##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007ORo

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

98-0481737(State or Other Jurisdiction
    of

(I.R.S. EmployerIncorporation or
    Organization)

Identification
    No.)   27 Richmond Road, Pembroke HM 08, Bermuda
 (Address of Principal Executive
    Offices and Zip Code)
  (441) 278-5400
  (Registrants Telephone Number, Including Area Code)
  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
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated
    filer þ

Accelerated
    filer o

Non-accelerated
    filer o

Smaller reporting
    company o(Do not check if a smaller
    reporting company)   Rule 12b-2 o þ
      DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K.




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##### 





ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  TABLE OF
    CONTENTS
  
  PagePART IITEM 1.


Business


1ITEM 1A.


Risk Factors


27ITEM 1B.


Unresolved Staff Comments


44ITEM 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


49ITEM 7A.


Quantitative and Qualitative Disclosures about
    Market Risk


91ITEM 8.


Financial Statements and Supplementary Data


92ITEM 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


92ITEM 9A.


Controls and Procedures


92ITEM 9B.


Other Information


95PART IIIITEM 10.


Directors, Executive Officers and Corporate
    Governance


95ITEM 11.


Executive Compensation


95ITEM 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


95ITEM 13.


Certain Relationships and Related Transactions,
    and Director Independence


95ITEM 14.


Principal Accountant Fees and Services


95PART IVITEM 15.


Exhibits and Financial Statement Schedules


95SIGNATURES


96EXHIBITS


E-1CONSOLIDATED FINANCIAL STATEMENTS


F-1EX-10.24: AMENDED AND RESTATED LONG-TERM INCENTIVE PLANEX-21.1: SUBSIDIARIESEX-23.1: CONSENT OF DELOITTE & TOUCHEEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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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 in this
    Form 10-K
    to $ are to the lawful currency of the United States.
  Item 1.
    Business.  General
    Overview
        Our
    Operations
    U.S.-domiciled
     1




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##### Table of Contents



Total
    Gross Premiums Written by Geographic Location
    for the years ended December 31, 2007, 2006 and
    2005
  Year EndedDecember 31,2007


2006


2005($ in millions)Bermuda

$
1,065.9


$
1,208.1


$
1,159.2Europe


246.9



278.5



265.0United States


192.7



172.4



136.1$
1,505.5


$
1,659.0


$
1,560.3   Our
    Operating Segments
    Year Ended


Year Ended


Year EndedDecember 31, 2007


December 31, 2006


December 31, 2005Gross Premiums Written


Gross Premiums Written


Gross Premiums Written$ (in millions)


% of Total


$ (in millions)


% of Total


$ (in millions)


% of TotalOperating SegmentsProperty

$
391.0



26.0
%

$
463.9



28.0
%

$
412.9



26.5
%Casualty


578.4



38.4
%


622.4



37.5
%


633.0



40.6
%Reinsurance


536.1



35.6
%


572.7



34.5
%


514.4



32.9
%Total

$
1,505.5



100.0
%

$
1,659.0



100.0
%

$
1,560.3



100.0
%  2




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##### Table of Contents



Property
    Segment
  General
      Product
    Lines and Customer Base
  U.S.-domiciled
      Underwriting
    and Risk Management
  and/or
    
    Measurement.  We will generally only underwrite
    risks in which we can obtain an electronic statement of property
    values. This statement of values must be current and include
    proper addresses and a breakdown of values for each location to
    be insured. We require an electronic format because we need the
    ability to arrange the information in a manner acceptable to our
    third party modeling company. This also gives us the ability to
    collate the information in a way that assists our internal
    catastrophe team in measuring our total gross limits in critical
    catastrophe zones.
    Risk Exposure Modeling.  We model the locations
    covered in each policy, which enables us to obtain a more
    accurate assessment of our property catastrophe exposure. We
    have contracted with two industry-recognized modeling firms to
    analyze our property catastrophe exposure on a quarterly basis.
    This periodic measurement of our property business gives us an
    up-to-date
    estimate of our property catastrophe exposure. 3




