##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-K
 
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 OR
 o
    
    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, LTD
 (Exact Name of Registrant as Specified in Its Charter)
 Bermuda(State or Other Jurisdiction of 
Incorporation or Organization)
    
    98-0481737(I.R.S. Employer
Identification No.)
 27 Richmond Road, Pembroke HM 08, Bermuda  (Address of Principal Executive Offices and Zip Code)
 (441) 278-5400  (Registrants Telephone Number, Including Area Code)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares, par value $0.03 per share
    
    New York Stock Exchange, Inc.
 Securities registered pursuant to Section 12(g) of the Act: None
  þ o
  o þ
 þ o
 o o
 o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
TABLE OF CONTENTS
 PagePART IITEM 1.
    
    Business
    
    
    1ITEM 1A.
    
    Risk Factors
    
    
    20ITEM 1B.
    
    Unresolved Staff Comments
    
    
    40ITEM 2.
    
    Properties
    
    
    45ITEM 3.
    
    Legal Proceedings
    
    
    45ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    45PART IIITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    46ITEM 6.
    
    Selected Financial Data
    
    
    47ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    50ITEM 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    104ITEM 8.
    
    Financial Statements and Supplementary Data
    
    
    105ITEM 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    105ITEM 9A.
    
    Controls and Procedures
    
    
    105ITEM 9B.
    
    Other Information
    
    
    107PART IIIITEM 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    107ITEM 11.
    
    Executive Compensation
    
    
    108ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    109ITEM 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    109ITEM 14.
    
    Principal Accountant Fees and Services
    
    
    109PART IVITEM 15.
    
    Exhibits and Financial Statement Schedules
    
    
    109SIGNATURESEXHIBITS
    
    
    E-1CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1EX-10.28EX-10.29EX-10.30EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  -i-




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##### Table of Contents



PART I
 References in this Annual Report on Form 10-K to the terms we, us, our, the company or
other similar terms mean the consolidated operations of Allied World Assurance Company Holdings,
Ltd and our consolidated subsidiaries, unless the context requires otherwise. References in this
Form 10-K to the term Holdings means Allied World Assurance Company Holdings, Ltd only.
References to our insurance subsidiaries may include our
reinsurance subsidiaries. References in
this Form 10-K to $ are to the lawful currency of the United States. For your convenience, we have
included a glossary beginning on page 40 of selected insurance and reinsurance terms.
 
 Item 1. Business.
 Overview
       Available Information
 www.awac.com
  -1-




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Our Strategy
  
    
    Capitalize on profitable underwriting opportunities. Our experienced management and
underwriting teams are positioned to locate and identify business with attractive risk/reward
characteristics. We pursue a strategy that emphasizes profitability, not market share. Key
elements of this strategy are prudent risk selection, appropriate pricing and adjusting our
business mix to remain flexible and opportunistic. As underwriting opportunities that we
believe will be profitable are identified, we seek ways to take advantage of these market
trends.
 
    
    Exercise underwriting and risk management discipline. We believe we exercise underwriting
and risk management discipline by: (i) maintaining a diverse spread of risk in our books of
business across product lines and geographic zones; (ii) managing our aggregate property
catastrophe exposure through the application of sophisticated modeling tools; (iii) monitoring
our exposures on non-property catastrophe coverages; (iv) adhering to underwriting guidelines
across our business lines; and (v) fostering a culture that focuses on enterprise risk
management and strong internal controls.
 
    
    Maintain a conservative investment strategy. We believe that we follow a conservative
investment strategy designed to emphasize the preservation of our capital and provide adequate
liquidity for the prompt payment of claims. Our investment portfolio consists primarily of
investment-grade, fixed-maturity securities of short- to medium-term duration.
  Our Operating Segments
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008
    
    
    December 31, 2007Gross Premiums Written
    
    
    Gross Premiums Written
    
    
    Gross Premiums WrittenOperating Segments
    
    $ (in millions)
    
    
    % of Total
    
    
    $ (in millions)
    
    
    % of Total
    
    
    $ (in millions)
    
    
    % of TotalU.S. insurance
    
    $
    674.8
    
    
    
    39.8
    
    
    $
    320.0
    
    
    
    22.2
    
    
    $
    192.7
    
    
    
    12.8International insurance
    
    
    555.9
    
    
    
    32.8
    
    
    
    695.5
    
    
    
    48.1
    
    
    
    776.7
    
    
    
    51.6Reinsurance
    
    
    465.6
    
    
    
    27.4
    
    
    
    430.1
    
    
    
    29.7
    
    
    
    536.1
    
    
    
    35.6Total
    
    $
    1,696.3
    
    
    
    100.0
    %
    
    $
    1,445.6
    
    
    
    100.0
    %
    
    $
    1,505.5
    
    
    
    100.0
    %
 -2-




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U.S. Insurance Segment
 General
   
 Products and Customer Base
    -3-




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##### Table of Contents



Distribution
 i-bind
 International Insurance Segment
 General
   -4-




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##### Table of Contents



Products and Customer Base
      -5-




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##### Table of Contents



Distribution
  Reinsurance Segment
 General
     
 Product Lines and Customer Base
  -6-




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##### Table of Contents



Distribution
  -7-




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##### Table of Contents



Security Arrangements
  Enterprise Risk Management
 General
  
    
    protect our capital position,
    
    ensure that our assumed risks (individually and in the
aggregate) are within our firm-wide risk appetite,
    
    maximize our risk-adjusted returns on capital, and
    
    manage our earnings volatility.
  Underwriting risk
 Catastrophe and Aggregate Accumulation risk:
 Reserving risk:
 Investment risk:
 Reinsurance risk:
 Operational risk:
  -8-




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##### Table of Contents



Underwriting Risk Management
     -9-




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##### Table of Contents



Competition
    Our Financial Strength Ratings
  Rated A
    
    
    Rated A2
    
    
    Rated A-(Excellent) from
    
    
    (Good) from
    
    
    (Strong) fromSubsidiary
    
    A.M. Best (1)
    
    
    Moodys (2)
    
    
    Standard & Poors (3)Allied World Assurance Company, Ltd
    
    
    X
    
    
    
    X
    
    
    
    XAllied World Assurance Company (U.S.) Inc.
    
    
    X
    
    
    
    X
    
    
    
    XAllied World National Assurance Company
    
    
    X
    
    
    
    X
    
    
    
    XAllied World Reinsurance Company
    
    
    X
    
    
    
    X
    
    
    
    XDarwin National Assurance Company
    
    
    X
    
    
    
    
    
    
    
    Darwin Select Insurance Company
    
    
    X
    
    
    
    
    
    
    
    Allied World Assurance Company (Europe) Limited
    
    
    X
    
    
    
    
    
    
    
    XAllied World Assurance Company (Reinsurance) Limited
    
    
    X
    
    
    
    
    
    
    
    X
 
 (1)
    
    Third highest of 16 available ratings from A.M. Best.(2)
    
    Sixth highest of 21 available ratings from Moodys.(3)
    
    Seventh highest of 21 available ratings from Standard & Poors.  -10-




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##### Table of Contents



Reserve for Losses and Loss Expenses
    Development of Reserve for Losses and Loss Expenses
Cumulative Deficiency (Redundancy)  Gross Losses
 Year Ended December 31,2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008(1)
    
    2009($ in thousands)As Originally Estimated:
    
    $
    213
    
    
    $
    310,508
    
    
    $
    1,058,653
    
    
    $
    2,037,124
    
    
    $
    3,405,407
    
    
    $
    3,636,997
    
    
    $
    3,919,772
    
    
    $
    4,576,828
    
    
    $
    4,761,772Liability Re-estimated as of:One Year Later
    
    
    213
    
    
    
    253,691
    
    
    
    979,218
    
    
    
    1,929,571
    
    
    
    3,318,359
    
    
    
    3,469,216
    
    
    
    3,537,721
    
    
    
    4,290,335Two Years Later
    
    
    213
    
    
    
    226,943
    
    
    
    896,649
    
    
    
    1,844,258
    
    
    
    3,172,105
    
    
    
    3,137,712
    
    
    
    3,202,129Three Years Later
    
    
    213
    
    
    
    217,712
    
    
    
    842,976
    
    
    
    1,711,212
    
    
    
    2,837,384
    
    
    
    2,801,154Four Years Later
    
    
    213
    
    
    
    199,860
    
    
    
    809,117
    
    
    
    1,503,070
    
    
    
    2,501,523Five Years Later
    
    
    213
    
    
    
    205,432
    
    
    
    704,436
    
    
    
    1,295,592Six Years Later
    
    
    213
    
    
    
    196,495
    
    
    
    626,588Seven Years Later
    
    
    213
    
    
    
    179,752Eight Years Later
    
    
    213Cumulative (Redundancy)
    
    
    
    
    
    
    (130,756
    )
    
    
    (432,065
    )
    
    
    (741,532
    )
    
    
    (903,884
    )
    
    
    (835,843
    )
    
    
    (717,643
    )(2)
    
    
    (286,493
    )Cumulative Claims Paid as of:One Year Later
    
    
    
    
    
    
    54,288
    
    
    
    138,793
    
    
    
    372,823
    
    
    
    712,032
    
    
    
    544,180
    
    
    
    561,386
    (3)
    
    
    574,823Two Years Later
    
    
    
    
    
    
    83,465
    
    
    
    237,394
    
    
    
    571,149
    
    
    
    1,142,878
    
    
    
    962,971
    
    
    
    921,819Three Years Later
    
    
    
    
    
    
    100,978
    
    
    
    300,707
    
    
    
    721,821
    
    
    
    1,434,437
    
    
    
    1,213,389Four Years Later
    
    
    18
    
    
    
    124,109
    
    
    
    371,638
    
    
    
    838,807
    
    
    
    1,575,663Five Years Later
    
    
    18
    
    
    
    163,516
    
    
    
    437,950
    
    
    
    906,270Six Years Later
    
    
    18
    
    
    
    180,580
    
    
    
    469,208Seven Years Later
    
    
    18
    
    
    
    191,577Eight Years Later
    
    
    18
 
 (1)
    
    Reserve for losses and loss expenses includes the reserves for losses
and loss expenses of Finial Insurance Company (renamed Allied World
Reinsurance Company), which we acquired in February 2008, and Darwin,
which we acquired in October 2008.(2)
    
    The cumulative (redundancy) on the original balance as of December 31,
2007 includes reserve development of Darwin subsequent to our
acquisition of the company. -11-




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##### Table of Contents



(3)
    
    The cumulative claims paid includes paid development of Finial
Insurance Company and Darwin subsequent to our acquisition of each
company. Development of Reserve for Losses and Loss Expenses
Cumulative Deficiency (Redundancy)  Gross Losses
 Year Ended December 31,2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Liability Re-estimated as of:One Year Later
    
    
    100
    %
    
    
    82
    %
    
    
    92
    %
    
    
    95
    %
    
    
    97
    %
    
    
    95
    %
    
    
    90
    %
    
    
    94
    %Two Years Later
    
    
    100
    %
    
    
    73
    %
    
    
    85
    %
    
    
    91
    %
    
    
    93
    %
    
    
    86
    %
    
    
    82
    %Three Years Later
    
    
    100
    %
    
    
    70
    %
    
    
    80
    %
    
    
    84
    %
    
    
    83
    %
    
    
    77
    %Four Years Later
    
    
    100
    %
    
    
    64
    %
    
    
    76
    %
    
    
    74
    %
    
    
    73
    %Five Years Later
    
    
    100
    %
    
    
    66
    %
    
    
    67
    %
    
    
    64
    %Six Years Later
    
    
    100
    %
    
    
    63
    %
    
    
    59
    %Seven Years Later
    
    
    100
    %
    
    
    58
    %Eight Years Later
    
    
    100
    %Cumulative (Redundancy)
    
    
    
    
    
    
    (42
    )%
    
    
    (41
    )%
    
    
    (36
    )%
    
    
    (27
    )%
    
    
    (23
    )%
    
    
    (18
    )%
    
    
    (6
    )%Gross Loss and Loss Expense Cumulative
Paid as a Percentage of Originally
Estimated LiabilityCumulative Claims Paid as of:One Year Later
    
    
    0
    %
    
    
    17
    %
    
    
    13
    %
    
    
    18
    %
    
    
    21
    %
    
    
    15
    %
    
    
    14
    %
    
    
    13
    %Two Years Later
    
    
    0
    %
    
    
    27
    %
    
    
    22
    %
    
    
    28
    %
    
    
    34
    %
    
    
    26
    %
    
    
    24
    %Three Years Later
    
    
    0
    %
    
    
    33
    %
    
    
    28
    %
    
    
    35
    %
    
    
    42
    %
    
    
    33
    %Four Years Later
    
    
    8
    %
    
    
    40
    %
    
    
    35
    %
    
    
    41
    %
    
    
    46
    %Five Years Later
    
    
    8
    %
    
    
    53
    %
    
    
    41
    %
    
    
    44
    %Six Years Later
    
    
    8
    %
    
    
    58
    %
    
    
    44
    %Seven Years Later
    
    
    8
    %
    
    
    62
    %Eight Years Later
    
    
    8
    %
 Losses Net of Reinsurance
 December 31,2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008(1)
    
    2009($ in thousands)As Originally
Estimated:
    
    $
    213
    
    
    $
    299,946
    
    
    $
    964,810
    
    
    $
    1,777,953
    
    
    $
    2,688,526
    
    
    $
    2,947,892
    
    
    $
    3,237,007
    
    
    $
    3,688,514
    
    
    $
    3,841,781Liability
Re-estimated as
of:One Year Later
    
    
    213
    
    
    
    243,129
    
    
    
    885,375
    
    
    
    1,728,868
    
    
    
    2,577,808
    
    
    
    2,824,815
    
    
    
    2,956,912
    
    
    
    3,440,522Two Years Later
    
    
    213
    
    
    
    216,381
    
    
    
    830,969
    
    
    
    1,626,334
    
    
    
    2,474,788
    
    
    
    2,570,194
    
    
    
    2,676,727Three Years Later
    
    
    213
    
    
    
    207,945
    
    
    
    771,781
    
    
    
    1,528,620
    
    
    
    2,215,504
    
    
    
    2,287,575Four Years Later
    
    
    213
    
    
    
    191,471
    
    
    
    745,289
    
    
    
    1,338,931
    
    
    
    1,921,279Five Years Later
    
    
    213
    
    
    
    197,656
    
    
    
    649,305
    
    
    
    1,147,207Six Years Later
    
    
    213
    
    
    
    188,733
    
    
    
    575,639Seven Years Later
    
    
    213
    
    
    
    172,219Eight Years Later
    
    
    213Cumulative
(Redundancy)
    
    
    
    
    
    
    (127,737
    )
    
    
    (389,171
    )
    
    
    (630,746
    )
    
    
    (767,247
    )
    
    
    (660,317
    )
    
    
    (560,280
    )(2)
    
    
    (247,992
    )Cumulative Claims
Paid as of:One Year Later
    
    
    
    
    
    
    52,077
    
    
    
    133,286
    
    
    
    305,083
    
    
    
    455,079
    
    
    
    365,251
    
    
    
    395,163
    (3)
    
    
    415,901Two Years Later
    
    
    
    
    
    
    76,843
    
    
    
    214,384
    
    
    
    478,788
    
    
    
    747,253
    
    
    
    674,263
    
    
    
    661,280Three Years Later
    
    
    
    
    
    
    93,037
    
    
    
    271,471
    
    
    
    620,760
    
    
    
    973,091
    
    
    
    859,380Four Years Later
    
    
    18
    
    
    
    116,494
    
    
    
    342,349
    
    
    
    728,246
    
    
    
    1,073,256Five Years Later
    
    
    18
    
    
    
    155,904
    
    
    
    407,163
    
    
    
    778,052Six Years Later
    
    
    18
    
    
    
    172,974
    
    
    
    425,805Seven Years Later
    
    
    18
    
    
    
    176,390Eight Years Later
    
    
    18
 
 (1)
    
    Reserve for losses and loss expenses net includes the reserves for
losses and loss expenses of Finial Insurance Company (renamed Allied
World Reinsurance Company), which we acquired in February 2008, and
Darwin, which we acquired in October 2008. -12-




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##### Table of Contents



(2)
    
    The cumulative (redundancy) on the original balance as of December 31,
2007 includes reserve development of Darwin subsequent to our
acquisition of the company.(3)
    
    The cumulative claims paid includes paid development of Finial
Insurance Company and Darwin subsequent to our acquisition of each
company. Losses Net of Reinsurance
 Year Ended December 31,2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Liability Re-estimated as of:One Year Later
    
    
    100
    %
    
    
    81
    %
    
    
    92
    %
    
    
    97
    %
    
    
    96
    %
    
    
    96
    %
    
    
    91
    %
    
    
    93
    %Two Years Later
    
    
    100
    %
    
    
    72
    %
    
    
    86
    %
    
    
    91
    %
    
    
    92
    %
    
    
    87
    %
    
    
    83
    %Three Years Later
    
    
    100
    %
    
    
    69
    %
    
    
    80
    %
    
    
    86
    %
    
    
    82
    %
    
    
    78
    %Four Years Later
    
    
    100
    %
    
    
    64
    %
    
    
    77
    %
    
    
    75
    %
    
    
    71
    %Five Years Later
    
    
    100
    %
    
    
    66
    %
    
    
    67
    %
    
    
    65
    %Six Years Later
    
    
    100
    %
    
    
    63
    %
    
    
    60
    %Seven Years Later
    
    
    100
    %
    
    
    57
    %Eight Years Later
    
    
    100
    %Cumulative (Redundancy)
    
    
    
    
    
    
    (43
    )%
    
    
    (40
    )%
    
    
    (35
    )%
    
    
    (29
    )%
    
    
    (22
    )%
    
    
    (17
    )%
    
    
    (7
    )%Net Loss and Loss Expense
Cumulative Paid as a Percentage
of Originally Estimated LiabilityCumulative Claims Paid as of:One Year Later
    
    
    0
    %
    
    
    17
    %
    
    
    14
    %
    
    
    17
    %
    
    
    17
    %
    
    
    12
    %
    
    
    12
    %
    
    
    11
    %Two Years Later
    
    
    0
    %
    
    
    26
    %
    
    
    22
    %
    
    
    27
    %
    
    
    28
    %
    
    
    23
    %
    
    
    20
    %Three Years Later
    
    
    0
    %
    
    
    31
    %
    
    
    28
    %
    
    
    35
    %
    
    
    36
    %
    
    
    29
    %Four Years Later
    
    
    8
    %
    
    
    39
    %
    
    
    35
    %
    
    
    41
    %
    
    
    40
    %Five Years Later
    
    
    8
    %
    
    
    52
    %
    
    
    42
    %
    
    
    44
    %Six Years Later
    
    
    8
    %
    
    
    58
    %
    
    
    44
    %Seven Years Later
    
    
    8
    %
    
    
    59
    %Eight Years Later
    
    
    8
    %
  Year Ended December 31,2009
    
    
    2008
    
    
    2007($ in thousands)Gross liability at beginning of year
    
    $
    4,576,828
    
    
    $
    3,919,772
    
    
    $
    3,636,997Reinsurance recoverable at beginning of year
    
    
    (888,314
    )
    
    
    (682,765
    )
    
    
    (689,105
    )Net liability at beginning of year
    
    
    3,688,514
    
    
    
    3,237,007
    
    
    
    2,947,892Acquisition of net reserve for losses and loss expenses
    
    
    
    
    
    
    298,927
    
    
    
    Net losses incurred related to:Current year
    
    
    852,052
    
    
    
    921,217
    
    
    
    805,417Prior years
    
    
    (247,992
    )
    
    
    (280,095
    )
    
    
    (123,077
    )Total incurred
    
    
    604,060
    
    
    
    641,122
    
    
    
    682,340Net paid losses related to:Current year
    
    
    42,320
    
    
    
    79,037
    
    
    
    32,599Prior years
    
    
    415,901
    
    
    
    395,163
    
    
    
    365,251Total paid
    
    
    458,221
    
    
    
    474,200
    
    
    
    397,850Foreign exchange revaluation
    
    
    7,428
    
    
    
    (14,342
    )
    
    
    4,625Net liability at end of year
    
    
    3,841,781
    
    
    
    3,688,514
    
    
    
    3,237,007Reinsurance recoverable at end of year
    
    
    919,991
    
    
    
    888,314
    
    
    
    682,765Gross liability at end of year
    
    $
    4,761,772
    
    
    $
    4,576,828
    
    
    $
    3,919,772
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Investments
 Investment Strategy and Guidelines
    Investment Committee and Investment Managers
   Our Portfolio
 Composition as of December 31, 2009
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As of December 31,2009Average
    
    
    PortfolioFair Value
    
    
    Rating
    
    
    Percentage($ in thousands)Type of InvestmentCash and cash equivalents
    
    $
    379,751
    
    
    AAA
    
    
    5.0
    %U.S. government securities
    
    
    820,756
    
    
    AAA
    
    
    10.9
    %U.S. government agencies
    
    
    557,809
    
    
    AAA
    
    
    7.4
    %Non-U.S. government securities
    
    
    511,001
    
    
    AAA
    
    
    6.8
    %Mortgage-backed securities:Agency mortgage-backed securities
    
    
    876,297
    
    
    AAA
    
    
    11.6
    %Non-agency residential mortgage-backed securities
    
    
    237,021
    
    
    AA
    
    
    3.1
    %Non-agency residential mortgage-backed
securities-non-investment grade strategy
    
    
    184,867
    
    
    
    B+
    
    
    
    2.5
    %Commercial mortgage-backed securities
    
    
    423,069
    
    
    AAA
    
    
    5.6
    %Total mortgage-backed securities
    
    
    1,721,254
    
    
    
    
    
    
    
    22.8
    %Corporate securities:Financial Institutions
    
    
    1,300,461
    
    
    AA-
    
    
    17.3
    %Industrials
    
    
    1,117,938
    
    
    
    A
    
    
    
    14.8
    %Utilities
    
    
    166,186
    
    
    BBB+
    
    
    2.2
    %Total corporate securities
    
    
    2,584,585
    
    
    
    
    
    
    
    34.3
    %Asset-backed securities:Credit card receivables
    
    
    80,466
    
    
    AAA
    
    
    1.1
    %Automobile loan receivables
    
    
    163,897
    
    
    AAA
    
    
    2.2
    %Collateralized loan obligations
    
    
    133,251
    
    
    AAA
    
    
    1.8
    %Other
    
    
    155,157
    
    
    AAA
    
    
    2.0
    %Total asset-backed securities
    
    
    532,771
    
    
    
    
    
    
    
    7.1
    %State, municipalities and political subdivisions
    
    
    243,218
    
    
    AA+
    
    
    3.2
    %Hedge funds
    
    
    184,725
    
    
    
    N/A
    
    
    
    2.5
    %Equity securities
    
    
    144
    
    
    
    N/A
    
    
    
    0.0
    %Total investment portfolio
    
    $
    7,536,014
    
    
    
    
    
    
    
    100.0
    %
  Ratings as of December 31, 2009
  Percentageof TotalAmortized
    
    
    Fair
    
    
    FairCost
    
    
    Value
    
    
    Value($ in millions)RatingsU.S. government and government agencies
    
    
    1,352.3
    
    
    
    1,378.6
    
    
    
    19.8
    %AAA/Aaa
    
    
    3,023.7
    
    
    
    3,076.1
    
    
    
    44.1
    %AA/Aa
    
    
    664.7
    
    
    
    684.3
    
    
    
    9.8
    %A/A
    
    
    1,303.3
    
    
    
    1,347.6
    
    
    
    19.3
    %BBB/Baa
    
    
    291.6
    
    
    
    318.2
    
    
    
    4.6
    %BB
    
    
    31.3
    
    
    
    34.8
    
    
    
    0.5
    %B/B
    
    
    22.6
    
    
    
    24.4
    
    
    
    0.4
    %CCC+ and below
    
    
    103.1
    
    
    
    107.4
    
    
    
    1.5
    %Total
    
    $
    6,792.6
    
    
    $
    6,971.4
    
    
    
    100.0
    %
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Maturity Distribution as of December 31, 2009
  Percentageof TotalAmortized
    
    
    Fair
    
    
    FairCost
    
    
    Value
    
    
    Value($ in millions)MaturityDue within one year
    
    $
    153.1
    
    
    $
    156.3
    
    
    
    2.2
    %Due after one year through five years
    
    
    3,125.6
    
    
    
    3,221.7
    
    
    
    46.3
    %Due after five years through ten years
    
    
    1,133.1
    
    
    
    1,166.9
    
    
    
    16.7
    %Due after ten years
    
    
    163.3
    
    
    
    172.4
    
    
    
    2.5
    %Mortgage-backed securities
    
    
    1,689.3
    
    
    
    1,721.3
    
    
    
    24.7
    %Asset-backed securities
    
    
    528.2
    
    
    
    532.8
    
    
    
    7.6
    %Total
    
    $
    6,792.6
    
    
    $
    6,971.4
    
    
    
    100.0
    %
 Investment Returns for the Year Ended December 31, 2009
  Net investment income
    
    
    300.7Net realized investment gains
    
    
    126.4Net change in unrealized gains
    
    
    181.1Net impairment charges recognized in earnings
    
    
    (49.6
    )Total net investment return
    
    
    558.6Total return(1)
    
    
    7.9
    %Effective annualized yield(2)
    
    
    4.2
    %
 
 (1)
    
    Total return for our investment portfolio is calculated using
beginning and ending market values adjusted for external cash flows
and includes the net change in unrealized gains and losses.(2)
    
    Effective annualized yield is calculated by dividing net investment
income by the average balance of aggregate invested assets, on an
amortized cost basis. Our Principal Operating Subsidiaries
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Our Employees
  Regulatory Matters
 General
  Bermuda
   Solvency and Capital Standards
 Liquidity
 Dividends
 Principal office and representatives
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Annual filings
 Currency matters
 Shareholder notification requirement
  Ireland
   United States
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Holding Company Regulation.
   Guaranty Fund Assessments.
 Involuntary Pools.
 Risk-Based Capital.
 NAIC Ratios.
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Surplus Lines Regulation.
 Switzerland
  Asia
   
 Item 1A. Risk Factors.
  Risks Related to Our Company
 Downgrades or the revocation of our financial strength ratings would affect our standing among
brokers and customers and may cause our premiums and earnings to decrease significantly.
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Actual claims may exceed our reserves for losses and loss expenses.
    We may experience significant losses and volatility in our financial results from catastrophic
events.
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The risk models we use to quantify catastrophe exposures and risk accumulations may prove
inadequate in predicting all outcomes from potential catastrophe events.
  We could face losses from terrorism, political unrest and pandemic diseases.
  Our business and our financial results may be adversely affected by unexpected levels of loss
due to climate change.
   The failure of any of the loss limitation methods we employ could have a material adverse effect on
our financial condition or results of operations.
  A prolonged recession and other adverse consequences as a result of the recent turmoil in the
U.S. and international financial markets could harm our business, liquidity and financial
condition, and our share price.
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We may be impacted from claims relating to the recent financial market turmoil, including subprime
and other credit and insurance exposures beyond our current estimates.
  For our reinsurance business, we depend on the policies, procedures and expertise of ceding
companies; these companies may fail to accurately assess the risks they underwrite which may lead
us to inaccurately assess the risks we assume.
  The availability and cost of security arrangements for reinsurance transactions may materially
impact our ability to provide reinsurance from Bermuda to insurers domiciled in the United States.
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We depend on a small number of brokers for a large portion of our revenues. The loss of business
provided by any one of them could adversely affect us.
  Our reliance on brokers subjects us to their credit risk.
  We may be unable to purchase reinsurance for our own account on commercially acceptable terms or to
collect under any reinsurance we have purchased.
   Our investment performance may adversely affect our financial performance and ability to conduct
business.
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Any increase in interest rates and/or credit spread levels could result in significant losses in
the fair value of our investment portfolio.
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The valuation of our investments may include methodologies, estimations and assumptions that
are subject to differing interpretations and could result in changes to investment valuations that
may materially adversely affect our financial condition   or results of operations.
  The determination of the impairments taken on our investments is highly subjective and could
materially impact our financial position or results of operations.
  We may be adversely affected by fluctuations in currency exchange rates.
   We may be adversely impacted by inflation.
  We may require additional capital in the future that may not be available to us on commercially
favorable terms.
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Our business could be adversely affected if we lose any member of our management team or are unable
to attract and retain our personnel.
  Employee error and misconduct may be difficult to detect and prevent and could adversely affect
our business, results of operations and financial condition.
  If a program administrator were to exceed its underwriting authority or otherwise breach
obligations owed to us, we could be adversely affected.
  If we experience difficulties with our information technology and telecommunications systems and/or
data security, our ability to conduct our business might be adversely affected.
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The integration of acquired companies, the growth of our operations through new lines of insurance
or reinsurance business, the expansion into new geographic regions and/or the entering into joint
ventures or partnerships may expose us to operational risks.
  A complaint filed against our Bermuda insurance subsidiary could, if adversely determined or
resolved, subject us to a material loss.
   Conflicts of interests may arise because affiliates of certain of our principal shareholders have
continuing agreements and business relationships with us, and our founding shareholders  compete
with us in several of our business lines.
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Government authorities are continuing to investigate the insurance industry, which may adversely
affect our business.
  Risks Related to the Insurance and Reinsurance Business
 The insurance and reinsurance business is historically cyclical and we expect to experience periods
with excess underwriting capacity and unfavorable premium rates and policy terms and conditions.
  Increased competition in the insurance and reinsurance markets in which we operate could adversely
impact our operating margins.
    The effects of emerging claims and coverage issues on our business are uncertain.
  
