Allied World Assurance 10-Q 7 May 10 2010 Q1 Quarterly report Financial data

Document And Entity Information

Document And Entity Information
	3 Months Ended Mar. 31, 2010	May. 03, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2010-03-31
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
Entity Registrant Name	ALLIED WORLD ASSURANCE CO HOLDINGS LTD
Entity Central Index Key	0001163348
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		50,466,804

CONDENSED CONSOLIDATED BALANCE

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

1_CONDENSED CONSOLIDATED BALANC

CONDENSED CONSOLIDATED BALANCE SHEETS (PARENTHETICAL) (USD $)
In Thousands, except Share data	Mar. 31, 2010	Dec. 31, 2009
Amortized costs of fixed maturity investments available for sale, at fair value	$3,069,009	$4,260,844
Common shares, par value	0.03	0.03
Common shares, issued	50,459,000	49,734,487
Common shares, outstanding	50,459,000	49,734,487

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Share data	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
REVENUES:
Gross premiums written	$504,163	$479,597
Premiums ceded	(70,871)	(74,559)
Net premiums written	433,292	405,038
Change in unearned premiums	(94,968)	(81,066)
Net premiums earned	338,324	323,972
Net investment income	68,902	77,854
Net realized investment gains	77,487	36,602
Net impairment charges recognized in earnings:
Total other-than-temporary impairment charges	(168)	(41,963)
Portion of loss recognized in other comprehensive income, before taxes
Net impairment charges recognized in earnings	(168)	(41,963)
Other income	297	466
Total revenues	484,842	396,931
EXPENSES:
Net losses and loss expenses	232,154	148,497
Acquisition costs	40,784	37,129
General and administrative expenses	63,463	57,365
Amortization and impairment of intangible assets	892	1,065
Interest expense	9,528	10,447
Foreign exchange loss	1,076	835
Total expenses	347,897	255,338
Income before income taxes	136,945	141,593
Income tax expense	3,205	10,185
NET INCOME	133,740	131,408
Other comprehensive loss:
Unrealized gains on investments arising during the period net of applicable deferred income tax benefit for the three months 2010: $219; 2009: $1,381	37,470	(64,060)
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax	(45,035)	6,632
Other comprehensive loss	(7,565)	(57,428)
COMPREHENSIVE INCOME	$126,175	$73,980
PER SHARE DATA:
Basic earnings per share	2.67	2.67
Diluted earnings per share	2.52	2.57
Weighted average common shares outstanding	50,023,816	49,248,118
Weighted average common shares and common share equivalents outstanding	53,115,756	51,120,049
Dividends declared per share	0.2	0.18

2_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (PARENTHETICAL) (USD $)
In Thousands	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Deferred income tax benefit for unrealized gains on investments arising during the period	$219	$1,381

3_CONDENSED CONSOLIDATED STATEM

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
In Thousands	Share Capital	Additional Paid-in Capital	Accumulated Other Comprehensive Income	Retained Earnings	Total
Balance at Dec. 31, 2008	$1,471	$1,314,785	$105,632	$994,974	$2,416,862
Net income				131,408	131,408
Dividends				(8,914)	(8,914)
Net unrealized losses, net of deferred income tax			(57,428)		(57,428)
Stock compensation	15	9,917			9,932
Balance at Mar. 31, 2009	1,486	1,324,702	48,204	1,117,468	2,491,860
Balance at Dec. 31, 2009	1,492	1,359,934	149,849	1,702,020	3,213,295
Net income				133,740	133,740
Dividends				(10,092)	(10,092)
Net unrealized losses, net of deferred income tax			(7,565)		(7,565)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
Total other comprehensive loss			(7,565)		(7,565)
Stock compensation	22	9,407			9,429
Balance at Mar. 31, 2010	$1,514	$1,369,341	$142,284	$1,825,668	$3,338,807

4_CONDENSED CONSOLIDATED STATEM

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

GENERAL

GENERAL
	3 Months Ended Mar. 31, 2010
GENERAL	1. GENERAL Allied World Assurance Company Holdings, Ltd ("Holdings") was incorporated in Bermuda on November13, 2001. Holdings, through its wholly-owned subsidiaries (collectively, the "Company"), provides property and casualty insurance and reinsurance on a worldwide basis through operations in Bermuda, the United States, Europe, Hong Kong and Singapore.