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##### Table of Contents




    Gross Exposed Policy Limits.  Prior to
    Hurricane Katrina in 2005, a majority of the insurance industry
    and all of the insurance rating agencies relied heavily on the
    probable maximum losses produced by the various risk exposure
    modeling companies. Hurricane Katrina demonstrated that reliance
    solely on the results of the modeling companies was
    inappropriate given their apparent failure to accurately predict
    the ultimate losses sustained. When the limitations of the risk
    exposure models became evident, we instituted an additional
    approach to determine our probable maximum loss.    
    Ceded Reinsurance.  We purchase treaty and
    facultative reinsurance to reduce our exposure to significant
    losses from our general property and energy portfolios of
    business. We also purchase property catastrophe reinsurance to
    protect these lines of business from catastrophic loss.
    Probable Maximum Loss and Risk Appetite.  Our
    direct property and reinsurance senior managers work together to
    develop our probable maximum loss. For our direct property,
    workers compensation and accident and health catastrophe and
    property reinsurance business, we seek to manage our risk
    exposure so that our probable maximum losses for a single
    catastrophic event, after all applicable reinsurance, in any
    one-in-250-year event does not exceed approximately
    20% of our total capital.  Casualty
    Segment
  General
  and/or
  Product
    Lines and Customer Base
  U.S.-domiciled non-U.S. domiciled
 4




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U.S.-domiciled U.S.-based
      Underwriting
    and Risk Management
      Reinsurance
    Segment
  General
     5




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actuarially-established
  Product
    Lines and Customer Base
    excess-of-loss
  excess-of-loss
       6




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##### Table of Contents



Underwriting
    and Risk Management
        Security
    Arrangements
    Business
    Strategy
    
    Leverage Our Diversified Underwriting
    Franchises.  Our business is diversified by both
    product line and geography. We underwrite a broad array of
    property, casualty and reinsurance risks from our operations in
    Bermuda, Europe and the United States. Our underwriting skills
    across multiple lines and multiple geographies allow us to
    remain flexible and opportunistic in our business selection in
    the face of fluctuating market conditions. 7




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##### Table of Contents




    Expand Our Distribution and Our Access to Markets in the
    United States.We have made substantial investments to
    expand our U.S. business, which grew in 2007 and which we
    expect will continue to grow in size and importance in the
    coming years. We employ a regional distribution strategy in the
    United States predominantly focused on underwriting direct
    casualty and property insurance for middle-market and
    non-Fortune 1000 client accounts. Through our U.S. excess
    and surplus lines capability, we believe we have a strong
    presence in specialty casualty lines and maintain an attractive
    base of U.S. middle-market clients, especially in the
    professional liability market. We are also expanding our
    reinsurance presence into the United States in order to further
    diversify our reinsurance portfolios.
    Grow Our European Business.  We intend to grow
    our European business, with an emphasis on the United Kingdom
    and Western Europe, where we believe the insurance and
    reinsurance markets are developed and stable. Our European
    strategy is predominantly focused on property and casualty
    insurance for large European and international accounts. The
    European operations provide us with diversification and the
    ability to spread our underwriting risks. We have access to the
    London wholesale market through our reinsurance subsidiary in
    Ireland.
    Actively Monitor Our Property Catastrophe
    Exposure.  We have historically managed our
    property catastrophe exposure by closely monitoring our policy
    limits in addition to utilizing complex risk models. This
    discipline has substantially reduced our historical loss
    experience and our exposure. In addition to our continued focus
    on aggregate limits and modeled probable maximum loss, we have
    implemented a strategy based on gross exposed policy limits in
    critical earthquake and hurricane zones. Our gross exposed
    policy limits approach focuses on exposures in catastrophe-prone
    geographic zones and takes into consideration flood severity,
    demand surge and business interruption exposures for each
    critical area. During the third quarter of 2007, we redefined
    our risk tolerance relating to property catastrophe events. For
    our direct property, workers compensation and accident and
    health catastrophe and property reinsurance business, we seek to
    manage our risk exposure so that our probable maximum loss for a
    single catastrophic event, after all applicable reinsurance, in
    any one-in-250 year event does not exceed
    approximately 20% of our total capital.
    Opportunistically Underwrite Diversified Reinsurance
    Risks.As part of our reinsurance segment, we
    target certain niche reinsurance markets, including professional
    liability, specialty casualty, property for U.S. regional
    carriers, and accident and health because we believe we
    understand the risks and opportunities in these markets. We seek
    to selectively deploy our capital in reinsurance lines where we
    believe there are profitable opportunities. In order to
    diversify our portfolio and complement our direct insurance
    business, we target the overall contribution from reinsurance to
    be approximately 35% of our total annual gross premiums written.
    We strive to maintain a well managed reinsurance portfolio,
    balanced by line of business, ceding source, geography and
    contract configuration. Our primary customer focus is on
    highly-rated carriers with proven underwriting skills and
    dependable operating models.  Competition
      non-U.S. insurers
 8




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Our
    Financial Strength Ratings
    Distribution
    of Our Insurance Products
     9




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##### Table of Contents



Percentage of GrossPremiums Writtenfor the Year EndedDecember 31, 2007BrokerMarsh & McLennan Companies, Inc.