    
    larger defense costs, settlements and jury awards in cases involving professionals and
corporate directors and officers covered by professional liability and directors and
officers liability insurance; and
    
    a trend of plaintiffs targeting property and casualty insurers in class action litigation
related to claims handling, insurance sales practices and other practices related to the
conduct of our business.
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Risks Related to Laws and Regulations Applicable to Us
 Compliance by our insurance subsidiaries with the legal and regulatory requirements to which they
are subject is expensive. Any failure to comply could have a material adverse effect on our
business.
    
    
    require Allied World Assurance Company, Ltd to maintain minimum levels of capital and
surplus,
    
    impose liquidity requirements which restrict the amount and type of investments it may
hold,
    
    prescribe solvency standards that it must meet, and
    
    restrict payments of dividends and reductions of capital and provide for the performance
of periodic examinations of Allied World Assurance Company, Ltd and its financial condition.
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Our Bermuda entities could become subject to regulation in the United States.
  Our holding company structure and regulatory and other constraints affect our ability to pay
dividends and make other payments.
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The
U.S. Congress is considering healthcare reform legislation which
could have a  material impact on
our business.
  Other legislative, regulatory and industry initiatives could adversely affect our business.
   
    
    provide insurance and reinsurance capacity in markets and to consumers that we target;
    
    require our participation in industry pools and guaranty associations;
    
    expand the scope of coverage under existing policies;
    
    increasingly mandate the terms of insurance and reinsurance policies;
    
    establish a new federal insurance regulator or financial industry systemic risk
regulator;
    
    revise laws and regulations under which we operate, including a potential change to U.S.
tax laws to disallow  or limit the current tax deduction for reinsurance premiums paid by our U.S.
subsidiaries to our Bermuda insurance subsidiary for reinsurance protections it provides to our U.S. subsidiaries; or
    
    disproportionately benefit the companies of one country over those of another.
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Our business could be adversely affected by Bermuda employment restrictions.
  Risks Related to Ownership of Our Common Shares
 Future sales of our common shares may adversely affect the market price.
  Our Bye-laws contain restrictions on ownership, voting and transfers of our common shares.
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Anti-takeover provisions in our Bye-laws could impede an attempt to replace or remove our
directors, which could diminish the value of our common shares.
   
    
    the election of our directors is staggered, meaning that members of only one of three
classes of our directors are elected each year, thus limiting a shareholders ability to
replace directors;
    
    our shareholders have a limited ability to remove directors;
    
    the total voting power of any shareholder beneficially owning 10% or more of the total
voting power of our voting shares will be reduced to less than 10% of the total voting
power. Conversely, shareholders owning less than 10% of the total voting power may gain
increased voting power as a result of these cutbacks;
    
    our directors may decline to register a transfer of shares if as a result of such
transfer any U.S. person owns 10% or more of our shares by vote or value (other than some of
our principal shareholders, whose share ownership may not exceed the percent of our common
shares owned immediately after our initial public offering of common shares in July 2006);
    
    if our directors determine that share ownership of any person may result in a violation
of our ownership limitations, our Board of Directors has the power to force that shareholder
to sell its shares; and
    
    our Board of Directors has the power to issue preferred shares without any shareholder
approval, which effectively allows the Board to dilute the holdings of any shareholder and
could be used to institute a poison pill that would work to dilute the share ownership of
a potential hostile acquirer, effectively preventing acquisitions that have not been
approved by our Board of Directors.
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As a shareholder of our company, you may have greater difficulties in protecting your interests
than as a shareholder of a U.S. corporation.
  It may be difficult to enforce service of process and enforcement of judgments against us and our
officers and directors.
     There are regulatory limitations on the ownership and transfer of our common shares.
   Risks Related to Taxation
 U.S. taxation of our non-U.S. companies could materially adversely affect our financial condition
and results of operations.
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Our U.S. subsidiaries may be subject to additional U.S. taxes in connection with our interaffiliate
arrangements.
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You may be subject to U.S. income taxation with respect to income of our non-U.S. companies and
ordinary income characterization of gains on disposition of our shares under the controlled foreign
corporation (CFC) rules.
  You may be subject to U.S. income taxation under the related person insurance income (RPII)
rules.
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U.S. tax-exempt entities may recognize unrelated business taxable income (UBTI).
  You may be subject to additional U.S. federal income taxation with respect to distributions on and
gains on dispositions of our shares under the passive foreign investment company (PFIC) rules.
  Application of a published IRS Revenue Ruling with respect to our insurance or reinsurance
arrangements can materially adversely affect us.
  We may be subject to U.K. tax, which may have a material adverse effect on our results of
operations.
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We may be subject to Irish tax, which may have a material adverse effect on our results of
operations.
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If corporate tax rates in Ireland increase, our business and financial results could be adversely
affected.
  If investments held by our Irish companies are determined not to be integral to the insurance and
reinsurance businesses carried on by those companies, additional Irish tax could be imposed and our
business and financial results could be adversely affected.
  We may become subject to taxes in Bermuda after March 28, 2016, which may have a material adverse
effect on our results of operations and our investment.
  
 Item 1B. Unresolved Staff Comments.
  GLOSSARY OF SELECTED INSURANCE AND OTHER TERMS
 Admitted insurer
    
    An insurer that is licensed or authorized to write insurance in a particular
state; to be distinguished from an insurer eligible to write excess and surplus
lines insurance on risks located within a jurisdiction.Attachment point
    
    The loss point of which an insurance or reinsurance policy becomes operative
and below which any losses are retained by either the insured or other insurers
or reinsurers, as the case may be.Capacity
    
    The maximum percentage of surplus, or the dollar amount of exposure, that an
insurer or reinsurer is willing or able to place at risk. Capacity may apply
to a single risk, a program, a line of business or an entire book of business.
Capacity may be constrained by legal restrictions, corporate restrictions or
indirect restrictions.Case reserves
    
    Loss reserves, established with respect to specific, individual reported claims.Catastrophe exposure or event
    
    A severe loss, typically involving multiple claimants. Common perils include
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earthquakes, hurricanes, tsunamis, hailstorms, severe winter weather, floods,
fires, tornadoes, explosions and other natural or man-made disasters.
Catastrophe losses may also arise from acts of war, acts of terrorism and
political instability.Catastrophe reinsurance
    
    A form of excess-of-loss reinsurance that, subject to a specified limit,
indemnifies the ceding company for the amount of loss in excess of a specified
retention with respect to an accumulation of losses resulting from a
catastrophic event. The actual reinsurance document is called a catastrophe
cover. These reinsurance contracts are typically designed to cover property
insurance losses but can be written to cover other types of insurance losses
such as workers compensation policies.Cede, cedent, ceding company
    
    When an insurer transfers some or all of its risk to a reinsurer, it cedes
business and is referred to as the ceding company or cedent.Commercial coverage
    
    Insurance products that are sold to entities and individuals in their business
or professional capacity, and which are intended for other than the insureds
personal or household use.Deductible
    
    The amount of loss that an insured retains. Also referred to as retention.Direct insurance
    
    Insurance sold by an insurer that contracts directly with the insured, as
distinguished from reinsurance.Directors and officers liability
    
    Insurance that covers liability for corporate directors and officers for
wrongful acts, subject to applicable exclusions, terms and conditions of the
policy.Earned premiums or premiums earned
    
    That portion of premiums written that applies to the expired portion of the
policy term. Earned premiums are recognized as revenues under both statutory
accounting practice and U.S. GAAP.Excess and surplus lines
    
    A risk or a part of a risk for which there is no insurance market available
among admitted insurers; or insurance written by non-admitted insurance
companies to cover such risks.Excess layer
    
    Insurance to cover losses in one or more layers above a certain amount with
losses below that amount usually covered by the insureds primary policy and
its self-insured retention.Excess-of-loss reinsurance
    
    Reinsurance that indemnifies the insured against all or a specified portion of
losses over a specified amount or retention.Exclusions
    
    Provisions in an insurance or reinsurance policy excluding certain risks or
otherwise limiting the scope of coverage.Exposure
    
    The possibility of loss. A unit of measure of the amount of risk a company
assumes.Facultative reinsurance
    
    The reinsurance of all or a portion of the insurance provided by a single
policy. Each policy reinsured is separately negotiated.Frequency
    
    The number of claims occurring during a specified period of time.
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General casualty
    
    Insurance that is primarily concerned with losses due to injuries to persons
and liability imposed on the insured for such injury or for damage to the
property of others.Gross premiums written
    
    Total premiums for insurance written and reinsurance written during a
given period.Healthcare liability
    
    Insurance coverage, often referred to as medical malpractice insurance, which
addresses liability risks of doctors, surgeons, nurses, other healthcare
professionals and the institutions (hospitals, clinics) in which they practice.Incurred but not reported (IBNR) reserves
    
    Reserves established by us for claims that have occurred but have not yet been
reported to us as well as for changes in the values of
claims that have been reported to us but are not yet settled.In-force
    
    Policies that have not expired or been terminated and for which the insurer
remains on risk as of a given date.Limits
or gross maximum limits
    
    The maximum amount that an insurer or reinsurer will insure or reinsure for a
specified risk, a portfolio of risks or on a single insured entity. The term also refers to the maximum
amount of benefit payable for a given claim or occurrence.Loss
    
    An occurrence that is the basis for submission or payment of a claim. Losses
may be covered, limited or excluded from coverage, depending on the terms of
the insurance policy or other insurance or reinsurance contracts.Losses incurred
    
    The total losses and loss adjustment expenses paid, plus the change in loss and
loss adjustment expense reserves, including IBNR, sustained by an insurance or
reinsurance company under its insurance policies or other insurance or
reinsurance contracts.Loss expenses
    
    The expenses incurred by an insurance or reinsurance company in settling a loss.Loss reserves
    
    Liabilities established by insurers and reinsurers to reflect the estimated
cost of claims incurred that the insurer or reinsurer will ultimately be
required to pay. Reserves are established for losses and for loss expenses, and
consist of case reserves and IBNR reserves. As the term is used in this Form
10-K, loss reserves is meant to include reserves for both losses and for loss
expenses.Net premiums earned
    
    The portion of net premiums written during or prior to a given period that was
recognized as income during such period.Net premiums written
    
    Gross premiums written, less premiums ceded to reinsurers.Per occurrence limitations
    
    The maximum amount recoverable under an insurance or reinsurance policy as a
result of any one event, regardless of the number of claims.Primary insurance (or primary risk layer)
    
    Insurance that absorbs the losses immediately above the insureds retention
layer. A primary insurer will pay up to a certain dollar amount of losses over
the insureds retention, at which point a higher layer excess insurer will be
liable for
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additional losses. The coverage terms of a primary insurance layer
typically assume an element of regular loss frequency.Probable maximum loss (PML)
    
    An estimate of the largest probable loss on any given insurance policy or
coverage.Producer
    
    A licensed professional, often
referred to as either an insurance agent, insurance broker or
intermediary, who acts as intermediary between the insurance carrier and
the insured or reinsured (as the case may be).Product liability
    
    Insurance that provides coverage to manufacturer and/or distributors of
tangible goods against liability for personal injury caused if such products
are unsafe or defective.Professional liability
    
    Insurance that provides liability
coverage to directors and officers, attorneys, doctors, accountants
and other professionals who offer services to the general public and claim
expertise in a particular area greater than the ordinary layperson for their
negligence or malfeasance.Property catastrophe coverage
    
    In reinsurance, coverage that protects the ceding company against accumulated
losses in excess of a stipulated sum that arise from a catastrophic event such
as an earthquake, fire or windstorm. Catastrophe loss generally refers to the
total loss of an insurer arising out of a single catastrophic event.Quota share reinsurance
    
    A proportional reinsurance treaty in which the ceding company cedes an
agreed-on percentage of every risk it insures that falls within a class or
classes of business subject to the treaty.Reinstatement premium
    
    The premium paid by a ceding company for the right and, typically the
obligation to reinstate the portion of coverage exhausted by prior claims.
Reinstatement provisions typically limit the amount of aggregate coverage for
all claims during the contract period and often require additional premium
payments.Reinsurance
    
    The practice whereby one insurer, called the reinsurer, in consideration of a
premium paid to that reinsurer, agrees to indemnify another insurer, called the
ceding company, for part or all of the liability of the ceding company under
one or more policies or contracts of insurance that it has issued. Reinsurance
does not legally discharge the ceding company from its liability with respect
to its obligations to the insured.Retention
    
    The amount of exposure an insured retains on any one risk or group of
risks. The term may apply to an insurance policy, where the insured is an
individual or business, or a reinsurance contract, where the insured is an
insurance company. See Deductible.Retrocessional coverage
    
    A transaction whereby a reinsurer cedes to another reinsurer, the
retrocessionaire, all or part of the reinsurance that the first reinsurer has
assumed. Retrocessional reinsurance does not legally discharge the ceding
reinsurer from its liability with respect to its obligations to the reinsured.
Reinsurance companies cede risks to retrocessionaires for reasons similar to
those that cause insurers to purchase reinsurance: to reduce net liability on
individual risks, to protect against catastrophic losses, to stabilize
financial ratios and to obtain additional underwriting capacity.Run-off
    
    Liability of an insurance or reinsurance company for existing claims that it
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expects to pay in the future and for which a loss reserve has been established.Self-insured
    
    A term which describes a risk, or part of a risk, retained by the insured in
lieu of transferring the risk to an insurer. A policy deductible or retention
feature allows a policyholder to self-insure a portion of an exposure and
thereby reduce its risk-transfer costs.Specialty lines
    
    A term used in the insurance and reinsurance industry to describe types of
insurance or classes of business that require specialized expertise to
underwrite. Insurance and reinsurance for these classes of business is not
widely available and is typically purchased from the specialty lines divisions
of larger insurance companies or from small specialty lines insurers.For our direct insurance operations, specialty lines include environmental
liability and Defense Base Act products. For our reinsurance business written
from Bermuda and Europe, specialty lines include workers compensation
catastrophe and political risk products and industry loss warranties. For our
reinsurance business written from the United States, specialty lines include
professional liability products such as directors and officers, errors and
omissions and medical malpractice.Subpart F income
    
    Insurance and reinsurance income (including underwriting and investment income)
and foreign personal holding company income (including interest, dividends and
other passive investment income).Surplus (or statutory surplus)
    
    As determined under statutory accounting principles, the amount remaining after
all liabilities, including loss reserves, are subtracted from all of the
admitted assets (i.e., those permitted by regulation to be recognized on the
statutory balance sheet). Surplus is also referred to as statutory surplus or
surplus as regards policyholders for statutory accounting purposes.Surplus lines
    
    A risk or a part of a risk for which there is no insurance market available
among admitted insurers or insurance written by non-admitted insurance
companies to cover such risks.Treaty reinsurance
    
    The reinsurance of a specified type or category of risks defined in a
reinsurance agreement (a treaty) between an insurer and a reinsurer.
Typically, in treaty reinsurance, the primary insurer (or reinsured) is
obligated to offer and the reinsurer is obligated to accept a specified portion
of all of that type or category of risk originally written by the insurer.Underwriter
    
    An employee of an insurance or reinsurance company who examines, accepts or
rejects risks and classifies accepted risks in order to charge an appropriate
premium for each accepted risk. The underwriter is expected to select business
that will produce an average risk of loss no greater than that anticipated for
the class of business.Underwriting results
    
    The pre-tax profit or loss experienced by an insurance company that is
calculated by deducting net losses and loss expenses, net acquisition costs and
general and administration expenses from net premiums earned. This profit or
loss calculation includes reinsurance assumed and ceded but excludes investment
income.Unearned premium
    
    The portion of premiums written that is allocable to the unexpired portion of
the policy term or underlying risk.
 -44-




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##### Table of Contents



Working layer
    
    Primary insurance that absorbs the losses immediately above the insureds
retention layer. A working layer insurer will pay up to a certain dollar amount
of losses over the insureds retention, at which point a higher layer excess
insurer will be liable for additional losses. The coverage terms of a working
layer typically assume an element of loss frequency.Written premium
    
    The premium entered on an insurers books for a policy issued during a given
period of time, whether coverage is provided only during that period of time or
also during subsequent periods.
 
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
    
 Item 4. Submission of Matters to a Vote of Security Holders.
  -45-




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##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
   High
    
    
    Low2009:First quarter
    
    $
    42.68
    
    
    $
    32.23Second quarter
    
    $
    41.32
    
    
    $
    35.43Third quarter
    
    $
    49.76
    
    
    $
    39.93Fourth quarter
    
    $
    49.31
    
    
    $
    44.322008:First quarter
    
    $
    50.24
    
    
    $
    38.29Second quarter
    
    $
    46.82
    
    
    $
    39.08Third quarter
    
    $
    42.93
    
    
    $
    34.67Fourth quarter
    
    $
    40.60
    
    
    $
    21.00
     Performance Graph
   -46-




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##### Table of Contents



TOTAL RETURN TO SHAREHOLDERS
(INCLUDES REINVESTMENT OF DIVIDENDS)
 COMPARISON OF CUMULATIVE TOTAL RETURN
 
 
 Item 6. Selected Financial Data.
  -47-




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##### Table of Contents



Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005($ in millions, except per share amounts and ratios)Summary Statement of Operations Data:Gross premiums written
    
    $
    1,696.3
    
    
    $
    1,445.6
    
    
    $
    1,505.5
    
    
    $
    1,659.0
    
    
    $
    1,560.3Net premiums written
    
    $
    1,321.1
    
    
    $
    1,107.2
    
    
    $
    1,153.1
    
    
    $
    1,306.6
    
    
    $
    1,222.0Net premiums earned
    
    $
    1,316.9
    
    
    $
    1,117.0
    
    
    $
    1,159.9
    
    
    $
    1,252.0
    
    
    $
    1,271.5Net investment income
    
    
    300.7
    
    
    
    308.8
    
    
    
    297.9
    
    
    
    244.4
    
    
    
    178.6Net realized investment gains (losses)
    
    
    126.4
    
    
    
    (60.0
    )
    
    
    37.0
    
    
    
    (4.8
    )
    
    
    (10.2
    )Net impairment charges recognized in
earnings
    
    
    (49.6
    )
    
    
    (212.9
    )
    
    
    (44.6
    )
    
    
    (23.9
    )
    
    
    Other income
    
    
    1.5
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    Net losses and loss expenses
    
    
    604.1
    
    
    
    641.1
    
    
    
    682.3
    
    
    
    739.1
    
    
    
    1,344.6Acquisition costs
    
    
    148.9
    
    
    
    112.6
    
    
    
    119.0
    
    
    
    141.5
    
    
    
    143.4General and administrative expenses
    
    
    248.6
    
    
    
    185.9
    
    
    
    141.6
    
    
    
    106.1
    
    
    
    94.3Amortization and impairment of intangible
assets
    
    
    11.1
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    39.0
    
    
    
    38.7
    
    
    
    37.8
    
    
    
    32.6
    
    
    
    15.6Foreign exchange loss (gain)
    
    
    0.7
    
    
    
    (1.4
    )
    
    
    (0.8
    )
    
    
    0.6
    
    
    
    2.2Income tax expense (benefit)
    
    
    36.6
    
    
    
    (7.6
    )
    
    
    1.1
    
    
    
    5.0
    
    
    
    (0.4
    )Net income (loss)
    
    $
    606.9
    
    
    $
    183.6
    
    
    $
    469.2
    
    
    $
    442.8
    
    
    $
    (159.8
    )Per Share Data:Earnings (loss) per share(1):Basic
    
    $
    12.26
    
    
    $
    3.75
    
    
    $
    7.84
    
    
    $
    8.09
    
    
    $
    (3.19
    )Diluted
    
    
    11.67
    
    
    
    3.59
    
    
    
    7.53
    
    
    
    7.75
    
    
    
    (3.19
    )Weighted average number of common
shares outstanding:Basic
    
    
    49,503,438
    
    
    
    48,936,912
    
    
    
    59,846,987
    
    
    
    54,746,613
    
    
    
    50,162,842Diluted
    
    
    51,992,674
    
    
    
    51,147,215
    
    
    
    62,331,165
    
    
    
    57,115,172
    
    
    
    50,162,842Dividends declared per share
    
    $
    0.74
    
    
    $
    0.72
    
    
    $
    0.63
    
    
    $
    0.15
    
    
    $
    9.93
 -48-




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##### Table of Contents



Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Selected Ratios:Loss and loss expense ratio(2)
    
    
    45.9
    %
    
    
    57.4
    %
    
    
    58.8
    %
    
    
    59.0
    %
    
    
    105.7
    %Acquisition cost ratio(3)
    
    
    11.3
    
    
    
    10.1
    
    
    
    10.3
    
    
    
    11.3
    
    
    
    11.3General and administrative expense ratio(4)
    
    
    18.9
    
    
    
    16.6
    
    
    
    12.2
    
    
    
    8.5
    
    
    
    7.4Expense ratio(5)
    
    
    30.2
    
    
    
    26.7
    
    
    
    22.5
    
    
    
    19.8
    
    
    
    18.7Combined ratio(6)
    
    
    76.1
    
    
    
    84.1
    
    
    
    81.3
    
    
    
    78.8
    
    
    
    124.4
 As of December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005($ in millions, except per share amounts)Summary Balance Sheet Data:Cash and cash equivalents
    
    $
    292.2
    
    
    $
    655.8
    
    
    $
    202.6
    
    
    $
    366.8
    
    
    $
    172.4Investments at fair value
    
    
    7,156.3
    
    
    
    6,157.1
    
    
    
    6,029.3
    
    
    
    5,440.3
    
    
    
    4,687.4Reinsurance recoverable
    
    
    920.0
    
    
    
    888.3
    
    
    
    682.8
    
    
    
    689.1
    
    
    
    716.3Total assets
    
    
    9,653.2
    
    
    
    9,022.5
    
    
    
    7,899.1
    
    
    
    7,620.6
    
    
    
    6,610.5Reserve for losses and loss expenses
    
    
    4,761.8
    
    
    
    4,576.8
    
    
    
    3,919.8
    
    
    
    3,637.0
    
    
    
    3,405.4Unearned premiums
    
    
    928.6
    
    
    
    930.4
    
    
    
    811.1
    
    
    
    813.8
    
    
    
    740.1Total debt
    
    
    498.9
    
    
    
    742.5
    
    
    
    498.7
    
    
    
    498.6
    
    
    
    500.0Total shareholders equity
    
    
    3,213.3
    
    
    
    2,416.9
    
    
    
    2,239.8
    
    
    
    2,220.1
    
    
    
    1,420.3
 
 (1)
    
    Please refer to Note 13 of the notes to consolidated financial statements for the calculation
of basic and diluted earnings per share.(2)
    
    Calculated by dividing net losses and loss expenses by net premiums earned.(3)
    
    Calculated by dividing acquisition costs by net premiums earned.(4)
    
    Calculated by dividing general and administrative expenses by net premiums earned.(5)
    
    Calculated by combining the acquisition cost ratio and the general and administrative expense
ratio.(6)
    
    Calculated by combining the loss ratio, acquisition cost ratio and general and administrative
expense ratio. -49-




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
 Our Business
    -50-




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##### Table of Contents



Financial Highlights
 Year Ended December 31,2009
    
    2008
    
    2007($ in millions except share and per share data)Gross premiums written
    
    $
    1,696.3
    
    
    $
    1,445.6
    
    
    $
    1,505.5Net income
    
    
    606.9
    
    
    
    183.6
    
    
    
    469.2Operating income
    
    
    537.7
    
    
    
    455.1
    
    
    
    476.0Basic earnings per share:Net income
    
    $
    12.26
    
    
    $
    3.75
    
    
    $
    7.84Operating income
    
    $
    10.86
    
    
    $
    9.30
    
    
    $
    7.95Diluted earnings per share:Net income
    
    $
    11.67
    
    
    $
    3.59
    
    
    $
    7.53Operating income
    
    $
    10.34
    
    
    $
    8.90
    
    
    $
    7.64Weighted average common shares outstanding:Basic
    
    
    49,503,438
    
    
    
    48,936,912
    
    
    
    59,846,987Diluted
    
    
    51,992,674
    
    
    
    51,147,215
    
    
    
    62,331,165Book value per share
    
    $
    64.61
    
    
    $
    49.29
    
    
    $
    45.95Diluted book value per share
    
    $
    59.56
    
    
    $
    46.05
    
    
    $
    42.53Annualized return on average equity (ROAE), net income
    
    
    22.6
    %
    
    
    8.3
    %
    
    
    21.7
    %Annualized ROAE, operating income
    
    
    20.0
    %
    
    
    20.6
    %
    
    
    22.1
    %
 Non-GAAP Financial Measures
  Operating income & operating income per share
  -51-




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##### Table of Contents



Year Ended December 31,2009
    
    
    2008
    
    
    2007($ in millions except share and per share data)Net income
    
    $
    606.9
    
    
    $
    183.6
    
    
    $
    469.2Add:Net realized investment (gains) losses
    
    
    (126.4
    )
    
    
    60.0
    
    
    
    (37.0
    )Net impairment charges in earnings
    
    
    49.6
    
    
    
    212.9
    
    
    
    44.6Impairment of intangible assets
    
    
    6.9
    
    
    
    
    
    
    
    Foreign exchange loss (gain)
    
    
    0.7
    
    
    
    (1.4
    )
    
    
    (0.8
    )Operating income
    
    $
    537.7
    
    
    $
    455.1
    
    
    $
    476.0Basic per share data:Net income
    
    $
    12.26
    
    
    $
    3.75
    
    
    $
    7.84Add:Net realized investment (gains) losses
    
    
    (2.55
    )
    
    
    1.23
    
    
    
    (0.62
    )Net impairment charges in earnings
    
    
    1.00
    
    
    
    4.35
    
    
    
    0.74Impairment of intangible assets
    
    
    0.14
    
    
    
    
    
    
    
    Foreign exchange loss (gain)
    
    
    0.01
    
    
    
    (0.03
    )
    
    
    (0.01
    )Operating income
    
    $
    10.86
    
    
    $
    9.30
    
    
    $
    7.95Diluted per share data:Net income
    
    $
    11.67
    
    
    $
    3.59
    
    
    $
    7.53Add:Net realized investment (gains) losses
    
    
    (2.43
    )
    
    
    1.17
    
    
    
    (0.59
    )Net impairment charges in earnings
    
    
    0.96
    
    
    
    4.16
    
    
    
    0.71Impairment of intangible assets
    
    
    0.13
    
    
    
    
    
    
    
    Foreign exchange loss (gain)
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    (0.01
    )Operating income
    
    $
    10.34
    
    
    $
    8.90
    
    
    $
    7.64
 Annualized return on equity
   -52-




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##### Table of Contents



2009
    
    
    2008
    
    
    2007($ in millions)Opening shareholders equity
    
    $
    2,416.9
    
    
    $
    2,239.8
    
    
    $
    2,220.1Deduct: accumulated other comprehensive income
    
    
    (105.6
    )
    
    
    (136.2
    )
    
    
    (6.5
    )Adjusted opening shareholders equity
    
    $
    2,311.3
    
    
    $
    2,103.6
    
    
    $
    2,213.6Closing shareholders equity
    
    $
    3,213.3
    
    
    $
    2,416.9
    
    
    $
    2,239.8Deduct: accumulated other comprehensive income
    
    
    (149.8
    )
    