BASIS OF PREPARATION AND CONSOL

BASIS OF PREPARATION AND CONSOLIDATION
	3 Months Ended Mar. 31, 2010
BASIS OF PREPARATION AND CONSOLIDATION	2. BASIS OF PREPARATION AND CONSOLIDATION These unaudited condensed consolidated financial statements include the accounts of Holdings and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with Article10 of RegulationS-X as promulgated by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Company's financial statements include, but are not limited to: * The premium estimates for certain reinsurance agreements, * Recoverability of deferred acquisition costs, * The reserve for outstanding losses and loss expenses, * Valuation of ceded reinsurance recoverables, * Determination of impairment of goodwill and other intangible assets, * Valuation of financial instruments, and * Determination of other-than-temporary impairment of investments. Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the consolidation. Certain immaterial reclassifications in the unaudited condensed consolidated statements of operations and comprehensive income ("consolidated income statements") and consolidated statements of cash flows and notes to the unaudited condensed consolidated financial statements have been made to prior years' amounts to conform to the current year's presentation. These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company's audited consolidated financial statements, and related notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December31, 2009.

NEW ACCOUNTING PRONOUNCEMENTS

NEW ACCOUNTING PRONOUNCEMENTS
	3 Months Ended Mar. 31, 2010
NEW ACCOUNTING PRONOUNCEMENTS	3. NEW ACCOUNTING PRONOUNCEMENTS In January2010, the Financial Accounting Standards Board ("FASB") issued ASU 2010-06 "Fair Value Measurements and Disclosures" ("ASU 2010-06"). ASU 2010-06 updated section ASC 820-10 to require a greater level of disaggregated information and more robust disclosure about valuation techniques and inputs to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December15, 2009, with the exception of the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measures which are effective for interim and annual reporting periods beginning after December15, 2010. See Note 6 "Fair Value of Financial Instruments" for the Company's disclosures about the fair value of financial instruments. In March2010, the FASB issued ASU 2010-11 "Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives" ("ASU 2010-11"). ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements, specifically one that is related only to the subordination of one financial instrument to another. ASU 2010-11 is effective for interim and annual periods beginning after June15, 2010. The Company is currently evaluating the provisions of ASU 2010-11 and its potential impact on future financial statements.

INVESTMENTS

INVESTMENTS
	3 Months Ended Mar. 31, 2010
INVESTMENTS	4. INVESTMENTS a) Available for Sale Securities The amortized cost, gross unrealized gains, unrealized losses, other-than-temporary-impairments ("OTTI") recorded through other comprehensive income ("OCI") and fair value of the Company's available for sale investments by category as of March31, 2010 and December31, 2009 are as follows: Gross Unrealized Unrealized Cost Gains Losses OTTI OCI Fair Value March31, 2010 U.S. Government and Government agencies $ 397,646 $ 20,292 $ (708 ) $ $ 417,230 Non-U.S. Government and Government agencies 139,947 7,219 (3,444 ) 143,722 States, municipalities and political subdivisions 171,054 14,740 (19 ) 185,775 Corporate debt: Financial institutions 367,904 20,232 (723 ) 387,413 Industrials 763,965 49,324 (212 ) 813,077 Utilities 178,595 14,558 193,153 Residential mortgage-backed: Non-agency residential 161,025 5,558 (7,368 ) (1,761 ) 157,454 Agency residential 634,002 28,894 (327 ) 662,569 Commercial mortgage-backed 167,620 9,031 (22 ) 176,629 Asset-backed 87,251 3,714 (98 ) 90,867 Total fixed maturity investments, available for sale $ 3,069,009 $ 173,562 $ (12,921 ) $ (1,761 ) $ 3,227,889 December31, 2009 U.S. Government and Government agencies $ 689,858 $ 34,831 $ (1,389 ) $ $ 723,300 Non-U.S. Government and Government agencies 271,528 13,752 (1,590 ) 283,690 States, municipalities and political subdivisions 210,315 17,429 (336 ) 227,408 Corporate debt: Financial institutions 684,386 27,695 (1,751 ) 710,330 Industrials 879,905 46,489 (184 ) 926,210 Utilities 143,773 10,479 154,252 Residential mortgage-backed: Non-agency residential 172,000 4,206 (11,517 ) (1,856 ) 162,833 Agency residential 708,652 28,882 (1,095 ) 736,439 Commercial mortgage-backed 406,236 6,482 (7,915 ) 404,803 Asset-backed 94,191 3,762 (146 ) 97,807 Total fixed maturity investments, available for sale $ 4,260,844 $ 194,007 $ (25,923 ) $ (1,856 ) $ 4,427,072 b) Trading Securities Securities accounted for at fair value with changes in fair value recognized in the consolidated income statements by category as of March31, 2010 and December31, 2009 are as follows: March 31, 2010