30
%Aon Corporation


24
%Willis Group Holdings Ltd.


10
%Jardine Lloyd Thompson Group plc


4
%All Others


32
%100
%   Claims
    Management
      Reserve
    for Losses and Loss Expenses
       10




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11




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##### Table of Contents



Development
    of Reserve for Losses and Loss Expenses
    Cumulative Deficiency (Redundancy)Gross Losses
  Year Ended December 31,2001


2002


2003


2004


2005


2006


2007As Originally Estimated:

$
213


$
310,508


$
1,058,653


$
2,037,124


$
3,405,407


$
3,636,997


$
3,919,772Liability Re-estimated as of:One Year Later


213



253,691



979,218



1,929,571



3,318,359



3,469,216Two Years Later


213



226,943



896,649



1,844,258



3,172,105Three Years Later


213



217,712



842,976



1,711,212Four Years Later


213



199,860



809,117Five Years Later


213



205,432Six Years Later


213Cumulative (Redundancy)






(105,076
)


(249,536
)


(325,912
)


(233,302
)


(167,781
)Cumulative Claims Paid as of:One Year Later






54,288



138,793



372,823



712,032



544,180Two Years Later






83,465



237,394



571,149



1,142,878Three Years Later






100,978



300,707



721,821Four Years Later


18



124,109



371,638Five Years Later


18



163,516Six Years Later


18   Development
    of Reserve for Losses and Loss Expenses
    Cumulative Deficiency (Redundancy)Gross Losses
  Year Ended December 31,2001


2002


2003


2004


2005


2006Liability Re-estimated as of:One Year Later


100
%


82
%


92
%


95
%


97
%


95
%Two Years Later


100
%


73
%


85
%


91
%


93
%Three Years Later


100
%


70
%


80
%


84
%Four Years Later


100
%


64
%


76
%Five Years Later


100
%


66
%Six Years Later


100
%Cumulative (Redundancy)






(34
)%


(24
)%


(16
)%


(7
)%


(5
)%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
%Two Years Later


0
%


27
%


22
%


28
%


34
%Three Years Later


0
%


33
%


28
%


35
%Four Years Later


8
%


40
%


35
%Five Years Later


8
%


53
%Six Years Later


8
%   12




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##### Table of Contents





Losses
    Net of Reinsurance
  Year Ended December 31,2001


2002


2003


2004


2005


2006


2007($ in thousands)As Originally Estimated:

$
213


$
299,946


$
964,810


$
1,777,953


$
2,688,526


$
2,947,892


$
3,237,007Liability Re-estimated as of:One Year Later


213



243,129



885,375



1,728,868



2,577,808



2,824,815Two Years Later


213



216,381



830,969



1,626,334



2,474,788Three Years Later


213



207,945



771,781



1,528,620Four Years Later


213



191,471



745,289Five Years Later


213



197,656Six Years Later


213Cumulative (Redundancy)






(102,290
)


(219,521
)


(249,333
)


(213,738
)


(123,077
)Cumulative Claims Paid as of:One Year Later






52,077



133,286



305,083



455,079



365,251Two Years Later






76,843



214,384



478,788



747,253Three Years Later






93,037



271,471



620,760Four Years Later


18



116,494



342,349Five Years Later


18



155,904Six Years Later


18   Losses
    Net of Reinsurance
  Year Ended December 31,2001


2002


2003


2004


2005


2006Liability Re-estimated as of:One Year Later


100
%


81
%


92
%


97
%


96
%


96
%Two Years Later


100
%


72
%


86
%


91
%


92
%Three Years Later


100
%


69
%


80
%


86
%Four Years Later


100
%


64
%


77
%Five Years Later


100
%


66
%Six Years Later


100
%Cumulative (Redundancy)






(34
)%


(23
)%


(14
)%


(8
)%


(4
)%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
%Two Years Later


0
%


26
%


22
%


27
%


28
%Three Years Later


0
%


31
%


28
%


35
%Four Years Later


8
%


39
%


35
%Five Years Later


8
%


52
%Six Years Later


8
%  13




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##### Table of Contents



Year Ended December 31,2007


2006


2005($ in thousands)Gross liability at beginning of year

$
3,636,997


$
3,405,353


$
2,037,124Reinsurance recoverable at beginning of year


(689,105
)