    
    (105.6
    )
    
    
    (136.2
    )Adjusted closing shareholders equity
    
    $
    3,063.5
    
    
    $
    2,311.3
    
    
    $
    2,103.6Average shareholders equity
    
    $
    2,687.3
    
    
    $
    2,207.4
    
    
    $
    2,158.6Net income available to shareholders
    
    $
    606.9
    
    
    $
    183.6
    
    
    $
    469.2Annualized return on average shareholders
equity  net income available to shareholders
    
    
    22.6
    %
    
    
    8.3
    %
    
    
    21.7
    %Operating income available to shareholders
    
    $
    537.7
    
    
    $
    455.1
    
    
    $
    476.0Annualized return on average shareholders
equity  operating income available to
shareholders
    
    
    20.0
    %
    
    
    20.6
    %
    
    
    22.1
    %
 Diluted book value per share
  Year Ended December 31,2009
    
    
    2008
    
    
    2007($ in millions except share and per share data)Price per share at period end
    
    $
    46.07
    
    
    $
    40.60
    
    
    $
    50.17Total shareholders equity
    
    $
    3,213.3
    
    
    $
    2,416.9
    
    
    $
    2,239.8Basic common shares outstanding
    
    
    49,734,487
    
    
    
    49,036,159
    
    
    
    48,741,927Add:Unvested restricted share units
    
    
    915,432
    
    
    
    971,907
    
    
    
    820,890Performance based equity awards
    
    
    1,583,237
    
    
    
    1,345,903
    
    
    
    886,251Dilutive options/warrants outstanding
    
    
    6,805,157
    
    
    
    6,371,151
    
    
    
    6,723,875Deduct:Options bought back via treasury method
    
    
    (5,087,405
    )
    
    
    (5,237,965
    )
    
    
    (4,506,182
    )Common shares and common share equivalents outstanding
    
    
    53,950,908
    
    
    
    52,487,155
    
    
    
    52,666,761Weighted average exercise price per share
    
    $
    34.44
    
    
    $
    33.38
    
    
    $
    33.62Basic book value per common share
    
    $
    64.61
    
    
    $
    49.29
    
    
    $
    45.95Diluted book value per common share
    
    $
    59.56
    
    
    $
    46.05
    
    
    $
    42.53
 -53-




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##### Table of Contents



Recent Developments
 Change to Segment Reporting
    Relevant Factors
 Revenues
   Expenses
  
    
    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
 -54-




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##### Table of Contents




    
    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.
   Ratios
  Critical Accounting Policies
  Reserve for Losses and Loss Expenses
  U.S. Insurance
    
    
    International Insurance
    
    
    Reinsurance
    
    
    TotalDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007($ in millions)Case reserves
    
    $
    268.1
    
    
    $
    257.3
    
    
    $
    107.0
    
    
    $
    570.4
    
    
    $
    619.3
    
    
    $
    643.7
    
    
    $
    313.5
    
    
    $
    256.3
    
    
    $
    212.7
    
    
    $
    1,152.0
    
    
    $
    1,132.9
    
    
    $
    963.4IBNR
    
    
    985.6
    
    
    
    871.2
    
    
    
    416.5
    
    
    
    1,786.0
    
    
    
    1,753.7
    
    
    
    1,736.3
    
    
    
    838.2
    
    
    
    819.0
    
    
    
    803.7
    
    
    
    3,609.8
    
    
    
    3,443.9
    
    
    
    2,956.4Reserve for losses and
loss expenses
    
    
    1,253.7
    
    
    
    1,128.5
    
    
    
    523.5
    
    
    
    2,356.4
    
    
    
    2,373.0
    
    
    
    2,380.0
    
    
    
    1,151.7
    
    
    
    1,075.3
    
    
    
    1,016.4
    
    
    
    4,761.8
    
    
    
    4,576.8
    
    
    
    3,919.8Reinsurance recoverables
    
    
    (351.8
    )
    
    
    (309.1
    )
    
    
    (52.3
    )
    
    
    (566.3
    )
    
    
    (576.0
    )
    
    
    (612.3
    )
    
    
    (1.9
    )
    
    
    (3.2
    )
    
    
    (18.2
    )
    
    
    (920.0
    )
    
    
    (888.3
    )
    
    
    (682.8
    )Net reserve for losses
and loss expenses
    
    $
    901.9
    
    
    $
    819.4
    
    
    $
    471.2
    
    
    $
    1,790.1
    
    
    $
    1,797.0
    
    
    $
    1,767.7
    
    
    $
    1,149.8
    
    
    $
    1,072.1
    
    
    $
    998.2
    
    
    $
    3,841.8
    
    
    $
    3,688.5
    
    
    $
    3,237.0
  -55-




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##### Table of Contents




    
    Reinsurers have to rely upon the cedents and reinsurance intermediaries to report
losses in a timely fashion.
    
    Reinsurers must rely upon cedents to price the underlying business appropriately.
    
    Reinsurers have less predictable loss emergence patterns than direct insurers,
particularly when writing excess-of-loss reinsurance.
 -56-




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##### Table of Contents



Paid Loss Development Method.
 Reported Loss Development Method.
 -57-




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##### Table of Contents



Expected Loss Ratio Method.
 Bornhuetter-Ferguson Paid Loss Method.
 Bornhuetter-Ferguson Reported Loss Method.
      -58-




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##### Table of Contents



As of December 31,Loss Year
    
    2009
    
    
    20082002
    
    
    2.0
    %
    
    
    4.0
    %2003
    
    
    4.0
    %
    
    
    6.0
    %2004
    
    
    6.0
    %
    
    
    8.0
    %2005
    
    
    8.0
    %
    
    
    10.0
    %2006
    
    
    10.0
    %
    
    
    10.0
    %2007
    
    
    10.0
    %
    
    
    10.0
    %2008
    
    
    10.0
    %
    
    
    10.0
    %2009
    
    
    10.0
    %
    
    
    
  -59-




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##### Table of Contents



Reserve for Losses and Loss ExpensesGross of Reinsurance Recoverable(1)Carried
    
    
    Low
    
    
    HighReserves
    
    
    Estimate
    
    
    Estimate($ in millions)U.S. insurance
    
    $
    1,253.7
    
    
    $
    1,040.7
    
    
    $
    1,426.9International insurance
    
    
    2,356.4
    
    
    
    1,790.8
    
    
    
    2,672.3Reinsurance
    
    
    1,151.7
    
    
    
    811.7
    
    
    
    1,370.7
 Reserve for Losses and Loss ExpensesNet of Reinsurance Recoverable(2)Carried
    
    
    Low
    
    
    HighReserves
    
    
    Estimate
    
    
    Estimate($ in millions)U.S. insurance
    
    $
    901.9
    
    
    $
    721.3
    
    
    $
    1,016.3International insurance
    
    
    1,790.1
    
    
    
    1,353.4
    
    
    
    2,054.4Reinsurance
    
    
    1,149.8
    
    
    
    813.9
    
    
    
    1,372.4
 
 (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. On a gross basis, the consolidated low estimate is $3,910.8 million and the
consolidated high estimate is $5,202.3 million.(2)
    
    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. On a net basis, the consolidated low estimate is $3,116.2 million
and the consolidated high estimate is $4,215.5 million.   Ceded Reinsurance
   -60-




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##### Table of Contents



Gross Premiums Written andPremiums CededYear Ended December 31,2009
    
    
    2008
    
    
    2007($ in millions)Gross
    
    $
    1,696.3
    
    
    $
    1,445.6
    
    
    $
    1,505.5Ceded
    
    
    (375.2
    )
    
    
    (338.4
    )
    
    
    (352.4
    )Net
    
    $
    1,321.1
    
    
    $
    1,107.2
    
    
    $
    1,153.1Ceded as percentage of gross
    
    
    22.1
    %
    
    
    23.4
    %
    
    
    23.4
    %
  Year Ended December 31,2009
    
    
    2008
    
    
    2007($ in millions)Premiums written ceded
    
    
    375.2
    
    
    
    338.4
    
    
    
    352.4Premiums earned ceded
    
    
    381.2
    
    
    
    347.0
    
    
    
    348.3Losses and loss expenses ceded
    
    
    196.6
    
    
    
    176.4
    
    
    
    189.8Acquisition costs ceded
    
    
    79.6
    
    
    
    70.8
    
    
    
    66.4
   
    
    We have purchased quota share reinsurance almost from inception for our general property
and energy lines of business written by our U.S. insurance and international insurance
segments. We have ceded from 35% to 55% (during 2009 and 2008 we ceded 40%) of up to $10
million of each applicable general property policy limit. We also purchase reinsurance to
provide protection for specified catastrophes insured by our U.S. insurance and
international insurance segments. The current treaty is an excess-of-loss reinsurance treaty
with four layers. The first layer has a limit of $45 million excess of $80 million, which is
45% placed with reinsurers and the remainder is retained by us. The second layer has a limit
of $50 million excess of $125 million, which is 100% placed with reinsurers. The third layer
has a limit of $75 million excess of $175 million, which is 100% placed with reinsurers. The
fourth layer has a limit of $75 million excess $250 million and covers only earthquakes,
which is 100% placed with reinsurers. We also purchased property catastrophe reinsurance
protection on our international general property business, which covers all territories
except the U.S. and Canada. The current treaty is an excess-of-loss reinsurance treaty with
a limit of $50 million excess of $50 million, which is 80% placed with reinsurers and the
remainder is retained by us. In addition, we purchased an excess-of-loss reinsurance treaty
for our general property line of business within our international insurance segment with a
limit of $10 million excess of $10 million or 10 million excess of 10 million. We have
also purchased a limited amount of facultative reinsurance for
general property and energy policies.
    
    We have purchased variable quota share reinsurance for our general casualty business
since December 2002. During 2009, we increased the cession of policies with limits less than
or equal to $25 million, 25 million or £15 million to 36% (35% in 2008) for policies
written by our Bermuda and European offices. Since 2002 for policies with limits greater
than $25 million but less than or equal to $50 million, 50 million or £30 million, we ceded
between 85% and 100% of up to $25 million of a variable quota share determined by the amount
of the policy limit in excess of $25 million divided by the policy limit. During 2009, the
cession percentage was 100% (100% in 2008). For policies with limits greater than $50
million but less than or equal to $75 million, 75 million or £45 million, we ceded 80% up to $25 million of a variable quota share determined by the amount of the
policy limit in excess of $50 million divided by the policy limit. For policies with limits
less than or equal to $25 million by our U.S. offices, our cession percentage was 28% in
2009 (40% in 2008).
    
    We have purchased quota share reinsurance protection for professional liability policies
written by our Bermuda, European and U.S. offices. During 2009, we ceded 30% (9% in 2008) of
policies written by the Bermuda office with limits up to $25 million and 27.5% of policies
written by our European offices with limits less than or equal to $25 million, 20 million
or £15 million. For our U.S. offices in 2009, we ceded 7.5% (32.5% in 2008) with limits less
than or equal to $25 million. In addition in 2009
 -61-




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##### Table of Contents



for our U.S. offices, we had an excess-of-loss reinsurance treaty that has one layer that is
$3 million excess of $2 million, which is 20% placed with reinsurers, and another layer that
is $20 million excess $5 million, which is 57% placed with reinsurers.
    
    We purchased variable quota share and excess-of-loss reinsurance protection for our
healthcare line of business written by our Bermuda and U.S. offices. In 2009, we ceded 40%
(40% in 2008) of policies with limits greater than $10 million up to $25 million written by
our Bermuda office. For our U.S. offices in 2009, we ceded 67% of $25 million policy limits
in excess of $1.0 million. During 2008, we ceded 30% of policies with limits of less than
or equal to $15 million and 30% for policies with limits greater than $15 million up to $25
million in certain limited cases.
  Reinsurance Recoverableas of December 31,2009
    
    
    2008($ in millions)Ceded case reserves
    
    $
    266.5
    
    
    $
    330.8Ceded IBNR reserves
    
    
    653.5
    
    
    
    557.5Reinsurance recoverable
    
    $
    920.0
    
    
    $
    888.3
    As of December 31,2009
    
    
    2008($ in millions)U.S. insurance
    
    $
    351.8
    
    
    $
    309.1International insurance
    
    
    566.3
    
    
    
    576.0Reinsurance
    
    
    1.9
    
    
    
    3.2Total reinsurance recoverable
    
    $
    920.0
    
    
    $
    888.3
  Premiums and Acquisition Costs
  -62-




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##### Table of Contents



Fair Value of Financial Instruments
  
    
    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.
  U.S. government and U.S. government agencies
 Non-U.S. government and government agencies
 -63-




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##### Table of Contents



States, municipalities and political subdivisions:
 Corporate debt:
 Mortgage-backed:
 Asset-backed:
 Hedge funds:
  Fair Value ofFixed Maturity
    
    
    Percentage ofInvestments as of
    
    
    Total Fixed
    
    
    Fair ValueDecember 31, 2009
    
    
    Maturity
    
    
    HierarchyPricing Sources
    
    ($ in millions)
    
    
    Investments
    
    
    LevelBarclay indices
    
    $
    4,282.9
    
    
    
    61.4
    %
    
    
    1 and 2Interactive Data Pricing
    
    
    1,243.0
    
    
    
    17.8
    
    
    
    2Reuters pricing service
    
    
    447.0
    
    
    
    6.4
    
    
    
    2Broker-dealer quotes
    
    
    358.8
    
    
    
    5.1
    
    
    
    3Merrill Lynch indices
    
    
    168.5
    
    
    
    2.4
    
    
    
    2Standard
& Poors Securities Evaluation
    
    
    107.1
    
    
    
    1.6
    
    
    
    2International indices
    
    
    100.2
    
    
    
    1.5
    
    
    
    2Other sources
    
    
    263.9
    
    
    
    3.8
    
    
    
    2$
    6,971.4
    
    
    
    100.0
    %
 Barclay indices:
 -64-




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##### Table of Contents



Interactive Data Pricing:
 Reuters pricing service:
 Broker-dealer quotes:
 Merrill Lynch Index:
 Standard
& Poors Securities Evaluation:
 International indices:
 Other sources:
   Other-Than-Temporary Impairment of Investments
  -65-




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##### Table of Contents




    
    Our debt securities are managed by external investment portfolio managers. We require
them to provide us with a list of debt securities they intend to sell at the end of the
reporting period. Any impairments in these securities are recognized as OTTI, as the
difference between the amortized cost and fair value and is recognized in the income
statement.
    
    At each reporting period we determine if it is more likely than not we will be required
to sell a debt security before the recovery of its amortized cost basis. We analyze our
current and future contractual and non-contractual obligations and our expectation of future
cash flows to determine if we will need to sell debt securities to fund our obligations. We
consider factors such as trends in underwriting profitability, cash flows from operations,
return on our invested assets, property catastrophe losses, timing of payments and other
specific contractual obligations that are coming due.
    
    For debt securities that are in an unrealized loss position that we do not intend to
sell, we assess whether a credit loss exists. The amount of the credit loss is recognized in
the income statement. The assessment involves consideration of several factors including:
(i) the significance of the decline in value and the resulting unrealized loss position,
(ii) the time period for which there has been a significant decline in value and (iii) an
analysis of the issuer of the investment, including its liquidity, business prospects and
overall financial position. We also look to additional factors depending on the type of
security identified below:
 
    
    Corporate bonds: The credit rating of the issuer as well as information from our
investment portfolio managers and rating agencies. Based on all reasonably available
information, we determine if a credit loss exists.
    
    Mortgage-backed and asset-backed securities: We utilize an independent third party
service to identify mortgage-backed or asset-backed securities where possible principal
and/or interest will not be paid. The independent third party service provides cash flow
projections using default rate, delinquency rate and prepayment assumptions under
different scenarios. We review the information received from the independent third party
and we determine the present value of future cash flows.
  Significant Input
    
    Range of Inputs
    
    
    Weighted Average of InputCredit default rate
    
    
    0.6%  11.0
    %
    
    
    6.1
    %Severity rate
    
    
    30.1%  100.0
    %
    
    
    37.2
    %
   -66-




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##### Table of Contents



Goodwill and Other Intangible Asset Impairment Valuation
  Year
    
    
    Finite or
    
    
    Estimated Useful
    
    
    Carrying Value
    
    
    Carrying ValueSource of goodwill or intangible asset
    
    Acquired
    
    
    Indefinite
    
    
    Life
    
    
    December 31, 2009
    
    
    December 31, 2008(in millions)Insurance licenses(1)
    
    
    2002
    
    
    Indefinite
    
    
    N/A
    
    
    $
    3.9
    
    
    $
    3.9Insurance licenses(2)
    
    
    2008
    
    
    Indefinite
    
    
    N/A
    
    
    
    12.0
    
    
    
    12.0Goodwill(2)
    
    
    2008
    
    
    Indefinite
    
    
    N/A
    
    
    
    3.9
    
    
    
    3.9Trademark/Tradename(3)
    
    
    2008
    
    
    Finite
    
    
    15 years
    
    
    
    
    
    
    
    7.3Distribution Network(3)
    
    
    2008
    
    
    Finite
    
    
    15 years
    
    
    
    35.0
    
    
    
    37.6Internally developed computer software(3)
    
    
    2008
    
    
    Finite
    
    
    3 years
    
    
    
    1.0
    
    
    
    1.5Insurance licenses(3)
    
    
    2008
    
    
    Indefinite
    
    
    N/A
    
    
    
    8.0
    
    
    
    8.0Covenants not-to-compete(3)
    
    
    2008
    
    
    Finite
    
    
    2 years / 1 year
    
    
    
    0.4
    
    
    
    1.1Goodwill(3)
    
    
    2008
    
    
    Indefinite
    
    
    N/A
    
    
    
    264.5
    
    
    
    264.6Total goodwill and other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    328.7
    
    
    $
    339.9
 
 (1)
    
    Related to the acquisition of Allied World National Assurance
Company and Allied World Assurance Company (U.S.) Inc.(2)
    
    Related to the acquisition of Finial Insurance Company(3)
    
    Related to the acquisition of Darwin  
    
    A significant decrease in the market price of the intangible asset;
    
    A significant adverse change in the extent or manner in which the intangible asset is
being used or in its physical condition;
    
    A significant adverse change in legal factors or in the business climate that could
affect the value of the intangible asset, including an adverse action or assessment by a
regulator;
    
    An accumulation of costs significantly in excess of the amount originally expected for
the acquisition or construction of the intangible asset;
    
    A current-period operating or cash flow loss combined with a history of operating or
cash flow losses or a projection or forecast that demonstrates continuing losses associated
with the use of the intangible asset; and
    
    A current expectation that, more likely than not, the intangible asset will be sold or
otherwise disposed of significantly before the end of its previously estimated useful life.
 -67-




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-68-




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##### Table of Contents



Results of Operations
  Year Ended December 31,2009
    
    
    2008
    
    
    2007($ in millions)Gross premiums written
    
    $
    1,696.3
    
    
    $
    1,445.6
    
    
    $
    1,505.5Net premiums written
    
    $
    1,321.1
    
    
    $
    1,107.2
    
    
    $
    1,153.1Net premiums earned
    
    
    1,316.9
    
    
    
    1,117.0
    
    
    
    1,159.9Net investment income
    
    
    300.7
    
    
    
    308.8
    
    
    
    297.9Net realized investment gains (losses)
    
    
    126.4
    
    
    
    (60.0
    )
    
    
    37.0Net impairment charges recognized in earnings
    
    
    (49.6
    )
    
    
    (212.9
    )
    
    
    (44.6
    )Other income
    
    
    1.5
    
    
    
    0.7
    
    
    
    $
    1,695.9
    
    
    $
    1,153.6
    
    
    $
    1,450.2Net losses and loss expenses
    
    
    604.1
    
    
    
    641.1
    
    
    
    682.3Acquisition costs
    
    
    148.9
    
    
    
    112.6
    
    
    
    119.0General and administrative expenses
    
    
    248.6
    
    
    
    185.9
    
    
    
    141.6Amortization and impairment of intangible assets
    
    
    11.1
    
    
    
    0.7
    
    
    
    Interest expense
    
    
    39.0
    
    
    
    38.7
    
    
    
    37.8Foreign exchange loss (gain)
    
    
    0.7
    
    
    
    (1.4
    )
    
    
    (0.8
    )$
    1,052.4
    
    
    $
    977.6
    
    
    $
    979.9Income before income taxes
    
    $
    643.5
    
    
    $
    176.0
    
    
    $
    470.3Income tax expense (benefit)
    
    
    36.6
    
    
    
    (7.6
    )
    
    
    1.1Net income
    
    $
    606.9
    
    
    $
    183.6
    
    
    $
    469.2RatiosLoss and loss expense ratio
    
    
    45.9
    %
    
    
    57.4
    %
    
    
    58.8
    %Acquisition cost ratio
    
    
    11.3
    %
    
    
    10.1
    %
    
    
    10.3
    %General and administrative expense ratio
    
    
    18.9
    %
    
    
    16.6
    %
    
    
    12.2
    %Expense ratio
    
    
    30.2
    %
    
    
    26.7
    %
    
    
    22.5
    %Combined ratio
    
    
    76.1
    %
    
    
    84.1
    %
    
    
    81.3
    %
 Comparison of Years Ended December 31, 2009 and 2008
 Premiums
  
    
    Gross premiums written in our U.S. insurance segment increased by $354.8 million, or
110.9%. The increase in gross premiums written was primarily due to the inclusion of gross
premiums written of approximately $340 million from Darwin for the year ended December 31,
2009 compared to $68.9 million of gross premiums written by Darwin for the period from
October 20, 2008, the date of acquisition, to December 31, 2008 and higher gross premiums
written by our other U.S. offices where attractive underwriting opportunities were present.
Gross premiums written by our U.S. offices, excluding Darwin, increased approximately $84
million, or 33%, due to increased new business driven by our expansion in the United States,
with new offices in Atlanta, Dallas, Los Angeles and Costa Mesa, and significant additional
underwriting staff and new products for our U.S. business as of December 31, 2009 compared
to December 31, 2008.
 -69-




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##### Table of Contents




    
    Gross premiums written in our international insurance segment decreased by $139.6
million, or 20.1%, due to the continued trend of the non-renewal of business that did not
meet our underwriting requirements (which included inadequate pricing and/or policy terms
and conditions) and increased competition. This was most noticeable in our general property
and energy lines of business where gross premiums written decreased by $55.9 million and
$37.6 million, respectively, during the year ended December 31, 2009 compared to the year
ended December 31, 2008. Also causing lower gross premiums written was a reduction of $27.1
million in professional liability business related to the financial services industry where
rates were not sufficient for the risks given the recent market turmoil within that
industry.
    
    Gross premiums written in our reinsurance segment increased by $35.5 million, or 8.3%.
The increase in gross premiums written was primarily due to new business written and lower
net downward adjustments on estimated premiums partially offset by non-renewal of business
that did not meet our underwriting requirements (which included inadequate pricing and/or
policy terms and conditions) and increased competition. Adjustments on estimated premiums
were higher by $13.6 million during the year ended December 31, 2009 compared to the year
ended December 31, 2008. We recognized net downward adjustments of $5.9 million during the
year ended December 31, 2009 compared to net downward adjustments of $19.5 million during
the year ended December 31, 2008.
  Year EndedDecember 31,
    
    
    Dollar
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in millions)United States
    
    $
    929.9
    
    
    $
    427.7
    
    
    $
    502.2
    
    
    
    117.4
    %Bermuda
    
    
    574.4
    
    
    
    793.7
    
    
    
    (219.3
    )
    
    
    (27.6
    )Europe
    
    
    186.5
    
    
    
    224.2
    
    
    
    (37.7
    )
    
    
    (16.8
    )Hong Kong
    
    
    5.5
    
    
    
    
    
    
    
    5.5
    
    
    
    n/a
    *$
    1,696.3
    
    
    $
    1,445.6
    
    
    $
    250.7
    
    
    
    17.3
    %
 
     Gross Premiums Written
    
    
    Net Premiums EarnedYear Ended December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008U.S. insurance
    
    
    39.8
    %
    
    
    22.2
    %
    
    
    34.0
    %
    
    
    16.1
    %International insurance
    
    
    32.8
    %
    
    
    48.1
    %
    
    
    31.4
    %
    
    
    42.3
    %Reinsurance
    
    
    27.4
    %
    
    
    29.7
    %
    
    
    34.6
    %
    
    
    41.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 -70-




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Net Investment Income
   Realized Investment Gains/Losses and Net Impairment Charges Recognized in Earnings
  
    
    Net realized investment gains of $31.9 million primarily related to the mark-to-market
adjustments for our hedge fund investments and debt securities that are carried at fair
value. We elected the fair value option under U.S. GAAP for certain debt securities that
were newly acquired during the period. As a result, changes in fair value for these debt
securities are recognized in the income statement. We expect to continue to elect the fair
value option for certain newly acquired securities. Also during the year ended December 31,
2009, we held several to-be-announced mortgage-backed securities (TBA MBS) that we account
for as derivatives under U.S. GAAP, and as such any change in fair value of TBA MBS is
recognized in the income statement. For further details on the TBA MBS, please refer to Note
5 in the notes to the consolidated financial statements.
 Mark-to-Market Adjustmentsfor the Year EndedDecember 31, 2009($ in millions)Hedge funds and equity securities
    
    $
    19.3Debt securities accounted for as trading securities
    
    
    12.4Debt securities accounted for as derivatives
    
    
    0.2Total
    
    $
    31.9
 
    
    Net realized investment gains of $94.5 million from the sale of securities, primarily due
to the sale of fixed maturity bonds partially offset by a realized loss of $21.9 million due
to the sale of our global high-yield bond fund.
   
    
    Net realized investment losses of $77.7 million related to the mark-to-market of our hedge
fund investments and equity securities.
    
    Net realized investment gains of $17.7 million from the sale of securities, including
$12.4 million of net realized gains from our investment in the Goldman Sachs Multi-Strategy
VI, Ltd fund (the Portfolio VI Fund) and AIG Select Hedge Ltd. fund (the AIG Select
Fund). These investment gains also included realized losses from the sale of our
investments in Lehman Brothers Holdings Ltd bonds of $45.0 million, Morgan Stanley bonds of
$15.0 million and Washington Mutual, Inc. bonds of $1.7 million, in addition to realized
gains from the sale of other securities.
 -71-




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Other Income
  Net Losses and Loss Expenses
   Loss Reserve Development by Loss Yearfor the Year ended December 31, 20092002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Total($ in millions)U.S. insurance
    
    $
    (6.7
    )
    
    $
    (22.3
    )
    
    $
    (36.3
    )
    
    $
    (19.6
    )
    
    $
    1.4
    
    
    $
    5.8
    
    
    $
    7.3
    
    
    $
    (70.4
    )International insurance
    
    
    (5.8
    )
    
    
    (18.7
    )
    
    
    (61.1
    )
    
    
    (78.7
    )
    
    
    11.3
    
    
    
    (8.5
    )
    
    
    22.0
    
    
    
    (139.5
    )Reinsurance
    
    
    (4.0
    )
    
    
    (16.2
    )
    
    
    (20.7
    )
    
    
    (4.2
    )
    
    
    (1.1
    )
    
    
    5.2
    
    
    
    2.9
    
    
    
    (38.1
    )Total
    
    $
    (16.5
    )
    
    $
    (57.2
    )
    
    $
    (118.1
    )
    
    $
    (102.5
    )
    
    $
    11.6
    
    
    $
    2.5
    
    
    $
    32.2
    
    
    $
    (248.0
    )
   Loss Reserve Development by Loss Yearfor the Year ended December 31, 20082002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    Total($ in millions)U.S. insurance
    
    $
    (3.9
    )
    
    $
    (10.3
    )
    
    $
    (8.9
    )
    
    $
    (2.2
    )
    
    $
    (6.6
    )
    
    $
    (4.5
    )
    
    $
    (36.4
    )International insurance
    
    
    (4.8
    )
    
    
    (69.6
    )
    
    
    (66.2
    )
    
    
    (25.3
    )
    
    
    7.0
    
    
    
    (9.7
    )
    
    
    (168.6
    )Reinsurance
    
    
    (0.2
    )
    
    
    (7.2
    )
    
    
    (18.9
    )
    
    
    (43.2
    )
    
    
    (2.2
    )
    
    
    (3.4
    )
    
    
    (75.1
    )Total
    
    $
    (8.9
    )
    
    $
    (87.1
    )
    
    $
    (94.0
    )
    
    $
    (70.7
    )
    
    $
    (1.8
    )
    
    $
    (17.6
    )
    
    $
    (280.1
    )
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Year EndedDecember 31,
    
    
    Dollar2009
    
    
    2008
    
    
    Change($ in millions)Net losses paid
    
    $
    458.2
    
    
    $
    474.2
    
    
    $
    (16.0
    )Net change in reported case reserves
    
    
    76.0
    
    
    
    89.6
    
    
    
    (13.6
    )Net change in IBNR
    
    
    69.9
    
    
    
    77.3
    
    
    
    (7.4
    )Net losses and loss expenses
    
    $
    604.1
    
    
    $
    641.1
    
    
    $
    (37.0
    )
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Year EndedDecember 31,2009
    
    
    2008($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    3,688.5
    
    
    $
    3,237.0Acquisition of net reserve for losses and loss expenses
    
    
    
    
    
    
    298.9Incurred related to:Current period non-catastrophe
    
    
    852.1
    
    
    
    773.1Current period property catastrophe
    
    
    
    
    
    
    148.1Prior period non-catastrophe
    
    
    (251.7
    )
    
    
    (246.6
    )Prior period property catastrophe
    
    
    3.7
    
    
    
    (33.5
    )Total incurred
    
    $
    604.1
    
    
    $
    641.1Paid related to:Current period non-catastrophe
    
    
    42.3
    
    
    
    40.9Current period property catastrophe
    
    
    
    
    
    
    38.1Prior period non-catastrophe
    
    
    343.4
    
    
    
    355.6Prior period property catastrophe
    
    
    72.5
    
    
    
    39.6Total paid
    
    $
    458.2
    
    
    $
    474.2Foreign exchange revaluation
    
    
    7.4
    
    
    
    (14.3
    )Net reserve for losses and loss expenses, December 31
    
    
    3,841.8
    
    
    
    3,688.5Losses and loss expenses recoverable
    
    
    920.0
    
    
    
    888.3Reserve for losses and loss expenses, December 31
    
    $
    4,761.8
    
    
    $
    4,576.8
 Acquisition Costs
  General and Administrative Expenses
  
    
    An overall increase in headcount, including the addition of Darwin employees for a
full year. The increased headcount resulted in overall increase in salary and related
costs by $45.4 million.
    
