428
 812,559
Employee share purchase plan29,293
 31,866
28,381
 45,960
Dilutive stock options outstanding2,620,016
 3,333,798
2,532,918
 3,152,496
Weighted average exercise price per share$16.24
 $15.88
$16.30
 $15.92
Deduct:      
Options bought back via treasury method(1,119,123) (1,735,830)(1,120,699) (1,515,171)
Common shares and common share equivalents outstanding99,595,251
 105,221,076
98,954,378
 104,190,324
Basic book value per common share$37.99
 $32.90
$38.11
 $33.95
Diluted book value per common share$36.98
 $32.06
$37.12
 $33.05






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Annualized return on average equity

Annualized return on average shareholders’ equity (“ROAE”) is calculated using average shareholders’ equity. We present ROAE as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of our financial information.

Annualized operating return on average shareholders’ equity is calculated using operating income and average shareholders’ equity.
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
($ in millions except percentage data)($ in millions except percentage data)
Opening shareholders’ equity$3,616.7
 $3,432.0
 $3,519.8
 $3,326.3
$3,682.8
 $3,373.2
 $3,616.7
 $3,326.3
              
Closing shareholders’ equity$3,682.8
 $3,373.2
 $3,682.8
 $3,373.2
$3,673.6
 $3,443.9
 $3,673.6
 $3,443.9
              
Average shareholders’ equity$3,649.7
 $3,402.6
 $3,601.3
 $3,349.8
$3,678.2
 $3,408.6
 $3,645.1
 $3,385.1
              
Net income (loss) available to shareholders$151.9
 $(1.9) $328.8
 $157.1
Annualized return on average shareholders’ equity —
net income (loss) available to shareholders
16.6% (0.2)% 18.3% 9.4%
Net income available to shareholders$30.9
 $122.8
 $359.8
 $280.0
Annualized return on average shareholders’ equity —
net income available to shareholders
3.4% 14.4% 13.2% 11.0%
Operating income available to shareholders$76.1
 $103.5
 $205.9
 $187.7
$60.6
 $101.8
 $266.5
 $289.5
Annualized return on average shareholders’ equity —
operating income available to shareholders
8.3% 12.2 % 11.4% 11.2%6.6% 11.9% 9.7% 11.4%






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Relevant Factors

Revenues

We derive our revenues primarily from premiums on our insurance policies and reinsurance contracts, net of any reinsurance or retrocessional coverage purchased. Insurance and reinsurance premiums are a function of the amounts and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, are known. In addition, our revenues include income generated from our investment portfolio, consisting of net investment income and net realized investment gains or losses.losses, and other income related to our non-insurance operations. Investment income is principally derived from interest and dividends earned on investments, as well as distributed and undistributed income from equity method investments, partially offset by investment management expenses and fees paid to our custodian bank. Net realized investment gains or losses include gains or losses from the sale of investments, as well as the change in the fair value of investments that we mark-to-market through net income. Other income currently includes revenue from our third-party claims administration services.

Expenses

Our expenses consist largely of net losses and loss expenses, acquisition costs and general and administrative expenses. Net losses and loss expenses incurred are comprised of three main components:

losses paid, which are actual cash payments to insureds and reinsureds, net of recoveries from reinsurers;
outstanding loss or case reserves, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and
reserves for losses incurred but not reported, or “IBNR”, which are reserves (in addition to case reserves) established by us that we believe are needed for the future settlement of claims. The portion recoverable from reinsurers is deducted from the gross estimated loss.

Acquisition costs are comprised of commissions, brokerage fees, insurance taxes and other acquisition related costs such as profit commissions. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business. Acquisition costs are reported after (1) deducting commissions received on ceded reinsurance,

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(2) deducting the part of deferred acquisition costs relating to the successful acquisition of new and renewal insurance and reinsurance contracts and (3) including the amortization of previously deferred acquisition costs.

General and administrative expenses include personnel expenses including stock-based compensation expense, rent expense, professional fees, information technology costs and other general operating expenses.

Ratios

The Company measures its segment results as underwriting income or loss plus other insurance-related revenue and expenses, which may include the net earnings from our claims administration services operations and other income or expense that is not directly related to our underwriting operations. Management measures results for each segmentsegment's underwriting income or loss on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio,” “expense ratio” and the “combined ratio.” Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written. The loss and loss expense ratio is derived by dividing net losses and loss expenses by net premiums earned. The acquisition cost ratio is derived by dividing acquisition costs by net premiums earned. The general and administrative expense ratio is derived by dividing general and administrative expenses by net premiums earned. The expense ratio is the sum of the acquisition cost ratio and the general and administrative expense ratio. The combined ratio is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.

Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial position and results of operations. Our unaudited condensed consolidated financial statements reflect determinations that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If events or other factors cause actual results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to

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reserves for losses and loss expenses, reinsurance recoverables, premiums and acquisition costs, valuation of financial instruments and goodwill and other intangible asset impairment valuation. For a detailed discussion of our critical accounting policies, please refer to our 2013 Form 10-K. There were no material changes in the application of our critical accounting estimates subsequent to that report.


























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Results of Operations

The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.
 
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
($ in millions)($ in millions)
Revenues              
Gross premiums written$760.4
 $765.2
 $1,661.8
 $1,602.3
$707.9
 $580.9
 $2,369.7
 $2,183.2
Net premiums written$553.9
 $581.2
 $1,325.5
 $1,276.3
$568.7
 $453.1
 $1,894.3
 $1,729.4
Net premiums earned$537.3
 $507.3
 $1,067.5
 $970.5
$541.7
 $510.8
 $1,609.3
 $1,481.3
Net investment income36.8
 37.6
 84.4
 71.0
43.4
 39.3
 127.8
 110.3
Net realized investment gains (losses)85.2
 (115.2) 139.4
 (35.6)
Net realized investment (losses) gains(35.1) 27.5
 104.3
 (8.1)
Other income1.0
 
 1.0
 
$659.3
 $429.7
 $1,291.3
 $1,005.9
$551.0
 $577.6
 $1,842.4
 $1,583.5
Expenses              
Net losses and loss expenses$314.9
 $275.2
 $590.1
 $530.3
$336.1
 $277.0
 $926.2
 $807.3
Acquisition costs74.3
 64.6
 142.0
 121.3
72.4
 65.1
 214.4
 186.4
General and administrative expenses96.2
 80.6
 176.5
 163.3
88.3
 88.6
 264.8
 251.8
Other expense6.6
 
 6.6
 
Amortization of intangible assets0.6
 0.6
 1.3
 1.2
0.6
 0.7
 1.9
 1.9
Interest expense14.6
 14.2
 29.1
 28.3
14.3
 14.1
 43.5
 42.4
Foreign exchange loss0.6
 0.4
 0.7
 3.0
0.3
 4.4
 1.0
 7.4
$501.2
 $435.6
 $939.7
 $847.4
$518.6
 $449.9
 $1,458.4
 $1,297.2
Income (loss) before income taxes158.1
 (5.9) 351.6
 158.5
Income tax expense (benefit)6.2
 (4.0) 22.8
 1.4
Net income (loss)$151.9
 $(1.9) $328.8
 $157.1
Income before income taxes32.4
 127.7
 384.0
 286.3
Income tax expense1.5
 4.9
 24.3
 6.3
Net income$30.9
 $122.8
 $359.7
 $280.0
Ratios              
Loss and loss expense ratio58.6% 54.2% 55.3% 54.6%62.0% 54.2% 57.6% 54.5%
Acquisition cost ratio13.8% 12.7% 13.3% 12.5%13.4% 12.7% 13.3% 12.6%
General and administrative expense ratio17.9% 15.9% 16.5% 16.8%16.3% 17.3% 16.5% 17.0%
Expense ratio31.7% 28.6% 29.8% 29.3%29.7% 30.0% 29.8% 29.6%
Combined ratio90.3% 82.8% 85.1% 83.9%91.7% 84.2% 87.4% 84.1%

Comparison of Three Months Ended JuneSeptember 30, 2014 and 2013

Premiums

Gross premiums written decreasedincreased by $4.8$127.0 million, or 0.6%21.9%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The overall decreaseincrease in gross premiums written was primarily the result of the following:
 
U.S. insurance: Gross premiums written increased by $34.1$78.0 million, or 11.1%25.3%. The increase in gross premiums written was primarily due to $11.4 millionthe growth in our general casualty line of business, in particular our primary casualty class of business which increased due to adding new business on existing accounts. We also continued to see growth from newin our newer lines of business such as our mergers and new insureds during the three months ended June 30, 2014 compared to the three months ended June 30, 2013, as well as premium rate increases across most lines of business. This was particularly evident in our general casualtyacquisitions, environmental and inland marine lines of business that had an overall increase in gross premiums written of $30.3 million.business. This growth was partially

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offset by the non-renewal of business, particularly in certain classes within our healthcare line of business, whichthat did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions);

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International insurance: Gross premiums written increased by $11.9$11.3 million, or 6.2%8.5%. The increase was primarily due to continued growth from new initiatives and newincreased premiums on existing lines of business, particularly in our professional liability line of business. Our newThis was partially offset by lower premiums written in our aviation and marine cargoline of business. The decrease in our aviation line of business contributed a combined $9.3was due to $13.1 million of gross premiums written during the current quarter. Our professional liability line of business grew $4.9 million primarily on new business writings in our mergers and acquisitions class of business. This growth wasthree months ended September 30, 2013 related to the renewal rights agreement we entered into with Markel International that did not occur during the three months ended September 30, 2014 partially offset by our general casualty line ofnew business which decreased by $3.7 million primarily due to the non-renewal of certain policieswritten during the current quarter, which did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions). During the quarter, we opened a new branch office in Sydney, Australia to further expand our distribution network in the Asia Pacific region;quarter; and
Reinsurance: Gross premiums written decreasedincreased by $50.8$37.7 million, or 19.1%27.1%. The decreaseincrease was primarily due tofrom one new treaty in our casualty reinsurance line of business that resulted in $21.9 million of gross premiums written, and the timing of renewals that were not renewed in the current quarter but were previously bound during the quarter ended June 30, 2013 and lower premiums writtenprimarily in our property reinsurance linesline of business. In ourWe had a large property reinsurance lines of business, we had lower premiumstreaty that renewed during the three months ended September 30, 2014 that was previously written during the currentsecond quarter compared toof last year. This property reinsurance treaty included a fronting component which resulted in our retaining a small portion of the same quarter last year of $12.4 million from our collateralized property catastrophe reinsurance program through Aeolus Re, Ltd. ("Aeolus Re").premiums written with the remainder being ceded.

The table below illustrates our consolidated gross premiums written by underwriter location for each of the periods indicated.
Three Months Ended 
 June 30,
 Dollar PercentageThree Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change Change2014 2013 Change Change
($ in millions)       ($ in millions)       
United States$442.5
 $440.2
 $2.3
 0.5 %$484.0
 $377.6
 $106.4
 28.2 %
Bermuda185.9
 211.0
 (25.1) (11.9)%109.5
 111.1
 (1.6) (1.4)%
Europe78.0
 60.3
 17.7
 29.4 %64.9
 51.9
 13.0
 25.0 %
Asia Pacific50.9
 53.8
 (2.9) (5.4)%45.1
 40.3
 4.8
 11.9 %
Canada3.1
 
 3.1
 n/a
4.4
 
 4.4
 n/a
$760.4
 $765.2
 $(4.8) (0.6)%$707.9
 $580.9
 $127.0
 21.9 %

Net premiums written decreasedincreased by $27.3$115.6 million, or 4.7%25.5%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The decreaseincrease in net premiums written was primarily due to higher cededgross premiums written during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.partially offset by higher premiums ceded. The increase in ceded premiums writtenceded was due to reinsurance treaties in support of our less mature lines of business that we did not have in place during the three months ended June 30, 2013, and recognizing annualhigher ceded premiums written atrelated to our collateralized property catastrophe reinsurance protection as the inception ofpremiums for the current treaty are recognized on a quarterly basis. This increase was partially offset by lower premiums ceded related to treaties that have contractual minimum premiums. The reduction in ceded premiums was due to recognizing annual ceded premiums at the inception of several reinsurance treaties rather than ratably over the contract period. This resulted in higher ceded premiums in previous quarters, as several reinsurance treaties incepted in those quarters, but lower ceded premiums in the current quarter. Previously, we recognized ceded premiums written on these agreements based on the actual premiums ceded each quarter. This resulted in the acceleration of ceded premiums written of $41.9 million in our U.S. insurance segment this quarter, but had no impact on net premiums earned. These increases in ceded premiums were partially offset by lower ceded premiums on our property catastrophe reinsurance protection for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 27.2%19.7% of gross premiums written for the three months ended JuneSeptember 30, 2014 compared to 24.0%22.0% for the same period in 2013. The increasereduction was primarily due to the accelerationtiming of the recognition of premiums ceded premiums in our U.S. insurance segment that increased the ratio by 5.5 percentage points.have contractual minimum premiums.

Net premiums earned increased by $30.0$30.9 million, or 5.9%6.0%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013 as a result of higher premiums earned in each of our operating segments.

We evaluate our business by segment, distinguishing between U.S. insurance, international insurance and reinsurance. The following table illustrates the mix of our business on both a gross premiums written and net premiums earned basis.
 Gross Premiums Written Net Premiums Earned
 Three Months Ended 
 September 30,
 Three Months Ended 
 September 30,
 2014 2013 2014 2013
U.S. insurance54.6% 53.1% 41.4% 40.7%
International insurance20.4% 22.9% 17.4% 17.1%
Reinsurance25.0% 24.0% 41.2% 42.2%
Total100.0% 100.0% 100.0% 100.0%


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 Gross Premiums Written Net Premiums Earned
 Three Months Ended 
 June 30,
 Three Months Ended 
 June 30,
 2014 2013 2014 2013
U.S. insurance44.9% 40.1% 39.9% 39.0%
International insurance26.9% 25.2% 16.6% 17.1%
Reinsurance28.2% 34.7% 43.5% 43.9%
Total100.0% 100.0% 100.0% 100.0%

Net Investment Income

Net investment income decreasedincreased by $0.8$4.1 million, or 2.1%10.4%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The decreaseincrease was primarily due to a net loss recorded for our equity method investments owned through Allied World Financial Services, Inc, partially offset by higher investment income fromrelated to our fixed maturity investments.non-core investments, which carry higher yields than government-backed securities. The annualized period book yield of the investment portfolio for the three months ended JuneSeptember 30, 2014 and 2013 was 1.7%2.0% and 1.8%1.9%, respectively.

We reported a net loss of $0.9 million from our other invested assets during the three months ended June 30, 2014 compared to earnings of $3.8 million during the three months ended June 30, 2013. The loss reported for the three months ended June 30, 2014 was due to a loss of $9.3 million recorded for an equity method investment due to impairment charges that it recorded. The earnings from our equity method investments can fluctuate from period to period based on the performance of each equity method investment and the seasonality of their results, and as such the current period earnings may not be indicative of the performance in future periods.

As of JuneSeptember 30, 2014, we held 10.6%10.3% of our total investments and cash equivalents in other"other invested assetsassets" compared to 9.9% as of JuneSeptember 30, 2013.

Investment management expenses of $4.7$5.2 million and $3.8$4.1 million were incurred during the three months ended JuneSeptember 30, 2014 and 2013, respectively. The increase of $0.9$1.1 million, or 23.7%26.8%, was primarily due to additional investment portfolio managers utilized in the current period as compared to the prior period.

As of JuneSeptember 30, 2014, approximately 88.3%88.0% of our fixed income investments consisted of investment grade securities. As of JuneSeptember 30, 2014 and December 31, 2013, the average Standard & Poor’s credit rating of our fixed income portfolio was A+ and AA-, respectively.

Realized Investment (Losses) Gains (Losses)

Net realized investment (losses) gains (losses) were comprised of the following:
Three Months Ended 
 June 30,
Three Months Ended 
 September 30,
2014 20132014 2013
($ in millions)($ in millions)
Net realized gains on sale:      
Fixed maturity investments, trading$10.3
 $7.6
$5.8
 $(4.8)
Equity securities, trading8.2
 6.4
(0.6) 13.9
Other invested assets: hedge funds and private equity, trading33.2
 9.1
13.6
 2.1
Total net realized gains on sale51.7
 23.1
18.8
 11.2
Net realized and unrealized (losses) gains on derivatives(13.7) 8.5
Mark-to-market gains (losses):   
Net realized and unrealized gains (losses) on derivatives2.2
 (4.2)
Mark-to-market (losses) gains:   
Fixed maturity investments, trading36.4
 (115.1)(40.8) 30.4
Equity securities, trading21.3
 (34.3)(8.5) (17.2)
Other invested assets: hedge funds and private equity, trading(10.5) 2.6
(6.8) 7.3
Total mark-to-market gains (losses)47.2
 (146.8)
Net realized investment gains (losses)$85.2
 $(115.2)
Total mark-to-market (losses) gains(56.1) 20.5
Net realized investment (losses) gains$(35.1) $27.5

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The total return of our investment portfolio was 1.4%0.1% and (0.9)%0.8% for the three months ended JuneSeptember 30, 2014 and 2013, respectively. The increasedecrease in total return was primarily due to lowerhigher interest rates and widening credit spreads that caused mark-to-market gainslosses on our fixed maturity investments during the current period compared to lower interest rates and higher stock price appreciationtightening credit spreads during the prior period.

Other Income

Other income represents the revenue of our equity securities duringthird-party claims administration services that we acquired in the three months ended June 30, 2014 compared to three months ended June 30, 2013. The realized and unrealized losses on derivatives for the three months ended June 30, 2014 were the result of selling interest rate future and swap contracts to reduce the duration of the investment portfolio. Given the decrease in interest rates during the quarter, we recorded a loss related to these interest rate future and swap contracts.current year.

Net Losses and Loss Expenses

Net losses and loss expenses increased by $39.7$59.1 million, or 14.4%21.3%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The following is a breakdown of the loss and loss expense ratio for the three months ended JuneSeptember 30, 2014 and 2013: 

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Three Months Ended 
 June 30, 2014
 Three Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point ChangeThree Months Ended 
 September 30, 2014
 Three Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
Amount % of NPE (1) Amount % of NPE (1) Amount % of NPE (1) Amount % of NPE (1) 
    ($ in millions)          ($ in millions)      
Non-catastrophe$360.0
 67.0 % $323.6
 63.7 % $36.4
 3.3$353.2
 65.2 % $338.4
 66.2 % $14.8
 (1.0)
Property catastrophe
 
 
 
 
 29.8
 5.5
 
 
 29.8
 5.5
Current period360.0
 67.0
 323.6
 63.7
 36.4
 3.3383.0
 70.7
 338.4
 66.2
 44.6
 4.5
Prior period(45.1) (8.4) (48.4) (9.5) 3.3
 1.1(46.9) (8.7) (61.4) (12.0) 14.5
 3.3
Net losses and loss expenses$314.9
 58.6 % $275.2
 54.2 % $39.7
 4.4$336.1
 62.0 % $277.0
 54.2 % $59.1
 7.8
________________________ 
(1)“NPE” means net premiums earned.

Current year non-catastrophe losses and loss expenses

The increase in the current year non-catastrophe losses and loss expenses and related ratio was primarily due to the overall growth of our operationsoperations. The decrease in the current year non-catastrophe losses and higher reported property losses in our U.S. insurance and reinsurance segments,loss expenses ratio was primarily due to several storm events in the United States, an earthquake in Chile, an oil spill in the Gulf of Mexico and a fire at a Russian oil refinery, partially offset by lower reported large property losses in our international insurance segment. The net increase in reported property loss activity during the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013 increased the current year non-catastrophe loss and loss adjustment expense ratio by 2.5 percentage points.2013.

Current year property catastrophe losses and loss expenses

During the three months ended JuneSeptember 30, 2014, we incurred $18.5 million of property catastrophe losses and June 30, 2013, weloss expenses related to Hurricane Odile, of which $15.0 million was recorded by our international insurance segment and $3.5 million by our reinsurance segment, $8.0 million related to Windstorm Ela, and $3.3 million related to PCS storm #45. The losses related to Windstorm Ela and PCS storm #45 were recorded in our reinsurance segment. The losses related to Windstorm Ela and PCS storm #45 were classified as catastrophes in the current period as the additional net losses recorded in this period made the aggregate net losses incurred for these events in excess of $10.0 million, which is our quantitative threshold for classifying property-related losses as catastrophes. We did not incur any property catastrophe losses.losses during the three months ended September 30, 2013.

Prior year losses and loss expenses

We recorded net favorable reserve development related to prior years of $45.1$46.9 million during the three months ended JuneSeptember 30, 2014 compared to net favorable reserve development of $48.4$61.4 million for the three months ended JuneSeptember 30, 2013, as shown in the tables below.
 