(716,333
)


(259,171
)Net liability at beginning of year


2,947,892



2,689,020



1,777,953Net losses incurred related to:Current year


805,417



849,850



1,393,685Prior years


(123,077
)


(110,717
)


(49,085
)Total incurred


682,340



739,133



1,344,600Net paid losses related to:Current year


32,599



27,748



125,018Prior years


365,251



455,079



305,082Total paid


397,850



482,827



430,100Foreign exchange revaluation


4,625



2,566



(3,433
)Net liability at end of year


3,237,007



2,947,892



2,689,020Reinsurance recoverable at end of year


682,765



689,105



716,333Gross liability at end of year

$
3,919,772


$
3,636,997


$
3,405,353   Investments
  Investment
    Strategy and Guidelines
  short-to-medium
     14




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##### Table of Contents



Investment
    Committee and Investment Manager
      Our
    Portfolio
  Composition
    as of December 31, 2007
  A-1/P-1.
    FairAmortized


Unrealized


Unrealized


MarketCost


Gains


Losses


Value($ in millions)Type of InvestmentU.S. government and agencies

$
1,987.6


$
65.7


$



$
2,053.3Non-U.S.
    government securities


100.4



18.7



(0.3
)


118.8Corporate securities


1,248.3



10.1



(5.8
)


1,252.6Mortgage-backed securities


2,095.6



22.8



(0.9
)


2,117.5Asset-backed securities


164.0



0.9







164.9Fixed income subtotal


5,595.9



118.2



(7.0
)


5,707.1Global high-yield bond fund


75.1



4.4







79.5Hedge funds


215.2



27.3



(1.0
)


241.5Other invested assets


1.2











1.2Total

$
5,887.4


$
149.9


$
(8.0
)

$
6,029.3   U.S.
    Government and Agencies
   15




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##### Table of Contents



Non-U.S.
    Government Securities
  Non-U.S. government non-U.S. governmental
  Corporate
    Securities
    Asset-Backed
    Securities
      Mortgage-Backed
    Securities
      Non-Fixed
    Income Investments
   16




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##### Table of Contents



Ratings
    as of December 31, 2007
    Percentageof TotalAmortized


Fair Market


Fair MarketCost


Value


Value($ in millions)RatingsU.S. government and government agencies

$
1,987.6


$
2,053.3



36.0
%AAA/Aaa


2,609.3



2,655.2



46.5
%AA/Aa


411.8



411.8



7.2
%A/A


519.6



519.3



9.1
%BBB/Baa


67.6



67.5



1.2
%Total

$
5,595.9


$
5,707.1



100.0
%     Maturity
    Distribution as of December 31, 2007
    Percentageof TotalAmortized


Fair Market


Fair MarketCost


Value


Value($ in millions)MaturityDue within one year

$
468.5


$
474.1



8.3
%Due after one year through five years


1,931.1



1,982.1



34.7
%Due after five years through ten years


840.7



869.0



15.2
%Due after ten years


96.0



99.5



1.8
%Mortgage-backed securities


2,095.6



2,117.5



37.1
%Asset-backed securities


164.0



164.9



2.9
%Total

$
5,595.9


$
5,707.1



100.0
%   Investment
    Returns for the Year Ended December 31, 2007
    Net investment income

$
297.9Net realized loss on sales of investments

$
(7.6
)Net change in unrealized gains and losses

$
129.8Total net investment return

$
420.1Total
    return(1)


7.0
%Effective annualized
    yield(2)


4.9
%     (1)
    
    Total return for our investment portfolio is calculated using
    beginning and ending market values adjusted for external cash
    flows and includes unrealized gains and losses. 17




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##### Table of Contents



(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
          Our
    Employees
    Regulatory
    Matters
  General
     18




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Bermuda
  General
    day-to-day
  Classification
    of Insurers
    Cancellation
    of Insurers Registration
    Principal
    Representative
   19




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##### Table of Contents



Independent
    Approved Auditor
    Loss
    Reserve Specialist
    Statutory
    Financial Statements
    Annual
    Statutory Financial Return
    Minimum
    Solvency Margin and Restrictions on Dividends and
    Distributions
      
    is required, with respect to its general business, to maintain a
    minimum solvency margin equal to the greatest of
    (1) $100,000,000, (2) 50% of net premiums written
    (being gross premiums written less any premiums ceded, but the
    company may not deduct more than 25% of gross premiums written
    when computing net premiums written) and (3) 15% of net
    losses and loss expense reserves;
    is prohibited from declaring or paying any dividends during any
    financial year if it is in breach of its minimum solvency margin
    or minimum liquidity ratio or if the declaration or payment of
    those dividends would cause it to fail to meet that margin or
    ratio (and if it has failed to meet its minimum solvency margin
    or minimum liquidity 20