    Increased stock-related compensation of $12.2 million, including an increase of $6.8
million associated with LTIP awards granted in 2008 to the maximum award payout. We
have accrued through the year ended December 31, 2009 the maximum award percentage, as
we believe it is probable that we will achieve the maximum award when these LTIP awards
vest at the end of 2010.
    
    Increase of $2.8 million related to the Darwin Long-Term Incentive Plan (Darwin
LTIP) that we assumed as part of the Darwin acquisition. The amount incurred for the
Darwin LTIP is a function of pre-acquisition underwriting profitability, including any
subsequent loss reserve development.
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Amortization and Impairment of Intangible Assets
  Interest Expense
  Net Income
  Comparison of Years Ended December 31, 2008 and 2007
 Premiums
  
    
    The non-renewal of business that did not meet our underwriting requirements (which
included pricing and/or policy and contract terms and conditions), increased competition and
decreasing rates for renewal business in each of our operating segments. This included a
reduction in gross premiums written within our international insurance segment for the
energy line of business, by $40.1 million, or 41.7%, and a reduction in the amount of gross
premiums written for certain energy classes of business within our general casualty line of
business in our international insurance segment by $9.9 million in response to deteriorating
market conditions.
    
    In our reinsurance segment, adjustments on estimated premiums were lower by $33.7 million
during the year ended December 31, 2008 compared to the year ended December 31, 2007. We
recognized net downward adjustments of $19.5 million during the year ended December 31, 2008
compared to net upward adjustments of $14.2 million during the year ended December 31, 2007.
    
    Offsetting these reductions were higher gross premiums written in our U.S. insurance
segment of $127.3 million, or 66.1%, primarily due to increased gross premiums written by
our U.S. offices as well as the inclusion of Darwins gross premiums written of $68.9
million for the period from October 20, 2008 to December 31, 2008.
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Year Ended December,
    
    
    Dollar
    
    
    Percentage2008
    
    
    2007
    
    
    Change
    
    
    Change($ in millions)Bermuda
    
    $
    793.7
    
    
    $
    1,065.9
    
    
    $
    (272.2
    )
    
    
    (25.5
    )%Europe
    
    
    224.2
    
    
    
    246.9
    
    
    
    (22.7
    )
    
    
    (9.2
    )United States
    
    
    427.7
    
    
    
    192.7
    
    
    
    235.0
    
    
    
    122.0$
    1,445.6
    
    
    $
    1,505.5
    
    
    $
    (59.9
    )
    
    
    (4.0
    )%
     Gross
    
    
    NetPremiums
    
    
    PremiumsWritten
    
    
    EarnedYear Ended December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007U.S. insurance
    
    
    22.2
    %
    
    
    12.8
    %
    
    
    16.1
    %
    
    
    11.1
    %International insurance
    
    
    48.1
    
    
    
    51.6
    
    
    
    42.3
    
    
    
    45.5Reinsurance
    
    
    29.7
    
    
    
    35.6
    
    
    
    41.6
    
    
    
    43.4
  Net Investment Income
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Realized Investment Gains/Losses and Net Impairment Charges Recognized in Earnings
  
    
    Net realized investment losses of $77.7 million related to the mark-to-market of our
hedge fund investments and equity securities. The net realized investment losses were due to
the overall volatility of the financial markets. In January 2009, one of the hedge funds
received a notice of termination from one of its lenders and was liquidated during 2009. We
did not receive any proceeds at final redemption, and as such
recognized a mark-to-market
loss of $19.4 million during the year ended December 31, 2008.
    
    Other net realized investment gains of $17.7 million. This included net realized gains of
$12.4 million from our investment in the Portfolio VI Fund and
the AIG Select Fund. Also included in
net realized investment gains of $17.7 million are net realized investment losses recognized
from the sale of fixed income securities issued by Lehman Brothers Holding Ltd of $45.0
million, Morgan Stanley of $15.0 million and Washington Mutual, Inc. of $1.7 million, in
addition to realized gains from the sale of other fixed maturity securities, primarily U.S.
Treasury securities.
  
    
    A write-down of $212.9 million related to declines in the market value of securities in
our available for sale portfolio that were considered to be other than temporary. The
declines in the market value of these securities were primarily due to the write-down of
residential and commercial mortgage-backed securities and corporate bonds due to the
widening of credit spreads caused by the continued decline in the U.S. housing market and
the current turmoil in the financial markets. Of the total other-than-temporary impairment
charge of $212.9 million recognized during the year ended December 31, 2008, $164.0 million
was due to our investment portfolio managers having the discretion to sell certain
investments, and therefore we could not assert we have the intent to hold certain
investments in an unrealized loss until recovery. In addition we recognized an
other-than-temporary impairment charge of $48.9 million for certain debt securities with
unrealized losses that we planned to sell subsequent to the reporting period. The following
shows the other-than-temporary impairment charge for our fixed maturity investments by
category:
 Other-than-temporaryimpairment chargesfor the Year EndedDecember 31,2008($ in millions)U.S. government and government agencies
    
    $
    21.1Non-U.S. government and government agencies
    
    
    2.8Corporate
    
    
    83.5States, municipalities and political subdivisions
    
    
    0.8Mortgage backed
    
    
    95.8Asset backed
    
    
    8.9Total other-than-temporary impairment charges
    
    $
    212.9
  
    
    A write-down of $23.9 million related to our investment
in the
Goldman Sachs Global Alpha Fund, plc (Global Alpha Fund). We
reviewed the carrying value of this investment in light of the significant changes in
economic conditions that occurred during 2007, which included subprime
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mortgage exposure, tightening of credit spreads and overall market volatility.
These economic conditions caused the fair value of this investment to decline. Prior to us
selling our shares in the fund, we could not reasonably estimate when recovery would
occur, and as such recorded an other-than-temporary impairment charge. We sold our shares
in the Global Alpha Fund on December 31, 2007 for proceeds of $31.5 million, which
resulted in an additional realized loss of $2.1 million.
    
    A write-down of $3.5 million related to our investment
in the Goldman Sachs Global Equity Opportunities
Fund, PLC. We submitted a redemption notice in November 2007 to sell our shares in this fund and
as a result recognized an other-than-temporary impairment charge at December 31, 2007. The
sale of shares occurred in February, 2008.
    
    A write-down of $2.2 million related to our investment in bonds issued by a mortgage
lending institution. We performed an analysis of the issuer, including its liquidity,
business prospects and overall financial position and concluded that an other-than-temporary
impairment charge should be recognized.
    
    The remaining write-downs of $15.0 million were solely due to changes in interest rates.
 Other Income
  Net Losses and Loss Expenses
   Loss Reserve Development by Loss Yearfor the Year ended December 31, 20082002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    Total($ in millions)U.S. insurance
    
    $
    (3.9
    )
    
    $
    (10.3
    )
    
    $
    (8.9
    )
    
    $
    (2.2
    )
    
    $
    (6.6
    )
    
    $
    (4.5
    )
    
    $
    (36.4
    )International insurance
    
    
    (4.8
    )
    
    
    (69.6
    )
    
    
    (66.2
    )
    
    
    (25.3
    )
    
    
    7.0
    
    
    
    (9.7
    )
    
    
    (168.6
    )Reinsurance
    
    
    (0.2
    )
    
    
    (7.2
    )
    
    
    (18.9
    )
    
    
    (43.2
    )
    
    
    (2.2
    )
    
    
    (3.4
    )
    
    
    (75.1
    )Total
    
    $
    (8.9
    )
    
    $
    (87.1
    )
    
    $
    (94.0
    )
    
    $
    (70.7
    )
    
    $
    (1.8
    )
    
    $
    (17.6
    )
    
    $
    (280.1
    )
 -78-




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
    
    The net favorable reserve development recognized in our U.S. insurance segment was
primarily the result of the general casualty, healthcare and general property lines of
business actual loss emergence being lower than the initial expected loss emergence for the
2002 through 2007 loss years. We also recognized $11.3 million in net favorable reserve
development related to Darwins business, which primarily related to the 2006 and 2007 loss
years.
    
    The net favorable reserve development recognized in our international insurance segment
primarily was a result of general casualty and healthcare lines of business actual loss
emergence being lower than the initial expected loss emergence for the 2002 through 2005
loss years, the professional liability line of business actual loss emergence being lower
than the initial expected loss emergence for the 2003 and 2004 loss years and the general
property and energy lines of business actual loss emergence being lower than the initial
expected loss emergence for the 2002 through 2007 loss years. The net favorable reserve
development was partially offset by unfavorable reserve development recognized in the
professional liability line of business for the 2002 and 2006 loss years due to increased
loss activity in those loss years.
    
    The net favorable reserve development recognized in our reinsurance segment was primarily
the result of net favorable reserve development of $25.7 million for our professional
liability reinsurance, general casualty reinsurance, accident and health reinsurance and
facultative reinsurance lines of business and $33.3 million of net favorable reserve
development for our property reinsurance and international reinsurance lines of business.
The net favorable reserve development for our professional liability reinsurance, general
casualty reinsurance, accident and health reinsurance and facultative reinsurance lines of
business was primarily the result of actual loss emergence being lower than the initial
expected loss emergence for the 2003 through 2005 loss years. The net favorable
non-catastrophe reserve development for our property reinsurance and international
reinsurance lines of business was primarily the result of actual loss emergence being lower
than the initial expected loss emergence for the 2002 through 2007 loss years.
   
    
    Net favorable non-catastrophe reserve development of $36.8 million for our U.S. insurance
segment, which consisted of $42.1 million of favorable reserve development primarily related
to low loss emergence in our general casualty and healthcare lines of business for the 2002
through 2004 loss years and low loss emergence in our general property line of business for
the 2002, 2003, 2005 and 2006 loss years. These favorable non-catastrophe reserve
developments were partially offset by $5.3 million of unfavorable reserve development due to
higher than anticipated loss emergence in our general property line of business for the 2004
loss year.
    
    Net favorable non-catastrophe reserve development of $43.9 million for our international
insurance segment, which consisted of $127.9 million of favorable reserve development
primarily related to low loss emergence in our healthcare, general property and energy lines
of business for the 2002 through 2004, and 2006 loss years, low loss emergence in our
professional liability line of business for the 2003 and 2004 loss years and low loss
emergence in our general casualty line of business for the 2004 loss year. These favorable
non-catastrophe reserve developments were partially offset by $84.0 million in unfavorable
non-catastrophe reserve development primarily related to higher than anticipated loss
emergence in our general casualty line of business for the 2003 and 2005 loss years, our
professional liability line of business for the 2002 loss year and our general property and
energy lines of business for the 2005 loss year.
    
    Net favorable non-catastrophe reserve development of $3.3 million, for our reinsurance
segment related to low loss emergence in our property and accident and health reinsurance
lines of business for the 2004 and 2005 accident years.
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##### Table of Contents




    
    Net favorable catastrophe reserve development of $35.1 million related to the 2005
windstorms and net favorable catastrophe reserve development of $4.0 million related to the
2004 windstorms. Of the $35.1 million in net favorable catastrophe reserve development, $2.8
million, $32.4 million and $3.8 million was recognized in the U.S. insurance, international
insurance and reinsurance segments, respectively. We recognized the net favorable
catastrophe reserve development for the 2004 and 2005 windstorms due to less than
anticipated reported loss activity. As of December 31, 2007, we estimated our net losses
related to Hurricanes Katrina, Rita and Wilma to be $420.9 million, which was a reduction
from our original estimate of $456.0 million.
   Year EndedDecember 31,
    
    
    Dollar2008
    
    
    2007
    
    
    Change($ in millions)Net losses paid
    
    $
    474.2
    
    
    $
    397.9
    
    
    $
    76.3Net change in reported case reserves
    
    
    89.6
    
    
    
    38.0
    
    
    
    51.6Net change in IBNR
    
    
    77.3
    
    
    
    246.4
    
    
    
    (169.1
    )Net losses and loss expenses
    
    $
    641.1
    
    
    $
    682.3
    
    
    $
    (41.2
    )
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Year EndedDecember 31,2008
    
    
    2007($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    3,237.0
    
    
    $
    2,947.9Acquisition of net reserve for losses and loss expenses
    
    
    298.9
    
    
    
    Incurred related to:Current period non-catastrophe
    
    
    773.1
    
    
    
    805.4Current period property catastrophe
    
    
    148.1
    
    
    
    Prior period non-catastrophe
    
    
    (246.6
    )
    
    
    (84.0
    )Prior period property catastrophe
    
    
    (33.5
    )
    
    
    (39.1
    )Total incurred
    
    $
    641.1
    
    
    $
    682.3Paid related to:Current period non-catastrophe
    
    
    40.9
    
    
    
    32.6Current period property catastrophe
    
    
    38.1
    
    
    
    Prior period non-catastrophe
    
    
    355.6
    
    
    
    266.8Prior period property catastrophe
    
    
    39.6
    
    
    
    98.5Total paid
    
    $
    474.2
    
    
    $
    397.9Foreign exchange revaluation
    
    
    (14.3
    )
    
    
    4.7Net reserve for losses and loss expenses, December 31
    
    
    3,688.5
    
    
    
    3,237.0Losses and loss expenses recoverable
    
    
    888.3
    
    
    
    682.8Reserve for losses and loss expenses, December 31
    
    $
    4,576.8
    
    
    $
    3,919.8
 Acquisition Costs
  General and Administrative Expenses
  
    
    Salary and employee welfare costs increased approximately $32.9 million due to our staff
count increasing to 560 as of December 31, 2008 from 300 as of December 31, 2007. The
increase in staff count includes 188 employees of Darwin. The increase also included a
one-time expense of $4.5 million for the reimbursement of forfeited stock compensation and
signing bonuses for new executives hired as part of the continued expansion of our U.S.
operations and increased stock compensation costs of $5.7 million for all offices. We also
recognized $3.1 million of salary and welfare costs related to the Darwin long-term
incentive plan. The Darwin long-term incentive plan was for certain of its key employees and
was based on underwriting profitability. Please see Note 12(c) of the notes to consolidated
financial statements for further details on the Darwin long-term incentive plan.
    
    Rent and amortization of leaseholds and furniture and fixtures increased by approximately
$4.3 million due to our new office space in New York, Farmington (CT) and Chicago and
increased amortization of furniture and fixtures.
    
    Information technology costs increased by approximately $2.8 million due to higher
network fees and consulting costs in 2008 than 2007. This increase was due to the
development of our technological infrastructure as well as an increase in the cost of
hardware and software.
    
    Professional fees increased by approximately $1.6 million.
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Amortization and Impairment of Intangible Assets
  Interest Expense
  Net Income
  Underwriting Results by Operating Segments
  U.S. Insurance Segment.
 International Insurance Segment.
 Reinsurance Segment.
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U.S. Insurance Segment
  Year Ended December 31,2009
    
    2008
    
    2007($ in millions)RevenuesGross premiums written
    
    $
    674.8
    
    
    $
    320.0
    
    
    $
    192.7Net premiums written
    
    
    493.1
    
    
    
    213.0
    
    
    
    123.2Net premiums earned
    
    
    447.5
    
    
    
    179.8
    
    
    
    128.3Other Income
    
    
    1.5
    
    
    
    0.7
    
    
    
    ExpensesNet losses and loss expenses
    
    
    211.4
    
    
    
    103.4
    
    
    
    53.1Acquisition costs
    
    
    58.1
    
    
    
    17.8
    
    
    
    11.4General and administrative expenses
    
    
    115.8
    
    
    
    66.8
    
    
    
    29.7Underwriting income (loss)
    
    
    63.7
    
    
    
    (7.5
    )
    
    
    34.1RatiosLoss and loss expense ratio
    
    
    47.2
    %
    
    
    57.5
    %
    
    
    41.4
    %Acquisition cost ratio
    
    
    13.0
    %
    
    
    9.9
    %
    
    
    8.9
    %General and administrative expense ratio
    
    
    25.9
    %
    
    
    37.1
    %
    
    
    23.1
    %Expense ratio
    
    
    38.9
    %
    
    
    47.0
    %
    
    
    32.0
    %Combined ratio
    
    
    86.1
    %
    
    
    104.5
    %
    
    
    73.4
    %
 Comparison of Years ended December 31, 2009 and 2008
 Premiums.
  Year EndedDecember 31,
    
    
    Dollar
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in millions)Professional liability
    
    $
    183.7
    
    
    $
    113.5
    
    
    $
    70.2
    
    
    
    61.9
    %Healthcare
    
    
    177.7
    
    
    
    49.7
    
    
    
    128.0
    
    
    
    257.5General casualty
    
    
    122.0
    
    
    
    56.1
    
    
    
    65.9
    
    
    
    117.5Programs
    
    
    101.5
    
    
    
    36.2
    
    
    
    65.3
    
    
    
    180.4General property
    
    
    71.5
    
    
    
    62.0
    
    
    
    9.5
    
    
    
    15.3Other
    
    
    18.4
    
    
    
    2.5
    
    
    
    15.9
    
    
    
    636.0$
    674.8
    
    
    $
    320.0
    
    
    $
    354.8
    
    
    
    110.9
    %
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Net losses and loss expenses.
   
    
    Net favorable reserve development of $36.5 million for Darwin-related business comprised
of $46.0 million of favorable development primarily the result of actual loss emergence
being lower than the expected loss emergence for the healthcare and program lines of
business primarily for the 2005 through 2008 loss years and the professional liability line
of business for the 2004 through 2006 loss years. This was offset by unfavorable development
of $9.5 million primarily in the professional liability line of business for the 2007 and
2008 loss years.
    
    Net favorable reserve development of $78.6 million for business written by our other U.S.
offices primarily the result of actual loss emergence being lower than the expected loss
emergence for the general casualty line of business for the 2002 through 2004 loss years,
professional liability line of business for the 2002 through 2004 and 2008 loss years, the
healthcare line of business for the 2002 through 2005 and 2008 loss years and the general
property line of business for the 2002 through 2007 loss years.
    
    Net unfavorable reserve development of $44.7 million for business written by our U.S.
offices primarily due to higher than expected reported losses for the general casualty line
of business for the 2005 through 2008 loss years and our professional liability line of
business for the 2005 through 2007 loss years.
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Year EndedDecember 31,2009
    
    
    2008($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    819.4
    
    
    $
    471.2Acquisition of net reserve for losses and loss expenses
    
    
    
    
    
    
    315.5Incurred related to:Current period non-catastrophe
    
    
    281.8
    
    
    
    121.4Current period catastrophe
    
    
    
    
    
    
    18.4Prior period non-catastrophe
    
    
    (74.9
    )
    
    
    (39.2
    )Prior period catastrophe
    
    
    4.5
    
    
    
    2.8Total incurred
    
    $
    211.4
    
    
    $
    103.4Paid related to:Current period non-catastrophe
    
    
    12.1
    
    
    
    4.7Current period catastrophe
    
    
    
    
    
    
    0.5Prior period non-catastrophe
    
    
    99.2
    
    
    
    62.2Prior period catastrophe
    
    
    17.6
    
    
    
    3.3Total paid
    
    $
    128.9
    
    
    $
    70.7Net reserve for losses and loss expenses, December 31
    
    
    901.9
    
    
    
    819.4Losses and loss expenses recoverable
    
    
    351.8
    
    
    
    309.1Reserve for losses and loss expenses, December 31
    
    $
    1,253.7
    
    
    $
    1,128.5
  Acquisition costs. .
 General and administrative expenses.
 Comparison of Years Ended December 31, 2008 and 2007
 Premiums.
 -85-




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Year EndedDecember 31,
    
    
    Dollar
    
    
    Percentage2008
    
    
    2007
    
    
    Change
    
    
    Change($ in millions)Professional liability
    
    $
    113.5
    
    
    $
    69.7
    
    
    $
    43.8
    
    
    
    62.8
    %General property
    
    
    62.0
    
    
    
    59.3
    
    
    
    2.7
    
    
    
    4.6General casualty
    
    
    56.1
    
    
    
    41.9
    
    
    
    14.2
    
    
    
    33.9Healthcare
    
    
    49.7
    
    
    
    6.0
    
    
    
    43.7
    
    
    
    728.3Programs
    
    
    36.2
    
    
    
    15.8
    
    
    
    20.4
    
    
    
    129.1Other
    
    
    2.5
    
    
    
    
    
    
    
    2.5
    
    
    
    n/a$
    320.0
    
    
    $
    192.7
    
    
    $
    127.3
    
    
    
    66.1
    %
    Other Income.
 Net losses and loss expenses.
  
    
    Net favorable reserve development of $27.9 million recognized was primarily the result of
the general casualty, healthcare and general property lines of business actual loss
emergence being lower than the initial expected loss emergence for the 2002 through 2007
loss years.
    
    Net favorable reserve development of $11.3 million recognized related to Darwins
business, which primarily related to the 2006 and 2007 loss years.
  -86-




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##### Table of Contents




    
    Net favorable reserve development of $28.0 million recognized was primarily the result of
the general casualty and healthcare lines of business actual loss emergence being lower than
the initial expected loss emergence for the 2002 through 2004 loss years.
    
    Net favorable reserve development of $14.1 million recognized was primarily the result of
the general property line of business actual loss emergence being lower than the initial
expected loss emergence for the 2002, 2003, 2005 and 2006 loss years.
    
    Net unfavorable reserve development of $5.3 million recognized due to higher than
anticipated loss emergence in our general property line of business for the 2004 loss year.
    Year EndedDecember 31,2008
    
    
    2007($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    471.2
    
    
    $
    457.3Acquisition of net reserve for losses and loss expenses
    
    
    315.5
    
    
    
    Incurred related to:Current period non-catastrophe
    
    
    121.4
    
    
    
    92.7Current period property catastrophe
    
    
    18.4
    
    
    
    Prior period non-catastrophe
    
    
    (39.2
    )
    
    
    (36.8
    )Prior period property catastrophe
    
    
    2.8
    
    
    
    (2.8
    )Total incurred
    
    $
    103.4
    
    
    $
    53.1Paid related to:Current period non-catastrophe
    
    
    4.7
    
    
    
    1.6Current period property catastrophe
    
    
    0.5
    
    
    
    Prior period non-catastrophe
    
    
    62.2
    
    
    
    26.2Prior period property catastrophe
    
    
    3.3
    
    
    
    11.4Total paid
    
    $
    70.7
    
    
    $
    39.2Foreign exchange revaluation
    
    
    
    
    
    
    Net reserve for losses and loss expenses, December 31
    
    
    819.4
    
    
    
    471.2Losses and loss expenses recoverable
    
    
    309.1
    
    
    
    52.3Reserve for losses and loss expenses, December 31
    
    $
    1,128.5
    
    
    $
    523.5
  Acquisition costs.
 -87-




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##### Table of Contents



General and administrative expenses.
 International Insurance Segment
  Year Ended December 31,2009
    
    2008
    
    2007($ in millions)RevenuesGross premiums written
    
    $
    555.9
    
    
    $
    695.5
    
    
    $
    776.7Net premiums written
    
    
    362.9
    
    
    
    465.9
    
    
    
    494.0Net premiums earned
    
    
    413.2
    
    
    
    472.6
    
    
    
    527.7ExpensesNet losses and loss expenses
    
    
    158.1
    
    
    
    288.6
    
    
    
    328.4Acquisition costs
    
    
    2.7
    
    
    
    3.8
    
    
    
    5.8General and administrative expenses
    
    
    84.4
    
    
    
    75.5
    
    
    
    72.8Underwriting income
    
    
    168.0
    
    
    
    104.7
    
    
    
    120.7RatiosLoss and loss expense ratio
    
    
    38.3
    %
    
    
    61.1
    %
    
    
    62.2
    %Acquisition cost ratio
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    1.1
    %General and administrative expense ratio
    
    
    20.4
    %
    
    
    16.0
    %
    
    
    13.8
    %Expense ratio
    
    
    21.1
    %
    
    
    16.8
    %
    
    
    14.9
    %Combined ratio
    
    
    59.4
    %
    
    
    77.9
    %
    
    
    77.1
    %
 Comparison of Years ended December 31, 2009 and 2008
 Premiums.
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##### Table of Contents



Year EndedDecember 31,
    
    
    Dollar
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in millions)Professional liability
    
    $
    180.6
    
    
    $
    216.8
    
    
    $
    (36.2
    )
    
    
    (16.7
    )%General casualty
    
    
    147.1
    
    
    
    161.2
    
    
    
    (14.1
    )
    
    
    (8.7
    )General property
    
    
    153.3
    
    
    
    209.2
    
    
    
    (55.9
    )
    
    
    (26.7
    )Healthcare
    
    
    56.5
    
    
    
    52.0
    
    
    
    4.5
    
    
    
    8.7Energy
    
    
    18.4
    
    
    
    56.0
    
    
    
    (37.6
    )
    
    
    (67.1
    )Other
    
    
    
    
    
    
    0.3
    
    
    
    (0.3
    )
    
    
    (100.0
    )$
    555.9
    
    
    $
    695.5
    
    
    $
    (139.6
    )
    
    
    (20.1
    )%
  Net losses and loss expenses.
  
    
    Net favorable reserve development of $128.5 million due to actual loss emergence being
lower than the expected loss emergence primarily for the general
casualty line of business for the
2002 through 2005 loss years, the professional liability line of
business for the 2004 and 2005
loss years and the healthcare line of business for the 2002 through 2005 loss years.
    
    Net favorable reserve development of $18.6 million related to the general property line
of business, which consisted of $28.7 million of net favorable reserve development due to
actual loss emergence being lower than the expected loss emergence for the 2002 through 2007
loss years and net unfavorable reserve development of $10.1 million due to higher than
expected reported losses for the 2008 loss year.
    
    Net unfavorable reserve development of $7.7 million related to the energy line of
business, which consisted of $10.9 million of net unfavorable reserve development due to
higher than expected reported losses for the 2005, 2007 and 2008 loss years and net
favorable development of $3.2 million due to actual loss emergence being lower than the
expected loss emergence for the 2002 through 2004 and 2006 loss years.
  
    
    Favorable non-catastrophe reserve development of $151.1 million related to low loss
emergence in our general casualty and healthcare lines of business for the 2002 through 2005
loss years and our professional liability line of business for the 2003 and 2004 loss years.
    
    Unfavorable non-catastrophe reserve development of $30.6 million due to higher than
anticipated loss emergence in our professional liability line of business for the 2002 and
2006 loss years.
    