(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2014For the Three Months Ended September 30, 2014
2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
($ in millions)($ in millions)
U.S. insurance$(1.5) $(0.5) $
 $(0.6) $(4.0) $(8.7) $1.1
 $8.2
 $(0.6) $7.7
 $1.1
$(0.1) $10.2
 $(16.6) $8.1
 $(3.5) $(15.4) $(2.3) $2.3
 $4.0
 $13.9
 $0.6
International insurance3.9
 (1.5) 1.9
 (10.6) 15.1
 (14.5) (11.9) 
 2.2
 (4.6) (20.0)(0.5) (1.3) (3.8) (8.5) (5.1) (7.1) (8.7) (7.4) 11.4
 1.8
 (29.2)
Reinsurance0.7
 (1.1) (0.7) (0.3) 0.3
 (0.6) 0.8
 (5.3) 2.4
 (22.4) (26.2)0.2
 5.3
 (1.0) (1.6) (4.3) (0.9) (0.6) (3.1) 1.9
 (14.2) (18.3)
$3.1
 $(3.1) $1.2
 $(11.5) $11.4
 $(23.8) $(10.0) $2.9
 $4.0
 $(19.3) $(45.1)$(0.4) $14.2
 $(21.4) $(2.0) $(12.9) $(23.4) $(11.6) $(8.2) $17.3
 $1.5
 $(46.9)


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For the three months ended JuneSeptember 30, 2014, the net unfavorable prior year reserve development for the 2011 through 2013 loss years in theour U.S. insurance segment was primarily relateddue to thea higher level of reported claims in our healthcare line of business due to adverse development on several claims above our previous expectations inwhile the medical malpractice class of business. The U.S. insurance segment also had adverse development on reported claims in our lawyers errors and omissions ("E&O") and primary casualty classes of business. Thenet unfavorable prior year reserve development for the 2005 loss year primarily relates to our professional liability line of business. The net favorable reserve development in theour international insurance segment for the 2011 and prior loss years was due to lower than expected loss emergence across most lines of business and loss years. The unfavorable prior reserve development for the 2012 loss year related to a single claim from the 2008 loss yearadverse development on two reported claims in our general casualtyprofessional liability line of business that is estimated to reach our full limit. Thebusiness. The net favorable prior year reserve development in our reinsurance segment for the 2013 loss year was primarily due to lower than expected reported loss activity in our property loss activity.reinsurance line of business.


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The following table shows the net favorable reserve development by loss year for each of our segments for the three months ended JuneSeptember 30, 2013.

(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2013For the Three Months Ended September 30, 2013
2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
($ in millions)($ in millions)
U.S. insurance$
 $(0.9) $(1.4) $0.4
 $(6.1) $(10.5) $(0.3) $(7.2) $13.2
 $9.9
 $(2.9)$(3.0) $(0.6) $(1.1) $(6.1) $(5.5) $(2.9) $(3.5) $(4.8) $13.2
 $18.1
 $3.8
International insurance6.4
 (5.6) 2.9
 (4.9) (7.5) (2.8) (4.2) (3.0) (2.1) (4.9) (25.7)0.2
 (1.2) 3.2
 (4.0) (8.6) (4.7) (5.9) (4.1) (2.1) (2.5) (29.7)
Reinsurance(0.3) (1.3) (1.0) 1.3
 
 (3.9) 1.4
 0.1
 2.6
 (18.7) (19.8)(1.6) (2.4) 1.5
 
 0.2
 (2.1) (2.0) (2.6) (12.1) (14.4) (35.5)
$6.1
 $(7.8) $0.5
 $(3.2) $(13.6) $(17.2) $(3.1) $(10.1) $13.7
 $(13.7) $(48.4)$(4.4) $(4.2) $3.6
 $(10.1) $(13.9) $(9.7) $(11.4) $(11.5) $(1.0) $1.2
 $(61.4)

For the three months ended JuneSeptember 30, 2013, the unfavorable reserve development for the 2011 and 2012 loss yearsyear for our U.S. insurance segment was primarily due to a higher than expected loss emergence, primarilylevel of reported claims in our healthcare and errors and omissions (“E&O”) lines of business. The unfavorable reserve development for the 2012 loss year for our U.S. insurance segment was primarily due to a higher level of reported claims in our healthcare, private/not for profit directors’ and officers’ (“D&O”) and healthcarelawyers E&O lines of business. The healthcare emergence was largely driven by one large claim and loss emergence in our medical malpractice class of business due to higher than expected loss frequency. The emergence in our private/not for profit D&O class of business was due to higher than expected loss frequency.

The favorable reserve development for the 2012 loss year for our reinsurance segment was dueprimarily related to lower than expected reported losses in our property reinsurance line of business.business, and included favorable reserve development related to recent catastrophic events that occurred in 2010 through 2012.

The following table shows the components of net losses and loss expenses for each of the periods indicated. 
 Three Months Ended 
 June 30,
 Dollar
 2014 2013 Change
 ($ in millions)
Net losses paid$258.4
 $262.9
 $(4.5)
Net change in reported case reserves48.3
 (18.2) 66.5
Net change in IBNR8.2
 30.5
 (22.3)
Net losses and loss expenses$314.9
 $275.2
 $39.7















 Three Months Ended 
 September 30,
 Dollar
 2014 2013 Change
 ($ in millions)
Net losses paid$256.2
 $243.7
 $12.5
Net change in reported case reserves40.3
 (15.7) 56.0
Net change in IBNR39.6
 49.0
 (9.4)
Net losses and loss expenses$336.1
 $277.0
 $59.1


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The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.
Three Months Ended 
 June 30,
Three Months Ended 
 September 30,
2014 20132014 2013
($ in millions)($ in millions)
Net reserves for losses and loss expenses, April 1$4,576.3
 $4,509.7
Net reserves for losses and loss expenses, July 1$4,633.9
 $4,517.3
Incurred related to:      
Current period non-catastrophe360.0
 323.6
353.2
 338.4
Current period property catastrophe29.8
 
Prior period(45.1) (48.4)(46.9) (61.4)
Total incurred314.9
 275.2
336.1
 277.0
Paid related to:      
Current period non-catastrophe23.1
 21.0
Current period53.6
 30.5
Prior period235.3
 241.9
202.6
 213.2
Total paid258.4
 262.9
256.2
 243.7
Foreign exchange revaluation1.2
 (4.7)(10.5) 4.1
Net reserve for losses and loss expenses, June 304,634.0
 4,517.3
Net reserve for losses and loss expenses, September 304,703.3
 4,554.7
Losses and loss expenses recoverable1,301.7
 1,179.6
1,349.0
 1,226.1
Reserve for losses and loss expenses, June 30$5,935.7
 $5,696.9
Reserve for losses and loss expenses, September 30$6,052.3
 $5,780.8

Acquisition Costs

Acquisition costs increased by $9.7$7.3 million, or 15.0%11.2%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The increase in acquisition costs was primarily due to the growth in premiums earned, higher profit commission accruals in our U.S. insurance segment and higher acquisition costsceding commissions paid to cedents for certain lines of business in our reinsurance segment. Acquisition costs as a percentage of net premiums earned were 13.8%13.4% for the three months ended JuneSeptember 30, 2014 compared to 12.7% for the same period in 2013. The higher acquisition cost ratio was primarily driven from our reinsurance segment.due to the reasons noted above.

General and Administrative Expenses

General and administrative expenses increaseddecreased by $15.6$0.3 million, or 19.4%0.3%, for the three months ended JuneSeptember 30, 2014 compared to the same period in 2013. Our general and administrative expense ratio was 17.9%16.3% and 15.9%17.3% for the three months ended JuneSeptember 30, 2014 and 2013, respectively. The increasedecrease in general and administrative expenses was primarily due to higherlower stock-based compensation andpartially offset by higher salary related costs due to higher headcount. We have granted cash equivalent restricted stock units and performance-based equity awards to certain key employees, and we measure the value of each of those awards at the period ending share price. Changes in our share price are recognized as increases or decreases in our compensation expense ratably over the service period. Our share price increased 11%decreased 3% for the three months ended JuneSeptember 30, 2014 compared to a 1% decrease9% increase for the same period in 2013.

Other Expense

Other expense represents the expenses of our third-party claims administration services that we acquired in the current year of $1.3 million and the transaction-related costs incurred for the acquisition of the Hong Kong and Singapore operations of RSA of $5.3 million.

Amortization of Intangible Assets

The amortization of intangible assets was virtually unchanged for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013.




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Interest Expense

Interest expense increased by $0.4$0.2 million, or 2.8%1.4%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013.

Foreign Exchange Loss

The foreign exchange loss decreased by $4.1 million, or 93.2%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease was due to higher gains recorded on our foreign exchange derivative contracts due to the strengthening of the U.S. dollar relative to other major currencies and the timing of the tenor of the derivative contracts.

Net Income

Net income for the three months ended JuneSeptember 30, 2014 was $151.9$30.9 million compared to a net lossincome of $1.9$122.8 million for the three months ended JuneSeptember 30, 2013. The $153.8$91.9 million increasedecrease was primarily the result of recording net realized gainslosses on our investments of $85.2$35.1 million during the three months ended JuneSeptember 30, 2014 compared to net realized lossesgains of $115.2$27.5 million

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during the three months ended JuneSeptember 30, 2013.2013, and higher net loss and loss expenses, including losses from catastrophes of $29.8 million. Income tax expense for the three months ended JuneSeptember 30, 2014 increaseddecreased by $10.2$3.4 million compared to the three months ended JuneSeptember 30, 2013. The increasedecrease in income tax expense was primarily due to higherlower taxable income in our U.S. operations.

Comparison of SixNine Months Ended JuneSeptember 30, 2014 and 2013

Premiums

Gross premiums written increased by $59.5$186.5 million, or 3.7%8.5%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The overall increase in gross premiums written was primarily the result of the following:
 
U.S. insurance: Gross premiums written increased by $48.1$126.1 million, or 8.5%14.5%. The increase in gross premiums written was primarily due to $21.7$45.2 million of new business growth from new lines of business and new insureds during the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013, increased premiums on renewed business as well as premium rate increases across most lines of business. This was particularly evident in our general casualty, programs,mergers and acquisitions, inland marine and environmental lines of business that had an overall increase in gross premiums written of $58.8 million.business. This growth was partially offset by the non-renewal of business, particularly in certain classes within our healthcare line of business, whichthat did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions);
International insurance: Gross premiums written increased by $17.7$29.1 million, or 5.5%6.4%. The increase was primarily due to continued growth from new initiatives and new lines of business. Our new aviation and marine cargo business contributed $13.6 million of gross premiums written during the current period. The professional liability line of business grew $9.4$17.1 million on new business writings in European E&O and mergers and acquisitions classes of business.business, and our aviation and marine cargo lines of business grew by $11.3 million. This growth was partially offset by the general casualty line of business, which decreased by $7.6$3.9 million compared to the prior period, due to non-recurring business written in 2013 and the non-renewal of certain policies during the current period, whichthat did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions); and
Reinsurance: Gross premiums written decreasedincreased by $6.3$31.4 million, or 0.9%3.7%. The decreaseincrease was driven primarily by the timing of a renewal that was not renewed in the current period but was previously bound during the six months ended June 30, 2013 partially offset by new business and increased renewals across several major lines of business. In our property reinsurance lines of business, we hadpremiums increased premiumsby approximately $16.8 million, which included $3.9 million of approximately $3.6 millionincreased premiums from our collateralized property catastrophe reinsurance program through Aeolus Re. In our specialty lines of business, our crop reinsurance line of business increased gross premiums written by $8.5 million primarily due to increases on renewals and new business.Re, Ltd. ("Aeolus Re"). We also experienced non-renewals of certain treaties, particularly in our casualty reinsurance line of business, either due to poor terms and conditions or the cedents not renewing their reinsurance or finding other reinsurance alternatives, and net downward premium adjustments on inforce treaties.reinsurance.








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The table below illustrates our consolidated gross premiums written by underwriter location for each of the periods indicated.
Six Months Ended 
 June 30,
 Dollar PercentageNine Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change Change2014 2013 Change Change
($ in millions)       ($ in millions)       
United States$963.3
 $918.6
 $44.7
 4.9 %$1,447.7
 $1,296.2
 $151.5
 11.7 %
Bermuda415.5
 439.7
 (24.2) (5.5)%525.0
 550.8
 (25.8) (4.7)%
Europe181.3
 146.8
 34.5
 23.5 %245.9
 198.7
 47.2
 23.8 %
Asia Pacific97.7
 97.2
 0.5
 0.5 %142.8
 137.5
 5.3
 3.9 %
Canada3.9
 
 3.9
 n/a
8.3
 
 8.3
 n/a
$1,661.8
 $1,602.3
 $59.5
 3.7 %$2,369.7
 $2,183.2
 $186.5
 8.5 %

Net premiums written increased by $49.2$164.9 million, or 3.9%9.5%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase in net premiums written was due to the increase in gross premiums written partially offset by an increaseand a decrease in ceded premiums written. The increase in ceded premiums written was due to new reinsurance treaties in support of our lines of business that we did not have in place during the six months ended June 30, 2013, recognizing annual ceded premiums written at the inception of treaties that have contractual minimum premiums partially offset by lower ceded premiums related to our property catastrophe reinsurance protection during the six months ended June 30, 2014 compared to

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the six months ended June 30, 2013. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage.protection. We ceded 20.2%20.1% of gross premiums written for the sixnine months ended JuneSeptember 30, 2014 compared to 20.3%20.8% for the same period in 2013. The above factors contributed to the increase in ceded premiums written but overall did not materially impact the ceded premium percentage during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Net premiums earned increased by $97.0$128.0 million, or 10.0%8.6%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013 as a result of higher premiums earned in each of our operating segments.

The following table illustrates the mix of our business on both a gross premiums written and net premiums earned basis.
Gross Premiums Written Net Premiums EarnedGross Premiums Written Net Premiums Earned
Six Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Nine Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
U.S. insurance36.8% 35.2% 40.0% 39.8%42.1% 39.9% 40.5% 40.0%
International insurance20.4% 20.0% 16.6% 17.6%20.4% 20.8% 16.9% 17.5%
Reinsurance42.8% 44.8% 43.4% 42.6%37.5% 39.3% 42.6% 42.5%
Total100.0% 100.0% 100.0% 100.0%100.0% 100.0% 100.0% 100.0%

Net Investment Income

Net investment income increased by $13.4$17.5 million, or 18.9%15.9%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase was due to higher income across most asset classes. The annualized period book yield of the investment portfolio for the sixnine months ended JuneSeptember 30, 2014 and 2013 was 2.0% and 1.7%1.8%, respectively.

Investment management expenses of $8.5$13.7 million and $8.1$12.2 million were incurred during the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. The increase of $0.4$1.5 million, or 4.9%12.3%, was primarily due to additional investment portfolio managers utilized in the current period as compared to the prior period.















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Realized Investment Gains (Losses)

Net realized investment gains (losses) were comprised of the following:
Six Months Ended 
 June 30,
Nine Months Ended 
 September 30,
2014 20132014 2013
($ in millions)($ in millions)
Net realized gains on sale:      
Fixed maturity investments, trading$17.7
 $29.5
$23.6
 $24.7
Equity securities, trading44.4
 16.2
43.8
 30.1
Other invested assets: hedge funds and private equity, trading39.6
 14.7
53.2
 16.8
Total net realized gains on sale101.7
 60.4
120.6
 71.6
Net realized and unrealized (losses) gains on derivatives(26.6) 7.6
(24.5) 3.4
Mark-to-market gains (losses):      
Fixed maturity investments, trading58.9
 (131.6)18.0
 (101.2)
Equity securities, trading(0.3) (1.4)(8.8) (18.6)
Other invested assets: hedge funds and private equity, trading5.7
 29.4
(1.1) 36.7
Total mark-to-market gains (losses)64.3
 (103.6)8.1
 (83.1)
Net realized investment gains (losses)$139.4
 $(35.6)$104.2
 $(8.1)

The total return of our investment portfolio was 2.6%2.7% and 0.4%1.2% for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. The increase in total return was primarily due to lower interest rates that caused mark-to-market gains on our fixed maturity investments due to lower interest rates and tighter credit spreads during the sixnine months ended JuneSeptember 30, 2014 compared to higher interest rates and tightening credit spreads which caused mark-to-market losses due to higher rates during the sixnine months ended JuneSeptember 30, 2013. Equity securities and other invested assets continued to have a positive impact on the total return for the both the nine months ended September 30, 2014 and 2013. The realized and unrealized losses on

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derivatives for the sixnine months ended JuneSeptember 30, 2014 were the result of selling interest rate future and swap contracts to reduce the duration of the investment portfolio. Given the decrease in interest rates during the year, we recorded a loss related to these interest rate future and swap contracts.

Other Income

Other income represents the revenue of our third-party claims administration services that we acquired in the current year.

Net Losses and Loss Expenses

Net losses and loss expenses increased by $59.8$118.9 million, or 11.3%14.7%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The following is a breakdown of the loss and loss expense ratio for the sixnine months ended JuneSeptember 30, 2014 and 2013: 
Six Months Ended 
 June 30, 2014
 Six Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point ChangeNine Months Ended 
 September 30, 2014
 Nine Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
Amount % of NPE (1) Amount % of NPE (1) Amount % of NPE (1) Amount % of NPE (1) 
    ($ in millions)          ($ in millions)      
Non-catastrophe$684.1
 64.1 % $622.8
 64.1 % $61.3
 $1,024.1
 63.7 % $961.2
 64.9 % $62.9
 (1.2)
Property catastrophe
 
 
 
 
 43.0
 2.7
 
 
 43.0
 2.7
Current period684.1
 64.1
 622.8
 64.1
 61.3
 1,067.1
 66.4
 961.2
 64.9
 105.9
 1.5
Prior period(94.0) (8.8) (92.5) (9.5) (1.5) 0.7(140.9) (8.8) (153.9) (10.4) 13.0
 1.6
Net losses and loss expenses$590.1
 55.3 % $530.3
 54.6 % $59.8
 0.7$926.2
 57.6 % $807.3
 54.5 % $118.9
 3.1
________________________ 
(1)“NPE” means net premiums earned.





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Current year non-catastrophe losses and loss expenses

The increase in the current year non-catastrophe losses and loss expenses was primarily due to the overall growth of our operations.operations partially offset by a reduction in IBNR loss reserves due to lower than expected property losses in our reinsurance segment. The decrease in the current non-catastrophe losses and loss expense ratio was primarily due to the reduction in IBNR loss reserves.

Current year property catastrophe losses and loss expenses

During the sixnine months ended JuneSeptember 30, 2014, we incurred $18.5 million of property catastrophe losses and June 30, 2013, weloss expenses related to Hurricane Odile, of which $15.0 million was recorded by our international insurance segment and $3.5 million by our reinsurance segment, $12.5 million related to PCS storm #45, and $12.0 million related to Windstorm Ela. The losses related to Windstorm Ela and PCS storm #45 were recorded in our reinsurance segment. We did not incur any property catastrophe losses.losses during the nine months ended September 30, 2013.

Prior year losses and loss expenses

We recorded net favorable reserve development related to prior years of $94.0$140.9 million during the sixnine months ended JuneSeptember 30, 2014 compared to net favorable reserve development of $92.5$153.9 million for the sixnine months ended JuneSeptember 30, 2013, as shown in the tables below.
 
(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
Six Months Ended June 30, 2014Nine Months Ended September 30, 2014
2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
($ in millions)($ in millions)
U.S. insurance$(4.7) $(0.5) $
 $(0.4) $(4.5) $(9.0) $1.0
 $12.7
 $(0.5) $7.7
 $1.8
$(4.8) $9.7
 $(16.6) $7.7
 $(8.0) $(24.4) $(1.3) $15.0
 $3.5
 $21.6
 $2.4
International insurance7.8
 (3.8) (0.7) (28.4) 9.3
 (20.3) (16.3) (5.0) 0.8
 7.2
 (49.4)7.3
 (5.1) (4.5) (36.9) 4.2
 (27.4) (25.0) (12.4) 12.2
 9.0
 (78.6)
Reinsurance(0.6) (0.3) (2.1) (2.4) (1.4) (0.4) 2.3
 (5.1) 0.3
 (36.7) (46.4)(0.4) 5.0
 (3.1) (4.0) (5.7) (1.3) 1.7
 (8.2) 2.2
 (50.9) (64.7)
$2.5
 $(4.6) $(2.8) $(31.2) $3.4
 $(29.7) $(13.0) $2.6
 $0.6
 $(21.8) $(94.0)$2.1
 $9.6
 $(24.2) $(33.2) $(9.5) $(53.1) $(24.6) $(5.6) $17.9
 $(20.3) $(140.9)

For the sixnine months ended JuneSeptember 30, 2014, the net unfavorable prior year reserve development in the U.S. insurance segment for the 2011 through 2013 loss yearyears was in our healthcare linelines of business and was due to adverse development on several claims above our previous expectations in the managed care E&O class of business and higher than expected loss frequency in the medical malpractice class of businessand severity. The net favorable prior year reserve development in the international insurance segment was primarily due to favorable reserve development for the 2007 loss year was due to favorable reserve development on an individualin our professional liability claim,line of business and the net favorable development for the 2009 and 2010to 2011 loss years was due to actual loss emergence being lower than anticipated across several lines of business. Net unfavorable development for the 2012 loss year was due to adverse development on two reported claims in our professional liability line of business and the unfavorable reserve development for the 2013 loss year was due to a single claimresulted from an increase in severity in our healthcare line of business. The net favorable prior year reserve development in our reinsurance segment for the 2013 loss year was primarily due to benign property loss activity, and therefore reported losses were less than our expectations.