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS
	3 Months Ended Mar. 31, 2010
DERIVATIVE INSTRUMENTS	5. DERIVATIVE INSTRUMENTS The Company uses currency forward contracts to manage currency exposure, which are the only derivative instruments used for risk management purposes. The U.S. dollar is the Company's reporting currency and the functional currency of its operating subsidiaries. The Company enters into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, the Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar, primarily the Canadian dollar, Euro and British Sterling. For liabilities incurred in currencies other than U.S. dollars, U.S. dollars are converted to the currency of the loss at the time of claim payment. As a result, the Company has an exposure to foreign currency risk resulting from fluctuations in exchange rates. The Company has developed a hedging strategy using currency forward contracts to minimize the potential loss of value caused by currency fluctuations. These currency forward contracts are not designated as hedges and accordingly are carried at fair value on the consolidated balance sheets as a part of "other assets" or "accounts payable and accrued liabilities," with the corresponding realized and unrealized gains and losses included in "foreign exchange loss" in the unaudited condensed consolidated statements of operations and comprehensive income. The fair value of our currency forward contracts as of March31, 2010 and December31, 2009 was a net payable of $2,343 and $1,650, respectively, and was included in "accounts payable and accrued expenses" in the unaudited condensed consolidated balance sheet.

FAIR VALUE OF FINANCIAL INSTRUM

FAIR VALUE OF FINANCIAL INSTRUMENTS
	3 Months Ended Mar. 31, 2010
FAIR VALUE OF FINANCIAL INSTRUMENTS	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 March31, 2010. Fair value measurement using: Quoted prices in active Significant markets for Significant other unobservable Carrying Total fair identical assets observable inputs inputs amount value (Level 1) (Level 2) (Level 3) Available for sale securities: U.S. Government and Government agencies $ 417,230 $ 417,230 $ 205,096 $ 212,134 $ Non-U.S. Government and Government agencies 143,722 143,722 143,722 States, municipalities and political 185,775 185,775 185,775 Corporate debt 1,393,643 1,393,643 1,393,643 Mortgage-backed 996,652 996,652 860,954 135,698 Asset-backed 90,867 90,867 84,764 6,103 Total available for sale fixed maturity investments 3,227,889 3,227,889 Trading securities: U.S. Government and Government agencies $ 1,648,683 $ 1,648,683 $ 1,539,451 $ 109,232 $ Non-U.S. Government and Government agencies 251,836 251,836 251,836 States, municipalities and political