    Net favorable non-catastrophe property reserve development of $27.9 million was
recognized primarily as a result of low loss emergence in our general property and energy
lines of business for the 2002 through 2007 loss years.
 -89-




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
    
    We recognized net favorable catastrophe reserve development of $20.2 million related to
the 2004 and 2005 windstorms due to lower than anticipated loss activity during the past
year.
    Year EndedDecember 31,2009
    
    
    2008($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    1,797.0
    
    
    $
    1,767.7Incurred related to:Current period non-catastrophe
    
    
    297.5
    
    
    
    368.3Current period catastrophe
    
    
    
    
    
    
    88.9Prior period non-catastrophe
    
    
    (136.5
    )
    
    
    (148.4
    )Prior period catastrophe
    
    
    (2.9
    )
    
    
    (20.2
    )Total incurred
    
    $
    158.1
    
    
    $
    288.6Paid related to:Current period non-catastrophe
    
    
    16.1
    
    
    
    26.8Current period catastrophe
    
    
    
    
    
    
    20.6Prior period non-catastrophe
    
    
    119.0
    
    
    
    186.5Prior period catastrophe
    
    
    37.3
    
    
    
    11.1Total paid
    
    $
    172.4
    
    
    $
    245.0Foreign exchange revaluation
    
    
    7.4
    
    
    
    (14.3
    )Net reserve for losses and loss expenses, December 31
    
    
    1,790.1
    
    
    
    1,797.0Losses and loss expenses recoverable
    
    
    566.3
    
    
    
    576.0Reserve for losses and loss expenses, December 31
    
    $
    2,356.4
    
    
    $
    2,373.0
 Acquisition costs.
 General and administrative expenses.
 -90-




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##### Table of Contents



Comparison of Years Ended December 31, 2008 and 2007
 Premiums.
  Year EndedDecember  31,
    
    
    Dollar
    
    
    Percentage2008
    
    
    2007
    
    
    Change
    
    
    Change($ in millions)Professional liability
    
    $
    216.8
    
    
    $
    199.6
    
    
    $
    17.2
    
    
    
    8.6
    %General property
    
    
    209.2
    
    
    
    234.2
    
    
    
    (25.0
    )
    
    
    (10.7
    )General casualty
    
    
    161.2
    
    
    
    198.4
    
    
    
    (37.2
    )
    
    
    (18.8
    )Energy
    
    
    56.0
    
    
    
    96.1
    
    
    
    (40.1
    )
    
    
    (41.7
    )Healthcare
    
    
    52.0
    
    
    
    47.0
    
    
    
    5.0
    
    
    
    10.6Other
    
    
    0.3
    
    
    
    1.4
    
    
    
    (1.1
    )
    
    
    (78.6
    )$
    695.5
    
    
    $
    776.7
    
    
    $
    (81.2
    )
    
    
    (10.5
    )%
  
    
    We increased the percentage ceded on our general casualty business and healthcare
business on a variable quota share basis.
    
    We renewed our property catastrophe reinsurance treaty, which resulted in ceded written
premiums of $26.1 million, of which $20.3 million was allocated to the international
insurance segment. The cost of the property catastrophe reinsurance treaty was higher than
the expiring treaty by approximately $7.0 million. The increased cost of the property
catastrophe reinsurance treaty was principally due to the renewed treaty expanding
earthquake coverage in the United States and increased exposure due to changes in our
general property quota share reinsurance treaty.
    
    Our international property catastrophe treaty was cancelled and rewritten effective May
1, 2008. This treaty covers worldwide losses, excluding the United States and Canada. The
total ceded premiums written for the international property catastrophe treaty was $2.0
million for the year ended December 31, 2008 compared to $1.6 million for the year ended
December 31, 2007.
    
    We purchased an excess-of-loss reinsurance treaty for our general property line of
business with a limit of $15 million excess of $10 million or 10 million excess of 10
million. The total ceded premiums written for the excess-of-loss
reinsurance treaty was $3.4 million.
There was no excess-of-loss reinsurance treaty in place during the year ended December 31, 2007.
  Net losses and loss expenses.
  -91-




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##### Table of Contents




    
    Favorable non-catastrophe reserve development of $151.1 million related to low loss
emergence in our general casualty and healthcare lines of business for the 2002 through 2005
loss years and our professional liability line of business for the 2003 and 2004 loss years.
    
    Unfavorable non-catastrophe reserve development of $30.6 million due to higher than
anticipated loss emergence in our professional liability line of business for the 2002 and
2006 loss years.
    
    Net favorable non-catastrophe property reserve development of $27.9 million was
recognized primarily as a result of low loss emergence in our general property and energy
lines of business for the 2002 through 2007 loss years.
    
    We recognized net favorable catastrophe reserve development of $20.2 million related to
the 2004 and 2005 windstorms due to lower than anticipated loss activity during the past
year.
  
    
    Net favorable non-catastrophe reserve development of $114.9 million primarily related to
low loss emergence in our healthcare line of business for the 2002 through 2004 and 2006
loss years, professional liability line of business for the 2003 and 2004 loss years and
general casualty line of business for the 2004 loss year.
    
    Net unfavorable non-catastrophe reserve development of $72.2 million primarily due to
higher than anticipated loss emergence in our general casualty line of business for the 2003
and 2005 loss years and in our professional liability line of business for the 2002 loss
year.
    
    Net favorable non-catastrophe property reserve development of $1.3 million consisted of
$13.1 million in net favorable reserve development that was primarily the result of our
general property and energy lines of business actual loss emergence being lower than the
initial expected loss emergence for the 2002 through 2004 and 2006 loss years, partially
offset by net unfavorable reserve development of $11.8 million that was primarily the result
of increased loss activity for our general property and energy lines of business for the
2005 loss year.
    
    Net favorable catastrophe reserve development of $32.4 million was recognized related to
the 2004 and 2005 windstorms due to less than anticipated reported loss activity over the 12
months prior to December 31, 2007.
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Year EndedDecember 31,2008
    
    
    2007($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    1,767.7
    
    
    $
    1,657.8Incurred related to:Current period non-catastrophe
    
    
    368.3
    
    
    
    404.7Current period property catastrophe
    
    
    88.9
    
    
    
    Prior period non-catastrophe
    
    
    (148.4
    )
    
    
    (43.9
    )Prior period property catastrophe
    
    
    (20.2
    )
    
    
    (32.4
    )Total incurred
    
    $
    288.6
    
    
    $
    328.4Paid related to:Current period non-catastrophe
    
    
    26.8
    
    
    
    19.1Current period property catastrophe
    
    
    20.6
    
    
    
    Prior period non-catastrophe
    
    
    186.5
    
    
    
    147.1Prior period property catastrophe
    
    
    11.1
    
    
    
    57.0Total paid
    
    $
    245.0
    
    
    $
    223.2Foreign exchange revaluation
    
    
    (14.3
    )
    
    
    4.7Net reserve for losses and loss expenses, December 31
    
    
    1,797.0
    
    
    
    1,767.7Losses and loss expenses recoverable
    
    
    576.0
    
    
    
    612.3Reserve for losses and loss expenses, December 31
    
    $
    2,373.0
    
    
    $
    2,380.0
 Acquisition costs.
 General and administrative expenses.
 -93-




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##### Table of Contents



Reinsurance Segment
  Year Ended December 31,2009
    
    2008
    
    2007($ in millions)RevenuesGross premiums written
    
    $
    465.6
    
    
    $
    430.1
    
    
    $
    536.1Net premiums written
    
    
    465.2
    
    
    
    428.4
    
    
    
    535.9Net premiums earned
    
    
    456.2
    
    
    
    464.5
    
    
    
    504.0ExpensesNet losses and loss expenses
    
    
    234.6
    
    
    
    249.1
    
    
    
    300.9Acquisition costs
    
    
    88.0
    
    
    
    91.0
    
    
    
    101.8General and administrative expenses
    
    
    48.4
    
    
    
    43.5
    
    
    
    39.1Underwriting income
    
    
    85.2
    
    
    
    80.9
    
    
    
    62.2RatiosLoss and loss expense ratio
    
    
    51.4
    %
    
    
    53.6
    %
    
    
    59.7
    %Acquisition cost ratio
    
    
    19.3
    %
    
    
    19.6
    %
    
    
    20.2
    %General and administrative expense ratio
    
    
    10.6
    %
    
    
    9.4
    %
    
    
    7.8
    %Expense ratio
    
    
    29.9
    %
    
    
    29.0
    %
    
    
    28.0
    %Combined ratio
    
    
    81.3
    %
    
    
    82.6
    %
    
    
    87.7
    %
 Comparison of Years ended December 31, 2009 and 2008
 Premiums.
   Year EndedDecember 31,
    
    
    Dollar
    
    
    Percentage2009
    
    
    2008
    
    
    Change
    
    
    Change($ in millions)General casualty reinsurance
    
    $
    138.5
    
    
    $
    108.8
    
    
    $
    29.7
    
    
    
    27.3
    %Property reinsurance
    
    
    100.5
    
    
    
    77.3
    
    
    
    23.2
    
    
    
    30.0Professional liability reinsurance
    
    
    102.8
    
    
    
    131.1
    
    
    
    (28.3
    )
    
    
    (21.6
    )International reinsurance
    
    
    84.2
    
    
    
    77.8
    
    
    
    6.4
    
    
    
    8.2Facultative reinsurance
    
    
    16.1
    
    
    
    23.7
    
    
    
    (7.6
    )
    
    
    (32.1
    )Specialty reinsurance
    
    
    23.5
    
    
    
    11.4
    
    
    
    12.1
    
    
    
    106.1$
    465.6
    
    
    $
    430.1
    
    
    $
    35.5
    
    
    
    8.3
    %
 -94-




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##### Table of Contents



Net losses and loss expenses.
  
    
    Net favorable reserve development of $49.9 million for our professional liability
reinsurance, general casualty reinsurance, facultative reinsurance and accident and health
reinsurance lines of business. The net favorable reserve development for these lines of
business was primarily the result of actual loss emergence being lower than the expected
loss emergence for the 2002 through 2006 loss years.
    
    Net favorable reserve development of $7.9 million for our property reinsurance line of
business primarily due to actual emergence being lower than the expected loss emergence for
the 2007 and 2008 loss years.
    
    Net unfavorable reserve development of $11.6 million for our professional liability
reinsurance line of business was primarily the result of actual loss emergence being higher
than the expected loss emergence driven by loss activity related to the market turmoil for
the 2007 and 2008 loss years.
    
    Net unfavorable reserve development of $8.1 million for our international reinsurance
line of business was primarily the result of actual loss emergence being higher than the
expected loss emergence driven by loss activity related to the market turmoil for the 2007
and 2008 loss years partially offset by favorable development in our international property
catastrophe line of business for the 2007 and 2008 loss years.
  
    
    Net favorable reserve development of $25.7 million for our professional liability
reinsurance, general casualty reinsurance, accident and health reinsurance and facultative
reinsurance lines of business. The net favorable reserve development for these lines of
business was primarily the result of actual loss emergence being lower than the initial
expected loss emergence for the 2003 through 2005 loss years.
    
    Net favorable reserve development of $33.3 million, excluding the 2004 and 2005
windstorms, for our property reinsurance and international reinsurance lines of business was
primarily the result of actual loss emergence being lower than the initial expected loss
emergence for the 2002 through 2007 loss years.
    
    We recognized net favorable development of $16.1 million related to the 2004 and 2005
windstorms.
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##### Table of Contents



Year EndedDecember 31,2009
    
    
    2008($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    1,072.1
    
    
    $
    998.2Acquisition of net reserve for losses and loss expenses
    
    
    
    
    
    
    (16.6
    )Incurred related to:Current period non-catastrophe
    
    
    272.7
    
    
    
    283.4Current period property catastrophe
    
    
    
    
    
    
    40.8Prior period non-catastrophe
    
    
    (40.2
    )
    
    
    (59.0
    )Prior period property catastrophe
    
    
    2.1
    
    
    
    (16.1
    )Total incurred
    
    $
    234.6
    
    
    $
    249.1Paid related to:Current period non-catastrophe
    
    
    14.1
    
    
    
    9.5Current period property catastrophe
    
    
    
    
    
    
    17.0Prior period non-catastrophe
    
    
    125.2
    
    
    
    106.9Prior period property catastrophe
    
    
    17.6
    
    
    
    25.2Total paid
    
    $
    156.9
    
    
    $
    158.6Net reserve for losses and loss expenses, December 31
    
    
    1,149.8
    
    
    
    1,072.1Losses and loss expenses recoverable
    
    
    1.9
    
    
    
    3.2Reserve for losses and loss expenses, December 31
    
    $
    1,151.7
    
    
    $
    1,075.3
  Acquisition costs.
 General and administrative expenses.
 Comparison of Years Ended December 31, 2008 and 2007
 Premiums.
 -96-




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Year EndedDecember 31,
    
    
    Dollar
    
    
    Percentage2008
    
    
    2007
    
    
    Change
    
    
    Change($ in millions)Professional liability reinsurance
    
    $
    131.1
    
    
    $
    210.9
    
    
    $
    (79.8
    )
    
    
    (37.8
    )%General casualty reinsurance
    
    
    108.8
    
    
    
    126.5
    
    
    
    (17.7
    )
    
    
    (14.0
    )International reinsurance
    
    
    77.8
    
    
    
    73.9
    
    
    
    3.9
    
    
    
    5.3Property reinsurance
    
    
    77.3
    
    
    
    83.7
    
    
    
    (6.4
    )
    
    
    (7.6
    )Facultative reinsurance
    
    
    23.7
    
    
    
    33.0
    
    
    
    (9.3
    )
    
    
    (28.2
    )Other
    
    
    11.4
    
    
    
    8.1
    
    
    
    3.3
    
    
    
    40.7$
    430.1
    
    
    $
    536.1
    
    
    $
    (106.0
    )
    
    
    (19.8
    )%
  Net losses and loss expenses.
  
    
    Net favorable reserve development of $25.7 million for our professional liability
reinsurance, general casualty reinsurance, accident and health reinsurance and facultative
reinsurance lines of business. The net favorable reserve development for these lines of
business was primarily the result of actual loss emergence being lower than the initial
expected loss emergence for the 2003 through 2005 loss years.
    
    Net favorable reserve development of $33.3 million, excluding the 2004 and 2005
windstorms, for our property reinsurance and international reinsurance lines of business was
primarily the result of actual loss emergence being lower than the initial expected loss
emergence for the 2002 through 2007 loss years.
    
    We recognized net favorable development of $16.1 million related to the 2004 and 2005
windstorms.
  
    
    Net favorable reserve development of $3.8 million related to the 2004 and 2005
windstorms.
    
    Favorable reserve development of $3.3 million related to low loss emergence in our
property and accident and health reinsurance lines of business for the 2004 and 2005 loss
years.
 -97-




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##### Table of Contents



Year EndedDecember 31,2008
    
    
    2007($ in millions)Net reserves for losses and loss expenses, January 1
    
    $
    998.2
    
    
    $
    832.8Acquisition of net reserve for losses and loss expenses
    
    
    (16.6
    )
    
    
    Incurred related to:Current period non-catastrophe
    
    
    283.4
    
    
    
    308.0Current period property catastrophe
    
    
    40.8
    
    
    
    Prior period non-catastrophe
    
    
    (59.0
    )
    
    
    (3.3
    )Prior period property catastrophe
    
    
    (16.1
    )
    
    
    (3.8
    )Total incurred
    
    $
    249.1
    
    
    $
    300.9Paid related to:Current period non-catastrophe
    
    
    9.5
    
    
    
    11.9Current period property catastrophe
    
    
    17.0
    
    
    
    Prior period non-catastrophe
    
    
    106.9
    
    
    
    93.5Prior period property catastrophe
    
    
    25.2
    
    
    
    30.1Total paid
    
    $
    158.6
    
    
    $
    135.5Net reserve for losses and loss expenses, December 31
    
    
    1,072.1
    
    
    
    998.2Losses and loss expenses recoverable
    
    
    3.2
    
    
    
    18.2Reserve for losses and loss expenses, December 31
    
    $
    1,075.3
    
    
    $
    1,016.4
  Acquisition costs.
 General and administrative expenses.
 -98-




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##### Table of Contents



Liquidity and Capital Resources
 General
    Restrictions and Specific Requirements
      -99-




---



##### Table of Contents



As of
    
    
    As ofDecember 31,
    
    
    December 31,2009
    
    
    2008($ in millions)Total trust accounts on deposit
    
    $
    1,025.5
    
    
    $
    892.6Total letters of credit facilities:Citibank Europe plc
    
    
    900.0
    
    
    
    900.0Credit Facility
    
    
    800.0
    
    
    
    800.0Total letters of credit facilities
    
    
    1,700.0
    
    
    
    1,700.0Total letters of credit facilities outstanding:Citibank Europe plc
    
    
    794.6
    
    
    
    769.9Credit Facility
    
    
    376.7
    
    
    
    217.1Total letters of credit facilities outstanding
    
    
    1,171.3
    
    
    
    987.0Total letters of credit facilities remaining:Citibank Europe plc
    
    
    105.4
    
    
    
    130.1Credit Facility(1)
    
    
    423.3
    
    
    
    332.9Total letters of credit facilities remaining
    
    
    528.7
    
    
    
    463.0Collateral committed to support the letter of credit facilities
    
    $
    1,208.3
    
    
    $
    1,313.0
 
 (1)
    
    Net of any borrowing or repayments under the Unsecured Facility.   -100-




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##### Table of Contents



Sources and Uses of Funds
       -101-




---



##### Table of Contents



As of
    
    
    As ofDecember 31,
    
    
    December 31,2009
    
    
    2008($ in millions)Due in one year or less
    
    $
    156.3
    
    
    $
    274.2Due after one year through five years
    
    
    3,221.7
    
    
    
    1,887.1Due after five years through ten years
    
    
    1,166.9
    
    
    
    1,254.9Due after ten years
    
    
    172.4
    
    
    
    365.8Mortgage-backed
    
    
    1,721.3
    
    
    
    2,089.9Asset-backed
    
    
    532.8
    
    
    
    160.1Total
    
    $
    6,971.4
    
    
    $
    6,032.0
   Financial Strength Ratings
   A.M. Best
    
    A/stableMoodys*
    
    A2/stableStandard & Poors**
    
    A-/stable
 
 *
    
    Moodys financial strength ratings are for Allied World Assurance Company, Ltd, Allied World
Assurance Company (U.S.) Inc., Allied World National Assurance Company and Allied World
Reinsurance Company only. Moodys revised its outlook from negative to stable on June 30,
2009.**
    
    Standard & Poors financial strength ratings are for Allied World Assurance Company, Ltd,
Allied World Assurance Company (U.S.) Inc., Allied World National Assurance Company, Allied
World Reinsurance Company, Allied World Assurance Company (Europe) Limited and Allied World
Assurance Company (Reinsurance) Limited only. -102-




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##### Table of Contents



A.M. Best
    
    bbb/stableMoodys
    
    Baa1/stableStandard & Poors
    
    BBB/stable
 Long-Term Debt
  Aggregate Contractual Obligations
  Payment Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years($ in millions)Contractual ObligationsSenior notes (including interest)
    
    $
    762.5
    
    
    $
    37.5
    
    
    $
    75.0
    
    
    $
    75.0
    
    
    $
    575.0Operating lease obligations
    
    
    103.1
    
    
    
    13.4
    
    
    
    22.7
    
    
    
    20.1
    
    
    
    46.9Investment commitments outstanding
    
    
    57.6
    
    
    
    57.6
    
    
    
    
    
    
    
    
    
    
    
    Darwin LTIP
    
    
    16.6
    
    
    
    13.1
    
    
    
    3.5
    
    
    
    
    
    
    
    Gross reserve for losses and loss expenses
    
    
    4,761.8
    
    
    
    1,165.7
    
    
    
    1,389.4
    
    
    
    595.9
    
    
    
    1,610.8Total
    
    $
    5,701.6
    
    
    $
    1,287.3
    
    
    $
    1,490.6
    
    
    $
    691.0
    
    
    $
    2,232.7
   Off-Balance Sheet Arrangements
  -103-




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
    Interest Rate Shift in Basis Points-200
    
    
    -100
    
    
    -50
    
    
    0
    
    
    +50
    
    
    +100
    
    
    +200($ in millions)Total market value
    
    $
    7,757.1
    
    
    $
    7,567.7
    
    
    $
    7,460.3
    
    
    $
    7,351.1
    
    
    $
    7,235.5
    
    
    $
    7,123.5
    
    
    $
    6,904.3Market value change from base
    
    
    406.0
    
    
    
    216.6
    
    
    
    109.2
    
    
    
    0.0
    
    
    
    (115.6
    )
    
    
    (227.6
    )
    
    
    (446.8
    )Change in unrealized
appreciation/(depreciation)
    
    
    5.5
    %
    
    
    2.9
    %
    
    
    1.5
    %
    
    
    0.0
    %
    
    
    (1.6
    )%
    
    
    (3.1
    )%
    
    
    (6.1
    )%
  Credit Spread Shift in Basis Points-200
    
    
    -100
    
    
    -50
    
    
    0
    
    
    +50
    
    
    +100
    
    
    +200($ in millions)Total market value
    
    $
    6,516.7
    
    
    $
    6,333.4
    
    
    $
    6,241.7
    
    
    $
    6,150.0
    
    
    $
    6,058.3
    
    
    $
    5,966.6
    
    
    $
    5,783.3Market value change from base
    
    
    366.7
    
    
    
    183.4
    
    
    
    91.7
    
    
    
    0.0
    
    
    
    (91.7
    )
    
    
    (183.4
    )
    
    
    (366.7
    )Change in unrealized
appreciation/(depreciation)
    
    
    6.0
    %
    
    
    3.0
    %
    
    
    1.5
    %
    
    
    0.0
    %
    
    
    (1.5
    )%
    
    
    (3.0
    )%
    
    
    (6.0
    )%
    -104-




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##### Table of Contents



Year Ended December 312009
    
    
    2008
    
    
    2007($ in millions)Realized exchange gain (loss)
    
    $
    5.9
    
    
    $
    (4.1
    )
    
    $
    1.6Unrealized exchange (loss) gain
    
    
    (6.6
    )
    
    
    5.5
    
    
    
    (0.8
    )Foreign exchange (loss) gain
    
    $
    (0.7
    )
    
    $
    1.4
    
    
    $
    0.8
 
 Item 8. Financial Statements and Supplementary Data.
 F-47
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Disclosure Controls and Procedures
  -105-




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##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting
    Changes in Internal Control Over Financial Reporting
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
  -106-




---



##### Table of Contents



Internal
Control  Integrated Framework
  /s/ Deloitte & ToucheHamilton, Bermuda
March 1, 2010   
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
   -107-




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##### Table of Contents



Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accountant Fees and Services.
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
   -108-




---



##### Table of Contents



SIGNATURES
  ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTDBy:

/s/ Scott A. CarmilaniName:
    Scott A. CarmilaniTitle:
    President and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Scott A. CarmilaniScott A. Carmilani
    
    President, Chief Executive Officer and
Chairman of the Board(Principal Executive Officer)
    
    March 1, 2010/s/ Joan H. DillardJoan H. Dillard
    
    Executive Vice President and
Chief Financial Officer(Principal Financial and Accounting Officer)
    
    March 1, 2010/s/ Barbara T. AlexanderBarbara T. Alexander
    
    Director
    
    March 1, 2010/s/ Patrick de Saint-Aignan Patrick de Saint-Aignan
    
    Director
    
    March 1, 2010/s/ James F. DuffyJames F. Duffy
    
    Director
    
    March 1, 2010/s/ Bart FriedmanBart Friedman
    
    Deputy Chairman of the Board
    
    March 1, 2010/s/ Scott Hunter Scott Hunter
    
    Director
    
    March 1, 2010/s/ Mark R. PattersonMark R. Patterson
    
    Director
    
    March 1, 2010/s/ Samuel J. Weinhoff Samuel J. Weinhoff
    
    Director
    
    March 1, 2010
 -109-




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1(1)
    
    Memorandum of Association3.2(15)
    
    Third Amended and Restated Bye-laws4.1(1)
    
    Specimen Common Share Certificate4.2(1)
    
    American International Group, Inc. Warrant, dated November 21, 20014.3(1)
    
    The Chubb Corporation Warrant, dated November 21, 20014.4(1)
    
    GS Capital Partners 2000, L.P. Warrant, dated November 21, 20014.5(1)
    
    GS Capital Partners 2000 Offshore, L.P. Warrant, dated November 21, 20014.6(1)
    
    GS Capital Partners 2000 Employee Fund, L.P. Warrant, dated November 21, 20014.7(1)
    
    GS Capital Partners 2000, GmbH & Co. Beteiligungs KG Warrant, dated November 21, 20014.8(1)
    
    Stone Street Fund 2000, L.P. Warrant, dated November 21, 20014.9(1)
    
    Bridge Street Special Opportunities Fund 2000, L.P. Warrant, dated November 21, 20014.10(2)
    
    Indenture, dated as of July 26, 2006, by and between Allied World Assurance Company Holdings, Ltd, as
issuer, and The Bank of New York, as trustee4.11(2)
    
    First Supplemental Indenture, dated as of July 26, 2006, by and between Allied World Assurance
Company, Ltd, as issuer, and The Bank of New York, as trustee4.12(2)
    
    Form of Note (Included as part of Exhibit 4.11)4.13(3)
    
    Amendment to Warrants to Purchase Common Shares of Allied World Assurance Company Holdings, Ltd,
dated as of August 1, 2006, by and among Allied World Assurance Company Holdings, Ltd and GS Capital
Partners 2000, L.P.; GS Capital Partners 2000 Offshore, L.P.; GS Capital Partners 2000, GmbH & Co.
Beteiligungs KG; GS Capital Partners 2000 Employee Fund, L.P.; Stone Street Fund 2000, L.P.; and
Bridge Street Special Opportunities Fund 2000, L.P.10.1(1)
    
    Registration Rights Agreement by and among Allied World Assurance Company Holdings, Ltd and the
shareholders named therein10.2(8)
    
    Allied World Assurance Company Holdings, Ltd Amended and Restated Long-Term Incentive Plan10.3(1)
    
    Form of Participation Agreement under the Allied World Assurance Company Holdings, Ltd Amended and
Restated Long-Term Incentive Plan10.4(4) 
    
    Form of Indemnification Agreement10.5(6)
    
    Insurance Letters of Credit-Master Agreement, dated February 28, 2007, by and among Allied World
Assurance Company, Ltd, Citibank N.A. and Citibank Europe plc10.6(6)
    
    Pledge Agreement, dated as of February 28, 2007, by and between Allied World Assurance Company, Ltd
and Citibank Europe plc10.7(6)
    
    Account Control Agreement, dated March 5, 2007, by and among Citibank Europe plc, as secured party;
Allied World Assurance Company, Ltd, as pledgor; and Mellon Bank, N.A10.8(7)
    
    Credit Agreement, dated as of November 27, 2007, by and among Allied World Assurance Company
Holdings, Ltd, Allied World Assurance Company, Ltd, the lenders a party thereto, Bank of America,
N.A., as syndication agent, and Wachovia Bank, National Association, as administrative agent,
fronting bank and letter of credit agent under the Unsecured Senior Revolving Credit Facility10.9(7)
    
    Credit Agreement, dated as of November 27, 2007, by and among Allied World Assurance Company
Holdings, Ltd, Allied World Assurance Company, Ltd, the lenders a party thereto, Bank of America,
N.A., as syndication agent, and Wachovia Bank, National Association, as administrative agent,
fronting bank and letter of credit agent under the Senior Secured Letter of Credit Facility10.10(7)
    
    Pledge and Security Agreement, dated as of November 27, 2007, by and between Allied World Assurance
Company, Ltd, as pledgor, and Wachovia Bank, National Association, as administrative agent10.11(7)
    
    Account Control Agreement, dated November 27, 2007, by and among Allied World Assurance Company, Ltd,
as
 E-1




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##### Table of Contents



ExhibitNumber
    
    Descriptionpledgor, Mellon Bank, N.A., as custodian, and Wachovia Bank, National Association, as
administrative agent10. 12(5)
    
    Stock Purchase Agreement, dated as of December 14, 2007, by and between Allied World Assurance
Company Holdings, Ltd and American International Group, Inc.10.13(9)
    