 (Favorable) and Unfavorable Loss Reserve Development by Loss Year
 For the Nine Months Ended September 30, 2013
 2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
 ($ in millions)
U.S. insurance$(3.1) $(2.7) $(4.6) $(7.2) $(18.5) $(17.1) $(6.5) $(12.1) $30.9
 $52.3
 $11.4
International insurance6.1
 (4.1) (1.1) (14.9) (18.9) (14.6) (6.5) (9.6) (11.8) (9.7) (85.1)
Reinsurance(1.4) (3.8) (1.6) 1.1
 (2.0) (9.0) (1.6) (4.7) (15.0) (42.2) (80.2)
 $1.6
 $(10.6) $(7.3) $(21.0) $(39.4) $(40.7) $(14.6) $(26.4) $4.1
 $0.4
 $(153.9)


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The following table showsFor the net favorable reserve development by loss year for each of our segments for the sixnine months ended June 30, 2013.

 (Favorable) and Unfavorable Loss Reserve Development by Loss Year
 For the Six Months Ended June 30, 2013
 2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
 ($ in millions)
U.S. insurance$(0.1) $(2.1) $(3.5) $(1.1) $(13.0) $(14.2) $(3.0) $(7.3) $17.7
 $34.2
 $7.6
International insurance5.9
 (2.9) (4.3) (10.9) (10.3) (9.9) (0.6) (5.5) (9.7) (7.2) (55.4)
Reinsurance0.2
 (1.4) (3.1) 1.1
 (2.2) (6.9) 0.4
 (2.1) (2.9) (27.8) (44.7)
 $6.0
 $(6.4) $(10.9) $(10.9) $(25.5) $(31.0) $(3.2) $(14.9) $5.1
 $(0.8) $(92.5)

For the six months ended JuneSeptember 30, 2013, the unfavorable reserve development for the 2011 and 2012 loss years for our U.S. insurance segment was due to higher than expected loss emergence, primarily in our private/not for profit D&O, healthcare and E&O lines of business. The healthcare emergence was largely driven by three large claims, each in excess of $3 million. The emergence in the E&O and private/not for profit D&O is due to higher than expected loss frequency.products.

The favorable reserve development for the 2012 loss year for our reinsurance segment was due to lower than expected reported losses in our property reinsurance line of business.business, including favorable loss reserve development related to recent catastrophic events that occurred in 2010 through 2012.


The following table shows the components of net losses and loss expenses for each of the periods indicated. 
Six Months Ended 
 June 30,
 DollarNine Months Ended 
 September 30,
 Dollar
2014 2013 Change2014 2013 Change
($ in millions)($ in millions)
Net losses paid$490.7
 $507.5
 $(16.8)$747.0
 $751.2
 $(4.2)
Net change in reported case reserves(2.9) (9.2) 6.3
37.3
 (24.9) 62.2
Net change in IBNR102.3
 32.0
 70.3
141.9
 81.0
 60.9
Net losses and loss expenses$590.1
 $530.3
 $59.8
$926.2
 $807.3
 $118.9

The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.
Six Months Ended 
 June 30,
Nine Months Ended 
 September 30,
2014 20132014 2013
($ in millions)($ in millions)
Net reserves for losses and loss expenses, January 1$4,532.0
 $4,504.4
$4,532.0
 $4,504.4
Incurred related to:      
Current period non-catastrophe684.1
 622.8
1,024.1
 961.2
Current period property catastrophe43.0
 
Prior period(94.0) (92.5)(140.9) (153.9)
Total incurred590.1
 530.3
926.2
 807.3
Paid related to:      
Current period non-catastrophe26.8
 24.4
Current period80.4
 55.0
Prior period463.9
 483.0
666.6
 696.2
Total paid490.7
 507.4
747.0
 751.2
Foreign exchange revaluation2.6
 (9.9)(7.9) (5.8)
Net reserve for losses and loss expenses, June 304,634.0
 4,517.4
Net reserve for losses and loss expenses, September 304,703.3
 4,554.7
Losses and loss expenses recoverable1,301.7
 1,179.6
1,349.0
 1,226.1
Reserve for losses and loss expenses, June 30$5,935.7
 $5,697.0
Reserve for losses and loss expenses, September 30$6,052.3
 $5,780.8

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Acquisition Costs

Acquisition costs increased by $20.7$28.0 million, or 17.1%15.0%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase in acquisition costs was due to the growth in net premiums earned and higher acquisition costsprofit commission accruals in our U.S. insurance segment and higher ceding commissions paid to cedents for certain lines of business in our reinsurance segment. Acquisition costs as a percentage of net premiums earned were 13.3% for the sixnine months ended JuneSeptember 30, 2014 compared to 12.5%12.6% for the same period in 2013. The higher acquisition cost ratio was driven from our reinsurance segment.

General and Administrative Expenses

General and administrative expenses increased by $13.2$13.0 million, or 8.1%5.2%, for the sixnine months ended JuneSeptember 30, 2014 compared to the same period in 2013. Our general and administrative expense ratio was 16.5% and 16.8%17.0% for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. The increase in general and administrative expenses was primarily due to

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higher salary related costs due to higher headcount as our average headcount increased by 13%12% partially offset by lower stock-based compensation due to changes in our share price. Our share price increased 1%decreased 2% for the sixnine months ended JuneSeptember 30, 2014 compared to a 16%26% increase for the same period in 2013.

Other Expense

Other expense represents the expenses of our third-party claims administration services that we acquired in the current year and the transaction-related costs incurred for the acquisition of the Hong Kong and Singapore operations of RSA.

Amortization of Intangible Assets

The amortization of intangible assets was virtually unchanged for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013.

Interest Expense

Interest expense increased by $0.8$1.1 million, or 2.8%2.6%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013.

Foreign Exchange Loss

The foreign exchange loss decreased by $6.4 million, or 86.5%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decrease was the result of the strengthening of the U.S. dollar relative to other major currencies during the current period.

Net Income

Net income for the sixnine months ended JuneSeptember 30, 2014 was $328.8$359.7 million compared to net income of $157.1$280.0 million for the sixnine months ended JuneSeptember 30, 2013. The $171.7$79.7 million increase was primarily the result of recording net realized gains on our investments of $139.4$104.3 million during the sixnine months ended JuneSeptember 30, 2014 compared to net realized losses of $35.6$8.1 million during the sixnine months ended JuneSeptember 30, 2013.2013 partially offset by lower underwriting income from our operating segment, which included $43.0 million in catastrophe-related losses. Income tax expense for the sixnine months ended JuneSeptember 30, 2014 increased by $21.4$18.0 million compared to the sixnine months ended JuneSeptember 30, 2013. The increase in income tax expense was primarily due to higher taxable income in our U.S. operations.

Underwriting Results by Operating Segments

Our company is organized into three operating segments:

U.S. Insurance Segment. The U.S. insurance segment includes our direct specialty insurance operations in the United States and Canada, as well as our claims administration services operations. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts, as well as third-party claims administration services.

International Insurance Segment. The international insurance segment includes our direct insurance operations in Bermuda, Europe and Asia Pacific, which includes offices in Australia, Singapore and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts from our Bermuda office and direct property and specialty casualty to our non-North American domiciled accounts from our European and Asia Pacific offices.

Reinsurance Segment. Our reinsurance segment has operations in Bermuda, Europe, Singapore and the United States. This segment includes the reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. We presently write reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.

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U.S. Insurance Segment

The following table summarizes the underwriting results and associated ratios for the U.S. insurance segment for each of the periods indicated.
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
($ in millions)($ in millions)
Revenues              
Gross premiums written$341.4
 $307.3
 $611.4
 $563.3
$386.7
 $308.7
 $998.1
 $872.0
Net premiums written222.0
 221.4
 424.7
 413.7
321.7
 238.8
 746.4
 652.5
Net premiums earned214.6
 197.5
 426.7
 385.9
224.8
 207.6
 651.5
 593.5
Expenses              
Net losses and loss expenses$145.5
 $124.4
 $287.5
 $257.7
$153.0
 $141.2
 $440.5
 $398.9
Acquisition costs29.7
 27.3
 57.2
 50.4
31.1
 28.4
 88.3
 78.8
General and administrative expenses46.6
 38.3
 84.0
 77.9
41.7
 41.7
 125.8
 119.5
Underwriting (loss) income$(7.2) $7.5
 $(2.0) $(0.1)(1.0) (3.7) (3.1) (3.7)
Other insurance-related income1.0
 
 1.0
 
Other insurance-related expenses1.3
 
 1.3
 
Segment (loss) income$(1.3) $(3.7) $(3.4) $(3.7)
Ratios              
Loss and loss expense ratio67.8% 63.0% 67.4% 66.8%68.1% 68.0% 67.6% 67.2%
Acquisition cost ratio13.8% 13.8% 13.4% 13.1%13.9% 13.7% 13.6% 13.3%
General and administrative expense ratio21.7% 19.4% 19.7% 20.2%18.6% 20.0% 19.3% 20.1%
Expense ratio35.5% 33.2% 33.1% 33.3%32.5% 33.7% 32.9% 33.4%
Combined ratio103.3% 96.2% 100.5% 100.1%100.6% 101.7% 100.5% 100.6%

Comparison of Three Months Ended JuneSeptember 30, 2014 and 2013

Premiums. Gross premiums written increased by $34.1$78.0 million, or 11.1%25.3%, for the three months ended JuneSeptember 30, 2014 compared to the same period in 2013. The increase in gross premiums written was primarily due to $11.4 millionthe growth in our general casualty line of business, in particular our primary casualty class of business which increased due to adding new business on existing accounts. We also continued to see growth from newin our newer lines of business such as mergers and new insuredsacquisitions, environmental and inland marine. This growth was partially offset by the non-renewal of business, particularly in certain classes within our healthcare line of business, which did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions).



















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The table below illustrates our gross premiums written by line of business for each of the periods indicated.
 Three Months Ended 
 September 30,
 Dollar Percentage
 2014 2013 Change Change
   ($ in millions)  
    
General casualty$153.0
 $107.2
 $45.8
 42.7 %
Professional liability66.0
 66.2
 (0.2) (0.3)%
Programs46.7
 41.1
 5.6
 13.6 %
Healthcare38.9
 43.4
 (4.5) (10.4)%
General property22.4
 18.7
 3.7
 19.8 %
Inland marine17.4
 12.1
 5.3
 43.8 %
Environmental15.8
 8.4
 7.4
 88.1 %
Other*26.5
 11.6
 14.9
 128.4 %
 $386.7
 $308.7
 $78.0
 25.3 %
________________________
*Includes our primary construction, mergers and acquisitions and surety lines of business.

Net premiums written increased by $82.9 million, or 34.7%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase was primarily due to higher gross premiums written and lower ceded premiums. The reduction in ceded premiums was due to recognizing annual ceded premiums at the inception of several reinsurance treaties rather than ratably over the contract period as these reinsurance treaties had contractual minimum premiums. This resulted in higher ceded premiums in previous quarters, as several reinsurance treaties incepted in those quarters, but lower ceded premiums in the current quarter. Partially offsetting this decrease in ceded premiums was higher premiums ceded related to our collateralized property catastrophe reinsurance protection as the premiums for the current treaty are recognized on a quarterly basis. We ceded 16.8% of gross premiums written for the three months ended September 30, 2014 compared to 22.6% for the three months ended September 30, 2013. The reduction was primarily due to the timing of the recognition of premiums ceded that have contractual minimum premiums and the growth in our general casualty line of business which has lower premiums ceded relative to other lines of business.

Net premiums earned increased by $17.2 million, or 8.3%, for the three months ended September 30, 2014 compared to the same period in 2013. The increase was due to the continued growth of our U.S. insurance operations.

Net losses and loss expenses. Net losses and loss expenses increased by $11.8 million, or 8.4%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The following is a breakdown of the loss and loss expense ratio for the three months ended September 30, 2014 and 2013:
 Three Months Ended 
 September 30, 2014
 Three Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
 Amount % of NPE Amount % of NPE  
     ($ in millions)      
Non-catastrophe$152.4
 67.8% $137.4
 66.2% $15.0
 1.6 Pts
Property catastrophe
 
 
 
 
 
Current period152.4
 67.8
 137.4
 66.2
 15.0
 1.6
Prior period0.6
 0.3
 3.8
 1.8
 (3.2) (1.5)
Net losses and loss expenses$153.0
 68.1% $141.2
 68.0% $11.8
 0.1 Pts

Current year non-catastrophe losses and loss expenses

The increase in the current year non-catastrophe losses and loss expenses and the related ratio was primarily due to growth of the business and a loss related to our surety line of business in the current period.

Current year property catastrophe losses and loss expenses

During the three months ended September 30, 2014 and September 30, 2013, we did not incur any property catastrophe losses.

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Prior year losses and loss expenses

Overall, our U.S. insurance segment recorded net unfavorable reserve development of $0.6 million during the three months ended JuneSeptember 30, 2014 compared to net unfavorable reserve development of $3.8 million for the three months ended September 30, 2013, as shown in the tables below.
 (Favorable) and Unfavorable Loss Reserve Development by Loss Year
 For the Three Months Ended September 30, 2014
 2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
 ($ in millions)
General casualty$(0.1) $0.7
 $
 $(0.1) $
 $
 $1.9
 $0.8
 $2.1
 $
 $5.3
Programs
 
 (0.2) (0.6) (0.8) (1.1) (1.4) (2.3) 1.1
 0.2
 (5.1)
General property
 0.5
 
 
 
 
 (0.2) 3.0
 (0.6) 
 2.7
Healthcare0.4
 (1.1) (0.6) 0.1
 
 (0.1) 
 1.9
 4.1
 7.6
 12.3
Professional liability(0.4) 10.1
 (15.8) 8.7
 (2.7) (14.2) (2.6) (1.1) (2.1) 7.3
 (12.8)
Inland marine
 
 
 
 
 
 
 
 (0.7) (1.2) (1.9)
Environmental
 
 
 
 
 
 
 
 0.1
 
 0.1
 $(0.1) $10.2
 $(16.6) $8.1
 $(3.5) $(15.4) $(2.3) $2.3
 $4.0
 $13.9
 $0.6

For the three months ended September 30, 2014, the net unfavorable prior year reserve development primarily related to our healthcare and professional liability lines of business. The unfavorable prior year reserve development in our healthcare line of business for the 2011 through 2013 loss years was primarily due to higher than expected loss emergence in our medical malpractice line of business. The net favorable development in our professional liability line of business was primarily related to our public D&O line of business due to favorable development on several claims in the 2006 and 2009 loss years partially offset by higher than expected loss emergence, driven primarily from several claims, in the 2005 loss year.

 (Favorable) and Unfavorable Loss Reserve Development by Loss Year
 For the Three Months Ended September 30, 2013
 2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
 ($ in millions)
General casualty$
 $
 $
 $
 $(4.6) $
 $(0.3) $
 $0.6
 $3.0
 $(1.3)
Programs
 
 
 
 (0.2) (1.7) (1.2) (1.4) 0.5
 0.5
 (3.5)
General property
 0.6
 (0.2) 3.2
 
 
 
 0.2
 (0.2) (1.0) 2.6
Healthcare(3.0) (0.8) 0.2
 
 
 (2.1) (2.3) 
 10.1
 5.1
 7.2
Professional liability
 (0.4) (1.1) (9.3) (0.7) 0.9
 0.3
 (3.6) 2.4
 10.5
 (1.0)
Other
 
 
 
 
 
 
 
 (0.2) 
 (0.2)
 $(3.0) $(0.6) $(1.1) $(6.1) $(5.5) $(2.9) $(3.5) $(4.8) $13.2
 $18.1
 $3.8

For the three months ended September 30, 2013, the unfavorable reserve development for the 2011 loss year was primarily due to higher than expected loss emergence in our healthcare and E&O lines of business. The unfavorable reserve development for the 2012 loss year was primarily due to higher than expected loss emergence in our healthcare, private/not for profit D&O and lawyers E&O lines of business. We also recorded unfavorable loss reserve development in our general property line of business for the 2006 loss year due to unfavorable development on a reported claim.

Acquisition costs. Acquisition costs increased by $2.7 million, or 9.5%, for the three months ended September 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The increase was primarily driven by the growth in net premiums earned and increased profit commissions in our programs line of business. The acquisition cost ratio was 13.9% for the three months ended September 30, 2014 compared to 13.7% for the three months ended September 30, 2013.


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General and administrative expenses. General and administrative expenses remained constant for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. While the general and administrative expenses remained constant, we did incur higher salary related costs as we continued to grow our U.S. operations offset by lower stock-based compensation expense. The general and administrative expense ratio decreased to 18.6% for the three months ended September 30, 2014 from 20.0% for the same period in 2013.

Other insurance-related income and expense. The other insurance-related income and expense represents the revenue and related expenses of our third-party claims administration services that we acquired in the current year.

Comparison of Nine Months Ended September 30, 2014 and 2013

Premiums. Gross premiums written increased by $126.1 million, or 14.5%, for the nine months ended September 30, 2014 compared to the same period in 2013. The increase in gross premiums written was primarily due to $45.2 million of new business growth during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, increased premiums on renewed business as well as premium rate increases across most lines of business. This was particularly evident in our general casualty, mergers and acquisitions, inland marine and environmental lines of business that had an overall increase in gross premiums written of $30.3 million.business. This growth was partially offset by the non-renewal of business, particularly in certain classes within our healthcare line of business, which did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions).

The table below illustrates our gross premiums written by line of business for each of the periods indicated.
 Three Months Ended 
 June 30,
 Dollar Percentage
 2014 2013 Change Change
   ($ in millions)  
    
General casualty$119.7
 $97.4
 $22.3
 22.9 %
Professional liability62.0
 64.4
 (2.4) (3.7)%
Healthcare37.7
 46.5
 (8.8) (18.9)%
General property34.8
 35.6
 (0.8) (2.2)%
Programs34.2
 33.7
 0.5
 1.5 %
Inland marine20.7
 12.7
 8.0
 63.0 %
Environmental11.4
 9.7
 1.7
 17.5 %
Other*20.9
 7.3
 13.6
 186.3 %
 $341.4
 $307.3
 $34.1
 11.1 %
________________________
*Includes our primary construction, mergers and acquisitions and surety lines of business.

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Net premiums written increased by $0.6 million, or 0.3%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was primarily due to higher gross premiums written and lower ceded premiums related to our property catastrophe reinsurance protection, partially offset by $41.9 million of additional ceded premiums written due to recognizing annual ceded premiums written at the inception of several reinsurance treaties rather than ratably over the contract period as these reinsurance contracts had contractual minimum premiums. This resulted in the acceleration of ceded premiums written but had no impact on net premiums earned. We ceded 35.0% of gross premiums written for the three months ended June 30, 2014 compared to 28.0% for the three months ended June 30, 2013.

Net premiums earned increased by $17.2 million, or 8.7%, for the three months ended June 30, 2014 compared to the same period in 2013. The increase was due to the continued growth of our U.S. insurance operations during 2013 and into 2014.

Net losses and loss expenses. Net losses and loss expenses increased by $21.1 million, or 17.0%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The following is a breakdown of the loss and loss expense ratio for the three months ended June 30, 2014 and 2013:
 Three Months Ended 
 June 30, 2014
 Three Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
 Amount % of NPE Amount % of NPE  
     ($ in millions)      
Non-catastrophe$144.4
 67.3% $127.3
 64.5 % $17.1
 2.8 Pts
Property catastrophe
 
 
 
 
 
Current period144.4
 67.3
 127.3
 64.5
 17.1
 2.8
Prior period1.1
 0.5
 (2.9) (1.5) 4.0
 2.0
Net losses and loss expenses$145.5
 67.8% $124.4
 63.0 % $21.1
 4.8 Pts

Current year non-catastrophe losses and loss expenses

The increase in the current year non-catastrophe losses and loss expenses and the related ratio was primarily due to growth of the business and higher non-catastrophe property losses in the current period compared to the same period last year.

Current year property catastrophe losses and loss expenses

During the three months ended June 30, 2014 and June 30, 2013, we did not incur any property catastrophe losses.