DEBT AND FINANCING ARRANGEMENTS

DEBT AND FINANCING ARRANGEMENTS
	3 Months Ended Mar. 31, 2010
DEBT AND FINANCING ARRANGEMENTS	7. DEBT AND FINANCING ARRANGEMENTS On July21, 2006, the Company issued $500,000 aggregate principal amount of 7.50% Senior Notes due August1, 2016 ("Senior Notes"), with interest on the notes payable on August 1 and February 1 of each year, commencing on February1, 2007. The Senior Notes were offered by the underwriters at a price of 99.71% of their principal amount, providing an effective yield to investors of 7.54%. The Senior Notes can be redeemed by the Company prior to maturity subject to payment of a "make-whole" premium. The Company has no current expectations of calling the notes prior to maturity. The Company has a collateralized amended letter of credit facility (the "Credit Facility") with Citibank Europe plc. that has been has been and will continue to be used to issue standby letters of credit. The Credit Facility was amended in December2008 to provide the Company with greater flexibility in the types of securities that are eligible to be posted as collateral and to increase the maximum aggregate amount available under the Credit Facility from $750,000 to $900,000 on an uncommitted basis. In November2007, the Company entered into a $800,000 five-year senior credit facility (the "Facility") with a syndication of lenders. The Facility consists of a $400,000 secured letter of credit facility for the issuance of standby letters of credit (the "Secured Facility") and a $400,000 unsecured facility for the making of revolving loans and for the issuance of standby letters of credit (the "Unsecured Facility"). Both the Secured Facility and the Unsecured Facility have options to increase the aggregate commitments by up to $200,000, subject to approval of the lenders. The Facility will be used for general corporate purposes and to issue standby letters of credit. The Facility contains representations, warranties and covenants customary for similar bank loan facilities, including a covenant to maintain a ratio of consolidated indebtedness to total capitalization as of the last day of each fiscal quarter or fiscal year of not greater than 0.35 to 1.0 and a covenant under the Unsecured Facility to maintain a certain consolidated net worth. In addition, each material insurance subsidiary must maintain a financial strength rating from A.M Best Company of at least A- under the Unsecured Facility and of at least B++ under the Secured Facility. Concurrent with this new Facility, the Company terminated the Letter of Credit Facility with Barclays Bank Plc and all outstanding letters of credit issued thereunder were transferred to the Secured Facility. The Company is in compliance with all covenants under the Facility as of March31, 2010 and December31, 2009. There are a total of 13 lenders that make up the Credit Facility syndication and that have varying commitments ranging from $20,000 to $87,500. Of the 13 lenders, four have commitments of $87,500 each, four have commitments of $62,500 each, four have commitments of $45,000 each and one has a commitment of $20,000. The one lender in the Credit Facility with a $20,000 commitment has declared bankruptcy under Chapter11 of the U.S. Bankruptcy Code. This lender will not meet its co

GOODWILL AND INTANGIBLE ASSETS

GOODWILL AND INTANGIBLE ASSETS
	3 Months Ended Mar. 31, 2010
GOODWILL AND INTANGIBLE ASSETS	8. GOODWILL AND INTANGIBLE ASSETS The following table shows an analysis of goodwill and intangible assets for the three months ended March31, 2010 and the year ended December31, 2009: Intangible assets with Intangible indefinite assets with Goodwill lives finite lives Total Net balance at December31, 2008 $ 268,532 $ 23,920 $ 47,490 $ 339,942 Additions Amortization (4,185 ) (4,185 ) Impairments (156 ) (6,866 ) (7,022 ) Net balance at December31, 2009 268,376 23,920 36,439 328,735 Additions Amortization (892 ) (892 ) Net balance at March31, 2010 268,376 23,920 35,547 327,843 Gross balance 268,532 23,920 48,200 340,652 Accumulated amortization (5,787 ) (5,787 ) Impairments (156 ) (6,866 ) (7,022 ) Net balance $ 268,376 $ 23,920 $ 35,547 $ 327,843 The amortization of the intangible assets with definite lives for the remainder of 2010 and for the years ended December31, 2011, 2012, 2013, 2014 and thereafter will be $2,592, $2,978, $2,533, $2,533, $2,533 and $22,378, respectively. The intangible assets will be amortized over a weighted average useful life of 13.2years.