    Allied World Assurance Company Holdings, Ltd Deferred Fee Plan for Non-Employee Directors10.14(9) 
    
    Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2001 Employee Stock Option
Plan10.15(9) 
    
    Form of Option Grant Notice and Option Agreement under Allied World Assurance Company Holdings, Ltd
Second Amended and Restated 2001 Employee Stock Option Plan10.16(9) 
    
    Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2004 Stock Incentive Plan10.17(9) 
    
    Form of RSU Award Agreement for employees under the Allied World Assurance Company Holdings, Ltd
Second Amended and Restated 2004 Stock Incentive Plan10.18(9) 
    
    Form of RSU Award Agreement for non-employee directors under the Allied World Assurance Company
Holdings, Ltd Second Amended and Restated 2004 Stock Incentive Plan10.19(9) 
    
    Allied World Assurance Company Holdings, Ltd 2008 Employee Share Purchase Plan10.20(10)
    
    Letter Agreement, dated December 30, 2008, by and among Allied World Assurance Company, Ltd, Citibank
Europe plc and The Bank of New York Mellon10.21(11) 
    
    Amended and Restated Employment Agreement, dated as of October 1, 2008, by and between Allied World
National Assurance Company and W. Gordon Knight10.22(12) 
    
    Amended and Restated Employment Agreement  Form for Bermuda Executive Officers10.23(13) 
    
    Second Amended and Restated Employment Agreement, dated as of March 1, 2009, by and between Allied
World Assurance Company Holdings, Ltd and Scott A. Carmilani.10.24(14) 
    
    Form of RSU Award Agreement for employees under the Allied World Assurance Company Holdings, Ltd
Second Amended and Restated 2004 Stock Incentive Plan, as amended in May 200910.25(16) 
    
    Form of Performance-Based Equity Award Agreement10.26(17) 
    
    Amended and Restated Employment Agreement, dated as of November 5, 2009, by and between Allied World
Assurance Company Holdings, Ltd and John L. Sennott, Jr.10.27(18)
    
    Amended and Restated Long-Term Incentive Plan of Darwin Professional Underwriters, Inc., effective as
of November 11, 200510.28
    
    Amended and Restated Accounting Services Agreement, dated as of April 1, 2009, by and between
BlackRock Financial Management, Inc. and Allied World Assurance Company, Ltd10.29
    
    Form of RSU Award Agreement for employees under the Allied World Assurance Company Holdings, Ltd
Second Amended and Restated 2004 Stock Incentive Plan, as amended in November 200910.30
    
    Allied World Assurance Company (U.S.) Inc. Second Amended and Restated Supplemental Executive
Retirement Plan21.1
    
    Subsidiaries of the Registrant23.1
    
    Consent of Deloitte & Touche, an independent registered public accounting firm31.1
    
    Certification by Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification by Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification by Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated herein by reference to the Registration Statement on
Form S-1 (Registration No. 333-132507) of Allied World Assurance
Company Holdings, Ltd filed with the SEC on March 17, 2006, as
amended, and declared effective by the SEC on July 11, 2006.(2)
    
    Incorporated herein by reference to the Current Report on Form 8-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
August 1, 2006. E-2




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##### Table of Contents



(3)
    
    Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Allied World Assurance Company Holdings, Ltd filed with the SEC on
November 14, 2006.(4)
    
    Incorporated herein by reference to the Current Report on Form 8-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
August 7, 2006.(5)
    
    Incorporated herein by reference to the Current Report on Form 8-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
December 17, 2007.(6)
    
    Incorporated herein by reference to the Current Report on Form 8-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
March 6, 2007.(7)
    
    Incorporated herein by reference to the Current Report on Form 8-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
December 3, 2007.(8)
    
    Incorporated herein by reference to the Annual Report on Form 10-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
February 29, 2008.(9)
    
    Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Allied World Assurance Company Holdings, Ltd filed with the SEC on
May 9, 2008.(10)
    
    Incorporated herein by reference to the Current Report on Form 8-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
January 5, 2009.(11)
    
    Incorporated herein by reference to the Annual Report on Form 10-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
February 27, 2009.(12)
    
    Incorporated herein by reference to the Annual Report on Form 10-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
February 27, 2009. Other than with respect to title, base salary and
housing and utility allowance, the amended and restated employment
agreements, dated as of October 1, 2008, for David Bell, Joan
Dillard, Frank DOrazio, Wesley Dupont and Marshall Grossack are
identical to the form filed as Exhibit 10.41 thereto.(13)
    
    Incorporated herein by reference to the Current Report on Form 8-K of
Allied World Assurance Company Holdings, Ltd filed with the SEC on
March 5, 2009.(14)
    
    Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Allied World Assurance Company Holdings, Ltd filed with the SEC on
May 8, 2009.(15)
    
    Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Allied World Assurance Company Holdings, Ltd filed with the SEC on
August 7, 2009.(16)
    
    Incorporated by reference to the Current Report on Form 8-K of Allied
World Assurance Company Holdings, Ltd filed with the SEC on September
18, 2009.(17)
    
    Incorporated herein by reference to the Quarterly Report on Form 10-Q
of Allied World Assurance Company Holdings, Ltd filed with the SEC on
November 6, 2009.(18)
    
    Incorporated herein by reference to the Registration Statement on
Form S-1 (Registration No. 333-132355) of Darwin Professional
Underwriters, Inc. filed with the SEC on March 10, 2006, as amended,
and declared effective by the SEC on May 16, 2006.
    
    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. E-3




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 Page No.Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    F-3Consolidated Statements of Operations and Comprehensive Income for the years ended December 31,
2009, 2008 and 2007
    
    F-4Consolidated Statements of Shareholders Equity for the years ended December 31, 2009, 2008 and 2007
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    
    F-6Notes to Consolidated Financial Statements
    
    F-7Schedule II  Condensed Financial Information of Parent Company
    
    S-1Schedule III  Supplementary Insurance Information
    
    S-4Schedule IV  Supplementary Reinsurance Information
    
    S-5
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 F-2




---



##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 
 CONSOLIDATED BALANCE SHEETS
 As of
    
    
    As ofDecember 31,
    
    
    December 31,2009
    
    
    2008ASSETS:Fixed maturity investments available for sale, at fair value (amortized cost: 2009: $4,260,844;
2008: $5,872,031)
    
    $
    4,427,072
    
    
    $
    6,032,029Fixed maturity investments trading, at fair value
    
    
    2,544,322
    
    
    
    Other invested assets trading, at fair value
    
    
    184,869
    
    
    
    69,902Other invested assets available for sale, at fair value (cost: 2009: nil; 2008: $89,229)
    
    
    
    
    
    
    55,199Total investments
    
    
    7,156,263
    
    
    
    6,157,130Cash and cash equivalents
    
    
    292,188
    
    
    
    655,828Restricted cash
    
    
    87,563
    
    
    
    50,439Securities lending collateral
    
    
    
    
    
    
    171,026Insurance balances receivable
    
    
    395,621
    
    
    
    347,941Prepaid reinsurance
    
    
    186,610
    
    
    
    192,582Reinsurance recoverable
    
    
    919,991
    
    
    
    888,314Accrued investment income
    
    
    53,046
    
    
    
    50,671Net deferred acquisition costs
    
    
    87,821
    
    
    
    86,181Goodwill
    
    
    268,376
    
    
    
    268,532Intangible assets
    
    
    60,359
    
    
    
    71,410Balances receivable on sale of investments
    
    
    55,854
    
    
    
    12,371Net deferred tax assets
    
    
    21,895
    
    
    
    22,452Other assets
    
    
    67,566
    
    
    
    47,603Total assets
    
    $
    9,653,153
    
    
    $
    9,022,480LIABILITIES:Reserve for losses and loss expenses
    
    $
    4,761,772
    
    
    $
    4,576,828Unearned premiums
    
    
    928,619
    
    
    
    930,358Reinsurance balances payable
    
    
    102,837
    
    
    
    95,129Securities lending payable
    
    
    
    
    
    
    177,010Balances due on purchases of investments
    
    
    55,670
    
    
    
    Syndicated loan
    
    
    
    
    
    
    243,750Senior notes
    
    
    498,919
    
    
    
    498,796Accounts payable and accrued liabilities
    
    
    92,041
    
    
    
    83,747Total liabilities
    
    $
    6,439,858
    
    
    $
    6,605,618SHAREHOLDERS EQUITY:Common shares, par value $0.03 per share, issued and outstanding 2009: 49,734,487 shares and
2008: 49,036,159 shares
    
    $
    1,492
    
    
    $
    1,471Additional paid-in capital
    
    
    1,359,934
    
    
    
    1,314,785Retained earnings
    
    
    1,702,020
    
    
    
    994,974Accumulated other comprehensive income: net unrealized gains on investments, net of tax
    
    
    149,849
    
    
    
    105,632Total shareholders equity
    
    $
    3,213,295
    
    
    $
    2,416,862Total liabilities and shareholders equity
    
    $
    9,653,153
    
    
    $
    9,022,480
  F-3




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 2009
    
    
    2008
    
    
    2007REVENUES:Gross premiums written
    
    $
    1,696,345
    
    
    $
    1,445,584
    
    
    $
    1,505,509Premiums ceded
    
    
    (375,220
    )
    
    
    (338,356
    )
    
    
    (352,399
    )Net premiums written
    
    
    1,321,125
    
    
    
    1,107,228
    
    
    
    1,153,110Change in unearned premiums
    
    
    (4,233
    )
    
    
    9,677
    
    
    
    6,832Net premiums earned
    
    
    1,316,892
    
    
    
    1,116,905
    
    
    
    1,159,942Net investment income
    
    
    300,675
    
    
    
    308,775
    
    
    
    297,932Net realized investment gains (losses)
    
    
    126,352
    
    
    
    (59,954
    )
    
    
    37,001Net impairment charges recognized in earnings:Total other-than-temporary impairment charges
    
    
    (68,236
    )
    
    
    (212,897
    )
    
    
    (44,618
    )Portion of loss recognized in other comprehensive income, before taxes
    
    
    18,659
    
    
    
    
    
    
    
    Net impairment charges recognized in earnings
    
    
    (49,577
    )
    
    
    (212,897
    )
    
    
    (44,618
    )Other income
    
    
    1,506
    
    
    
    746
    
    
    
    1,695,848
    
    
    
    1,153,575
    
    
    
    1,450,257EXPENSES:Net losses and loss expenses
    
    
    604,060
    
    
    
    641,122
    
    
    
    682,340Acquisition costs
    
    
    148,847
    
    
    
    112,569
    
    
    
    118,959General and administrative expenses
    
    
    248,592
    
    
    
    185,850
    
    
    
    141,641Amortization and impairment of intangible assets
    
    
    11,051
    
    
    
    710
    
    
    
    Interest expense
    
    
    39,019
    
    
    
    38,743
    
    
    
    37,848Foreign exchange loss (gain)
    
    
    748
    
    
    
    (1,421
    )
    
    
    (817
    )1,052,317
    
    
    
    977,573
    
    
    
    979,971Income before income taxes
    
    
    643,531
    
    
    
    176,002
    
    
    
    470,286Income tax expense (benefit)
    
    
    36,644
    
    
    
    (7,633
    )
    
    
    1,104NET INCOME
    
    
    606,887
    
    
    
    183,635
    
    
    
    469,182Other comprehensive income (loss)Unrealized gains (losses) on investments arising during the year net of
applicable deferred income tax (expense) benefit 2009: $(1,064); 2008: $9,433; and 2007: $(5,839)
    
    
    243,188
    
    
    
    (198,405
    )
    
    
    122,133Portion of other-than-temporary impairment losses recognized in other
comprehensive income, net of applicable deferred income tax for the year ended
2009: nil
    
    
    (18,659
    )
    
    
    
    
    
    
    Reclassification adjustment for net realized investment (gains) losses included in
net income, net of applicable income tax
    
    
    (43,464
    )
    
    
    194,085
    
    
    
    7,617Other comprehensive income (loss)
    
    
    181,065
    
    
    
    (4,320
    )
    
    
    129,750COMPREHENSIVE INCOME
    
    $
    787,952
    
    
    $
    179,315
    
    
    $
    598,932PER SHARE DATABasic earnings per share
    
    $
    12.26
    
    
    $
    3.75
    
    
    $
    7.84Diluted earnings per share
    
    $
    11.67
    
    
    $
    3.59
    
    
    $
    7.53Weighted average common shares outstanding
    
    
    49,503,438
    
    
    
    48,936,912
    
    
    
    59,846,987Weighted average common shares and common share equivalents outstanding
    
    
    51,992,674
    
    
    
    51,147,215
    
    
    
    62,331,165Dividends declared per share
    
    $
    0.74
    
    
    $
    0.72
    
    
    $
    0.63
  F-4




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Additional
    
    
    Accumulated OtherShare
    
    
    Paid-in
    
    
    Comprehensive
    
    
    RetainedCapital
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    TotalDecember 31, 2006
    
    $
    1,809
    
    
    $
    1,822,607
    
    
    $
    6,464
    
    
    $
    389,204
    
    
    $
    2,220,084Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    469,182
    
    
    
    469,182Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,052
    )
    
    
    (38,052
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    129,750
    
    
    
    
    
    
    
    129,750Stock compensation
    
    
    3
    
    
    
    22,319
    
    
    
    
    
    
    
    
    
    
    
    22,322Stock acquired
    
    
    (350
    )
    
    
    (563,094
    )
    
    
    
    
    
    
    
    
    
    
    (563,444
    )December 31, 2007
    
    $
    1,462
    
    
    $
    1,281,832
    
    
    $
    136,214
    
    
    $
    820,334
    
    
    $
    2,239,842Cumulative effect adjustment upon adoption of
ASC 825
    
    
    
    
    
    
    
    
    
    
    (26,262
    )
    
    
    26,262
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183,635
    
    
    
    183,635Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,257
    )
    
    
    (35,257
    )Other comprehensive (loss)
    
    
    
    
    
    
    
    
    
    
    (4,320
    )
    
    
    
    
    
    
    (4,320
    )Stock compensation
    
    
    9
    
    
    
    32,953
    
    
    
    
    
    
    
    
    
    
    
    32,962December 31, 2008
    
    $
    1,471
    
    
    $
    1,314,785
    
    
    $
    105,632
    
    
    $
    994,974
    
    
    $
    2,416,862Cumulative effect adjustment upon adoption of
ASC 320-10-65(1), net of deferred taxes
    
    
    
    
    
    
    
    
    
    
    (136,848
    )
    
    
    136,848
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606,887
    
    
    
    606,887Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,689
    )
    
    
    (36,689
    )Other comprehensive income:Net unrealized gains, net of deferred income tax
    
    
    
    
    
    
    
    
    
    
    199,724
    
    
    
    
    
    
    
    199,724Portion of other-than-temporary impairment
losses recognized in other comprehensive
income, net of deferred income tax
    
    
    
    
    
    
    
    
    
    
    (18,659
    )
    
    
    
    
    
    
    (18,659
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    181,065
    
    
    
    
    
    
    
    181,065Stock compensation
    
    
    21
    
    
    
    45,149
    
    
    
    
    
    
    
    
    
    
    
    45,170December 31, 2009
    
    $
    1,492
    
    
    $
    1,359,934
    
    
    $
    149,849
    
    
    $
    1,702,020
    
    
    $
    3,213,295
 
 (1)
    
    Cumulative effect adjustment reflects adoption of ASC 320-10-65 (as described in Note 2 to the accompanying notes to the
condensed consolidated financial statements) as of April 1, 2009.  F-5




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 2009
    
    
    2008
    
    
    2007CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income
    
    $
    606,887
    
    
    $
    183,635
    
    
    $
    469,182Adjustments to reconcile net income to cash provided by operating activities:Net realized gains on sales of investments
    
    
    (94,466
    )
    
    
    (17,768
    )
    
    
    (37,001
    )Net impairment charges recognized in earnings
    
    
    49,577
    
    
    
    212,897
    
    
    
    44,618Mark to market adjustments
    
    
    (31,886
    )
    
    
    77,722
    
    
    
    Stock compensation expense
    
    
    40,399
    
    
    
    28,186
    
    
    
    22,491Insurance balances receivable
    
    
    (47,680
    )
    
    
    (2,809
    )
    
    
    (238
    )Prepaid reinsurance
    
    
    5,972
    
    
    
    11,479
    
    
    
    (4,117
    )Reinsurance recoverable
    
    
    (31,677
    )
    
    
    55,621
    
    
    
    6,340Accrued investment income
    
    
    (2,375
    )
    
    
    11,134
    
    
    
    (4,651
    )Net deferred acquisition costs
    
    
    (1,640
    )
    
    
    6,202
    
    
    
    (3,052
    )Net deferred tax assets
    
    
    (507
    )
    
    
    (14,163
    )
    
    
    (5,626
    )Other assets
    
    
    (26,966
    )
    
    
    21,947
    
    
    
    (2,941
    )Reserve for losses and loss expenses
    
    
    184,944
    
    
    
    96,959
    
    
    
    282,775Unearned premiums
    
    
    (1,739
    )
    
    
    (21,157
    )
    
    
    (2,714
    )Reinsurance balances payable
    
    
    7,708
    
    
    
    3,177
    
    
    
    (15,037
    )Accounts payable and accrued liabilities
    
    
    5,035
    
    
    
    5,809
    
    
    
    4,763Other items, net
    
    
    6,603
    
    
    
    (1,928
    )
    
    
    6,176Net cash provided by operating activities
    
    
    668,189
    
    
    
    656,943
    
    
    
    760,968CASH FLOWS USED IN INVESTING ACTIVITIES:Purchases of fixed maturity investments  available for sale
    
    
    (6,504,094
    )
    
    
    (4,558,664
    )
    
    
    (4,282,638
    )Purchases of fixed maturity investments  trading
    
    
    (4,338,454
    )
    
    
    
    
    
    
    Purchases of other invested assets
    
    
    (166,848
    )
    
    
    (63,357
    )
    
    
    (175,770
    )Sales of fixed maturity investments  available for sale
    
    
    8,346,180
    
    
    
    4,583,751
    
    
    
    3,966,822Sales of fixed maturity investments  trading
    
    
    1,818,736
    
    
    
    
    
    
    
    Sales of other invested assets
    
    
    133,057
    
    
    
    158,857
    
    
    
    106,713Net cash paid for acquisitions
    
    
    
    
    
    
    (536,195
    )
    
    
    Changes in securities lending collateral received
    
    
    171,026
    
    
    
    (23,785
    )
    
    
    157,501Purchases of fixed assets
    
    
    (5,075
    )
    
    
    (21,190
    )
    
    
    (9,666
    )Change in restricted cash
    
    
    (37,124
    )
    
    
    17,447
    
    
    
    70,337Net cash used in investing activities
    
    
    (582,596
    )
    
    
    (443,136
    )
    
    
    (166,701
    )CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:Dividends paid
    
    
    (36,689
    )
    
    
    (35,257
    )
    
    
    (38,052
    )Proceeds from the exercise of stock options
    
    
    7,442
    
    
    
    4,046
    
    
    
    (168
    )Stock acquired
    
    
    
    
    
    
    
    
    
    
    (563,444
    )(Repayment of) proceeds from syndicated loan
    
    
    (243,750
    )
    
    
    243,750
    
    
    
    Changes in securities lending collateral
    
    
    (177,010
    )
    
    
    29,769
    
    
    
    (157,501
    )Net cash (used in) provided by financing activities
    
    
    (450,007
    )
    
    
    242,308
    
    
    
    (759,165
    )Effect of exchange rate changes on foreign currency cash
    
    
    774
    
    
    
    (2,869
    )
    
    
    663NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (363,640
    )
    
    
    453,246
    
    
    
    (164,235
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    655,828
    
    
    
    202,582
    
    
    
    366,817CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    292,188
    
    
    $
    655,828
    
    
    $
    202,582Supplemental disclosure of cash flow information: Cash paid for income taxes
    
    $
    42,170
    
    
    $
    3,658
    
    
    $
    3,814 Cash paid for interest expense
    
    
    39,115
    
    
    
    37,500
    
    
    
    38,021
  F-6




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 1. GENERAL
  2. SIGNIFICANT ACCOUNTING POLICIES
  
    
    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.
     F-7




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 a) Premiums and Acquisition Costs
     b) Reserve for Losses and Loss Expenses
    F-8




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 c) Ceded Reinsurance
    d) Investments
       F-9




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 d) Investments  (continued)
        F-10




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 d) Investments  (continued)
  
    
    The Companys debt securities are managed by external investment portfolio managers. The
Company requires them to provide a list of debt securities they intend to sell at the end of
the reporting period. Any impairments in these securities are recognized as OTTI as the
difference between the amortized cost and fair value and is recognized in the consolidated
income statements and included in net impairment charges recognized in earnings.
    
    At each reporting period the Company determines if it is more likely than not the Company
will be required to sell a debt security before the recovery of its amortized cost basis. The
Company analyzes its current and future contractual and non-contractual obligations and its
expectation of future cash flows to determine if the Company will need to sell debt
securities to fund its obligations. The Company considers factors such as trends in
underwriting profitability, cash flows from operations, return on invested assets, property
catastrophe losses, timing of payments and other specific contractual obligations that are
coming due.
    
    For debt securities that are in an unrealized loss position that the Company does not
intend to sell, the Company assesses whether a credit loss exists. The amount of the credit
loss is recognized in the consolidated income statements and is included in net impairment
charges recognized in earnings. The assessment involves consideration of several factors
including: (i) the significance of the decline in value and the resulting unrealized loss
position, (ii) the time period for which there has been a significant decline in value and
(iii) an analysis of the issuer of the investment, including its liquidity, business
prospects and overall financial position. The Company also looks to additional factors
depending on the type of security as defined below:
 
    
    Corporate bonds:The credit rating of the issuer as well as information from the
Companys investment portfolio managers and rating agencies. Based on all reasonably
available information, the Company determines if a credit loss exists.
    
    Mortgage-backed and asset-backed securities:The Company utilizes an independent third
party service to identify mortgage backed or asset backed securities where possible
principal and/or interest will not be paid. The independent third party service provides
cash flow projections using default rate, delinquency rate and prepayment assumptions
under different scenarios. The Company reviews the information received from the
independent third party and the Company determines the present value of future cash
flows.
   F-11




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 e) Translation of Foreign Currencies
  f) Cash and Cash Equivalents
  g) Income Taxes
   h) Employee Stock Option Compensation Plan
  i) Restricted Stock Units
  j) Long-Term Incentive Plan Awards
  k) Goodwill and Intangible Assets
  F-12




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 k) Goodwill and Intangible Assets (continued)
      l) Derivative Instruments
   F-13




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 l) Derivative Instruments  (continued)
  m) Earnings Per Share
  n) New Accounting Pronouncements
    F-14




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 2. SIGNIFICANT ACCOUNTING POLICIES  (continued)
 n) New Accounting Pronouncements  (continued)
    3. ACQUISITIONS
 a) Finial Insurance Company
  b) Darwin Professional Underwriters, Inc.
  F-15




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 3. ACQUISITIONS(continued)
 b) Darwin Professional Underwriters, Inc .(continued)
   Fair ValueFixed maturity investments
    
    $
    577,492Equity securities
    
    
    10,686Cash and cash equivalents
    
    
    57,979Insurance balances receivable
    
    
    40,630Reinsurance recoverable
    
    
    156,255Prepaid reinsurance
    
    
    40,225Deferred acquisition costs
    
    
    12,919Net deferred tax assets
    
    
    12,878Intangible assets
    
    
    56,200Goodwill
    
    
    264,615Other assets
    
    
    17,389Total assets acquired
    
    
    1,247,268Reserve for losses and loss expenses
    
    
    455,182Unearned premiums
    
    
    140,432Reinsurance balances payable
    
    
    24,776Balances due on purchase of investments
    
    
    35,204Accounts payable and accrued liabilities
    
    
    32,919Total liabilities acquired
    
    
    688,513Net assets acquired
    
    $
    558,755
  Intangible AssetsFair Value
    
    
    Amortization PeriodRenewal rights
    
    $
    38,000
    
    
    15 yearsTrademarks
    
    
    7,400
    
    
    15 yearsInternally developed software
    
    
    1,600
    
    
    3 yearsNon-compete covenants
    
    
    1,200
    
    
    2 yearsInsurance licenses
    
    
    8,000
    
    
    
    N/A$
    56,200
     F-16




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 3. ACQUISITIONS(continued)
 b) Darwin Professional Underwriters, Inc .(continued)
 For the Years EndedDecember 31,2008
    
    
    2007Revenue
    
    $
    1,341,252
    
    
    $
    1,653,703Net income
    
    $
    215,309
    
    
    $
    498,879Basic earnings per share
    
    $
    4.40
    
    
    $
    8.34Diluted earnings per share
    
    $
    4.21
    
    
    $
    8.00
 4. INVESTMENTS
 a) Available for Sale Securities
  F-17




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 4. INVESTMENTS  (continued)
 a)
Available for Sale Securities  (continued)
 GrossUnrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    OTTI OCI
    
    
    Fair ValueDecember 31, 2009U.S. Government and Government agencies
    
    $
    689,858
    
    
    $
    34,831
    
    
    $
    (1,389
    )
    
    $
    
    
    
    $
    723,300Non-U.S. Government and Government agencies
    
    
    271,528
    
    
    
    13,752
    
    
    
    (1,590
    )
    
    
    
    
    
    
    283,690States, municipalities and political subdivisions
    
    
    210,315
    
    
    
    17,429
    
    
    
    (336
    )
    
    
    
    
    
    
    227,408Corporate debt:Financial institutions
    
    
    684,386
    
    
    
    27,695
    
    
    
    (1,751
    )
    
    
    
    
    
    
    710,330Industrials
    
    
    879,905
    
    
    
    46,489
    
    
    
    (184
    )
    
    
    
    
    
    
    926,210Utilities
    
    
    143,773
    
    
    
    10,479
    
    
    
    
    
    
    
    
    
    
    
    154,252Residential mortgage-backed:Non-agency residential
    
    
    172,000
    
    
    
    4,206
    
    
    
    (11,517
    )
    
    
    (1,856
    )
    
    
    162,833Agency residential
    
    
    708,652
    
    
    
    28,882
    
    
    
    (1,095
    )
    
    
    
    
    
    
    736,439Commercial mortgage-backed
    
    
    406,236
    
    
    
    6,482
    
    
    
    (7,915
    )
    
    
    
    
    
    
    404,803Asset-backed
    
    
    94,191
    
    
    
    3,762
    
    
    
    (146
    )
    
    
    
    
    
    
    97,807Total fixed maturity investments, available for
sale
    
    $
    4,260,844
    
    
    $
    194,007
    
    
    $
    (25,923
    )
    
    $
    (1,856
    )
    
    $
    4,427,072December 31, 2008U.S. Government and Government agencies
    
    $
    1,608,230
    
    
    $
    162,556
    
    
    $
    (551
    )
    
    $
    
    
    
    $
    1,770,235Non-U.S. Government and Government agencies
    
    
    272,186
    
    
    
    12,738
    
    
    
    (4,768
    )
    
    
    
    
    
    
    280,156States, municipalities and political subdivisions
    
    
    350,044
    
    
    
    19,618
    
    
    
    (43
    )
    
    
    
    
    
    
    369,619Corporate debt:Financial institutions
    
    
    974,564
    
    
    
    30,147
    
    
    
    (9,991
    )
    
    
    
    
    
    
    994,720Industrials
    
    
    292,512
    
    
    
    3,725
    
    
    
    (809
    )
    
    
    
    
    
    
    295,428Utilities
    
    
    70,222
    
    
    
    1,666
    
    
    
    (66
    )
    
    
    
    
    
    
    71,822Residential mortgage-backed:Non-agency residential
    
    
    249,298
    
    
    
    67
    
    
    
    (18,841
    )
    
    
    
    
    
    
    230,523Agency residential
    
    
    1,336,567
    
    
    
    47,726
    
    
    
    (88
    )
    
    
    
    
    
    
    1,384,205Commercial mortgage-backed
    
    
    553,914
    
    
    
    1,173
    
    
    
    (79,878
    )
    
    
    
    
    
    
    475,209Asset-backed
    
    
    164,495
    
    
    
    36
    
    
    
    (4,419
    )
    
    
    
    
    
    
    160,112Total fixed maturity investments, available for
sale
    
    
    5,872,031
    
    
    
    279,452
    
    
    
    (119,454
    )
    
    
    
    
    
    
    6,032,029Global high-yield bond fund
    
    
    89,229
    
    
    
    
    
    
    
    (34,030
    )
    
    
    
    
    
    
    55,199Total investments, available for sale
    
    $
    5,961,260
    
    
    $
    279,452
    
    
    $
    (153,484
    )
    
    $
    
    
    
    $
    6,087,228
  F-18




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 4. INVESTMENTS  (continued)
 b) Trading Securities
  Fair ValueDecember 31, 2009U.S. Government and Government agencies
    
    $
    655,266Non-U.S. Government and Government agencies
    
    
    227,310States, municipalities and political subdivisions
    
    
    15,810Corporate debt:Financial institutions
    
    
    590,130Industrials
    
    
    191,729Utilities
    
    
    11,934Residential mortgage-backed:Non-agency residential
    
    
    259,055Agency residential
    
    
    139,858Commercial mortgage-backed
    
    
    18,266Asset-backed
    
    
    434,964Total fixed maturity investments, trading
    
    
    2,544,322Hedge funds
    
    
    184,725Equity securities
    
    
    144Total
    
    $
    2,729,191December 31, 2008Hedge funds
    
    $
    48,573Equity securities
    
    
    21,329Total
    
    $
    69,902
 c) Contractual Maturity Dates
  Amortized Cost
    
    
    Fair ValueDue within one year
    
    $
    153,060
    
    
    $
    156,325Due after one year through five years
    
    
    3,125,599
    
    
    
    3,221,714Due after five years through ten years
    
    
    1,133,114
    
    
    
    1,166,920Due after ten years
    
    
    163,297
    
    
    
    172,410Mortgage-backed
    
    
    1,689,341
    
    
    
    1,721,254Asset-backed
    
    
    528,152
    
    
    
    532,771$
    6,792,563
    
    
    $
    6,971,394
  F-19




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 4. INVESTMENTS  (continued)
 d) Other Invested Assets
  Long
    
    
    ShortHedge Fund
    
    Fair Value as of
    
    
    Unfunded
    
    
    Exposure(1)
    
    
    Exposure(2)
    
    
    Gross
    
    
    NetType
    
    December 31, 2009
    
    
    Commitments
    
    
    (% of funded)
    
    
    (% of funded)
    
    
    Exposure(3)
    
    
    Exposure(4)Secondary private equity funds
    
    $
    12,567
    
    
    $
    48,369
    
    
    
    100
    %
    
    
    0
    %
    
    
    100
    %
    
    
    100
    %Distressed
    
    
    54,151
    
    
    
    9,211
    
    
    
    69
    %
    
    
    19
    %
    
    
    88
    %
    
    
    50
    %Equity long/short
    
    
    54,041
    
    
    
    
    
    
    
    96
    %
    
    
    47
    %
    
    
    143
    %
    
    
    49
    %Multi-strategy
    
    
    63,966
    
    
    
    
    
    
    
    94
    %
    
    
    40
    %
    
    
    134
    %
    
    
    54
    %Total
    
    $
    184,725
    
    
    $
    57,580
 
 (1)
    
    Long exposure represents the ratio of the funds equity to investments in
securities (over 100% may denote explicit borrowing).(2)
    
    Short exposure represents the ratio of the funds equity to securities sold short.(3)
    
    Gross exposure is the addition of the long and short exposures.(4)
    
    Net exposure is the subtraction of the short exposure from the long exposure. 
    