Prior year losses and loss expenses

Overall, our U.S. insurance segment recorded net unfavorable reserve development of $1.1 million during the three months ended June 30, 2014 compared to net favorable reserve development of $2.9 million for the three months ended June 30, 2013, as shown in the tables below.
 (Favorable) and Unfavorable Loss Reserve Development by Loss Year
 For the Three Months Ended June 30, 2014
 2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
 ($ in millions)
General casualty$(0.1) $
 $
 $(0.2) $(2.5) $
 $1.4
 $
 $(1.9) $4.2
 $0.9
Programs
 
 
 (0.1) (0.3) (0.3) 0.3
 (0.8) (0.6) (1.4) (3.2)
General property
 
 
 
 
 
 0.5
 (1.6) (0.3) 3.2
 1.8
Healthcare(1.4) (0.5) 
 
 (0.8) 1.1
 0.1
 9.9
 2.0
 2.1
 12.5
Professional liability
 
 
 (0.3) (0.4) (9.5) (1.0) 1.7
 1.6
 
 (7.9)
Inland Marine
 
 
 
 
 
 
 
 (0.2) (0.4) (0.6)
Environmental
 
 
 
 
 
 (0.2) (1.0) (1.2) 
 (2.4)
 $(1.5) $(0.5) $
 $(0.6) $(4.0) $(8.7) $1.1
 $8.2
 $(0.6) $7.7
 $1.1


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For the three months ended June 30, 2014, the net unfavorable prior year reserve development in our healthcare lines of business for the 2011 through 2013 loss years was primarily due to adverse development on several claims above our previous expectations in the medical malpractice class of business. We also experienced adverse development on reported claims in our lawyers E&O class of business for the 2011 and 2012 loss years and our primary casualty class of business in the 2013 loss year.

 (Favorable) and Unfavorable Loss Reserve Development by Loss Year
 For the Three Months Ended June 30, 2013
 2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
 ($ in millions)
General casualty$
 $(0.3) $(0.2) $
 $(1.2) $(1.4) $0.3
 $
 $0.8
 $0.5
 $(1.5)
Programs
 
 
 (1.4) (1.7) 0.1
 (0.1) (1.8) (0.2) 1.4
 (3.7)
General property
 0.1
 
 0.3
 (0.2) (1.3) 0.1
 (2.5) 1.6
 
 (1.9)
Healthcare
 (0.7) (0.7) (1.7) (1.5) (3.6) (1.3) (1.0) 10.1
 2.2
 1.8
Professional liability
 
 (0.5) 3.2
 (1.5) (4.3) 0.7
 (1.8) 1.3
 5.0
 2.1
Other
 
 
 
 
 
 
 (0.1) (0.4) 0.8
 0.3
 $
 $(0.9) $(1.4) $0.4
 $(6.1) $(10.5) $(0.3) $(7.2) $13.2
 $9.9
 $(2.9)

For the three months ended June 30, 2013, the unfavorable reserve development for the 2011 and 2012 loss years was due to higher than expected loss emergence, primarily in our private/not for profit D&O and healthcare lines of business. The healthcare emergence was largely driven by one large claim and loss emergence in our medical malpractice class of business. The emergence in the private/not for profit D&O is due to higher than expected loss frequency.

Acquisition costs. Acquisition costs increased by $2.4 million, or 8.8%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was primarily driven by the growth in net premiums earned. The acquisition cost ratio was 13.8% for both the three months ended June 30, 2014 and 2013.

General and administrative expenses. General and administrative expenses increased by $8.3 million, or 21.7%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was primarily due to higher stock-based compensation expense and higher salary related costs as we continue to grow our U.S. insurance operations. The general and administrative expense ratio increased to 21.7% for the three months ended June 30, 2014 from 19.4% for the same period in 2013, reflecting higher expenses partially offset by higher net premiums earned.

Comparison of Six Months Ended June 30, 2014 and 2013

Premiums. Gross premiums written increased by $48.1 million, or 8.5%, for the six months ended June 30, 2014 compared to the same period in 2013. The increase in gross premiums written was primarily due to $21.7 million of new business growth from new lines of business and new insureds during the six months ended June 30, 2014 compared to the six months ended June 30, 2013, as well as premium rate increases across most lines of business. This was particularly evident in our general casualty, programs, inland marine and environmental lines of business that had an overall increase in gross premiums written of $58.8 million. This growth was partially offset by the non-renewal of business, particularly in certain classes within our healthcare line of business, which did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions).













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The table below illustrates our gross premiums written by line of business for each of the periods indicated.
Six Months Ended 
 June 30,
 Dollar PercentageNine Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change Change2014 2013 Change Change
  ($ in millions)  
      ($ in millions)  
    
General casualty$199.0
 $164.3
 $34.7
 21.1 %$352.0
 $271.5
 $80.5
 29.7 %
Professional liability124.2
 127.5
 (3.3) (2.6)%190.2
 193.7
 (3.5) (1.8)%
Programs73.2
 66.6
 6.6
 9.9 %119.9
 107.7
 12.2
 11.3 %
Healthcare72.1
 100.0
 (27.9) (27.9)%111.0
 143.4
 (32.4) (22.6)%
General property53.7
 55.3
 (1.6) (2.9)%76.1
 74.0
 2.1
 2.8 %
Inland marine32.8
 20.7
 12.1
 58.5 %50.2
 32.8
 17.4
 53.0 %
Environmental21.7
 16.3
 5.4
 33.1 %37.6
 24.7
 12.9
 52.2 %
Other*34.6
 12.6
 22.0
 174.6 %61.1
 24.2
 36.9
 152.5 %
$611.4
 $563.3
 $48.1
 8.5 %$998.1
 $872.0
 $126.1
 14.5 %
________________________
*Includes our primary construction, mergers and acquisitions and surety lines of business.

Net premiums written increased by $11.0$93.9 million, or 2.7%14.4%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase in net premiums written was primarily due to higher gross premiums written and lower ceded premiums related to our property catastrophe reinsurance protection partially offset by higher premiums ceded due to recognizing annual ceded premiums written at the inception of the treaty rather than ratably over the contract period for those reinsurance contracts where there is a contractual minimum premium.written. We ceded 30.5%25.2% of gross premiums written for both the sixnine months ended JuneSeptember 30, 2014 compared to 26.6% during during the same period inand 2013.

Net premiums earned increased by $40.8$58.0 million, or 10.6%9.8%, for the sixnine months ended JuneSeptember 30, 2014 compared to the same period in 2013. The increase was due to the continued growth of our U.S. insurance operations during 2013 and into 2014.operations.

Net losses and loss expenses. Net losses and loss expenses increased by $29.8$41.6 million, or 11.6%10.4%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The following is a breakdown of the loss and loss expense ratio for the sixnine months ended JuneSeptember 30, 2014 and 2013: 

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Six Months Ended 
 June 30, 2014
 Six Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point ChangeNine Months Ended 
 September 30, 2014
 Nine Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
Amount % of NPE Amount % of NPE Amount % of NPE Amount % of NPE 
    ($ in millions)          ($ in millions)      
Non-catastrophe$285.7
 67.0% $250.1
 64.8% $35.6
 2.2 Pts
$438.1
 67.2% $387.5
 65.3% $50.6
 1.9 Pts
Property catastrophe
 
 
 
 
 

 
 
 
 
 
Current period285.7
 67.0
 250.1
 64.8
 35.6
 2.2
438.1
 67.2
 387.5
 65.3
 50.6
 1.9
Prior period1.8
 0.4
 7.6
 2.0
 (5.8) (1.6)2.4
 0.4
 11.4
 1.9
 (9.0) (1.5)
Net losses and loss expenses$287.5
 67.4% $257.7
 66.8% $29.8
 0.6 Pts
$440.5
 67.6% $398.9
 67.2% $41.6
 0.4 Pts

Current year non-catastrophe losses and loss expenses

The increase in the current year non-catastrophe losses and loss expenses and the related ratio was primarily due to growth and mix of the business, higher non-catastrophe property losses in the current period compared to the same period last year, a loss related to our surety line of business in the current period and increased loss adjustment expenses across several lines of business.

Current year property catastrophe losses and loss expenses

During the sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013, we did not incur any property catastrophe losses.




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Prior year losses and loss expenses

Overall, our U.S. insurance segment recorded net unfavorable reserve development of $1.8$2.4 million during the threenine months ended JuneSeptember 30, 2014 compared to net unfavorable reserve development of $7.6$11.4 million for the threenine months ended JuneSeptember 30, 2013, as shown in the tables below.
 
(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2014For the Nine Months Ended September 30, 2014
2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
($ in millions)($ in millions)
General casualty$(3.0) $
 $
 $(0.7) $(4.8) $0.3
 $1.3
 $2.0
 $(1.9) $4.2
 $(2.6)$(3.1) $0.7
 $
 $(0.8) $(4.8) $0.3
 $3.2
 $2.8
 $0.2
 $4.2
 $2.7
Programs
 
 
 0.9
 1.3
 (3.3) 0.3
 (1.8) (0.8) (1.4) (4.8)
 
 (0.2) 0.3
 0.5
 (4.4) (1.1) (4.1) 0.3
 (1.2) (9.9)
General property
 
 
 
 
 
 0.5
 (1.6) (0.3) 3.2
 1.8

 0.5
 
 
 
 
 0.3
 1.4
 (0.9) 3.2
 4.5
Healthcare(1.7) (0.5) 
 (0.3) (0.6) 3.1
 0.1
 14.2
 3.8
 2.1
 20.2
(1.3) (1.6) (0.6) (0.2) (0.6) 3.0
 0.1
 16.1
 7.9
 9.7
 32.5
Professional liability
 
 
 (0.3) (0.4) (9.1) (1.0) 1.2
 0.4
 
 (9.2)(0.4) 10.1
 (15.8) 8.4
 (3.1) (23.3) (3.6) 0.1
 (1.7) 7.3
 (22.0)
Inland Marine
 
 
 
 
 
 
 (0.3) (0.5) (0.4) (1.2)
Inland marine
 
 
 
 
 
 
 (0.3) (1.2) (1.6) (3.1)
Environmental
 
 
 
 
 
 (0.2) (1.0) (1.2) 
 (2.4)
 
 
 
 
 
 (0.2) (1.0) (1.1) 
 (2.3)
$(4.7) $(0.5) $
 $(0.4) $(4.5) $(9.0) $1.0
 $12.7
 $(0.5) $7.7
 $1.8
$(4.8) $9.7
 $(16.6) $7.7
 $(8.0) $(24.4) $(1.3) $15.0
 $3.5
 $21.6
 $2.4

For the sixnine months ended JuneSeptember 30, 2014, the net unfavorable prior year reserve development primarily related to our healthcare and professional liability lines of business. The unfavorable prior year reserve development in theour healthcare line of business for the 2011 through 2013 loss years was primarily due to adverse development on several claims above our previous expectations in the managed care E&O class of business and higher than expected loss frequency and severityseverity. The net favorable development in our professional liability line of business was primarily related to our public D&O class of business due to favorable development on several claims in the medical malpractice class of business. We also experienced2006 and 2009 loss year partially offset by adverse development on reported claims in our lawyers E&O class of business for the 2011 and 2012 loss years and the primary casualty class of business in the 20132005 loss year.


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(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2013For the Nine Months Ended September 30, 2013
2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
($ in millions)($ in millions)
General casualty$
 $(0.7) $(0.5) $
 $(4.5) $(3.1) $0.1
 $
 $2.0
 $0.5
 $(6.2)$
 $(0.7) $(0.5) $
 $(9.1) $(3.1) $(0.2) $
 $2.6
 $3.5
 $(7.5)
Programs
 
 
 (1.4) (3.3) 0.2
 (0.7) (2.7) (0.6) 2.8
 (5.7)
 
 
 (1.4) (3.5) (1.5) (1.9) (4.1) (0.1) 3.3
 (9.2)
General property
 0.1
 
 0.3
 (0.2) (1.3) (1.3) (0.2) 1.5
 2.0
 0.9

 0.7
 (0.2) 3.5
 (0.2) (1.3) (1.3) 
 1.3
 1.0
 3.5
Healthcare(0.1) (1.0) (1.6) (2.7) (2.3) (6.2) (1.2) (1.6) 13.1
 9.0
 5.4
(3.1) (1.8) (1.4) (2.7) (2.3) (8.3) (3.5) (1.6) 23.2
 14.1
 12.6
Professional liability
 (0.5) (1.4) 2.7
 (2.7) (3.8) 0.1
 (2.7) 2.1
 18.3
 12.1

 (0.9) (2.5) (6.6) (3.4) (2.9) 0.4
 (6.3) 4.5
 28.8
 11.1
Other
 
 
 
 
 
 
 (0.1) (0.4) 1.6
 1.1

 
 
 
 
 
 
 (0.1) (0.6) 1.6
 0.9
$(0.1) $(2.1) $(3.5) $(1.1) $(13.0) $(14.2) $(3.0) $(7.3) $17.7
 $34.2
 $7.6
$(3.1) $(2.7) $(4.6) $(7.2) $(18.5) $(17.1) $(6.5) $(12.1) $30.9
 $52.3
 $11.4

For the sixnine months ended JuneSeptember 30, 2013, the unfavorable reserve development for the 2011 and 2012 loss years was due to higher than expected loss emergence, primarily in our healthcare, private/not for profit D&O, healthcare D&O and E&O lines of business. The healthcare D&O emergence was largely driven by three large claims, each in excess of $3 million. The emergence in the E&O and private/not for profit D&O is due to higher than expected loss frequency.

Acquisition costs. Acquisition costs increased by $6.8$9.5 million, or 13.5%12.1%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase was driven by the growth in net premiums earned, higher commission and brokerage rates compared to last year due to changes in the mix of business and higher rates charged by brokers, and an increase in other acquisition related costs. The acquisition cost ratio was 13.4%13.6% and 13.1%13.3% for the sixnine months ended JuneSeptember 30, 2014 and 2013.

General and administrative expenses. General and administrative expenses increased by $6.1$6.3 million, or 7.8%5.3%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase was primarily due to higher salary-

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relatedsalary-related costs as we continue to grow our U.S. insurance operations.operations partially offset by lower stock-based compensation. The general and administrative expense ratio decreased to 19.7%19.3% for the sixnine months ended JuneSeptember 30, 2014 from 20.2%20.1% for the same period in 2013.

Other insurance-related income and expense. The other insurance-related income and expense represents the revenue and related expenses of our third-party claims administration services that we acquired in the current year.



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International Insurance Segment

The following table summarizes the underwriting results and associated ratios for the international insurance segment for each of the periods indicated.
 
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
($ in millions)($ in millions)
Revenues              
Gross premiums written$204.5
 $192.6
 $338.8
 $321.1
$144.2
 $132.9
 $483.1
 $454.0
Net premiums written122.2
 106.4
 197.6
 184.1
87.8
 75.7
 285.5
 259.8
Net premiums earned89.2
 87.0
 177.6
 171.2
94.0
 87.6
 271.6
 258.8
Expenses              
Net losses and loss expenses$35.9
 $31.0
 $59.5
 $59.9
$55.8
 $31.1
 $115.3
 $91.0
Acquisition costs0.6
 (0.4) (0.4) (1.2)1.2
 (0.3) 0.8
 (1.5)
General and administrative expenses29.4
 24.1
 54.2
 48.9
28.0
 26.5
 82.2
 75.4
Underwriting income$23.3
 $32.3
 $64.3
 $63.6
9.0
 30.3
 73.3
 93.9
Other insurance-related income
 
 
 
Other insurance-related expenses5.3
 
 5.3
 
Segment income$3.7
 $30.3
 $68.0
 $93.9
Ratios              
Loss and loss expense ratio40.3% 35.6 % 33.5 % 35.0 %59.4% 35.5 % 42.5% 35.2 %
Acquisition cost ratio0.6% (0.4)% (0.2)% (0.7)%1.3% (0.3)% 0.3% (0.6)%
General and administrative expense ratio33.0% 27.7 % 30.5 % 28.6 %29.8% 30.2 % 30.3% 29.1 %
Expense ratio33.6% 27.3 % 30.3 % 27.9 %31.1% 29.9 % 30.6% 28.5 %
Combined ratio73.9% 62.9 % 63.8 % 62.9 %90.5% 65.4 % 73.1% 63.7 %

Comparison of Three Months Ended JuneSeptember 30, 2014 and 2013

Premiums. Gross premiums written increased by $11.9$11.3 million, or 6.2%8.5%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The increase was primarily due to continued growth from new initiatives and newincreased premiums on existing lines of business, particularly in our professional liability line of business. Our newThis was partially offset by lower premiums written in our aviation and marine cargoline of business. The decrease in our aviation line of business contributed a combined $9.3was due to $13.1 million of gross premiums written during the current quarter. The professional liability line of business grew $4.9 million primarily on new business writings inthree months ended September 30, 2013 related to the mergers and acquisitions class of business. This growth wasrenewal rights agreement we entered into with Markel International that did not occur during the three months ended September 30, 2014 partially offset by the general casualty line ofnew business which decreased by $3.7 million primarily due to the non-renewal of certain policieswritten during the current quarter, which did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions). During the quarter, we opened a new branch office in Sydney, Australia to further expand our distribution network in the Asia Pacific region.quarter.
The table below illustrates our gross premiums written by underwriter location for our international insurance operations.
Three Months Ended 
 June 30,
 Dollar PercentageThree Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change         Change        2014 2013 Change         Change        
  ($ in millions)      ($ in millions)    
Bermuda$135.0
 $136.3
 $(1.3) (1.0)%$84.2
 $83.9
 $0.3
 0.4%
Europe61.9
 49.2
 12.7
 25.8 %51.2
 42.7
 8.5
 19.9%
Asia Pacific7.6
 7.1
 0.5
 7.0 %8.8
 6.3
 2.5
 39.7%
$204.5
 $192.6
 $11.9
 6.2 %$144.2
 $132.9
 $11.3
 8.5%


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The table below illustrates our gross premiums written by line of business for each of the periods indicated.
Three Months Ended 
 June 30,
 Dollar PercentageThree Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change Change2014 2013 Change Change
($ in millions)       ($ in millions)       
General property$65.5
 $65.2
 $0.3
 0.5 %
Professional liability62.2
 57.3
 4.9
 8.6 %$51.5
 $43.8
 $7.7
 17.6 %
General casualty40.6
 44.3
 (3.7) (8.4)%32.4
 28.7
 3.7
 12.9 %
General property23.3
 22.6
 0.7
 3.1 %
Healthcare19.9
 21.2
 (1.3) (6.1)%19.2
 18.6
 0.6
 3.2 %
Aviation8.7
 13.1
 (4.4) (33.6)%
Trade credit7.0
 4.6
 2.4
 52.2 %6.9
 6.1
 0.8
 13.1 %
Aviation6.7
 
 6.7
 n/a
Other*2.6
 
 2.6
 n/a
2.2
 
 2.2
 n/a
$204.5
 $192.6
 $11.9
 6.2 %$144.2
 $132.9
 $11.3
 8.5 %
________________________
*Includes our marine cargo lineand onshore construction lines of business.

Net premiums written increased by $15.8$12.1 million, or 14.8%16.0%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The increase in net premiums written was primarily due to higher gross premiums written and lower ceded premiums due to lower cessions in our professional liability reinsurance treaty. This was partially offset by higher premiums ceded during the quarter related to our collateralized property catastrophe reinsurance protection as the premiums for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.current treaty are recognized on a quarterly basis. We ceded 40.2%39.1% of gross premiums written for the three months ended JuneSeptember 30, 2014 compared to 44.8%43.0% for the three months ended JuneSeptember 30, 2013.

Net premiums earned increased by $2.2$6.4 million, or 2.5%7.3%, primarily due to higher net premiums written during 2013as we continued to expand our European and the first half of 2014.Asia Pacific operations.

Net losses and loss expenses. Net losses and loss expenses increased by $4.9$24.7 million, or 15.8%79.4%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The following is a breakdown of the loss and loss expense ratio for the three months ended JuneSeptember 30, 2014 and 2013: 
Three Months Ended 
 June 30, 2014
 Three Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point ChangeThree Months Ended 
 September 30, 2014
 Three Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
Amount % of NPE Amount % of NPE Amount % of NPE Amount % of NPE 
    ($ in millions)          ($ in millions)      
Non-catastrophe$55.9
 62.7 % $56.7
 65.1 % $(0.8) (2.4) Pts
$70.0
 74.5 % $60.8
 69.4 % $9.2
 5.1 Pts
Property catastrophe
 
 
 
 
 
15.0
 16.0
 
 
 15.0
 16.0
Current period55.9
 62.7
 56.7
 65.1
 (0.8) (2.4)85.0
 90.5
 60.8
 69.4
 24.2
 21.1
Prior period(20.0) (22.4) (25.7) (29.5) 5.7
 7.1
(29.2) (31.1) (29.7) (33.9) 0.5
 2.8
Net losses and loss expenses$35.9
 40.3 % $31.0
 35.6 % $4.9
 4.7 Pts
$55.8
 59.4 % $31.1
 35.5 % $24.7
 23.9 Pts

Current year non-catastrophe losses and loss expenses

The decreaseincrease in the current year non-catastrophe losses and loss expenses and related ratio was primarily due to lowerhigher reported non-catastrophe property loss activity during the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013.