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##### Table of Contents



ratio on the last day of any financial year, Allied World
    Assurance Company, Ltd would be prohibited, without the approval
    of the BMA, from declaring or paying any dividends during the
    next financial year);  
    is prohibited from declaring or paying in any financial year
    dividends of more than 25% of its total statutory capital and
    surplus (as shown on its previous financial years
    statutory balance sheet) unless it files with the BMA (at least
    seven days before payment of those dividends) an affidavit
    stating that it will continue to meet the required margins;
    is prohibited, without the approval of the BMA, from reducing by
    15% or more its total statutory capital as set out in its
    previous years financial statements, and any application
    for an approval of that type must include an affidavit stating
    that it will continue to meet the required margins; and
    is required, at any time it fails to meet its solvency margin,
    within 30 days (45 days where total statutory capital
    and surplus falls to $75 million or less) after becoming
    aware of that failure or having reason to believe that a failure
    has occurred, to file with the BMA a written report containing
    specified information.    Minimum
    Liquidity Ratio
    Supervision,
    Investigation and Intervention
    and/or
 21




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Disclosure
    of Information
    Shareholder
    Controllers
      Selected
    Other Bermuda Law Considerations
     22




---



##### Table of Contents



Ireland
      United
    States
  Our
    U.S. Subsidiaries
   23




---



##### Table of Contents



Holding Company Regulation. 12-month
      Guaranty Fund Assessments.
  Involuntary Pools.
 24




---



##### Table of Contents



Risk-Based Capital.
  NAIC Ratios.
  Surplus Lines Regulation. hard-to-place
  Federal Initiatives.
 25




---



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Available
    Information
  Form 10-K.
  Form 10-K, Form 10-Q Form 8-K
 26




---



##### Table of Contents



1-800-SEC-0330.
  Item 1A.
    Risk
    Factors.  Form 10-K
  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.
        Actual
    claims may exceed our reserves for losses and loss
    expenses.
     27




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##### Table of Contents



A
    complaint filed against our Bermuda insurance subsidiary could,
    if adversely determined or resolved, subject us to a material
    loss.
      Government
    authorities are continuing to investigate the insurance
    industry, which may adversely affect our business.
    When
    we act as a property insurer and as a property, workers
    compensation and personal accident reinsurer, we are
    particularly vulnerable to losses from
    catastrophes.
   28




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We
    could face losses from terrorism, political unrest and pandemic
    diseases.
    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.
    We may
    be impacted by claims relating to the recent credit market
    downturn and subprime insurance exposures.
   29




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##### Table of Contents



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.
  U.S.-domiciled
    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.
   30




---



##### Table of Contents



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.
      Any
    increase in interest rates could result in significant losses in
    the fair value of our investment portfolio.
     31




---



##### Table of Contents



We may
    be adversely affected by fluctuations in currency exchange
    rates.
  non-U.S. currencies non-U.S. currency, non-U.S. currency
    We may
    require additional capital in the future that may not be
    available to us on commercially favorable terms.
    Conflicts
    of interests may arise because affiliates of some of our
    principal shareholders have continuing agreements and business
    relationships with us, and also may compete with us in several
    of our business lines.
     32




---



##### Table of Contents



Our
    business could be adversely affected if we lose any member of
    our management team or are unable to attract and retain our
    personnel.
    Our
    participation in a securities lending program subjects us to
    risk of default by the borrowers.
    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.
  non-U.S. insurers
 33




---



##### Table of Contents



The
    effects of emerging claims and coverage issues on our business
    are uncertain.
    
    larger 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.  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 34




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##### Table of Contents




    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.      1909-2000;
    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.
   35




---



##### Table of Contents



30-day
      Our
    business could be adversely affected by Bermuda employment
    restrictions.
  six-to-nine-year
 36




---



##### Table of Contents



Risks
    Related to Ownership of Our Common Shares
  Future
    sales of our common shares may adversely affect the market
    price.
  Form S-8 Form S-8
  Our
    Bye-laws contain restrictions on ownership, voting and transfers
    of our common shares.
     37




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##### Table of Contents



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 your 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,
    no shareholder may transfer 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 percentage of our
    common shares owned immediately after our initial public
    offering of common shares in July 2006 (IPO)),
    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.  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.
     38