    Secondary private equity funds:These funds buy limited partnership interests from
existing limited partners of primary private equity funds. As owners of private equity
funds seek liquidity, they can sell their existing investments, plus any remaining
commitment, to secondary market participants. The Company has invested in two secondary
funds to purchase those primary limited partnership interests. The fair values of the
investments in this category have been estimated using the net asset value per share of the
investments. These investments cannot be redeemed because the investments include
restrictions that do not allow for redemption until termination of the fund. The remaining
restriction period for these investments range from eight to nine years.
    
    Distressed funds:In distressed debt investing, managers take positions in the debt of
companies experiencing significant financial difficulties, including bankruptcy, or in
certain positions of the capital structure of structured securities. The manager relies on
the fundamental analysis of these securities, including the claims on the assets and the
likely return to bondholders. The fair values of the investments in this category have
been estimated using the net asset value per share of the investments. The Company has
invested in four distressed funds, three of which are not currently eligible for redemption
due to imposed lock-up periods with remaining periods ranging from eight months to eight
years. Investments representing approximately 35% of the value of the investments
in this category will be eligible for redemption in August 2010. Investments representing
approximately 10% of the value of the investments in this category are currently
eligible for quarterly redemption with a 45-day notification period and redemption fee if
redeemed prior to January 2012.
    
    Equity long/short funds:In long/short equities, managers take positions in companies
they deem to be undervalued and short stocks they believe to be overvalued. Long/short
managers may invest in countries, regions or sectors and vary by their use of leverage and
target net long position. The fair values of the investments in this category have been
estimated using the net asset value per share of the investments. The Company has invested
in two equity long/short funds, neither of which are currently eligible for redemption due
to imposed lock-up periods with remaining periods ranging from eight
to twelve months at
which time the funds will be eligible for quarterly redemption with a
60-day notification
period.
    
    Multi-strategy funds:These funds may utilize many strategies employed by specialized
funds including distressed investing, equity long/short, merger, convertible and fixed
income arbitrage and macro trading. The fair values of the investments in this category
have been estimated using the net asset value per share of the investments. The Company
has invested in three multi-strategy funds. Investments representing
approximately 46% of the value of the investments in this category are currently eligible for
quarterly redemption with a 60-day notification period. Investments representing
approximately 16% of the value of the investments in this category are currently
eligible for quarterly redemption with a 45-day notification period and redemption fee if
redeemed prior to December 2010.
  F-20




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 4. INVESTMENTS  (continued)
 e) Net Investment Income
 2009
    
    
    2008
    
    
    2007Fixed maturities and other investments
    
    $
    306,578
    
    
    $
    287,910
    
    
    $
    283,888Other invested assets
    
    
    1,506
    
    
    
    14,540
    
    
    
    1,230Cash and cash equivalents
    
    
    1,570
    
    
    
    13,054
    
    
    
    18,644Expenses
    
    
    (8,979
    )
    
    
    (6,729
    )
    
    
    (5,830
    )Net investment income
    
    $
    300,675
    
    
    $
    308,775
    
    
    $
    297,932
 f) Components of Realized Gains and Losses
  2009
    
    
    2008
    
    
    2007Gross realized gains on sale of securities
    
    $
    185,322
    
    
    $
    170,274
    
    
    $
    39,049Gross realized losses on sale of securities
    
    
    (90,856
    )
    
    
    (152,506
    )
    
    
    (2,048
    )Mark-to-market changes: debt securities trading
    
    
    12,430
    
    
    
    
    
    
    
    Mark-to-market changes: TBA MBS
    
    
    173
    
    
    
    
    
    
    
    Mark-to-market changes: hedge funds
    
    
    19,283
    
    
    
    (77,722
    )
    
    
    Net realized investment gains (losses)
    
    $
    126,352
    
    
    $
    (59,954
    )
    
    $
    37,001
  g) Pledged Assets
   F-21




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 4. INVESTMENTS  (continued)
 g) Pledged Assets  (continued)
  As of
    
    
    As ofDecember 31,
    
    
    December 31,2009
    
    
    2008Total trust accounts on deposit
    
    $
    1,025,524
    
    
    $
    892,634Total letters of credit facilities:Citibank Europe plc
    
    
    900,000
    
    
    
    900,000Credit Facility
    
    
    800,000
    
    
    
    800,000Total letters of credit facilities
    
    
    1,700,000
    
    
    
    1,700,000Total letters of credit facilities outstanding:Citibank Europe plc
    
    
    794,609
    
    
    
    769,853Credit Facility
    
    
    376,658
    
    
    
    217,175Total letters of credit facilities outstanding
    
    
    1,171,267
    
    
    
    987,028Total letters of credit facilities remaining:Citibank Europe plc
    
    
    105,391
    
    
    
    130,147Credit Facility(1)
    
    
    423,342
    
    
    
    332,825Total letters of credit facilities remaining
    
    
    528,733
    
    
    
    462,972Collateral committed to support the letter of credit facilities
    
    $
    1,208,359
    
    
    $
    1,312,976
 
 (1)
    
    Net of any borrowing or repayments under the Unsecured Facility.  h) Analysis of Unrealized Losses
  F-22




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 4. INVESTMENTS  (continued)
 h) Analysis of Unrealized Losses  (continued)
  2009
    
    
    2008Gross Fair
    
    
    Unrealized
    
    
    
    
    
    
    Gross Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    OTTI OCI
    
    
    Value
    
    
    Loss
    
    
    OTTI OCILess than 12 monthsU.S. Government and Government
agencies
    
    $
    112,349
    
    
    $
    (1,367
    )
    
    $
    
    
    
    $
    14,625
    
    
    $
    (551
    )
    
    $
    Non-U.S. Government and
Government agencies
    
    
    40,450
    
    
    
    (1,079
    )
    
    
    
    
    
    
    52,646
    
    
    
    (4,768
    )
    
    
    States, municipalities and political
subdivisions
    
    
    7,637
    
    
    
    (336
    )
    
    
    
    
    
    
    5,943
    
    
    
    (43
    )
    
    
    Corporate debtFinancial institutions
    
    
    45,697
    
    
    
    (560
    )
    
    
    
    
    
    
    237,169
    
    
    
    (9,991
    )
    
    
    Industrials
    
    
    18,409
    
    
    
    (184
    )
    
    
    
    
    
    
    57,389
    
    
    
    (810
    )
    
    
    Utilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,541
    
    
    
    (65
    )
    
    
    Residential mortgage-backedNon-agency residential
    
    
    82,544
    
    
    
    (8,797
    )
    
    
    (1,527
    )
    
    
    101,487
    
    
    
    (18,576
    )
    
    
    Agency residential
    
    
    70,525
    
    
    
    (1,057
    )
    
    
    
    
    
    
    8,074
    
    
    
    (88
    )
    
    
    Commercial mortgage-backed
    
    
    56,396
    
    
    
    (511
    )
    
    
    
    
    
    
    381,415
    
    
    
    (79,874
    )
    
    
    Asset-backed
    
    
    8,516
    
    
    
    (120
    )
    
    
    
    
    
    
    79,003
    
    
    
    (4,419
    )
    
    
    $
    442,523
    
    
    $
    (14,011
    )
    
    $
    (1,527
    )
    
    $
    940,292
    
    
    $
    (119,185
    )
    
    $
    More than 12 monthsU.S. Government and Government
agencies
    
    $
    271
    
    
    $
    (22
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Non-U.S. Government and
Government agencies
    
    
    3,700
    
    
    
    (511
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate debtFinancial institutions
    
    
    23,462
    
    
    
    (1,191
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage-backedNon-agency residential
    
    
    27,265
    
    
    
    (2,720
    )
    
    
    (329
    )
    
    
    1,301
    
    
    
    (265
    )
    
    
    Agency residential
    
    
    214
    
    
    
    (38
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial mortgage-backed
    
    
    149,074
    
    
    
    (7,404
    )
    
    
    
    
    
    
    777
    
    
    
    (4
    )
    
    
    Asset-backed
    
    
    419
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Global high-yield bond fund
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,229
    
    
    
    (34,030
    )
    
    
    $
    204,405
    
    
    $
    (11,912
    )
    
    $
    (329
    )
    
    $
    91,307
    
    
    $
    (34,299
    )
    
    $
    $
    646,928
    
    
    $
    (25,923
    )
    
    $
    (1,856
    )
    
    $
    1,031,599
    
    
    $
    (153,484
    )
    
    $
    
  i) Other-than-temporary impairment charges
  F-23




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 4. INVESTMENTS  (continued)
 i) Other-than-temporary impairment charges  (continued)
   Weighted AverageSignificant Input
    
    Range of Inputs
    
    of InputCredit default rate
    
    0.6% 11.0%
    
    
    6.1
    %Severity rate
    
    30.1%  100.0%
    
    
    37.2
    %
  For the YearEnded December 31,2009Beginning balance of credit losses
    
    $
    7,140Additions for credit loss for which OTTI was not previously recognized
    
    
    4,489Reductions for securities sold during the period (realized)
    
    
    (13,631
    )Reductions for OTTI previously recognized due to intent to sell
    
    
    Additions resulting from the increase in credit losses
    
    
    3,125Reductions resulting from the improvement in expected cash flows
    
    
    (27
    )Ending balance of credit losses
    
    $
    1,096
   F-24




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 4. INVESTMENTS  (continued)
 i) Other-than-temporary impairment charges  (continued)
  2009
    
    
    2008
    
    
    2007Asset backed
    
    $
    31,545
    
    
    $
    8,913
    
    
    $
    447Mortgage backed
    
    
    18,027
    
    
    
    95,823
    
    
    
    5,440U.S. government and government agencies
    
    
    5
    
    
    
    21,102
    
    
    
    8,302Non-U.S. government and government agencies
    
    
    
    
    
    
    2,779
    
    
    
    63Corporate
    
    
    
    
    
    
    83,467
    
    
    
    2,966States, municipalities and political subdivisions
    
    
    
    
    
    
    813
    
    
    
    Total other-than-temporary impairment charges
    
    $
    49,577
    
    
    $
    212,897
    
    
    $
    17,218
 j) Securities Lending
  F-25




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
  
    
    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.
  Fair value measurement using:Quoted prices in
    
    
    
    
    
    
    Significantactive markets for
    
    
    Significant other
    
    
    unobservableCarrying
    
    
    
    
    
    
    identical assets
    
    
    observable inputs
    
    
    inputsamount
    
    
    Total fair value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available for sale securities:U.S. Government and Government agencies
    
    $
    723,300
    
    
    $
    723,300
    
    
    $
    268,912
    
    
    $
    454,388
    
    
    $
    Non-U.S. Government and Government agencies
    
    
    283,690
    
    
    
    283,690
    
    
    
    
    
    
    
    283,690States, municipalities and political subdivisions
    
    
    227,408
    
    
    
    227,408
    
    
    
    
    
    
    
    227,408Corporate debt
    
    
    1,790,792
    
    
    
    1,790,792
    
    
    
    
    
    
    
    1,790,792Mortgage-backed
    
    
    1,304,075
    
    
    
    1,304,075
    
    
    
    
    
    
    
    1,155,944
    
    
    
    148,131Asset-backed
    
    
    97,807
    
    
    
    97,807
    
    
    
    
    
    
    
    88,598
    
    
    
    9,209Total available for sale fixed maturity
investments
    
    
    4,427,072
    
    
    
    4,427,072Trading securities:U.S. Government and Government
agencies
    
    $
    655,266
    
    
    $
    655,266
    
    
    $
    551,845
    
    
    $
    103,421
    
    
    $
    Non-U.S. Government and
Government agencies
    
    
    227,310
    
    
    
    227,310
    
    
    
    
    
    
    
    227,310States, municipalities and political
subdivisions
    
    
    15,810
    
    
    
    15,810
    
    
    
    
    
    
    
    15,810Corporate debt
    
    
    793,793
    
    
    
    793,793
    
    
    
    
    
    
    
    793,793Mortgage-backed
    
    
    417,179
    
    
    
    417,179
    
    
    
    
    
    
    
    311,331
    
    
    
    105,848Asset-backed
    
    
    434,964
    
    
    
    434,964
    
    
    
    
    
    
    
    339,302
    
    
    
    95,662Total trading fixed maturity investments
    
    
    2,544,322
    
    
    
    2,544,322Total fixed maturity investments
    
    
    6,971,394
    
    
    
    6,971,394Total other invested assets, fair value
    
    
    184,869
    
    
    
    184,869
    
    
    
    144
    
    
    
    
    
    
    
    184,725Total investments
    
    $
    7,156,263
    
    
    $
    7,156,263
    
    
    $
    820,901
    
    
    $
    5,791,787
    
    
    $
    543,575Senior notes
    
    
    498,919
    
    
    
    531,250
    
    
    
    
    
    
    
    531,250
 F-26




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 5. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
  U.S. government and U.S. government agencies:
 Non-U.S. government and government agencies:
 States, municipalities and political subdivisions:
 Corporate debt:
 Mortgage-backed:
 Asset-backed:
 Hedge
funds:
 Senior notes:
 F-27




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 5. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
  Fair value measurement using significantunobservable inputs (Level 3):Mortgage-Hedge Funds
    
    
    backed
    
    
    Asset-backedYear Ended December 31, 2009Opening balance
    
    $
    48,573
    
    
    $
    
    
    
    $
    Total gains or losses included in earnings:Realized (losses) gains
    
    
    (3,007
    )
    
    
    
    
    
    
    Change in fair value of hedge fund investments
    
    
    22,366
    
    
    
    
    
    
    
    Purchases or sales
    
    
    116,793
    
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    253,979
    
    
    
    104,871Ending balance
    
    $
    184,725
    
    
    $
    253,979
    
    
    $
    104,871Year Ended December 31, 2008Opening balance
    
    $
    241,435
    
    
    $
    
    
    
    $
    Total gains or losses included in earnings:Realized gains (losses)
    
    
    12,159
    
    
    
    
    
    
    
    Change in fair value of hedge fund investments
    
    
    (77,886
    )
    
    
    
    
    
    
    Purchases or sales
    
    
    (127,135
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    Ending balance
    
    $
    48,573
    
    
    $
    
    
    
    $
    
  F-28




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 6. RESERVE FOR LOSSES AND LOSS EXPENSES
  2009
    
    
    2008OSLR
    
    $
    1,152,035
    
    
    $
    1,132,931IBNR
    
    
    3,609,737
    
    
    
    3,443,897Reserve for losses and loss expenses
    
    $
    4,761,772
    
    
    $
    4,576,828
  2009
    
    
    2008
    
    
    2007Gross liability at beginning of year
    
    $
    4,576,828
    
    
    $
    3,919,772
    
    
    $
    3,636,997Reinsurance recoverable at beginning of year
    
    
    (888,314
    )
    
    
    (682,765
    )
    
    
    (689,105
    )Net liability at beginning of year
    
    
    3,688,514
    
    
    
    3,237,007
    
    
    
    2,947,892Acquisition of net reserve for losses and loss expenses
    
    
    
    
    
    
    298,927
    
    
    
    Net losses incurred related to:Current year
    
    
    852,052
    
    
    
    921,217
    
    
    
    805,417Prior years
    
    
    (247,992
    )
    
    
    (280,095
    )
    
    
    (123,077
    )Total incurred
    
    
    604,060
    
    
    
    641,122
    
    
    
    682,340Net paid losses related to:Current year
    
    
    42,320
    
    
    
    79,037
    
    
    
    32,599Prior years
    
    
    415,901
    
    
    
    395,163
    
    
    
    365,251Total paid
    
    
    458,221
    
    
    
    474,200
    
    
    
    397,850Foreign exchange revaluation
    
    
    7,428
    
    
    
    (14,342
    )
    
    
    4,625Net liability at end of year
    
    
    3,841,781
    
    
    
    3,688,514
    
    
    
    3,237,007Reinsurance recoverable at end of year
    
    
    919,991
    
    
    
    888,314
    
    
    
    682,765Gross liability at end of year
    
    $
    4,761,772
    
    
    $
    4,576,828
    
    
    $
    3,919,772
      F-29




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 7. CEDED REINSURANCE
  2009
    
    
    2008OSLR recoverable
    
    $
    266,540
    
    
    $
    330,816IBNR recoverable
    
    
    653,451
    
    
    
    557,498Reinsurance recoverable
    
    $
    919,991
    
    
    $
    888,314
   Losses andPremiums
    
    
    Premiums
    
    
    LossWritten
    
    
    Earned
    
    
    ExpensesDecember 31, 2009Direct
    
    $
    1,230,770
    
    
    $
    1,241,488
    
    
    $
    565,401Assumed
    
    
    465,575
    
    
    
    456,596
    
    
    
    235,237Ceded
    
    
    (375,220
    )
    
    
    (381,192
    )
    
    
    (196,578
    )$
    1,321,125
    
    
    $
    1,316,892
    
    
    $
    604,060December 31, 2008Direct
    
    $
    1,015,444
    
    
    $
    997,619
    
    
    $
    578,284Assumed
    
    
    430,140
    
    
    
    466,296
    
    
    
    239,236Ceded
    
    
    (338,356
    )
    
    
    (347,010
    )
    
    
    (176,398
    )$
    1,107,228
    
    
    $
    1,116,905
    
    
    $
    641,122December 31, 2007Direct
    
    $
    969,450
    
    
    $
    1,003,924
    
    
    $
    577,701Assumed
    
    
    536,059
    
    
    
    504,300
    
    
    
    294,427Ceded
    
    
    (352,399
    )
    
    
    (348,282
    )
    
    
    (189,788
    )$
    1,153,110
    
    
    $
    1,159,942
    
    
    $
    682,340
  8. DEBT AND FINANCING ARRANGEMENTS
  F-30




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 8. DEBT AND FINANCING ARRANGEMENTS-(continued)
       F-31




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 9. GOODWILL AND INTANGIBLE ASSETS
  Intangible assetswith indefinite
    
    
    Intangible assetsGoodwill
    
    
    lives
    
    
    with finite lives
    
    
    TotalNet balance at December 31, 2007
    
    $
    
    
    
    $
    3,920
    
    
    $
    
    
    
    $
    3,920Additions
    
    
    268,532
    
    
    
    20,000
    
    
    
    48,200
    
    
    
    336,732Amortization
    
    
    
    
    
    
    
    
    
    
    (710
    )
    
    
    (710
    )Net balance at December 31, 2008
    
    
    268,532
    
    
    
    23,920
    
    
    
    47,490
    
    
    
    339,942Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    (4,185
    )
    
    
    (4,185
    )Impairments
    
    
    (156
    )
    
    
    
    
    
    
    (6,866
    )
    
    
    (7,022
    )Net balance at December 31, 2009
    
    
    268,376
    
    
    
    23,920
    
    
    
    36,439
    
    
    
    328,735Gross balance
    
    
    268,532
    
    
    
    23,920
    
    
    
    48,200
    
    
    
    340,652Accumulated amortization
    
    
    
    
    
    
    
    
    
    
    (4,895
    )
    
    
    (4,895
    )Impairments
    
    
    (156
    )
    
    
    
    
    
    
    (6,866
    )
    
    
    (7,022
    )Net balance
    
    $
    268,376
    
    
    $
    23,920
    
    
    $
    36,439
    
    
    $
    328,735
   10. INCOME TAXES
   Fiscal YearsU.S. Internal Revenue Service (IRS) for the U.S. subsidiaries
    
    
    2006  2009Inland Revenue for the U.K. branches
    
    
    2008  2009Irish Revenue Commissioners for the Irish subsidiaries
    
    
    2005  2009Swiss Federal Tax Administration for the Swiss branch
    
    
    2008  2009Inland Revenue Department for the Hong Kong branch
    
    
    2009
 F-32




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 10. INCOME TAXES(continued)
    2009
    
    
    2008
    
    
    2007Current income tax expense
    
    $
    38,763
    
    
    $
    10,220
    
    
    $
    6,730Deferred income tax benefit
    
    
    (2,119
    )
    
    
    (17,853
    )
    
    
    (5,626
    )Income tax expense (benefit)
    
    $
    36,644
    
    
    $
    (7,633
    )
    
    $
    1,104
   2009
    
    
    2008Deferred tax assets:Unearned premium
    
    $
    9,893
    
    
    $
    9,894Realized gains
    
    
    6,917
    
    
    
    1,286Deferred acquisition costs
    
    
    6,403
    
    
    
    896Reserve for losses and loss expenses
    
    
    16,658
    
    
    
    15,799Equity compensation
    
    
    14,414
    
    
    
    11,100Other-than-temporary impairments
    
    
    586
    
    
    
    15,329Mark-to-market on securities acquired
    
    
    6,303
    
    
    
    11,114Unrealized translation on investments in foreign currency
    
    
    
    
    
    
    1,771Total deferred tax assets
    
    
    61,174
    
    
    
    67,189Deferred tax liabilities:Unrealized appreciation and timing difference on investments
    
    
    (16,378
    )
    
    
    (17,085
    )Intangible assets
    
    
    (18,804
    )
    
    
    (22,483
    )Market discount on bonds
    
    
    (410
    )
    
    
    (4,350
    )Other deferred tax liabilities
    
    
    (3,687
    )
    
    
    (819
    )Total deferred tax liabilities
    
    
    (39,279
    )
    
    
    (44,737
    )Net deferred tax assets
    
    $
    21,895
    
    
    $
    22,452
  F-33




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 10. INCOME TAXES(continued)
  2009
    
    
    2008
    
    
    2007Income before taxes
    
    $
    643,531
    
    
    $
    176,002
    
    
    $
    470,286Expected tax rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Foreign taxes at local expected tax rates.
    