Current year property catastrophe losses and loss expenses

During the three months ended JuneSeptember 30, 2014, we incurred $15.0 million of property catastrophe losses and June 30, 2013,loss expenses related to Hurricane Odile, whereas we did not incur any property catastrophe losses.losses during the three months ended September 30, 2013.





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Prior year losses and loss expenses

Overall, our international insurance segment recorded net favorable reserve development of $20.0$29.2 million during the three months ended JuneSeptember 30, 2014 compared to net favorable reserve development of $25.7$29.7 million for the three months ended JuneSeptember 30, 2013, as shown in the tables below.
 

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(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2014For the Three Months Ended September 30, 2014
2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
($ in millions)($ in millions)
General casualty$5.2
 $(0.7) $(1.2) $(1.4) $15.5
 $(6.6) $(4.1) $2.0
 $(0.1) $
 $8.6
$0.8
 $(0.6) $(1.0) $(1.1) $(3.7) $(5.0) $(0.3) $(2.5) $(0.1) $��
 $(13.5)
General property
 (0.2) (0.4) (0.1) 
 (0.2) (0.4) (1.4) (2.3) (5.9) (10.9)0.1
 0.6
 (0.4) 
 (0.4) 
 (0.5) (3.5) (0.2) (1.3) (5.6)
Professional liability(1.2) (0.7) 3.5
 (9.1) (0.4) (7.7) (3.5) (0.4) 6.0
 
 (13.5)(0.2) (0.4) (1.3) (7.2) (0.8) (2.0) (3.9) (1.5) 14.9
 
 (2.4)
Healthcare(0.1) 0.1
 
 
 
 
 (3.9) (0.2) (0.2) 
 (4.3)(1.2) (0.9) (1.1) (0.2) (0.2) (0.1) (4.0) 0.1
 (1.2) 1.2
 (7.6)
Trade Credit
 
 
 
 
 
 
 
 (1.2) 1.3
 0.1
Trade credit
 
 
 
 
 
 
 
 (2.0) 1.9
 (0.1)
$3.9
 $(1.5) $1.9
 $(10.6) $15.1
 $(14.5) $(11.9) $
 $2.2
 $(4.6) $(20.0)$(0.5) $(1.3) $(3.8) $(8.5) $(5.1) $(7.1) $(8.7) $(7.4) $11.4
 $1.8
 $(29.2)

For the three months ended JuneSeptember 30, 2014, thewe recorded unfavorable prior year reserve development in the general casualtyour professional liability line of business for the 20082012 loss year relatedprimarily due to a single claim estimated to reach our full limit.higher than expected loss emergence.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2013For the Three Months Ended September 30, 2013
2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
($ in millions)  ($ in millions)  
General casualty$6.6
 $(0.7) $(1.4) $(3.3) $(2.4) $(2.0) $1.7
 $
 $(0.2) $
 $(1.7)$0.7
 $(0.6) $(1.4) $(2.3) $(1.8) $(4.1) $(0.6) $(2.9) $(0.1) $
 $(13.1)
General property
 
 (0.1) 0.2
 0.8
 (0.4) (3.7) (2.7) (1.6) (4.9) (12.4)
 
 3.4
 (0.1) (0.1) (0.1) (0.1) (0.8) (1.3) (2.5) (1.6)
Professional liability(0.2) (4.7) 4.5
 (1.4) (5.5) 
 (6.1) (0.1) (0.1) 
 (13.6)0.2
 (0.4) 1.4
 (1.1) (3.6) (0.2) (0.3) (0.2) (0.4) 
 (4.6)
Healthcare
 (0.2) (0.1) (0.4) (0.4) (0.4) 3.9
 (0.2) (0.2) 
 2.0
(0.7) (0.2) (0.2) (0.5) (3.1) (0.3) (4.9) (0.2) (0.3) 
 (10.4)
$6.4
 $(5.6) $2.9
 $(4.9) $(7.5) $(2.8) $(4.2) $(3.0) $(2.1) $(4.9) $(25.7)$0.2
 $(1.2) $3.2
 $(4.0) $(8.6) $(4.7) $(5.9) $(4.1) $(2.1) $(2.5) $(29.7)

For the three months ended September 30, 2013, we recorded unfavorable loss reserve development in our general property line of business for the 2005 loss year due to higher than expected loss emergence on an energy claim.

Acquisition costs. Acquisition costs increased by $1.01.5 million, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The acquisition cost ratio was 0.6%1.3% for the three months ended JuneSeptember 30, 2014 and negative 0.4%0.3% for the three months ended JuneSeptember 30, 2013. The negative cost represents ceding commissions received on ceded premiums, that have been earned, in excess of the brokerage fees and commissions paid on gross premiums written, that have been amortized. The ceding commission income also covers costs that are expensed as incurred. The increase in the acquisition costs and related ratio was due to lower ceding commission income earned from our outward reinsurance treaties due to lower ceded premiums, combined with higher acquisition-related costs during the three months ended September 30, 2014 compared to the three months ended September 30, 2013.

General and administrative expenses. General and administrative expenses increased by $5.3$1.5 million, or 22.0%5.7%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The increase was primarily due to higher stock-based compensation expense and higher salary-related costs as we continue to grow our international insurance operations.operations by adding specialty underwriting teams partially offset by lower stock-based compensation expense. The general and administrative expense ratio was 33.0%29.8% and 27.7%30.2% for the three months ended JuneSeptember 30, 2014 and 2013, respectively.

Other insurance-related income and expense. The increaseother insurance-related expenses incurred for the current quarter represent the transaction-related costs incurred for our acquisition of RSA's Hong Kong and Singapore operations. Upon closing of the acquisition in 2015, RSA's Hong Kong and Singapore operations will be combined into our current branch

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operations in these jurisdictions and will be included in the general and administrative expense ratio was primarily due tointernational insurance segment. As such, the higher compensationtransaction-related costs discussed above.have been reflected in this segment.

Comparison of SixNine Months Ended JuneSeptember 30, 2014 and 2013

Premiums. Gross premiums written increased by $17.7$29.1 million, or 5.5%6.4%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase was primarily due to continued growth from new initiatives and new lines of business. Our new aviation and marine cargo business contributed $13.6 million of gross premiums written during the current period. The professional liability line of business grew $9.4$17.1 million on new business writings in European E&O and mergers and acquisitions classes of business.business, and our aviation and marine cargo lines of business grew by $11.3 million. This growth was partially offset by the general casualty line of business, which decreased by $7.6$3.9 million compared to the prior period, due to non-recurring business written in 2013 and the non-renewal of certain policies during the current period, whichthat did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions).




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The table below illustrates our gross premiums written by underwriter location for our international insurance operations.
Six Months Ended 
 June 30,
 Dollar PercentageNine Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change         Change        2014 2013 Change         Change        
  ($ in millions)      ($ in millions)    
Bermuda$214.9
 $221.5
 $(6.6) (3.0)%$299.1
 $305.4
 $(6.3) (2.1)%
Europe110.9
 86.8
 24.1
 27.8 %162.1
 129.5
 32.6
 25.2 %
Asia Pacific13.0
 12.8
 0.2
 1.6 %21.9
 19.1
 2.8
 14.7 %
$338.8
 $321.1
 $17.7
 5.5 %$483.1
 $454.0
 $29.1
 6.4 %

The table below illustrates our gross premiums written by line of business for each of the periods indicated.
Six Months Ended 
 June 30,
 Dollar PercentageNine Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change Change2014 2013 Change Change
($ in millions)       ($ in millions)       
Professional liability$151.3
 $134.2
 $17.1
 12.7 %
General property$102.1
 $103.9
 $(1.8) (1.7)%125.4
 126.5
 (1.1) (0.9)%
Professional liability99.8
 90.4
 9.4
 10.4 %
General casualty60.7
 68.3
 (7.6) (11.1)%93.1
 97.0
 (3.9) (4.0)%
Healthcare47.1
 47.7
 (0.6) (1.3)%66.3
 66.3
 
  %
Trade credit15.5
 10.8
 4.7
 43.5 %22.4
 16.9
 5.5
 32.5 %
Aviation9.5
 
 9.5
 n/a
18.2
 13.1
 5.1
 38.9 %
Other*4.1
 
 4.1
 n/a
6.4
 
 6.4
 n/a
$338.8
 $321.1
 $17.7
 5.5 %$483.1
 $454.0
 $29.1
 6.4 %
________________________
*Includes our marine cargo lineand onshore construction lines of business.

Net premiums written increased by $13.5$25.7 million, or 7.3%9.9%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase in net premiums written was primarily due to higher gross premiums written, and lower ceded premiums related to our property catastrophe reinsurance protection for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013, and lower cessions in our professional liability reinsurance treaty. This was partially offset by higher premiums ceded for new reinsurance contracts for our aviation, marine cargo and small- to medium-sized enterprise lines of business, which included additional ceded premium due to recognizing annual ceded premiums written at the inception of certain reinsurance treaties rather than ratably over the contract period where there is a contractual minimum premium.business. We ceded 41.7%40.9% of gross premiums written for the sixnine months ended JuneSeptember 30, 2014 compared to 42.7%42.8% for the sixnine months ended JuneSeptember 30, 2013.

Net premiums earned increased by $6.4$12.9 million, or 3.7%5.0%, primarily due to higher net premiums written during 2013as we continued to expand our European and into 2014.Asia Pacific operations.

Net losses and loss expenses. Net losses and loss expenses decreasedincreased by $0.4$24.3 million, or 0.7%26.7%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The following is a breakdown of the loss and loss expense ratio for the sixnine months ended JuneSeptember 30, 2014 and 2013: 
 Six Months Ended 
 June 30, 2014
 Six Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
 Amount % of NPE Amount % of NPE  
     ($ in millions)      
Non-catastrophe$108.9
 61.3 % $115.3
 67.4 % $(6.4) (6.1) Pts
Property catastrophe
 
 
 
 
 
Current period108.9
 61.3
 115.3
 67.4
 (6.4) (6.1)
Prior period(49.4) (27.8) (55.4) (32.4) 6.0
 4.6
Net losses and loss expenses$59.5
 33.5 % $59.9
 35.0 % $(0.4) (1.5) Pts



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 Nine Months Ended 
 September 30, 2014
 Nine Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
 Amount % of NPE Amount % of NPE  
     ($ in millions)      
Non-catastrophe$178.9
 65.9 % $176.1
 68.1 % $2.8
 (2.2) Pts
Property catastrophe15.0
 5.5
 
 
 15.0
 5.5
Current period193.9
 71.4
 176.1
 68.1
 17.8
 3.3
Prior period(78.6) (28.9) (85.1) (32.9) 6.5
 4.0
Net losses and loss expenses$115.3
 42.5 % $91.0
 35.2 % $24.3
 7.3 Pts

Current year non-catastrophe losses and loss expenses

The decreaseincrease in the current year non-catastrophe losses and loss expenses and related ratio was primarily due lower reported property loss activity during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 andgrowth in international insurance operations partially offset by an increase to the loss adjustment expense reserve during the sixnine months ended JuneSeptember 30, 2013 that did not occur during the sixnine months ended JuneSeptember 30, 2014.

Current year property catastrophe losses and loss expenses

During the sixnine months ended JuneSeptember 30, 2014 we incurred $15.0 million of property catastrophe losses and June 30, 2013,loss expenses related to Hurricane Odile, whereas we did not incur any property catastrophe losses.losses during the nine months ended September 30, 2013.

Prior year losses and loss expenses

Overall, our international insurance segment recorded net favorable reserve development of $49.4$78.6 million during the sixnine months ended JuneSeptember 30, 2014 compared to net favorable reserve development of $55.4$85.1 million for the sixnine months ended JuneSeptember 30, 2013, as shown in the tables below.
 
(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2014For the Nine Months Ended September 30, 2014
2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
($ in millions)($ in millions)
General casualty$9.6
 $(1.4) $(2.5) $(3.5) $11.4
 $(9.3) $(8.8) $1.9
 $(0.1) $
 $(2.7)$10.4
 $(2.0) $(3.5) $(4.6) $7.7
 $(14.3) $(9.1) $(0.6) $(0.2) $
 $(16.2)
General property(0.3) 0.1
 (0.5) (1.1) (0.3) (0.7) 0.1
 (4.6) (4.6) (10.1) (22.0)(0.2) 0.7
 (0.9) (1.1) (0.7) (0.7) (0.4) (8.1) (4.8) (11.4) (27.6)
Professional liability(1.4) (1.6) 3.2
 (22.8) (1.0) (10.3) (3.6) (0.8) 5.9
 
 (32.4)(1.6) (2.0) 1.9
 (30.0) (1.8) (12.3) (7.5) (2.3) 20.8
 
 (34.8)
Healthcare(0.1) (0.9) (0.9) (1.0) (0.8) 
 (3.9) (0.5) (0.2) 16.0
 7.7
(1.3) (1.8) (2.0) (1.2) (1.0) (0.1) (7.9) (0.4) (1.4) 17.2
 0.1
Trade Credit
 
 
 
 
 
 (0.1) (1.0) (0.2) 1.3
 
Trade credit
 
 
 
 
 
 (0.1) (1.0) (2.2) 3.2
 (0.1)
$7.8
 $(3.8) $(0.7) $(28.4) $9.3
 $(20.3) $(16.3) $(5.0) $0.8
 $7.2
 $(49.4)$7.3
 $(5.1) $(4.5) $(36.9) $4.2
 $(27.4) $(25.0) $(12.4) $12.2
 $9.0
 $(78.6)

For the sixnine months ended JuneSeptember 30, 2014, the unfavorable prior year reserve development in the healthcare line of business for the 2013 loss year and for the general casualty line of business for the 2008 loss year related to singleindividual claims within each of those lines of business. The favorable prior year reserve development in the professional liability line of business for the 2007 loss year was primarily due to favorable reserve development on an individual claim.claim while the unfavorable development for the 2012 loss year was primarily due to adverse development on two reported claims. The favorable development in the 2009 and 2010 loss years was primarily due to actual loss emergence being lower than anticipated across several lines of business.


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(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2013For the Nine Months Ended September 30, 2013
2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
($ in millions)  ($ in millions)  
General casualty$6.3
 $2.4
 $(7.0) $(6.7) $(8.7) $(4.7) $(1.2) $(0.2) $
 $0.9
 $(18.9)$7.0
 $1.8
 $(8.4) $(9.0) $(10.5) $(8.8) $(1.8) $(3.1) $(0.1) $0.9
 $(32.0)
General property
 
 (0.1) (0.2) 1.1
 (1.0) (3.5) (4.0) (9.5) (8.1) (25.3)
 
 3.3
 (0.3) 1.0
 (1.1) (3.6) (4.8) (10.8) (10.6) (26.9)
Professional liability(0.3) (5.0) 3.3
 (2.9) (10.9) 0.3
 (6.5) (0.4) (0.1) 
 (22.5)(0.1) (5.4) 4.7
 (4.0) (14.5) 0.1
 (6.8) (0.6) (0.5) 
 (27.1)
Healthcare(0.1) (0.3) (0.5) (1.1) 8.2
 (4.5) 10.6
 (0.9) (0.1) 
 11.3
(0.8) (0.5) (0.7) (1.6) 5.1
 (4.8) 5.7
 (1.1) (0.4) 
 0.9
$5.9
 $(2.9) $(4.3) $(10.9) $(10.3) $(9.9) $(0.6) $(5.5) $(9.7) $(7.2) $(55.4)$6.1
 $(4.1) $(1.1) $(14.9) $(18.9) $(14.6) $(6.5) $(9.6) $(11.8) $(9.7) $(85.1)

For the sixnine months ended JuneSeptember 30, 2013, the net favorable reserve development for loss years 2004 throughto 2012 wasis a result of actual loss emergence being lower than anticipated.anticipated, in particular for our general property line of business for the 2011 and 2012 loss years. The unfavorable reserve development in our healthcare line in the 2007 and 2009 loss years was due to adverse development on individual claims.

Acquisition costs. Acquisition costs increased by $0.8$2.3 million, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The acquisition cost ratio was negative 0.2%0.3% for the sixnine months ended JuneSeptember 30, 2014 and negative

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0.7% 0.6% for the sixnine months ended JuneSeptember 30, 2013. The lower negativehigher acquisition cost ratio is primarily due to higher other acquisition related costs during the current year as compared to the prior year partially offset by additional ceding commission income earned on the new aviation reinsurance treaties and increased ceding commission income on certain renewal reinsurance treaties.year.

General and administrative expenses. General and administrative expenses increased by $5.3$6.8 million, or 10.8%9.0%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase in general and administrative expenses werewas due to increased salary and related costs.costs partially offset by lower stock-based compensation expense. The general and administrative expense ratio was 30.5%30.3% and 28.6%29.1% for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively.

Other insurance-related income and expense. The other insurance-related expenses incurred for the current period represent the transaction-related costs incurred for our acquisition of RSA's Hong Kong and Singapore operations.



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Reinsurance Segment

The following table summarizes the underwriting results and associated ratios for the reinsurance segment for each of the periods indicated.
Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
2014 2013 2014 20132014 2013 2014 2013
($ in millions)($ in millions)
Revenues              
Gross premiums written$214.5
 $265.3
 $711.6
 $717.9
$177.0
 $139.3
 $888.6
 $857.2
Net premiums written209.8
 253.4
 703.2
 678.5
159.2
 138.6
 862.4
 817.1
Net premiums earned233.4
 222.8
 463.3
 413.4
223.0
 215.6
 686.2
 629.0
Expenses              
Net losses and loss expenses$133.4
 $119.8
 $243.2
 $212.7
$127.3
 $104.7
 $370.4
 $317.4
Acquisition costs44.0
 37.7
 85.2
 72.1
40.1
 37.0
 125.3
 109.1
General and administrative expenses20.2
 18.1
 38.3
 36.5
18.6
 20.4
 56.9
 56.9
Underwriting income$35.8
 $47.2
 $96.6
 $92.1
37.0
 53.5
 133.6
 145.6
Other insurance-related income
 
 
 
Other insurance-related expenses
 
 
 
Segment income$37.0
 $53.5
 $133.6
 $145.6
Ratios              
Loss and loss expense ratio57.2% 53.8% 52.5% 51.5%57.1% 48.5% 54.0% 50.5%
Acquisition cost ratio18.9% 16.9% 18.4% 17.4%18.0% 17.1% 18.3% 17.3%
General and administrative expense ratio8.6% 8.1% 8.3% 8.8%8.3% 9.5% 8.3% 9.1%
Expense ratio27.5% 25.0% 26.7% 26.2%26.3% 26.6% 26.6% 26.4%
Combined ratio84.7% 78.8% 79.2% 77.7%83.4% 75.1% 80.6% 76.9%

Comparison of Three Months Ended JuneSeptember 30, 2014 and 2013

Premiums. Gross premiums written decreasedincreased by $50.8$37.7 million, or 19.1%27.1%, for the three months ended JuneSeptember 30, 2014 compared to the same period in 2013. The decreaseincrease was primarily due tofrom one new treaty in our casualty reinsurance line of business that resulted in $21.9 million of gross premiums written, and the timing of renewals that were not renewed in the current quarter but were previously bound during the quarter ended June 30, 2013 and lower premiums writtenprimarily in our property reinsurance linesline of business. In ourWe had a large property reinsurance lines of business, we had lower premiumstreaty that renewed during the three months ended September 30, 2014 that was previously written during the currentsecond quarter compared toof last year. This property reinsurance treaty included a fronting component which resulted in our retaining a small portion of the same quarter last year of $12.4 million from our collateralized property catastrophe reinsurance program through Aeolus Re.premiums written with the remainder being ceded.


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The table below illustrates our gross premiums written by underwriter location for our reinsurance operations.
Three Months Ended 
 June 30,
 Dollar PercentageThree Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change         Change        2014 2013 Change         Change        
  ($ in millions)      ($ in millions)    
United States$104.2
 $132.9
 $(28.7) (21.6)%$101.8
 $68.9
 $32.9
 47.8 %
Bermuda50.9
 74.7
 (23.8) (31.9)%25.3
 27.2
 (1.9) (7.0)%
Asia43.3
 46.7
 (3.4) (7.3)%36.2
 33.9
 2.3
 6.8 %
Europe16.1
 11.0
 5.1
 46.4 %13.7
 9.3
 4.4
 47.3 %
$214.5
 $265.3
 $(50.8) (19.1)%$177.0
 $139.3
 $37.7
 27.1 %







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The table below illustrates our gross premiums written by line of business for each of the periods indicated.