INCOME TAXES

INCOME TAXES
	3 Months Ended Mar. 31, 2010
INCOME TAXES	9. INCOME TAXES Under current Bermuda law, Holdings and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Holdings and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Holdings and Allied World Assurance Company, Ltd will be exempted from such taxes until March28, 2016. Certain subsidiaries of Holdings file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom, Ireland, Switzerland and Hong Kong. The following tax years by jurisdiction are open to examination: Fiscal Years U.S. Internal Revenue Service ("IRS") for the U.S. subsidiaries 2006 2009 Inland Revenue for the U.K. branches 2008 2009 Irish Revenue Commissioners for the Irish subsidiaries 2005 2009 Swiss Federal Tax Administration for the Swiss branch 2008 2009 Inland Revenue Department for the Hong Kong branch 2009 To the best of the Company's knowledge, there are no examinations pending by the Inland Revenue or the Irish Revenue Commissioners. The IRS is currently completing an examination of the 2006 tax returns of Darwin Professional Underwriters, Inc. ("Darwin"). Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12months of January2010.

SHAREHOLDERS' EQUITY

SHAREHOLDERS' EQUITY
	3 Months Ended Mar. 31, 2010
SHAREHOLDERS' EQUITY	10. SHAREHOLDERS' EQUITY a) Authorized shares The authorized share capital of Holdings as at March31, 2010 and December31, 2009 was $10,000. The issued share capital consists of the following: March 31, December 31, 2010 2009 Common shares issued and fully paid, par value $0.03 per share 50,459,000 49,734,487 Share capital at end of period $ 1,514 $ 1,492 As of March31, 2010, there were outstanding 41,979,907 voting common shares and 8,479,093 non-voting common shares. b) Share Warrants In conjunction with the private placement offering at the formation of the Company, the Company granted warrants to certain founding shareholders to acquire up to 5,500,000 common shares at an exercise price of $34.20 per share. These warrants are exercisable in certain limited conditions, including a public offering of common shares, and expire November21, 2011. Any cash dividends paid to shareholders do not impact the exercise price of $34.20 per share for these founder warrants. There are various restrictions on the ability of warrant holders to dispose of their shares. As of March31, 2010, none of these founder warrants have been exercised. c) Dividends In February2010, the Company declared a dividend of $0.20 per common share payable on April 1, 2010 to shareholders of record on March16, 2010. The total dividend payable amounted to $10,092 and has been included in the unaudited condensed consolidated balance sheets. In February2009, the Company declared a quarterly dividend of $0.18 per common share on April 2, 2009 payable to shareholders of record on March17, 2009.

EMPLOYEE BENEFIT PLANS

EMPLOYEE BENEFIT PLANS
	3 Months Ended Mar. 31, 2010
EMPLOYEE BENEFIT PLANS	11. EMPLOYEE BENEFIT PLANS a) Employee option plan In 2001, the Company implemented the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2001 Employee Stock Option Plan (the "Plan"). Under the Plan, up to 4,000,000 common shares of Holdings may be issued. Holdings has filed a registration statement on Form S-8 under the Securities Act of 1933, as amended, to register common shares issued or reserved for issuance under the Plan. These options are exercisable in certain limited conditions, expire after 10years, and generally vest pro-rata over four years from the date of grant. The exercise price of options issued are determined by the compensation committee of the board of directors but shall not be less than 100% of the fair market value of the common shares of Holdings on the date the option award is granted. Year Ended March 31, 2010 Weighted Average Options Exercise Price Outstanding at beginning of period 1,314,907 $ 35.54 Granted 311,610 46.05 Exercised (97,048 ) 28.18 Forfeited (5,251 ) 41.54 Expired (5,062 ) 45.72 Outstanding at end of period 1,519,156 $ 38.11 Assumptions used in the option-pricing model for the options granted during the three months ended March31, 2010 are as follows: Options granted during the Three Months ended March 31, 2010 Expected term of option 5.47 years Weighted average risk-free interest rate 2.65 % Weighted average expected volatility 42.35 % Dividend yield 1.25 % Weighted average fair value on grant date $ 17.34 The Company has assumed a weighted average annual forfeiture rate of 6.37% in determining the compensation expense over the service period. Compensation expense of $792 and $625 relating to the options has been included in "general and administrative expenses" in the Company's consolidated income statements for the three months ended March31, 2010 and 2009, respectively. As of March31, 2010 and December31, 2009, the Company has recorded in "additional paid-in capital" on the consolidated balance sheets an amount of $32,259 and $28,699, respectively, in connection with all options granted. b) Stock incentive plan In 2004, the Company implemented the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2004 Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for grants of restricted stock, restricted stock units ("RSUs"), dividend equivalent rights and other equity-based awards. A total of 2,000,000 common shares may be issued under the Stock Incentive Plan. To date, only RSUs have been granted. These RSUs generally vest in the fourth or fifth year from the original grant date, or pro-rata over four years from the date of the grant. Three Months Ended March 31, 2010 Weighted Average Grant Date Fair RSUs Value Outstanding RSUs at beginning of period 915,432 $ 36.51 RSUs granted 41,197 46.05 Performance based RSUs granted