    
    5.6
    %
    
    
    (3.2
    )%
    
    
    0.3
    %Disallowed expenses and capital allowances
    
    
    0.1
    %
    
    
    0.3
    %
    
    
    0.2
    %Prior year refunds and adjustments
    
    
    (0.1
    )%
    
    
    (1.1
    )%
    
    
    (0.2
    )%Other
    
    
    0.1
    %
    
    
    (0.4
    )%
    
    
    (0.1
    )%Effective tax rate
    
    
    5.7
    %
    
    
    (4.4
    )%
    
    
    0.2
    %
 11. SHAREHOLDERS EQUITY
 a) Authorized Shares
  2009
    
    
    2008Common shares issued and fully paid, par value $0.03 per share
    
    
    49,734,487
    
    
    
    49,036,159Share capital at end of year
    
    $
    1,492
    
    
    $
    1,471
  b) Share Warrants
  c) Dividends
   d) Shares acquired
  F-34




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 12. EMPLOYEE BENEFIT PLANS
 a) Employee Option Plan
  Year Ended December 31, 2009WeightedAverage
    
    
    Weighted Average
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding at beginning of year
    
    
    1,358,151
    
    
    $
    33.63Granted
    
    
    279,540
    
    
    
    38.97Exercised
    
    
    (265,694
    )
    
    
    (28.00
    )Forfeited
    
    
    (51,700
    )
    
    
    (41.61
    )Expired
    
    
    (5,390
    )
    
    
    (43.69
    )Outstanding at end of year
    
    
    1,314,907
    
    
    
    35.54
    
    
    
    6.5 years
    
    
    $
    13,852Exercisable at end of year
    
    
    701,896
    
    
    $
    31.66
    
    
    
    5 years
    
    
    $
    10,118
   Options granted
    
    
    Options granted
    
    
    Options grantedduring the year ended
    
    
    during the year ended
    
    
    during the year endedDecember 31, 2007
    
    
    December 31, 2008
    
    
    December 31, 2009Expected term of option
    
    
        6.25 years
    
    
    
    6.25 years
    
    
    
    4.75 yearsWeighted average risk-free interest rate
    
    
    4.60
    %
    
    
    2.58
    %
    
    
    2.03
    %Weighted average expected volatility
    
    
    22.82
    %
    
    
    24.22
    %
    
    
    42.96
    %Dividend yield
    
    
    1.50
    %
    
    
    1.66
    %
    
    
    1.71
    %Weighted average fair value on grant date
    
    $
    12.05
    
    
    $
    9.63
    
    
    $
    12.80
    F-35




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 12. EMPLOYEE BENEFIT PLANS-(continued)
 b) Stock Incentive Plan
  Year ended December 31, 2009WeightedAverage GrantRSUs
    
    
    Date Fair ValueOutstanding RSUs at beginning of year
    
    
    971,707
    
    
    $
    36.81RSUs granted
    
    
    133,575
    
    
    
    39.01RSUs fully vested
    
    
    (156,119
    )
    
    
    (40.15
    )RSUs forfeited
    
    
    (33,731
    )
    
    
    (38.29
    )Outstanding RSUs at end of year
    
    
    915,432
    
    
    $
    36.51
    c) Long-Term Incentive Plan
  Year ended December 31, 2009WeightedAverage GrantDateLTIP
    
    
    Fair ValueOutstanding LTIP awards at beginning of year
    
    
    1,066,319
    
    
    $
    41.61LTIP awards granted
    
    
    278,759
    
    
    
    39.02Additional LTIP awards granted due to the achievement of 2006  2008 performance criteria
    
    
    98,338
    
    
    
    34.00LTIP awards vested
    
    
    (295,005
    )
    
    
    34.00Outstanding LTIP awards at end of year
    
    
    1,148,411
    
    
    $
    42.28
  F-36




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 12. EMPLOYEE BENEFIT PLANS  (continued)
 c) Long-Term Incentive Plan  (continued)
       d) Cash-equivalent stock awards
  F-37




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 12. EMPLOYEE BENEFIT PLANS  (continued)
 d) Cash-equivalent stock awards  (continued)
  For the years ended December 31,2009
    
    
    2008
    
    
    2007Stock Options
    
    $
    2,556
    
    
    $
    2,405
    
    
    $
    2,551RSUs
    
    
    9,003
    
    
    
    7,988
    
    
    
    7,418LTIP
    
    
    25,580
    
    
    
    17,820
    
    
    
    12,522Cash-equivalent stock awards
    
    
    3,260
    
    
    
    
    
    
    
    Total
    
    $
    40,399
    
    
    $
    28,213
    
    
    $
    22,491
 e) Pension Plans
  f) Employee Share Purchase Plan
  13. EARNINGS PER SHARE
  2009
    
    
    2008
    
    
    2007Basic earnings per shareNet income
    
    $
    606,887
    
    
    $
    183,635
    
    
    $
    469,182Weighted average common shares outstanding
    
    
    49,503,438
    
    
    
    48,936,912
    
    
    
    59,846,987Basic earnings per share
    
    $
    12.26
    
    
    $
    3.75
    
    
    $
    7.84
 2009
    
    
    2008
    
    
    2007Diluted earnings per shareNet income
    
    $
    606,887
    
    
    $
    183,635
    
    
    $
    469,182Weighted average common shares outstanding
    
    
    49,503,438
    
    
    
    48,936,912
    
    
    
    59,846,987Share equivalents: Options and warrants
    
    
    1,241,644
    
    
    
    1,046,185
    
    
    
    1,807,903Restricted stock units
    
    
    413,714
    
    
    
    419,936
    
    
    
    349,760LTIP awards
    
    
    833,878
    
    
    
    744,182
    
    
    
    326,515Weighted average common shares and common
share equivalents outstanding  diluted
    
    
    51,992,674
    
    
    
    51,147,215
    
    
    
    62,331,165Diluted earnings per share
    
    $
    11.67
    
    
    $
    3.59
    
    
    $
    7.53
  F-38




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 13. EARNINGS PER SHARE(continued)
  14. RELATED PARTY TRANSACTIONS
 a) American International Group, Inc.
  2007Gross premiums written
    
    $
    106,705Brokerage and commissions
    
    
    20,550Paid losses and loss expenses
    
    
    95,722
    b) The Chubb Corporation
   2009
    
    2008
    
    2007Gross premiums written
    
    $
    9,548
    
    
    $
    10,541
    
    
    $
    12,405Brokerage and commissions
    
    
    2,103
    
    
    
    2,585
    
    
    
    3,074Paid losses and loss expenses
    
    
    1,395
    
    
    
    6,808
    
    
    
    2,355
  F-39




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 15. COMMITMENTS AND CONTINGENCIES
 a) Concentrations of Credit Risk
     b) Operating Leases
  2010
    
    $
    13,3522011
    
    
    11,9592012
    
    
    10,7262013
    
    
    10,4262014
    
    
    9,6842015 through 2021
    
    
    46,949$
    103,096
  c) Producers
  d) Legal Proceedings
   F-40




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio
information)
 15. COMMITMENTS AND CONTINGENCIES  (continued)
 d)
Legal Proceedings  (continued)
  16. STATUTORY CAPITAL AND SURPLUS
    F-41




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 16.
STATUTORY CAPITAL AND SURPLUS  (continued)
      17. SEGMENT INFORMATION
   F-42




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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 17. SEGMENT INFORMATION(continued)
      International2009
    
    U.S. Insurance
    
    
    Insurance
    
    
    Reinsurance
    
    
    TotalGross premiums written
    
    $
    674,826
    
    
    $
    555,944
    
    
    $
    465,575
    
    
    $
    1,696,345Net premiums written
    
    
    493,067
    
    
    
    362,893
    
    
    
    465,165
    
    
    
    1,321,125Net premiums earned
    
    
    447,491
    
    
    
    413,170
    
    
    
    456,231
    
    
    
    1,316,892Other income
    
    
    1,506
    
    
    
    
    
    
    
    
    
    
    
    1,506Net losses and loss expenses
    
    
    (211,363
    )
    
    
    (158,062
    )
    
    
    (234,635
    )
    
    
    (604,060
    )Acquisition costs
    
    
    (58,114
    )
    
    
    (2,742
    )
    
    
    (87,991
    )
    
    
    (148,847
    )General and administrative expenses
    
    
    (115,797
    )
    
    
    (84,390
    )
    
    
    (48,405
    )
    
    
    (248,592
    )Underwriting income
    
    
    63,723
    
    
    
    167,976
    
    
    
    85,200
    
    
    
    316,899Net investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,675Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,352Net impairment charges recognized in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,577
    )Amortization and impairment of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,051
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,019
    )Foreign exchange loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (748
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    643,531Loss and loss expense ratio
    
    
    47.2
    %
    
    
    38.3
    %
    
    
    51.4
    %
    
    
    45.9
    %Acquisition cost ratio
    
    
    13.0
    %
    
    
    0.7
    %
    
    
    19.3
    %
    
    
    11.3
    %General and administrative expense ratio
    
    
    25.9
    %
    
    
    20.4
    %
    
    
    10.6
    %
    
    
    18.9
    %Combined ratio
    
    
    86.1
    %
    
    
    59.4
    %
    
    
    81.3
    %
    
    
    76.1
    %
 F-43




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 17. SEGMENT INFORMATION(continued)
 International2008
    
    U.S. Insurance
    
    
    Insurance
    
    
    Reinsurance
    
    
    TotalGross premiums written
    
    $
    319,985
    
    
    $
    695,459
    
    
    $
    430,140
    
    
    $
    1,445,584Net premiums written
    
    
    212,978
    
    
    
    465,869
    
    
    
    428,381
    
    
    
    1,107,228Net premiums earned
    
    
    179,818
    
    
    
    472,550
    
    
    
    464,537
    
    
    
    1,116,905Other income
    
    
    746
    
    
    
    
    
    
    
    
    
    
    
    746Net losses and loss expenses
    
    
    (103,363
    )
    
    
    (288,620
    )
    
    
    (249,139
    )
    
    
    (641,122
    )Acquisition costs
    
    
    (17,832
    )
    
    
    (3,774
    )
    
    
    (90,963
    )
    
    
    (112,569
    )General and administrative expenses
    
    
    (66,810
    )
    
    
    (75,490
    )
    
    
    (43,550
    )
    
    
    (185,850
    )Underwriting (loss) income
    
    
    (7,441
    )
    
    
    104,666
    
    
    
    80,885
    
    
    
    178,110Net investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308,775Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,954
    )Net impairment charges recognized in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (212,897
    )Amortization and impairment of intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (710
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,743
    )Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,421Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    176,002Loss and loss expense ratio
    
    
    57.5
    %
    
    
    61.1
    %
    
    
    53.6
    %
    
    
    57.4
    %Acquisition cost ratio
    
    
    9.9
    %
    
    
    0.8
    %
    
    
    19.6
    %
    
    
    10.1
    %General and administrative expense ratio
    
    
    37.1
    %
    
    
    16.0
    %
    
    
    9.4
    %
    
    
    16.6
    %Combined ratio
    
    
    104.5
    %
    
    
    77.9
    %
    
    
    82.6
    %
    
    
    84.1
    %
 International2007
    
    U.S. Insurance
    
    
    Insurance
    
    
    Reinsurance
    
    
    TotalGross premiums written
    
    $
    192,719
    
    
    $
    776,731
    
    
    $
    536,059
    
    
    $
    1,505,509Net premiums written
    
    
    123,234
    
    
    
    493,988
    
    
    
    535,888
    
    
    
    1,153,110Net premiums earned
    
    
    128,282
    
    
    
    527,699
    
    
    
    503,961
    
    
    
    1,159,942Net losses and loss expenses
    
    
    (53,076
    )
    
    
    (328,401
    )
    
    
    (300,863
    )
    
    
    (682,340
    )Acquisition costs
    
    
    (11,364
    )
    
    
    (5,791
    )
    
    
    (101,804
    )
    
    
    (118,959
    )General and administrative expenses
    
    
    (29,676
    )
    
    
    (72,842
    )
    
    
    (39,123
    )
    
    
    (141,641
    )Underwriting income
    
    
    34,166
    
    
    
    120,665
    
    
    
    62,171
    
    
    
    217,002Net investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    297,932Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,001Net impairment charges recognized in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,618
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,848
    )Foreign exchange gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    817Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    470,286Loss and loss expense ratio
    
    
    41.4
    %
    
    
    62.2
    %
    
    
    59.7
    %
    
    
    58.8
    %Acquisition cost ratio
    
    
    8.9
    %
    
    
    1.1
    %
    
    
    20.2
    %
    
    
    10.3
    %General and administrative expense ratio
    
    
    23.1
    %
    
    
    13.8
    %
    
    
    7.8
    %
    
    
    12.2
    %Combined ratio
    
    
    73.4
    %
    
    
    77.1
    %
    
    
    87.7
    %
    
    
    81.3
    %
  F-44




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 17. SEGMENT INFORMATION  (continued)
 2009
    
    
    2008
    
    
    2007United States
    
    $
    748,111
    
    
    $
    321,468
    
    
    $
    123,233Bermuda
    
    
    433,419
    
    
    
    636,662
    
    
    
    876,484Europe
    
    
    134,253
    
    
    
    149,098
    
    
    
    153,393Hong Kong
    
    
    5,342
    
    
    
    
    
    
    
    Total net premiums written
    
    $
    1,321,125
    
    
    $
    1,107,228
    
    
    $
    1,153,110
  18. SUBSEQUENT EVENT
   F-45




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 19. UNAUDITED QUARTERLY FINANCIAL DATA
  Quarter EndedDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2009
    
    
    2009
    
    
    2009
    
    
    2009REVENUES:Gross premiums written
    
    $
    322,129
    
    
    $
    401,837
    
    
    $
    492,782
    
    
    $
    479,597Premiums ceded
    
    
    (88,435
    )
    
    
    (80,881
    )
    
    
    (131,344
    )
    
    
    (74,559
    )Net premiums written
    
    
    233,694
    
    
    
    320,956
    
    
    
    361,438
    
    
    
    405,038Change in unearned premiums
    
    
    96,787
    
    
    
    7,815
    
    
    
    (27,770
    )
    
    
    (81,066
    )Net premiums earned
    
    
    330,481
    
    
    
    328,771
    
    
    
    333,668
    
    
    
    323,972Net investment income
    
    
    73,252
    
    
    
    73,032
    
    
    
    76,537
    
    
    
    77,854Net realized investment gains
    
    
    37,796
    
    
    
    46,861
    
    
    
    5,093
    
    
    
    36,602Net impairment charges recognized in earnings:Total other-than-temporary impairment charges
    
    
    (187
    )
    
    
    (9,861
    )
    
    
    (16,225
    )
    
    
    (41,963
    )Portion of loss recognized in other
comprehensive income, before taxes
    
    
    
    
    
    
    7,908
    
    
    
    10,751
    
    
    
    Net impairment charges recognized in earnings
    
    
    (187
    )
    
    
    (1,953
    )
    
    
    (5,474
    )
    
    
    (41,963
    )Other income
    
    
    373
    
    
    
    298
    
    
    
    369
    
    
    
    466441,715
    
    
    
    447,009
    
    
    
    410,193
    
    
    
    396,931EXPENSES:Net losses and loss expenses
    
    
    141,403
    
    
    
    136,441
    
    
    
    177,719
    
    
    
    148,497Acquisition costs
    
    
    38,126
    
    
    
    36,630
    
    
    
    36,963
    
    
    
    37,129General and administrative expenses
    
    
    72,212
    
    
    
    57,521
    
    
    
    61,495
    
    
    
    57,365Amortization and impairment of intangible assets
    
    
    7,856
    
    
    
    1,065
    
    
    
    1,065
    
    
    
    1,065Interest expense
    
    
    9,527
    
    
    
    9,523
    
    
    
    9,522
    
    
    
    10,447Foreign exchange loss (gain)
    
    
    1,408
    
    
    
    (273
    )
    
    
    (1,222
    )
    
    
    835270,532
    
    
    
    240,907
    
    
    
    285,542
    
    
    
    255,338Income before income taxes
    
    
    171,183
    
    
    
    206,102
    
    
    
    124,651
    
    
    
    141,593Income tax expense
    
    
    9,928
    
    
    
    5,548
    
    
    
    10,981
    
    
    
    10,185NET INCOME
    
    $
    161,255
    
    
    $
    200,554
    
    
    $
    113,670
    
    
    $
    131,408Basic earnings per share
    
    $
    3.25
    
    
    $
    4.05
    
    
    $
    2.30
    
    
    $
    2.67Diluted earnings per share
    
    $
    3.05
    
    
    $
    3.83
    
    
    $
    2.22
    
    
    $
    2.57Weighted average common shares outstanding
    
    
    49,662,575
    
    
    
    49,574,266
    
    
    
    49,523,459
    
    
    
    49,248,118Weighted average common shares and common share
equivalents outstanding
    
    
    52,880,733
    
    
    
    52,345,913
    
    
    
    51,257,887
    
    
    
    51,120,049
 F-46




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
 19. UNAUDITED QUARTERLY FINANCIAL DATA (continued)
 Quarter EndedDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2008
    
    
    2008
    
    
    2008
    
    
    2008REVENUES:Gross premiums written
    
    $
    310,945
    
    
    $
    290,981
    
    
    $
    446,784
    
    
    $
    396,874Premiums ceded
    
    
    (84,442
    )
    
    
    (57,078
    )
    
    
    (126,534
    )
    
    
    (70,302
    )Net premiums written
    
    
    226,503
    
    
    
    233,903
    
    
    
    320,250
    
    
    
    326,572Change in unearned premiums
    
    
    76,481
    
    
    
    38,070
    
    
    
    (51,374
    )
    
    
    (53,500
    )Net premiums earned
    
    
    302,984
    
    
    
    271,973
    
    
    
    268,876
    
    
    
    273,072Net investment income
    
    
    82,583
    
    
    
    76,916
    
    
    
    72,345
    
    
    
    76,931Net realized investment (losses) gains
    
    
    (19,454
    )
    
    
    (76,848
    )
    
    
    21,514
    
    
    
    14,835Net impairment charges recognized in earnings:Total other-than-temporary impairment charges
    
    
    (100,593
    )
    
    
    (75,028
    )
    
    
    (25,907
    )
    
    
    (11,370
    )Portion of loss recognized in other
comprehensive income (loss), before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net impairment charges recognized in earnings
    
    
    (100,593
    )
    
    
    (75,028
    )
    
    
    (25,907
    )
    
    
    (11,370
    )Other income
    
    
    746
    
    
    
    
    
    
    
    
    
    
    
    266,266
    
    
    
    197,013
    
    
    
    336,828
    
    
    
    353,468EXPENSES:Net losses and loss expenses
    
    
    143,531
    
    
    
    176,010
    
    
    
    178,084
    
    
    
    143,497Acquisition costs
    
    
    30,849
    
    
    
    28,615
    
    
    
    26,265
    
    
    
    26,840General and administrative expenses
    
    
    55,405
    
    
    
    40,794
    
    
    
    46,380
    
    
    
    43,271Amortization and impairment of intangible assets
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    10,205
    
    
    
    9,515
    
    
    
    9,513
    
    
    
    9,510Foreign exchange loss (gain)
    
    
    1,230
    
    
    
    (2,728
    )
    
    
    (399
    )
    
    
    476241,930
    
    
    
    252,206
    
    
    
    259,843
    
    
    
    223,594Income before income taxes
    
    
    24,336
    
    
    
    (55,193
    )
    
    
    76,985
    
    
    
    129,874Income tax
expense (benefit)
    
    
    4,484
    
    
    
    (8,826
    )
    
    
    (2,220
    )
    
    
    (1,071
    )NET INCOME (LOSS)
    
    $
    19,852
    
    
    $
    (46,367
    )
    
    $
    79,205
    
    
    $
    130,945Basic earnings (loss) per share
    
    $
    0.40
    
    
    $
    (0.95
    )
    
    $
    1.62
    
    
    $
    2.68Diluted earnings (loss) per share
    
    $
    0.39
    
    
    $
    (0.95
    )
    
    $
    1.56
    
    
    $
    2.55Weighted average common shares outstanding
    
    
    49,028,249
    
    
    
    49,007,389
    
    
    
    48,897,931
    
    
    
    48,811,932Weighted average common shares and common share
equivalents outstanding
    
    
    50,366,814
    
    
    
    49,007,389
    
    
    
    50,873,712
    
    
    
    51,380,423
 F-47




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##### Table of Contents



Schedule II
 ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 CONDENSED BALANCE SHEETS  PARENT COMPANY
as of December 31, 2009 and 2008
 2009
    
    
    2008ASSETS:Cash and cash equivalents
    
    $
    53,849
    
    
    $
    296,984Investments in subsidiaries
    
    
    3,680,882
    
    
    
    2,888,149Balances due from subsidiaries
    
    
    1,053
    
    
    
    3,851Other assets
    
    
    5,081
    
    
    
    5,323Total assets
    
    $
    3,740,865
    
    
    $
    3,194,307LIABILITIES:Accounts payable and accrued liabilities
    
    $
    284
    
    
    $
    118Interest payable
    
    
    15,625
    
    
    
    16,312Balances due to subsidiaries
    
    
    12,742
    
    
    
    18,469Syndicated loan
    
    
    
    
    
    
    243,750Senior notes
    
    
    498,919
    
    
    
    498,796Total liabilities
    
    $
    527,570
    
    
    $
    777,445SHAREHOLDERS EQUITY:Common shares, par value $0.03 per share,
issued and outstanding 2009: 49,734,487 shares
and 2008: 49,036,159 shares
    
    $
    1,492
    
    
    $
    1,471Additional paid-in capital
    
    
    1,359,934
    
    
    
    1,314,785Retained earnings
    
    
    1,702,020
    
    
    
    994,974Accumulated other comprehensive income
    
    
    149,849
    
    
    
    105,632Total shareholders equity
    
    $
    3,213,295
    
    
    $
    2,416,862Total liabilities and shareholders equity
    
    $
    3,740,865
    
    
    $
    3,194,307
  S-1




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME  PARENT COMPANY
 2009
    
    
    2008
    
    
    2007REVENUES:Net investment income
    
    $
    297
    
    
    $
    1,744
    
    
    $
    3,504297
    
    
    
    1,744
    
    
    
    3,504EXPENSES:General and administrative expenses
    
    
    6,477
    
    
    
    7,285
    
    
    
    7,594Interest expense
    
    
    39,019
    
    
    
    38,743
    
    
    
    37,84845,496
    
    
    
    46,028
    
    
    
    45,442Loss before equity in earnings of consolidated subsidiaries
    
    
    (45,199
    )
    
    
    (44,284
    )
    
    
    (41,938
    )Equity in earnings of consolidated subsidiaries
    
    
    652,086
    
    
    
    227,919
    
    
    
    511,120NET INCOME
    
    $
    606,887
    
    
    $
    183,635
    
    
    $
    469,182Other comprehensive income (loss)Unrealized gains (losses) on investments arising during
the year net of applicable deferred income tax (expense)
benefit
    
    
    243,188
    
    
    
    (198,405
    )
    
    
    122,133Portion of other-than-temporary impairment losses
recognized in other comprehensive income, net of deferred
income tax
    
    
    (18,659
    )
    
    
    
    
    
    
    Reclassification adjustment for net realized investment
(gains) losses included in net income, net of applicable
income tax
    
    
    (43,464
    )
    
    
    194,085
    
    
    
    7,617Other comprehensive income (loss)
    
    
    181,065
    
    
    
    (4,320
    )
    
    
    129,750COMPREHENSIVE INCOME
    
    $
    787,952
    
    
    $
    179,315
    
    
    $
    598,932
  S-2




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##### Table of Contents



ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 CONDENSED STATEMENTS OF CASH FLOWS  PARENT COMPANY
 2009
    
    
    2008
    
    
    2007CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income
    
    $
    606,887
    
    
    $
    183,635
    
    
    $
    469,182Adjustments to reconcile net income to cash provided by operating activities:Equity in earnings of consolidated subsidiaries
    
    
    (652,086
    )
    
    
    (227,919
    )
    
    
    (511,120
    )Dividends received from subsidiaries
    
    
    75,000
    
    
    
    160,000
    
    
    
    575,000Stock compensation expenses
    
    
    468
    
    
    
    543
    
    
    
    743Amortization of discount on senior notes
    
    
    495
    
    
    
    459
    
    
    
    427Balance due from subsidiaries
    
    
    2,798
    
    
    
    (1,699
    )
    
    
    (2,127
    )Other assets
    
    
    (129
    )
    
    
    219
    
    
    
    (598
    )Accounts payable and accrued liabilities
    
    
    166
    
    
    
    (112
    )
    
    
    34Interest payable
    
    
    (687
    )
    
    
    687
    
    
    
    (625
    )Balances due to affiliates
    
    
    
    
    
    
    Balances due to subsidiaries
    
    
    (5,727
    )
    
    
    1,227
    
    
    
    5,226Net cash provided by operating activities
    
    
    27,185
    
    
    
    117,040
    
    
    
    536,142CASH FLOWS USED IN INVESTING ACTIVITIES:Investment in subsidiaries
    
    
    
    
    
    
    (60,137
    )
    
    
    (11,200
    )Net cash used in investing activities
    
    
    
    
    
    
    (60,137
    )
    
    
    (11,200
    )CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:Dividends paid
    
    
    (36,689
    )
    
    
    (35,257
    )
    
    
    (38,052
    )Proceeds from (payment of) the exercise of stock options
    
    
    7,442
    
    
    
    4,046
    
    
    
    (168
    )Stock acquired
    
    
    
    
    
    
    
    
    
    
    (563,444
    )(Repayment of) proceeds from syndicated loan
    
    
    (243,750
    )
    
    
    243,750
    
    
    
    Stock compensation funding due from subsidiaries
    
    
    2,677
    
    
    
    2,451
    
    
    
    2,230Net cash (used in) provided by financing activities
    
    
    (270,320
    )
    
    
    214,990
    
    
    
    (599,434
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (243,135
    )
    
    
    271,893
    
    
    
    (74,492
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    296,984
    
    
    
    25,091
    
    
    
    99,583CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    53,849
    
    
    $
    296,984
    
    
    $
    25,091
  S-3




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##### Table of Contents



Schedule III
 ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 SUPPLEMENTARY INSURANCE INFORMATION
 Year Ended December 31, 2009
 Reserve for
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization ofNet Deferred
    
    
    Losses
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Losses and
    
    
    Deferred
    
    
    Other
    
    
    NetAcquisition
    
    
    and Loss
    
    
    Unearned
    
    
    Premiums
    
    
    Investment
    
    
    Loss
    
    
    Acquisition
    
    
    Operating
    
    
    PremiumsCosts
    
    
    Expenses
    
    
    Premiums
    
    
    Earned
    
    
    Income
    
    
    Expenses
    
    
    Costs
    
    
    Expenses
    
    
    WrittenU.S. insurance
    
    $
    28,417
    
    
    $
    1,253,711
    
    
    $
    356,437
    
    
    $
    447,491
    
    
    $
    
    
    
    $
    211,363
    
    
    $
    58,114
    
    
    $
    115,797
    
    
    $
    493,067International insurance
    
    
    2,974
    
    
    
    2,356,340
    
    
    
    302,773
    
    
    
    413,170
    
    
    
    
    
    
    
    158,062
    
    
    
    2,742
    
    
    
    84,390
    
    
    
    362,893Reinsurance
    
    
    56,430
    
    
    
    1,151,721
    
    
    
    269,409
    
    
    
    456,231
    
    
    
    
    
    
    
    234,635
    
    
    
    87,991
    
    
    
    48,405
    
    
    
    465,165Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    87,821
    
    
    $
    4,761,772
    
    
    $
    928,619
    
    
    $
    1,316,892
    
    
    $
    300,675
    
    
    $
    604,060
    
    
    $
    148,847
    
    
    $
    248,592
    
    
    $
    1,321,125
 Year Ended December 31, 2008
 Reserve for
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization ofNet Deferred
    
    
    Losses
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Losses and
    
    
    Deferred
    
    
    Other
    
    
    NetAcquisition
    
    
    and Loss
    
    
    Unearned
    
    
    Premiums
    
    
    Investment
    
    
    Loss
    
    
    Acquisition
    
    
    Operating
    
    
    PremiumsCosts
    
    
    Expenses
    
    
    Premiums
    
    
    Earned
    
    
    Income
    
    
    Expenses
    
    
    Costs
    
    
    Expenses
    
    
    WrittenU.S. insurance
    
    $
    22,914
    
    
    $
    1,128,522
    
    
    $
    309,459
    
    
    $
    179,818
    
    
    $
    
    
    
    $
    103,363
    
    
    $
    17,832
    
    
    $
    66,810
    
    
    $
    212,978International insurance
    
    
    5,232
    
    
    
    2,373,030
    
    
    
    359,808
    
    
    
    472,550
    
    
    
    
    
    
    
    288,620
    
    
    
    3,774
    
    
    
    75,490
    
    
    
    465,869Reinsurance
    
    
    58,035
    
    
    
    1,075,276
    
    
    
    261,091
    
    
    
    464,537
    
    
    
    
    
    
    
    249,139
    
    
    
    90,963
    
    
    
    43,550
    
    
    
    428,381Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308,775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    86,181
    
    
    $
    4,576,828
    
    
    $
    930,358
    
    
    $
    1,116,905
    
    
    $
    308,775
    
    
    $
    641,122
    
    
    $
    112,569
    
    
    $
    185,850
    
    
    $
    1,107,228
 Year Ended December 31, 2007
 Reserve for
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization ofDeferred
    
    
    Losses
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Losses and
    
    
    Deferred
    
    
    Other
    
    
    NetAcquisition
    
    
    and Loss
    
    
    Unearned
    
    
    Premiums
    
    
    Investment
    
    
    Loss
    
    
    Acquisition
    
    
    Operating
    
    
    PremiumsCosts
    
    
    Expenses
    
    
    Premiums
    
    
    Earned
    
    
    Income
    
    
    Expenses
    
    
    Costs
    
    
    Expenses
    
    
    WrittenU.S. insurance
    
    $
    11,106
    
    
    $
    523,529
    
    
    $
    119,705
    
    
    $
    128,282
    
    
    $
    
    
    
    $
    53,076
    
    
    $
    11,364
    
    
    $
    29,676
    
    
    $
    123,234International insurance
    
    
    29,702
    
    
    
    2,379,833
    
    
    
    391,305
    
    
    
    527,699
    
    
    
    
    
    
    
    328,401
    
    
    
    5,791
    
    
    
    72,842
    
    
    
    493,988Reinsurance
    
    
    67,487
    
    
    
    1,016,410
    
    
    
    300,073
    
    
    
    503,961
    
    
    
    
    
    
    
    300,863
    
    
    
    101,804
    
    
    
    39,123
    
    
    
    535,888Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    297,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    108,295
    
    
    $
    3,919,772
    
    
    $
    811,083
    
    
    $
    1,159,942
    
    
    $
    297,932
    
    
    $
    682,340
    
    
    $
    118,959
    
    
    $
    141,641
    
    
    $
    1,153,110
 S-4




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##### Table of Contents



Schedule IV
 ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
 SUPPLEMENTARY REINSURANCE INFORMATION
 (b)
    
    
    (c)
    
    
    (d)
    
    
    Percentage ofCeded to
    
    
    Assumed from
    
    
    Net
    
    
    Amount Assumed(a)
    
    
    Other
    
    
    Other
    
    
    Amount
    
    
    to NetGross
    
    
    Companies
    
    
    Companies
    
    
    (a) - (b) + (c)
    
    
    (c)/(d)Year ended December
31, 2009
    
    $
    1,230,770
    
    
    $
    375,220
    
    
    $
    465,575
    
    
    $
    1,321,125
    
    
    
    35
    %Year ended December 31,
2008
    
    $
    1,015,444
    
    
    $
    338,356
    
    
    $
    430,140
    
    
    $
    1,107,228
    
    
    
    39
    %Year ended December 31, 2007
    
    $
    969,450
    
    
    $
    352,399
    
    
    $
    536,059
    
    
    $
    1,153,110
    
    
    
    46
    %
 S-5