Three Months Ended 
 June 30,
 Dollar PercentageThree Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change         Change        2014 2013 Change         Change        
  ($ in millions)      ($ in millions)    
Casualty$86.7
 $56.0
 $30.7
 54.8 %
Property$119.8
 $152.4
 $(32.6) (21.4)%83.1
 $72.6
 10.5
 14.5 %
Casualty64.4
 76.7
 (12.4) (16.1)%
Specialty30.3
 36.2
 (5.9) (16.3)%7.2
 10.7
 (3.5) (32.7)%
$214.5
 $265.3
 $(50.8) (19.1)%$177.0
 $139.3
 $37.7
 27.1 %

Net premiums written decreasedincreased by $43.6$20.6 million, or 17.2%14.9%, due to the decreaseincrease in gross premiums written partially offset by lowerhigher premiums ceded premiums during the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The increase in premiums ceded was due to the timing of ceded premiums related to the large property reinsurance treaty that had a fronting component, as well as premiums ceded for our current year collateralized property catastrophe reinsurance protection as the premiums for the current treaty are recognized on a quarterly basis.

Net premiums earned increased by $10.6$7.4 million, or 4.8%3.4%, as a result of the increase in net premiums written during the previous quarters, as well as the reduction in ceded earned premium related to the non-renewal of the collateralized retrocessional catastrophe cover that we purchased during the first quarter of 2013 partially offset by the ceded earned premium related to the collateralized property catastrophe reinsurance we purchased in the current quarter.quarters.

Net losses and loss expenses. Net losses and loss expenses increased by $13.6$22.6 million, or 11.4%21.6%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The following is a breakdown of the loss and loss expense ratio for the three months ended JuneSeptember 30, 2014 and 2013: 
Three Months Ended 
 June 30, 2014
 Three Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point ChangeThree Months Ended 
 September 30, 2014
 Three Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
Amount % of NPE Amount % of NPE Amount % of NPE Amount % of NPE 
    ($ in millions)          ($ in millions)      
Non-catastrophe$159.6
 68.4 % $139.6
 62.7 % $20.0
 5.7
$130.8
 58.7 % $140.2
 65.0 % $(9.4) (6.3)
Property catastrophe
 
 
 
 
 
14.8
 6.6
 
 
 14.8
 6.6
Current period159.6
 68.4
 139.6
 62.7
 20.0
 5.7
145.6
 65.3
 140.2
 65.0
 5.4
 0.3
Prior period(26.2) (11.2) (19.8) (8.9) (6.4) (2.3)(18.3) (8.2) (35.5) (16.5) 17.2
 8.3
Net losses and loss expenses$133.4
 57.2 % $119.8
 53.8 % $13.6
 3.4
$127.3
 57.1 % $104.7
 48.5 % $22.6
 8.6

Current year non-catastrophe losses and loss expenses

The increasedecrease in the current year non-catastrophe losses and loss expenses and related ratio was primarily due to the growth of the business and higher reportedlower incurred large property losses during the three months ended JuneSeptember 30, 2014 compared to the same period in 2013.2013, as well as a reduction in IBNR loss reserves due to lower than expected property losses. The reported large non-catastrophe property losses during the three months ended JuneSeptember 30, 2014 were approximately $6.1 million which primarily related to additional development for several storm events in the United States an earthquakethat occurred during the previous quarter. This compares to $14.9 million in Chile, an oil spill in the Gulf of Mexico and a fire at a Russian oil refinery. The increase in the current year non-catastrophe losses and loss expense ratio was primarily due to the higher reported large non-catastrophe property losses discussed above, which resulted in an increase of 6.0 percentage points infor the current year non-catastrophe losses and loss expense ratio.three months ended September 30, 2014.




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Current year property catastrophe losses and loss expenses

During the three months ended JuneSeptember 30, 2014, we incurred property catastrophe losses and June 30, 2013,loss expenses of $8.0 million related to Windstorm Ela, $3.5 million related to Hurricane Odile and $3.3 million related to PCS storm #45, whereas we did not incur any property catastrophe losses.losses during the three months ended September 30, 2013.

Prior year losses and loss expenses

Overall, our reinsurance segment recorded net favorable reserve development of $26.2$18.3 million during the three months ended JuneSeptember 30, 2014 compared to net favorable reserve development of $19.8$35.5 million for the three months ended JuneSeptember 30, 2013, as shown in the tables below.

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(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2014For the Three Months Ended September 30, 2014
2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
($ in millions)($ in millions)
Property$0.4
 $
 $(0.1) $
 $0.1
 $0.4
 $0.4
 $(5.1) $(2.6) $(15.9) $(22.4)$(0.1) $0.9
 $
 $0.1
 $(0.1) $
 $0.6
 $0.6
 $1.1
 $(14.8) $(11.7)
Casualty0.7
 (0.6) (0.5) (0.2) 0.2
 (1.2) 0.2
 0.2
 (0.9) (0.8) (2.9)0.1
 4.6
 (1.0) (1.6) (4.1) (0.8) (0.6) (3.1) (0.1) (0.1) (6.7)
Specialty(0.4) (0.5) (0.1) (0.1) 
 0.2
 0.2
 (0.4) 5.9
 (5.7) (0.9)0.2
 (0.2) 
 (0.1) (0.1) (0.1) (0.6) (0.6) 0.9
 0.7
 0.1
$0.7
 $(1.1) $(0.7) $(0.3) $0.3
 $(0.6) $0.8
 $(5.3) $2.4
 $(22.4) $(26.2)$0.2
 $5.3
 $(1.0) $(1.6) $(4.3) $(0.9) $(0.6) $(3.1) $1.9
 $(14.2) $(18.3)

For the three months ended JuneSeptember 30, 2014, the net favorable reserve development in the property line of business for the 2013 loss year iswas due to lower than expected reported loss activity.

(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2013For the Three Months Ended September 30, 2013
2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
($ in millions)($ in millions)
Property$
 $0.1
 $(0.5) $0.1
 $
 $(0.1) $
 $(0.6) $(1.5) $(22.6) $(25.1)$
 $0.1
 $1.0
 $
 $
 $
 $(0.4) $(2.2) $(6.0) $(14.2) $(21.7)
Casualty(0.3) (1.1) (0.1) 0.8
 
 (1.1) (0.1) 0.7
 3.3
 5.3
 7.4
(1.6) (2.4) 0.6
 0.1
 0.3
 (2.0) (1.4) (0.7) (0.2) 0.4
 (6.9)
Specialty
 (0.3) (0.4) 0.4
 
 (2.7) 1.5
 
 0.8
 (1.4) (2.1)
 (0.1) (0.1) (0.1) (0.1) (0.1) (0.2) 0.3
 (5.9) (0.6) (6.9)
$(0.3) $(1.3) $(1.0) $1.3
 $
 $(3.9) $1.4
 $0.1
 $2.6
 $(18.7) $(19.8)$(1.6) $(2.4) $1.5
 $
 $0.2
 $(2.1) $(2.0) $(2.6) $(12.1) $(14.4) $(35.5)

For the three months ended JuneSeptember 30, 2013, the favorable reserve development for the 2011 and 2012 loss yearyears for our reinsurance segment was largely due to lower than expected reported losses in our property line of business. Our casualty line of business experienced higher than expected loss emergence that caused the unfavorable loss reserve development in the 2011 and 2012 loss years.

Acquisition costs. Acquisition costs increased by $6.3$3.1 million, or 16.7%8.4%, for the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013. The increase was due to the increase in premiums earned, as well as higher profit commission accruals recorded in the current quarter and increased ceding commission charged bycommissions paid to cedents in certain lines of business. The acquisition cost ratio was 18.9%18.0% for the three months ended JuneSeptember 30, 2014 compared to 16.9%17.1% for the three months ended JuneSeptember 30, 2013. The increase in the acquisition cost ratio was due to higher profit commission accruals and increased ceding commission charged by cedents.commissions paid to cedents in certain lines of business.

General and administrative expenses. General and administrative expenses increaseddecreased by $2.1$1.8 million, or 11.6%8.8%, for the three months ended JuneSeptember 30, 2014 compared to the same period in 2013. The increasedecrease in general and administrative expenses was primarily due to higherlower stock-based compensation expense. The general and administrative expense ratios for the three months ended JuneSeptember 30, 2014 and 2013 were 8.6%8.3% and 8.1%9.5%, respectively, due to the higher expenses noted above partially offset by higher net premiums earned.respectively.

Comparison of SixNine Months Ended JuneSeptember 30, 2014 and 2013

Premiums. Gross premiums written decreasedincreased by $6.3$31.4 million, or 0.9%3.7%, for the sixnine months ended JuneSeptember 30, 2014 compared to the same period in 2013. The decreaseincrease was driven primarily by the timing of a renewal that was not renewed in the current period but was previously bound during the six months ended June 30, 2013 partially offset by new business and increased

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renewals across several major lines of business. In our property reinsurance lines of business, we hadpremiums increased premiumsby approximately $16.8 million, which included $3.9 million of approximately $3.6 millionincreased premiums from our collateralized property catastrophe reinsurance program through Aeolus Re. In our specialty lines of business, our crop reinsurance line of business increased gross premiums written by $8.5 million primarily due to increases on renewals and new business. We also experienced non-renewals of certain treaties, particularly in our casualty reinsurance line of business, either due to poor terms and conditions or the cedents not renewing their reinsurance or finding other reinsurance alternatives, and net downward premium adjustments on inforce treaties.reinsurance.










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The table below illustrates our gross premiums written by underwriter location for our reinsurance operations.
Six Months Ended 
 June 30,
 Dollar PercentageNine Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change         Change        2014 2013 Change         Change        
  ($ in millions)      ($ in millions)    
United States$355.9
 $355.3
 $0.6
 0.2 %$458.0
 $424.2
 $33.8
 8.0 %
Bermuda200.6
 218.2
 (17.6) (8.1)%225.9
 245.4
 (19.5) (7.9)%
Asia84.7
 84.4
 0.3
 0.4 %120.9
 118.3
 2.6
 2.2 %
Europe70.4
 60.0
 10.4
 17.3 %83.8
 69.3
 14.5
 20.9 %
$711.6
 $717.9
 $(6.3) (0.9)%$888.6
 $857.2
 $31.4
 3.7 %

The table below illustrates our gross premiums written by line of business for each of the periods indicated.
Six Months Ended 
 June 30,
 Dollar PercentageNine Months Ended 
 September 30,
 Dollar Percentage
2014 2013 Change         Change        2014 2013 Change         Change        
  ($ in millions)      ($ in millions)    
Property$370.3
 $364.0
 $6.3
 1.7 %$453.4
 $436.6
 $16.8
 3.8%
Casualty236.2
 230.3
 5.9
 2.6%
Specialty191.8
 179.6
 12.2
 6.8 %199.0
 190.3
 8.7
 4.6%
Casualty149.5
 174.3
 (24.8) (14.2)%
$711.6
 $717.9
 $(6.3) (0.9)%$888.6
 $857.2
 $31.4
 3.7%

Net premiums written increased by $24.7$45.3 million, or 3.6%5.5%, primarily due to the increase in gross premiums written and not renewing the collateralized retrocessional catastrophe cover partially offset by ceded premiums written for the current year collateralized property catastrophe reinsurance protection.

Net premiums earned increased by $49.9$57.2 million, or 12.1%9.1%, as a result of the increase in net premiums written during 2013 and into 2014, as well as the reduction in ceded earned premium related to the non-renewal of the prior year collateralized retrocessional catastrophe cover.cover partially offset by the current year collateralized property catastrophe reinsurance protection.

Net losses and loss expenses. Net losses and loss expenses increased by $30.5$53.0 million, or 14.3%16.7%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The following is a breakdown of the loss and loss expense ratio for the threenine months ended JuneSeptember 30, 2014 and 2013: 
Six Months Ended 
 June 30, 2014
 Six Months Ended 
 June 30, 2013
 Dollar Change Loss Ratio Percentage Point ChangeNine Months Ended 
 September 30, 2014
 Nine Months Ended 
 September 30, 2013
 Dollar Change Loss Ratio Percentage Point Change
Amount % of NPE Amount % of NPE Amount % of NPE Amount % of NPE 
    ($ in millions)          ($ in millions)      
Non-catastrophe$289.6
 62.5 % $257.4
 62.3 % $32.2
 0.2$407.1
 59.3 % $397.6
 63.3 % $9.5
 (4.0)
Property catastrophe
 
 
 
 
 28.0
 4.1
 
 
 28.0
 4.1
Current period289.6
 62.5
 257.4
 62.3
 32.2
 0.2435.1
 63.4
 397.6
 63.3
 37.5
 0.1
Prior period(46.4) (10.0) (44.7) (10.8) (1.7) 0.8(64.7) (9.4) (80.2) (12.8) 15.5
 3.4
Net losses and loss expenses$243.2
 52.5 % $212.7
 51.5 % $30.5
 1.0$370.4
 54.0 % $317.4
 50.5 % $53.0
 3.5






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Current year non-catastrophe losses and loss expenses

The increase in the current year non-catastrophe losses and loss expenses was primarily due to growth in the reinsurance operations partially offset by lower incurred large property losses during the nine months ended September 30, 2014 compared to the same period in 2013, as well as a reduction in IBNR loss reserves due to lower than expected property losses. The decrease in the current year non-catastrophe losses and the relatedloss expenses ratio was primarily due to higherthe reduction in IBNR loss reserves and lower reported large non-catastrophe property losses during the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013 partially offset by2013. The large non-catastrophe property losses during the mixnine months ended September 30, 2014 were 18.9 million and were primarily related to several storm events in the United States that occurred during the second quarter of business.2014. This compares to $26.5 million in large reported non-catastrophe property losses for the nine months ended September 30, 2013.

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Current year property catastrophe losses and loss expenses

During the sixnine months ended JuneSeptember 30, 2014, we incurred property catastrophe losses and June 30, 2013,loss expenses of $12.5 million related to PCS storm #45, $12.0 million related to Windstorm Ela and $3.5 million related to Hurricane Odile, whereas we did not incur any property catastrophe losses.losses during the nine months ended September 30, 2013.

Prior year losses and loss expenses

Overall, our reinsurance segment recorded net favorable reserve development of $46.4$64.7 million during the sixnine months ended JuneSeptember 30, 2014 compared to net favorable reserve development of $44.7$80.2 million for the sixnine months ended JuneSeptember 30, 2013, as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2014For the Nine Months Ended September 30, 2014
2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total2004 and
Prior
 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
($ in millions)($ in millions)
Property$0.5
 $
 $(0.2) $(0.2) $(0.2) $0.3
 $1.0
 $(5.8) $(4.3) $(29.6) $(38.5)$0.4
 $0.9
 $(0.2) $(0.1) $(0.3) $0.3
 $1.6
 $(5.2) $(3.2) $(44.4) $(50.2)
Casualty(0.7) 
 (1.8) (2.1) (1.2) (1.0) 1.0
 1.1
 (0.2) 1.4
 (3.5)(0.6) 4.6
 (2.8) (3.7) (5.3) (1.8) 0.4
 (2.0) (0.3) 1.3
 (10.2)
Specialty(0.4) (0.3) (0.1) (0.1) 
 0.3
 0.3
 (0.4) 4.8
 (8.5) (4.4)(0.2) (0.5) (0.1) (0.2) (0.1) 0.2
 (0.3) (1.0) 5.7
 (7.8) (4.3)
$(0.6) $(0.3) $(2.1) $(2.4) $(1.4) $(0.4) $2.3
 $(5.1) $0.3
 $(36.7) $(46.4)$(0.4) $5.0
 $(3.1) $(4.0) $(5.7) $(1.3) $1.7
 $(8.2) $2.2
 $(50.9) $(64.7)

For the sixnine months ended JuneSeptember 30, 2014, the net favorable reserve development in the property line of business for the 2013 loss year is due to lower than expected reported loss activity.

(Favorable) and Unfavorable Loss Reserve Development by Loss Year(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2013For the Nine Months Ended September 30, 2013
2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total2003 and
Prior
 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
($ in millions)($ in millions)
Property$
 $0.1
 $(2.3) $0.1
 $
 $(0.2) $(0.1) $(2.9) $(8.5) $(35.5) $(49.3)$
 $0.2
 $(1.3) $0.1
 $
 $(0.2) $(0.5) $(5.1) $(14.5) $(49.7) $(71.0)
Casualty0.2
 (1.2) (0.3) 0.7
 (2.2) (3.6) (0.4) 0.9
 3.3
 5.3
 2.7
(1.4) (3.6) 0.3
 0.8
 (1.9) (5.6) (1.8) 0.2
 3.1
 5.7
 (4.2)
Specialty
 (0.3) (0.5) 0.3
 
 (3.1) 0.9
 (0.1) 2.3
 2.4
 1.9

 (0.4) (0.6) 0.2
 (0.1) (3.2) 0.7
 0.2
 (3.6) 1.8
 (5.0)
$0.2
 $(1.4) $(3.1) $1.1
 $(2.2) $(6.9) $0.4
 $(2.1) $(2.9) $(27.8) $(44.7)$(1.4) $(3.8) $(1.6) $1.1
 $(2.0) $(9.0) $(1.6) $(4.7) $(15.0) $(42.2) $(80.2)

For the sixnine months ended JuneSeptember 30, 2013, the favorable loss reserve development for the 2011 and 2012 loss yearyears for our reinsurance segment was largely due to lower than expected reported losses in our property line of business. The unfavorable loss reserve development in our casualty reinsurance line of business for the 2011 and 2012 loss years was primarily due to the frequency of claims being greater than anticipated.

Acquisition costs. Acquisition costs increased by $13.1$16.2 million, or 18.2%14.8%, for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. The increase was due to the increase in net premiums written, as well as higher profit commission accruals recorded in the current quarterearned and increased ceding commission charged bypaid to cedents in certain lines of business. The acquisition cost ratio was 18.4%18.3% for the sixnine months ended JuneSeptember 30, 2014 compared to 17.4%17.3% for the sixnine months ended JuneSeptember 30, 2013. The increase in the acquisition cost ratio was due to higher profit commission accruals and increased ceding commission charged by cedentspaid to cedents.

General and administrative expenses. General and administrative expenses increased by $1.8 million, or 4.9%,remained constant for the sixnine months ended JuneSeptember 30, 2014 compared to the same period in 2013. The increase in general and administrative expenses was primarily due to higher salary related costs partially offset by lower stock-based compensation expense. The general and administrative expense ratios for the sixnine months ended JuneSeptember 30, 2014 and 2013 were 8.3% and 8.8%9.1%, respectively. The decrease in the general and administrative expense ratio was due to the increase in net premiums earned outpacing the increase in expenses.


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Reserves for Losses and Loss Expenses

Reserves for losses and loss expenses by segment were comprised of the following:
U.S. Insurance International Insurance Reinsurance TotalU.S. Insurance International Insurance Reinsurance Total
Jun 30,
2014
 Dec 31,
2013
 Jun 30,
2014
 Dec 31,
2013
 Jun 30,
2014
 Dec 31,
2013
 Jun 30,
2014
 Dec 31,
2013
Sep 30,
2014
 Dec 31,
2013
 Sep 30,
2014
 Dec 31,
2013
 Sep 30,
2014
 Dec 31,
2013
 Sep 30,
2014
 Dec 31,
2013
($ in millions)($ in millions)
Case reserves$591.9
 $609.8
 $483.6
 $441.0
 $468.1
 $470.1
 $1,543.6
 $1,520.9
$605.5
 $609.8
 $503.8
 $441.0
 $476.7
 $470.1
 $1,586.0
 $1,520.9
IBNR1,607.4
 1,509.2
 1,683.7
 1,710.4
 1,101.0
 1,026.0
 4,392.1
 4,245.6
1,642.7
 1,509.2
 1,702.5
 1,710.4
 1,121.1
 1,026.0
 4,466.3
 4,245.6
Reserve for losses and loss expenses2,199.3
 2,119.0
 2,167.3
 2,151.4
 1,569.1
 1,496.1
 5,935.7
 5,766.5
2,248.2
 2,119.0
 2,206.3
 2,151.4
 1,597.8
 1,496.1
 6,052.3
 5,766.5
Reinsurance recoverables(576.4) (558.7) (717.3) (669.6) (8.0) (6.2) (1,301.7) (1,234.5)(587.7) (558.7) (754.0) (669.6) (7.3) (6.2) (1,349.0) (1,234.5)
Net reserve for losses and loss expenses$1,622.9
 $1,560.3
 $1,450.0
 $1,481.8
 $1,561.1
 $1,489.9
 $4,634.0
 $4,532.0
$1,660.5
 $1,560.3
 $1,452.3
 $1,481.8
 $1,590.5
 $1,489.9
 $4,703.3
 $4,532.0

We participate in certain lines of business where claims may not be reported for many years. Accordingly, management does not solely rely upon reported claims on these lines for estimating ultimate liabilities. We also use statistical and actuarial methods to estimate expected ultimate losses and loss expenses. Loss reserves do not represent an exact calculation of liability. Rather, loss reserves are estimates of what we expect the ultimate resolution and administration of claims will cost. These estimates are based on various factors including underwriters’ expectations about loss experience, actuarial analysis, comparisons with the results of industry benchmarks and loss experience to date. Loss reserve estimates are refined as experience develops and as claims are reported and resolved. Establishing an appropriate level of loss reserves is an inherently uncertain process. Ultimate losses and loss expenses may differ from our reserves, possibly by material amounts.