EARNINGS PER SHARE

EARNINGS PER SHARE
	3 Months Ended Mar. 31, 2010
EARNINGS PER SHARE	12. EARNINGS PER SHARE The following table sets forth the comparison of basic and diluted earnings per share: Three Months Ended March 31, 2010 2009 Basic earnings per share Net income $ 133,740 $ 131,408 Weighted average common shares outstanding 50,023,816 49,248,118 Basic earnings per share $ 2.67 $ 2.67 Three Months Ended March 31, 2010 2009 Diluted earnings per share Net income $ 133,740 $ 131,408 Weighted average common shares outstanding 50,023,816 49,248,118 Share equivalents: Warrants and options 1,583,024 778,470 Restricted stock units 482,390 343,223 LTIP awards 1,026,526 750,238 Weighted average common shares and common share equivalents outstanding diluted 53,115,756 51,120,049 Diluted earnings per share $ 2.52 $ 2.57 For the three months ended March31, 2010 and 2009 a weighted average of 516,385 and 640,719 employee stock options, respectively, were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share. For the three months ended March31, 2010 and 2009, a weighted average of 9,471 and 336,809 RSUs were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share.

SEGMENT INFORMATION

SEGMENT INFORMATION
	3 Months Ended Mar. 31, 2010
SEGMENT INFORMATION	13. 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 product lines fall within these classifications. The U.S. insurance segment includes the Company's direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts. The international insurance segment includes the Company's direct insurance operations in Bermuda, Europe and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts and mid-sized to large non-North American domiciled accounts. The reinsurance 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. 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. Management measures results for each segment on the basis of the "loss and loss expense ratio," "acquisition cost ratio," "general and administrative expense ratio" and the "combined ratio." 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 "combined ratio" is the sum of the "loss and loss expense ratio," the "acquisition cost ratio" and the "general and administrative expense ratio." The following table provides a summary of the segment results for the three months ended March 31, 2010 and 2009. International Three Months Ended March 31, 2010 U.S. Insurance Insurance Reinsurance Total Gross premiums written $ 162,085 $ 121,422 $ 220,656 $ 504,163 Net premiums written 131,555 81,081 220,656 433,292 Net premiums earned 129,205 87,043 122,076 338,324 Other income 297 297 Net losses and loss expenses (98,425 ) (57,449 ) (76,280 ) (232,

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS
	3 Months Ended Mar. 31, 2010
SUBSEQUENT EVENTS	14. SUBSEQUENT EVENTS On May6, 2010, the Company declared a quarterly dividend of $0.20 per common share, payable on June10, 2010 to shareholders of record on May25, 2010. On May6, 2010, the board of directors of Holdings authorized the Company to repurchase up to $500,000 of Holdings' common shares through a share repurchase program. Repurchases under the authorization may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. This authorization is effective through May3, 2012. 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. At any time, the repurchase program may be modified, extended or terminated by the board of directors.