The following tables provide our ranges of loss and loss expense reserve estimates by business segment as of JuneSeptember 30, 2014:
Reserve for Losses and Loss Expenses
Gross of Reinsurance Recoverable
Reserve for Losses and Loss Expenses
Gross of Reinsurance Recoverable
Carried
Reserves    
 
Low
Estimate    
 
High
Estimate    
Carried
Reserves    
 
Low
Estimate    
 
High
Estimate    
($ in millions)($ in millions)
U.S. insurance$2,199.3
 $1,734.8
 $2,469.5
$2,248.2
 $1,779.3
 $2,530.8
International insurance2,167.3
 1,691.6
 2,378.0
2,206.3
 1,770.2
 2,425.9
Reinsurance1,569.1
 1,281.2
 1,750.5
1,597.8
 1,306.3
 1,776.5
Consolidated (1)5,935.7
 4,795.5
 6,512.1
6,052.3
 4,948.2
 6,640.8
Reserve for Losses and Loss Expenses
Net of Reinsurance Recoverable
Reserve for Losses and Loss Expenses
Net of Reinsurance Recoverable
Carried
Reserves    
 
Low
Estimate    
 
High
Estimate    
Carried
Reserves    
 
Low
Estimate    
 
High
Estimate    
($ in millions)($ in millions)
U.S. insurance$1,622.9
 $1,287.8
 $1,854.3
$1,660.5
 $1,313.5
 $1,909.6
International insurance1,450.0
 1,123.4
 1,606.6
1,452.3
 1,162.9
 1,611.5
Reinsurance1,561.1
 1,275.0
 1,742.1
1,590.5
 1,301.2
 1,768.7
Consolidated (1)4,634.0
 3,763.5
 5,125.8
4,703.3
 3,859.2
 5,208.3
________________________ 
(1)For statistical reasons, it is not appropriate to add together the ranges of each business segment in an effort to determine the low and high range around the consolidated loss reserves.

Our range for each business segment was determined by utilizing multiple actuarial loss reserving methods along with various assumptions of reporting patterns and expected loss ratios by loss year. The various outcomes of these techniques were combined to determine a reasonable range of required loss and loss expense reserves. While we believe our approach to determine the range of loss and loss expense is reasonable, there are no assurances that actual loss experience will be within the ranges of loss and loss expense noted above.

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Our selection of the actual carried reserves is generally above the midpoint of the range. We believe that we should be prudent in our reserving practices due to the lengthy reporting patterns and relatively large limits of net liability for any one risk of our direct excess casualty business and of our casualty reinsurance business. Thus, due to this uncertainty regarding estimates for reserve for losses and loss expenses, we have carried our consolidated reserve for losses and loss expenses, net of reinsurance recoverable, above the midpoint of the low and high estimates for the consolidated net losses and loss expenses. We believe that relying on the more prudent actuarial indications is appropriate for these lines of business.

Reinsurance Recoverable

The following table illustrates our reinsurance recoverable as of JuneSeptember 30, 2014 and December 31, 2013:
 
June 30,
2014
 December 31,
2013
September 30,
2014
 December 31,
2013
($ in millions)($ in millions)
Ceded case reserves$248.8
 $225.8
$261.5
 $225.8
Ceded IBNR reserves1,052.9
 1,008.7
1,087.5
 1,008.7
Reinsurance recoverable$1,301.7
 $1,234.5
$1,349.0
 $1,234.5

We remain obligated for amounts ceded in the event our reinsurers do not meet their obligations. Accordingly, we have evaluated the reinsurers that are providing reinsurance protection to us and will continue to monitor their credit ratings and financial stability. We generally have the right to terminate our treaty reinsurance contracts at any time, upon prior written notice to the reinsurer, under specified circumstances, including the assignment to the reinsurer by A.M. Best of a financial strength rating of less than “A-.” Approximately 99% of ceded reserves as of JuneSeptember 30, 2014 were recoverable from reinsurers who had an A.M. Best rating of “A-” or higher.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. The company believes that its cash flows from operations and investments will provide sufficient liquidity for the foreseeable future.

Holdings is a holding company and transacts no business of its own. Cash flows to Holdings may comprise dividends, advances and loans from its subsidiary companies. Holdings is therefore reliant on receiving dividends and other permitted distributions from its subsidiaries to make dividend payments on its common shares.

Our operating subsidiaries depend upon cash inflows from premium receipts, net of commissions, investment income and proceeds from sales and redemptions of investments. Cash outflows for our operating subsidiaries are in the form of claims payments, net of reinsurance recoveries, reinsurance premium payments, purchase of investments, operating expenses and income tax payments as well as dividend payments to the holding company.

Historically, our operating subsidiaries have generated sufficient cash flows to meet all of their obligations. Because of the inherent volatility of our business, the seasonality in the timing of payments by insureds and cedents, the irregular timing of loss payments, and the impact of a change in interest rates and credit spreads on the investment income as well as seasonality in coupon payment dates for fixed income securities, cash flows from operating activities may vary between periods. In the unlikely event that paid losses exceed operating cash flows in any given period, we would use our cash balances available, liquidate a portion of our investment portfolio or borrow under our revolving loan facility (see "Credit Facilities" below) in order to meet our short-term liquidity needs.

Our total investments and cash and cash equivalents totaled $8.8$9.0 billion as of JuneSeptember 30, 2014, the main components of which were investment grade fixed income securities and cash and cash equivalents. As of JuneSeptember 30, 2014, we held $635.1$831.3 million of unrestricted cash and cash equivalents and $518.0$358.5 million of fixed income securities with a maturity of less than one year to meet short-term liquidity needs. Our remaining fixed income securities, equity securities and "other invested assets" are available to meet our long-term liquidity needs.


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As of JuneSeptember 30, 2014, we had $150 million available under our revolving loan facility.

Dividend Restrictions

The jurisdictions in which our operating subsidiaries are licensed to write business impose regulations requiring companies to maintain or meet various defined statutory ratios, including solvency and liquidity requirements. Some jurisdictions also place restrictions on the declaration and payment of dividends and other distributions. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in the Company’s 2013 Form 10-K.

Cash Flows 
 Six Months Ended 
 June 30,
 Nine Months Ended 
 September 30,
 2014 2013 2014 2013
 ($ in millions) ($ in millions)
Cash flows provided by operating activities $448.9
 $133.6
 $669.7
 $338.2
Cash flows used in investing activities (184.2) (43.4)
Cash flows (used in) provided by investing activities (154.1) 80.9
Cash flows used in financing activities (164.7) (90.3) (213.6) (141.8)
Effect of exchange rate changes on foreign currency cash 3.2
 (7.7) (2.6) (6.2)
Net increase (decrease) in cash and cash equivalents 103.2
 (7.8)
Net increase in cash and cash equivalents 299.4
 271.1
Cash and cash equivalents, beginning of period 531.9
 681.9
 531.9
 681.9
Cash and cash equivalents, end of period $635.1
 $674.1
 $831.3
 $953.0

The primary sources of cash inflows from operating activities are premiums received, loss payments from reinsurers, return of funds held balances related to our collateralized property catastrophe reinsurance program through Aeolus Re, and investment income. The primary sources of cash outflows from operating activities are ceded premiums paid to reinsurers, claims paid, contributions of funds held balances, commissions paid, operating expenses, interest expense and income taxes. The primary factor in our ability to generate positive operating cash flow is underwriting profitability. We have generated positive operating cash flow for more than 10 consecutive years.

In our casualty lines of business, claims may be reported and settled many years after the coverage period has terminated. As a result, we expect that we will generate significant operating cash flow as we accumulate casualty loss reserves on our balance sheet. In our property lines of business, claims are generally reported and paid within a relatively short period of time and we expect volatility in our operating cash flows as losses are incurred. We expect increases in the amount of expected loss payments in future periods with a resulting decrease in operating cash flow; however, we do not expect loss payments to exceed the premiums generated. Actual premiums written and collected and losses and loss expenses paid in any period could vary materially from our expectations and could have a significant and adverse effect on operating cash flow.

The increase in cash flows from operations was primarily due to the net receipt of $212.3$232.0 million of our funds held balance from Aeolus Re, which is included in "funds held" on the unaudited condensed consolidated balance sheets, for the 2013 and prior underwriting years. The return of our funds held balance from Aeolus Re is a function of the performance of each underwriting year. The timing and the amounts received from Aeolus Re can vary significantly, and we could potentially not receive any amounts back.

Cash flows from investing activities consist primarily of proceeds on the sale of investments and payments for investments acquired in addition to changes in restricted cash. The change in cash flows used in investing activities reflects the higher net purchases of securities during the sixnine months ended JuneSeptember 30, 2014 compared to the same period in 2013.2013 primarily due to the increase in operating cash flow.

Cash flows from financing activities consist primarily of capital raising activities, which include the issuance of common shares or debt, the repurchase of our common shares, the payment of dividends and the repayment of debt. The increase in cash flows used in financing activities was due to the $55.2$46.0 million increase in share repurchases for the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. Dividends paid increased as we increased our quarterly dividend per share amount to $0.167$0.225 in 2014 from $0.125 in 2013.





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Investments

Our funds are primarily invested in liquid, high-grade fixed income securities. As of JuneSeptember 30, 2014 and December 31, 2013, 88.3%88.0% and 89.3%, respectively, of our fixed income portfolio consisted of investment grade securities. The maturity distribution of our fixed-maturity portfolio (on a fair value basis) as of JuneSeptember 30, 2014 and December 31, 2013 was as follows: 
 June 30,
2014
 December 31,
2013
 September 30,
2014
 December 31,
2013
 ($ in millions) ($ in millions)
Due in one year or less $518.0
 $838.8
 $358.5
 $838.8
Due after one year through five years 2,805.5
 2,698.8
 2,935.5
 2,698.8
Due after five years through ten years 739.2
 697.8
 792.5
 697.8
Due after ten years 93.2
 67.0
 101.0
 67.0
Mortgage-backed 1,323.8
 1,292.5
 1,240.4
 1,292.5
Asset-backed 677.4
 505.9
 700.4
 505.9
Total $6,157.1
 $6,100.8
 $6,128.3
 $6,100.8

We have investments in "other invested assets", comprising interests in hedge funds, private equity funds, other private securities and high yield loan funds, the carrying value of which was $932.6$929.2 million as of JuneSeptember 30, 2014. Some of these funds have redemption notice requirements. For each of our funds, liquidity is allowed after certain defined periods based on the terms of each fund. See Note 4(b) “Investments — Other Invested Assets” to our unaudited condensed consolidated financial statements for additional details on our other invested assets.

We do not believe that inflation has had a material effect on our consolidated results of operations. The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. The effects of inflation are considered implicitly in pricing. Loss reserves are established to recognize likely loss settlements at the date payment is made. Those reserves inherently recognize the effects of inflation. The actual effects of inflation on our results cannot be accurately known, however, until claims are ultimately resolved.

Credit Facilities

In the normal course of our operations, we enter into agreements with financial institutions to obtain secured and unsecured credit facilities.

Allied World Assurance Company, Ltd currently has access to up to $1.45 billion in letters of credit under two letter of credit facilities, a $1.0 billion uncommitted secured facility with Citibank Europe plc and a $450 million committed secured credit facility with a syndication of lenders (the “Amended Secured Credit Facility”). These credit facilities are primarily for the issuance of standby letters of credit to support obligations in connection with the insurance and reinsurance business.

The letters of credit issued under the credit facility with Citibank Europe plc are deemed to be automatically extended without amendment for twelve months from the expiry date, or any future expiration date unless at least 30 days prior to any expiration date Citibank Europe plc notifies us that they elect not to consider the letters of credit renewed for any such additional period.

A portion of the Amended Secured Credit Facility may also be used for revolving loans for general corporate and working capital purposes, up to a maximum of $150 million. We may request that existing lenders under the Amended Secured Credit Facility make additional commitments from time to time, up to $150 million, subject to approval by the lenders. The Amended Secured Credit Facility contains representations, warranties and covenants customary for similar bank loan facilities, including certain covenants that, among other things, require us to maintain a certain leverage ratio and financial strength rating. We are in compliance with all covenants under the Amended Secured Credit Facility as of JuneSeptember 30, 2014.

As of JuneSeptember 30, 2014, we had combined unused letters of credit capacity of $747.6$984.1 million from the Amended Secured Credit Facility and Citibank Europe plc. We believe that this remaining capacity is sufficient to meet our future letter of credit needs. During the sixnine months ended JuneSeptember 30, 2014, we did not utilize the revolving loan available under the Amended Secured Credit Facility.



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Allied World Assurance Company, AG entered into a 20-year mortgage commitment with a Swiss bank for a company-used office building in Zug, Switzerland. See "Long-Term Debt" below for additional information regarding the 20-year mortgage commitment. In conjunction with the mortgage commitment, Allied World Assurance Company, AG entered into a three-year credit facility with a Swiss bank that provides up to CHF 5.0 million for general corporate purposes; however, we will use the proceeds from the credit facility to fund the purchase of the office building in Zug, Switzerland. The interest rate for the credit facility is 2.5%.

Pledged Assets

We use trust accounts primarily to meet security requirements for inter-company and certain reinsurance transactions. We also have cash and cash equivalents and investments on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with reinsurance contract provisions and relevant insurance regulations. In addition, our credit facilities are collateralized, at least to the extent of letters of credit outstanding at any given time.

Security arrangements with ceding insurers may subject our assets to security interests or require that a portion of our assets be pledged to, or otherwise held by, third parties. Both of our letter of credit facilities are fully collateralized by assets held in custodial accounts at the Bank of New York Mellon held for the benefit of the banks. Although the investment income derived from our assets while held in trust accrues to our benefit, the investment of these assets is governed by the terms of the letter of credit facilities or the investment regulations of the state or territory of domicile of the ceding insurer, which may be more restrictive than the investment regulations otherwise applicable to us. The restrictions may result in lower investment yields on these assets, which may adversely affect our profitability.

As of JuneSeptember 30, 2014 and December 31, 2013, $2,745.4$3,082.6 million and $2,894.4 million, respectively, of cash and cash equivalents and investments were deposited, pledged or held in escrow accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.

In addition, as of JuneSeptember 30, 2014 and December 31, 2013, a further $886.2$543.8 million and $1,053.6 million, respectively, of cash and cash equivalents and investments were pledged as collateral for our credit facilities. The decrease in the assets pledged as collateral for our credit facilities was primarily due to a reduction in funding to various cedents where we were overfunded and our establishment of a direct collateral arrangement for our Lloyd's operations and, as such, the pledged assets are included in the $3,082.6 million noted above, whereas previously they were included in the pledged assets for our credit facilities.

We do not currently anticipate that the restrictions on liquidity resulting from restrictions on the payment of dividends by our subsidiary companies or from assets committed in trust accounts or to collateralize the letter of credit facilities will have a material impact on our ability to carry out our normal business activities, including interest and dividend payments, respectively, on our senior notes (described below) and common shares.

Financial Strength Ratings

Financial strength ratings represent the opinions of rating agencies on our capacity to meet our obligations. In the event of a significant downgrade in ratings, our ability to write business and to access the capital markets could be impacted. Our financial strength ratings as of JuneSeptember 30, 2014 have not changed since December 31, 2013. See Item 1. “Business” in our 2013 Form 10-K.

Capital Resources

The table below sets forth the capital structure of the Company as of JuneSeptember 30, 2014 and December 31, 2013: 
 June 30,
2014
 December 31,
2013
 September 30,
2014
 December 31,
2013
 ($ in millions) ($ in millions)
Senior notes $798.6
 $798.5
 $798.7
 $798.5
Shareholders’ equity 3,682.8
 3,519.8
 3,673.6
 3,519.8
Total capitalization $4,481.4
 $4,318.3
 $4,472.3
 $4,318.3
Debt to total capitalization 17.8% 18.5% 17.9% 18.5%

On September 10, 2012, we filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange CommissionSEC in which we may offer from time to time common shares of Allied World Switzerland, senior or subordinated debt securities of Allied World Bermuda, guarantees of debt securities of Allied World Bermuda, warrants to purchase common

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shares of Allied World Switzerland, warrants to purchase debt securities of Allied World Bermuda or units which may consist of any combination of the securities listed above. The registration statement is intended to provide us with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and our capital needs.

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Share Repurchases

On May 1, 2014, our shareholders approved a new share repurchase program in order for us to repurchase up to $500.0 million of our common shares. This new share repurchase program supersedes the 2012 share repurchase program and no further repurchases will be made under the 2012 share repurchase program. Under the terms of this new share repurchase program, the first three million of common shares repurchased will remain in treasury and will be used by us to satisfy share delivery obligations under our equity-based compensation plans. Any additional common shares will be designated for cancellation at acquisition and will be canceled upon shareholder approval. As of JuneSeptember 30, 2014 approximately $454.2$429.2 million remained under this share repurchase authorization. Effective in the third quarter of 2014, we temporarily suspended our share repurchase program so as to preserve capital for future obligations such as the purchase of the Hong Kong and Singapore operations of RSA and any catastrophic events that may occur during the remainder of the year. We continually monitor our capital levels and will restart the share repurchase program when we believe it is prudent to do so.

During the three month and sixnine months ended JuneSeptember 30, 2014, our share repurchases were as follows: 
Three Months Ended 
 June 30, 2014
 Six Months Ended 
 June 30, 2014
Three Months Ended 
 September 30, 2014
 Nine Months Ended 
 September 30, 2014
($ in millions)($ in millions)
Common shares repurchased1,949,496
 3,961,692
654,851
 4,616,543
Total cost of shares repurchased$70.9
 $139.5
$25.0
 $164.5
Average price per share$36.36
 $35.22
$38.17
 $35.64

Shares repurchased by the Company and not designated for cancellation are classified as “Treasury shares, at cost” on the consolidated balance sheets. The Company will issue shares out of treasury principally related to the Company’s employee benefit plans. Shares repurchased and designated for cancellation are constructively retired and recorded as a share cancellation.

Long-Term Debt

In July 2006, Allied World Bermuda issued $500.0 million aggregate principal amount of 7.50% senior notes due August 1, 2016, with interest payable August 1 and February 1 each year. Allied World Bermuda can redeem the senior notes prior to maturity, subject to payment of a “make-whole” premium; however, Allied World Bermuda currently has no intention of redeeming the notes.

In November 2010, Allied World Bermuda issued $300.0 million aggregate principal amount of 5.50% senior notes due November 1, 2020, with interest payable May 15 and November 15 each year, commencing May 15, 2011. Allied World Bermuda can redeem the senior notes prior to maturity, subject to payment of a “make-whole” premium; however, Allied World Bermuda currently has no intention of redeeming the notes.

The senior notes issued in 2006 and 2010 have been unconditionally and irrevocably guaranteed for the payment of the principal and interest by Holdings.

Allied World Assurance Company, AG entered into a 20-year mortgage commitment with a Swiss bank for a company-used office building in Zug, Switzerland. The total proceeds to be received under the mortgage are CHF 18.0 million with a fixed annual interest rate of 3.2% payable quarterly. The mortgage payments will be CHF 0.3 million per year, plus accrued interest, for the first 19 years with the remaining balance payable at the end of the mortgage. We will receive the proceeds from the bank during the fourth quarter of 2014 at which time we will recognize the mortgage loan liability in our consolidated balance sheet.

Off-Balance Sheet Arrangements
As of JuneSeptember 30, 2014, we did not have any off-balance sheet arrangements.




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Item 3.Quantitative and Qualitative Disclosures About Market Risk.
We believe that we are principally exposed to three types of market risk: interest rate risk, credit risk and currency risk.
The fixed income securities in our investment portfolio are subject to interest rate risk and credit risk. Any changes in interest rates and credit spreads have a direct effect on the fair values of fixed income securities. As interest rates rise, the fair values fall, and vice versa. As credit spreads widen, the fair values fall, and vice versa.
In the table below changes in fair values as a result of changes in interest rates are determined by calculating hypothetical JuneSeptember 30, 2014 ending prices based on yields adjusted to reflect the hypothetical changes in interest rates, comparing such hypothetical ending prices to actual ending prices, and multiplying the difference by the principal amount of the security. The

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sensitivity analysis is based on estimates. The estimated changes of our fixed maturity investments and cash and cash equivalents are presented below and actual changes for interest rate shifts could differ significantly.
Interest Rate Shift in Basis PointsInterest Rate Shift in Basis Points
-200 -100 -50  +50 +100 +200-200 -100 -50  +50 +100 +200
($ in millions)($ in millions)
Total fair value$7,201.7
 $7,065.9
 $6,993.9
 $6,920.0
 $6,846.1
 $6,773.2
 $6,630.6
$7,406.7
 $7,276.9
 $7,208.4
 $7,138.5
 $7,068.5
 $6,999.3
 $6,863.7
Fair value change from base281.7
 145.9
 73.9
 
 (73.9) (146.8) (289.4)268.2
 138.4
 69.9
 
 (70.0) (139.2) (274.8)
Change in unrealized appreciation/(depreciation)4.1% 2.1% 1.1% % (1.1)% (2.1)% (4.2)%3.8% 1.9% 1.0% % (1.0)% (1.9)% (3.8)%
In the table below changes in fair values as a result of changes in credit spreads are determined by calculating hypothetical JuneSeptember 30, 2014 ending prices adjusted to reflect the hypothetical changes in credit spreads, comparing such hypothetical ending prices to actual ending prices, and multiplying the difference by the principal amount of the security. The sensitivity analysis is based on estimates. The estimated changes of our non-cash, non-U.S. Treasury fixed maturity investments are presented below and actual changes in credit spreads could differ significantly.
Credit Spread Shift in Basis PointsCredit Spread Shift in Basis Points
-200 -100 -50  +50 +100 +200-200 -100 -50  +50 +100 +200
($ in millions)($ in millions)
Total fair value$5,318.3
 $5,208.4
 $5,153.5
 $5,098.5
 $5,043.5
 $4,988.6
 $4,878.7
$5,371.3
 $5,250.5
 $5,190.1
 $5,129.8
 $5,069.4
 $5,009.0
 $4,888.2
Fair value change from base219.8
 109.9
 55.0
 
 (55.0) (109.9) (219.8)241.5
 120.7
 60.3
 
 (60.4) (120.8) (241.6)
Change in unrealized appreciation/(depreciation)4.3% 2.2% 1.1% % (1.1)% (2.2)% (4.3)%4.7% 2.4% 1.2% % (1.2)% (2.4)% (4.7)%
In addition to credit spread risk, our portfolio is also exposed to the risk of securities being downgraded or of issuers defaulting. In an effort to minimize this risk, our investment guidelines have been defined to ensure that the assets held are well diversified and are primarily high-quality securities.

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The following table shows the types of securities in our portfolio, their fair market values, average rating and portfolio percentage as of JuneSeptember 30, 2014.
Fair Value 
 June 30, 2014
 
Average  
Rating
 
Portfolio
Percentage  
Fair Value 
 September 30, 2014
 
Average  
Rating
 
Portfolio
Percentage  
($ in millions)    ($ in millions)    
Cash and cash equivalents$762.9
 AAA 8.7%$1,010.2
 AAA 11.2%
U.S. government securities1,058.6
 AA+ 11.9%998.5
 AA+ 11.0%
U.S. government agencies215.7
 AA+ 2.5%185.6
 AA+ 2.1%
Non-U.S. government and government agencies185.1
 AA+ 2.1%219.3
 AA+ 2.4%
State, municipalities and political subdivisions261.3
 AA- 3.0%260.7
 AA- 2.9%
Mortgage-backed securities (“MBS”):      
Agency MBS659.0
 AA+ 7.5%593.2
 AA+ 6.6%
Non-agency MBS129.5
 B+ 1.5%126.0
 B+ 1.4%
Commercial MBS535.3
 BBB 6.1%521.2
 BBB 5.8%
Total mortgage-backed securities1,323.8
 15.1%1,240.4
 13.8%
Corporate securities:      
Financials1,168.9
 A 13.3%1,194.9
 A 13.3%
Industrials1,167.5
 BBB 13.3%1,202.9
 BBB 13.3%
Utilities98.9
 BBB+ 1.1%125.5
 BBB+ 1.4%
Total corporate securities2,435.3
 27.7%2,523.3
 28.0%
Asset-backed securities:      
Credit cards67.6
 AAA 0.8%72.7
 AAA 0.8%
Auto receivables11.2
 AAA 0.1%27.3
 AAA 0.3%
Student Loans154.9
 AA+ 1.8%164.1
 AA+ 1.8%
Collateralized loan obligations381.6
 AA 4.3%372.2
 AA 4.1%
Other62.1
 AAA 0.7%64.1
 AAA 0.7%
Total asset-backed securities677.4
 7.7%700.4
 7.8%
Other invested assets:      
Private equity266.8
 N/A 3.0%303.1
 N/A 3.4%
Hedge funds505.2
 N/A 5.7%471.5
 N/A 5.2%
Other private securities128.1
 N/A 1.5%123.1
 N/A 1.4%
High yield loan fund32.5
 N/A 0.4%31.5
 N/A 0.3%
Total other invested assets932.6
 10.6%929.2
 10.3%
Equities938.1
 N/A 10.7%945.1
 N/A 10.5%
Total investment portfolio$8,790.8
 100.0%$9,012.7
 100.0%
As of JuneSeptember 30, 2014, we held $6.2$6.1 billion of fixed income securities. Of those assets, approximately 88.3%88.0% were rated investment grade (Baa3/BBB- or higher) with the remaining 11.7%12.0% rated in the below investment grade category. The average credit quality of the fixed maturity portfolios was A+ by Standard & Poor’s.
Our agency pass-through mortgage-backed securities are exposed to prepayment risk, which occurs when holders of individual mortgages increase the frequency with which they prepay the outstanding principal before the maturity date to refinance at a lower interest rate cost. Given the proportion that these securities comprise of the overall portfolio, and the current interest rate environment and condition of the credit market, prepayment risk is not considered significant at this time.
Our non-agency commercial mortgage-backed securities are subject to the risk of non-payment due to increased levels of delinquencies, defaults and losses on commercial loans that cumulatively create shortfalls beyond the level of subordination in our specific securities.
As of JuneSeptember 30, 2014, we held investments in "other invested assets" with a carrying value of $932.6$929.2 million. Included in other invested assets are private equity funds, hedge funds, other private securities and a high yield loan fund. Investments in

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these types of assets involve certain risks related to, among other things, the illiquid nature of the fund shares, the limited operating history of these investments, as well as risks associated with the strategies employed by the managers of these investments. The funds’ objectives are generally to seek attractive long-term returns with lower volatility by investing in a range of diversified investment strategies. As our reserves and capital continue to build, we may consider additional investments in these or other alternative investments.
As of JuneSeptember 30, 2014, our direct exposure to European credit across all of Europe was $748.2$774.3 million as outlined in the table below and is included within “fixed maturity investments trading, at fair value” and “equity securities trading, at fair value” in the consolidated balance sheets. As of JuneSeptember 30, 2014, we had no direct sovereign exposure to Greece, Ireland, Italy, Portugal, Spain or Ukraine.
June 30, 2014September 30, 2014
Sovereign and 
Sovereign
Guaranteed
 
Structured   
Products
 
Corporate
Bonds and   
Equities
 
Total
Exposure     
Sovereign and 
Sovereign
Guaranteed
 
Structured   
Products
 
Corporate
Bonds and   
Equities
 
Total
Exposure     
($ in millions)($ in millions)
Austria$
 $
 $0.1
 $0.1
$
 $
 $0.1
 $0.1
Belgium
 
 15.8
 15.8

 
 15.5
 15.5
Denmark
 
 2.0
 2.0

 
 2.3
 2.3
Finland
 
 1.2
 1.2

 
 1.5
 1.5
France
 0.9
 207.4
 208.3

 
 225.1
 225.1
Germany31.8
 
 21.1
 52.9
29.9
 
 17.2
 47.1
Greece
 
 0.5
 0.5
Hungary
 
 0.2
 0.2

 
 0.3
 0.3
Ireland
 5.2
 1.5
 6.7

 
 2.0
 2.0
Italy
 
 5.4
 5.4

 
 4.4
 4.4
Luxembourg
 3.7
 14.3
 18.0

 3.6
 15.5
 19.1
Netherlands34.3
 0.8
 79.9
 115.0
34.1
 
 87.4
 121.5
Norway
 
 24.7
 24.7

 
 28.2
 28.2
Poland
 
 0.7
 0.7
Portugal
 
 0.7
 0.7

 
 0.6
 0.6
Spain
 
 17.8
 17.8

 
 18.5
 18.5
Sweden
 
 45.7
 45.7

 
 44.6
 44.6
Switzerland2.3
 
 43.6
 45.9
2.2
 
 49.8
 52.0
United Kingdom27.3
 4.2
 155.7
 187.2
26.0
 4.1
 161.0
 191.1
Total exposure$95.7
 $14.8
 $637.7
 $748.2
$92.2
 $7.7
 $674.4
 $774.3
The U.S. dollar is our reporting currency and the functional currency of all of our operating subsidiaries. However, we enter into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, we maintain a portion of our investments and liabilities in currencies other than the U.S. dollar, primarily Euro, British Sterling, Swiss Franc and the Canadian dollar. Receivables in non-U.S. currencies are generally converted into U.S. dollars at the time of receipt. When we incur a liability in a non-U.S. currency, we carry such liability on our books in the original currency. These liabilities are converted from the non-U.S. currency to U.S. dollars at the time of payment. As a result, we have an exposure to foreign currency risk resulting from fluctuations in exchange rates. We utilize a hedging strategy to minimize the potential loss of value caused by currency fluctuations by using foreign currency forward contract derivatives that expire in 90 days from purchase.
As of JuneSeptember 30, 2014 and December 31, 2013, approximately 4.3%4.1% and 2.3%, respectively, of our total investments and cash and cash equivalents were denominated in currencies other than the U.S. dollar. Of our business written during the sixnine months ended JuneSeptember 30, 2014 and 2013, approximately 14% and 11%, respectively, was written in currencies other than the U.S. dollar.
Item 4.Controls and Procedures.

In connection with the preparation of this quarterly report, our management has performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and

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procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of JuneSeptember 30, 2014. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of JuneSeptember 30, 2014, our Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide an absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

No changes were made in our internal controls over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), during the quarter ended JuneSeptember 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION
Item 1.Legal Proceedings.
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. These legal proceedings generally relate to claims asserted by or against the Company in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under these proceedings are included in the reserve for losses and loss expenses in the Company’s consolidated balance sheets. As of JuneSeptember 30, 2014, the Company was not a party to any material legal proceedings arising outside the ordinary course of business that management believes will have a material adverse effect on the Company’s results of operations, financial position or cash flow.

Item 1A.Risk Factors.
Our business is subject to a number of risks, including those identified in Item 1A. of Part I of our 2013 Form 10-K, that could have a material adverse effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. There have been no material changes to the risk factors described in our 2013 Form 10-K. The risks described in our 2013 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could have a material adverse effect on our business, results of operations, financial condition and/or liquidity.

On August 22, 2014, Allied World Assurance Company, Ltd entered into (i) a Sale of Business Agreement with RSA, with respect to RSA’s Hong Kong insurance operations (the “Hong Kong Purchase Agreement”); and (ii) a Sale of Business Agreement with RSA with respect to RSA’s Singapore insurance operations (the “Singapore Purchase Agreement” and together with the Hong Kong Purchase Agreement, collectively, the “Purchase Agreements”). The Purchase Agreements provide that Allied World Assurance Company, Ltd will acquire the in-force insurance portfolios and related assets and liabilities of RSA’s Hong Kong and Singapore insurance operations. The following are a number of risks that we face in connection with the proposed acquisitions.

The occurrence of any event, change or other circumstances that could give rise to the termination of the Purchase Agreements could adversely affect our future business.

There are significant risks and uncertainties associated with the acquisitions. The occurrence of certain events, changes or any other circumstances could give rise to the termination of one or both of the Purchase Agreements and cause the acquisitions not to be completed. There is no assurance that we will receive the necessary regulatory approvals from the Office of the

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Commissioner of Insurance in Hong Kong and the Monetary Authority of Singapore as well as the High Court of Singapore. If we fail to obtain such approvals or meet other conditions necessary to complete the acquisitions set forth in the Purchase Agreements, we would not be able to close the transactions. Failure to complete the acquisition(s) would prevent us from realizing its anticipated benefits to our business.

We must obtain regulatory approvals to complete the acquisitions, which, if delayed, not granted or granted with unacceptable conditions may jeopardize or delay the acquisitions, result in additional expense or reduce the anticipated benefits of the acquisitions.

We must obtain regulatory approvals from the Office of the Commissioner of Insurance in Hong Kong and the Monetary Authority of Singapore as well as the High Court of Singapore prior to the completion of the acquisitions. The regulatory authorities from which we seek approvals have broad discretion in administering relevant laws and regulations. As a condition to the approval of the acquisitions, regulatory authorities may impose requirements or limitations that could negatively affect the way we conduct our Hong Kong and/or Singapore business operations post-acquisition. If we agree to any material conditions or restrictions in order to obtain any approvals required to complete the acquisitions, these conditions or restrictions could adversely affect our ability to integrate each company’s businesses or reduce the anticipated benefits of the acquisitions.

Our business could be adversely impacted by uncertainty related to the proposed acquisitions, whether or not the acquisitions are completed.

Whether or not the acquisitions are completed, the announcement and pendency of the acquisitions could impact our business, which could have an adverse effect on our financial condition, results of operations and the success of the acquisitions, including:

that the proposed acquisitions disrupt our current business plans and operations;

our management's attention being directed toward the completion of the acquisitions and transaction-related considerations and being diverted away from our day-to-day business operations and the execution of our current business plans; and

we may incur significantly higher transaction costs than we currently anticipate, such as legal and accounting fees, and other costs, fees, expenses and charges related to the acquisitions, whether or not the acquisitions are completed.

The anticipated benefits of the acquisitions may not be realized fully or at all or may take longer to realize than expected.

The acquisitions involve the integration of RSA's Hong Kong and Singapore operations with and into our current Hong Kong and Singapore branch operations, which have previously operated independently. We will devote significant management attention and resources integrating the Hong Kong and Singapore businesses. Delays in this process could adversely affect our business, results of operations, financial condition and share price after the completion of the acquisitions. Achieving the anticipated benefits of the acquisitions is subject to a number of uncertainties, including whether RSA's Hong Kong and Singapore businesses and our business are integrated in an efficient and effective manner, and general competitive factors in the marketplace. We may experience unanticipated difficulties or expenses in connection with integrating these businesses, including:

retaining existing employees, clients, brokers, agents and third-party service providers of RSA's Hong Kong and Singapore operations;

retaining and integrating management and other key employees of RSA's Hong Kong and Singapore operations;

unanticipated issues in integrating information, communications, marketing, administrative and other systems; and

potential charges to earnings resulting from the application of purchase accounting to the transaction.

Even if the business operations are integrated successfully, there can be no assurance that we will realize the full benefits of synergies that we currently expect from this integration or that these benefits will be achieved within the anticipated time frame. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected

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revenues and diversion of management’s time and energy and could materially adversely affect our business, financial condition and results of operations.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
 
(c)The following table summarizes our repurchases of our common shares during the three months ended JuneSeptember 30, 2014:
Period 
Total Number  
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased   
as Part of Publicly
Announced Plans
or Programs  
 
Maximum Dollar Value
(or Approximate
Dollar Value) of
Shares that May Yet
be Purchased Under
the Plans or Programs
April 1 - 30 2014 690,000
 $34.76
 690,000
 $142.9 million  
May 1 - 31, 2014 630,000
 36.79
 630,000
 477.9 million  
June 1 - 30, 2014 629,496
 37.65
 629,496
 454.2 million  
Total 1,949,496
 $36.36
 1,949,496
 $454.2 million(1)
Period 
Total Number  
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased   
as Part of Publicly
Announced Plans
or Programs  
 
Maximum Dollar Value
(or Approximate
Dollar Value) of
Shares that May Yet
be Purchased Under
the Plans or Programs
July 1 - 31, 2014 654,851
 $38.17
 654,851
 $429.2 million  
August 1 - 31, 2014 
 
 
 429.2 million  
September 1 - 30, 2014 
 
 
 429.2 million  
Total 654,851
 $38.17
 654,851
 $429.2 million(1)
________________________  
(1)At the 2014 Annual Shareholder Meeting on May 1, 2014, Holdings’ shareholders approved a new, two-year $500 million share repurchase program. The newPlease see Part I, Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Share Repurchases” for more information about our share repurchase program superseded the 2012 share repurchase program effective May 1, 2014.program. Share repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise.


Item 3.Defaults Upon Senior Securities.
None.

Item 4.Mine Safety Disclosures.
Not applicable.

Item 5.Other Information.
None.

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Item 6.Exhibits.

Exhibit
Number
 Description
   
3.1(1)2.1(1)Sale of Business Agreement by and between Royal & Sun Alliance Insurance plc and Allied World Assurance Company, Ltd related to Hong Kong operations, dated as of August 22, 2014.
2.2(2)Sale of Business Agreement by and between Royal & Sun Alliance Insurance plc and Allied World Assurance Company, Ltd related to Singapore operations, dated as of August 22, 2014.
3.1(3) Articles of Association of Allied World Assurance Company Holdings, AG, as amended and restated.
10.1(2)†Employment Agreement, dated as of May 1, 2014, by and between Allied World National Assurance Company and Louis P. Iglesias.
   
31.1 Certification by Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification by Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1* Certification by Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2* Certification by Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.1 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of JuneSeptember 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations and Comprehensive Income for the three and sixnine months ended JuneSeptember 30, 2014 and 2013, (iii) the Consolidated Statements of Shareholders’ Equity for the sixnine months ended JuneSeptember 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2014 and 2013 and (v) the Notes to the Consolidated Financial Statements.
________________________ 
(1)
Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on August 25, 2014.

(2)Incorporated herein by reference to Exhibit 2.2 to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on August 25, 2014.
(3)Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on May 2,July 29, 2014.
(2)
Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Allied World Assurance Company Holdings, AG filed with the SEC on August 2, 2013. Other than with respect to commencement date, title, base salary and employer, the employment agreement for Mr. Louis P. Iglesias is materially identical to the employment agreement for Mr. John Gauthier filed thereto.

Management contract or compensatory plan, contract or arrangement.

  
*These certifications are being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of title 18 United States Code) and are not being filed as part of this report.
  



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
Dated: July 23,October 22, 2014  
   
 By:/s/ Scott A. Carmilani
 Name: Scott A. Carmilani
 Title:President and Chief Executive Officer
Dated: July 23,October 22, 2014  
   
 By:/s/ Thomas A. Bradley
 Name:Thomas A. Bradley
 Title:Executive Vice President and Chief Financial Officer
Dated: July 23,October 22, 2014  
   
 By:/s/ Kent W. Ziegler
 Name:Kent W. Ziegler
 Title:Senior Vice President, Finance and Chief Accounting Officer

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EXHIBIT INDEX
Exhibit
Number
 Description
   
3.1(1)2.1(1)Sale of Business Agreement by and between Royal & Sun Alliance Insurance plc and Allied World Assurance Company, Ltd related to Hong Kong operations, dated as of August 22, 2014.
2.2(2)Sale of Business Agreement by and between Royal & Sun Alliance Insurance plc and Allied World Assurance Company, Ltd related to Singapore operations, dated as of August 22, 2014.
3.1(3) Articles of Association of Allied World Assurance Company Holdings, AG, as amended and restated.
10.1(2)†

Employment Agreement, dated as of May 1, 2014, by and between Allied World National Assurance Company and Louis P. Iglesias.

   
31.1 Certification by Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification by Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1* Certification by Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2* Certification by Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.1 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of JuneSeptember 30, 2014 and December 31, 2013, (ii) the Consolidated Statements of Operations and Comprehensive Income for the three and sixnine months ended JuneSeptember 30, 2014 and 2013, (iii) the Consolidated Statements of Shareholders’ Equity for the sixnine months ended JuneSeptember 30, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2014 and 2013 and (v) the Notes to the Consolidated Financial Statements.
_______________________________________________ 
(1)Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on August 25, 2014.
(2)Incorporated herein by reference to Exhibit 2.2 to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on August 25, 2014.
(3)Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on May 2,July 29, 2014.
(2)Incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Allied World Assurance Company Holdings, AG filed with the SEC on August 2, 2013. Other than with respect to commencement date, title, base salary and employer, the employment agreement for Mr. Louis P. Iglesias is materially identical to the employment agreement for Mr. John Gauthier filed thereto.

Management contract or compensatory plan, contract or arrangement.

  
*These certifications are being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of title 18 United States Code) and are not being filed as part of this report.