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##### Table of Contents



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.
  non-U.S. companies, non-U.S. companies), non-U.S. company non-U.S. company non-U.S. companies
   39




---



##### Table of Contents



Ireland-United non-U.S. company
  non-U.S. company non-U.S. company non-U.S. companies non-U.S. company
  non-U.S. companies
  Our
    U.S. subsidiaries may be subject to additional U.S. taxes in
    connection with our interaffiliate arrangements.
    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.
  non-U.S. companies
 40




---



##### Table of Contents



non-U.S. entities non-U.S. corporation. non-U.S. entities, non-U.S. company non-U.S. companies non-U.S. entities, non-U.S. entities non-U.S. entities non-U.S. entities non-U.S. subsidiaries non-U.S. subsidiary 5-year non-U.S. entities
  You
    may be subject to U.S. income taxation under the related person
    insurance income (RPII) rules.
  non-U.S. insurance non-U.S. companies non-U.S. entities non-U.S. insurance non-U.S. insurance non-U.S. insurance non-U.S. entities,
 41




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##### Table of Contents



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.
  2005-40
  Future
    U.S. legislative action or other changes in U.S. tax law might
    adversely affect us.
  non-U.S. insurance non-U.S. companies
  We may
    be subject to U.K. tax, which may have a material adverse effect
    on our results of operations.
   42




---



##### Table of Contents



non-U.K. resident
            We may
    be subject to Irish tax, which may have a material adverse
    effect on our results of operations.
   43




---



##### Table of Contents



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.   44




---



##### Table of Contents



Item 2.
    Properties.    Item 3.
    Legal
    Proceedings.        Item 4.
    Submission
    of Matters to a Vote of Security Holders.   45




---



##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.    High


Low2007:First quarter

$
46.50


$
40.87Second quarter

$
52.00


$
42.10Third quarter

$
52.37


$
42.75Fourth quarter

$
53.48


$
43.442006:Third quarter (commencing July 12, 2006)

$
41.00


$
34.10Fourth quarter

$
44.28


$
39.20           Issuer
    Purchases of Equity Securities
  MaximumTotal Number of


Number of SharesShares Purchased


that May Yet beas Part of Publicly


Purchased UnderTotal Number of


Average Price


Announced Plans


the Plan orPeriod

Shares Purchased


Paid per Share


or Programs


Programs10/1/2007- 10/31/2007














11/1/2007- 11/30/2007














12/1/2007- 12/31/2007


11,693,333
(1)

$
48.19







Total


11,693,333


$
48.19







     (1)
    
    In December 2007, our company entered into a stock purchase
    agreement with AIG, one of our companys founding
    shareholders, pursuant to which our company purchased an AIG
    subsidiary holding 11,693,333 of our common shares. The
    acquisition of these common shares was a privately negotiated
    transaction and was not part of any publicly announced
    repurchase plan or program. The purchase price per share was
    based on and reflects a 0.5% discount from the volume-weighted
    average trading price of our companys common shares during
    the ten 46




---



##### Table of Contents



consecutive trading-day period leading up to December 14,
    2007. The stock purchase agreement we entered with AIG to
    acquire these shares and the transactions contemplated thereby
    were approved by our companys board of directors and the
    purchase price was funded using existing capital.  Performance
    Graph
      TOTAL
    RETURN TO SHAREHOLDERS
    (INCLUDES REINVESTMENT OF DIVIDENDS)
  COMPARISON OF CUMULATIVE TOTAL RETURN
  
  Item 6.
    Selected
    Financial Data.  Form 10-K. Form 10-K,
 47




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##### Table of Contents



Year Ended December 31,2007


2006


2005


2004


2003($ in millions, except per share amounts and ratios)Summary Statement of Operations Data:Gross premiums written

$
1,505.5


$
1,659.0


$
1,560.3


$
1,708.0


$
1,573.7Net premiums written

$
1,153.1


$
1,306.6


$
1,222.0


$
1,372.7


$
1,346.5Net premiums earned

$
1,159.9


$
1,252.0


$
1,271.5


$
1,325.5


$
1,167.2Net investment income


297.9



244.4



178.6



129.0



101.0Net realized investment (losses) gains


(7.6
)


(28.7
)


(10.2
)


10.8



13.4Net losses and loss expenses


682.3



739.1



1,344.6



1,013.4



762.1Acquisition costs


119.0



141.5



143.4



170.9



162.6General and administrative expenses


141.6



106.1



94.3



86.3



66.5Interest expense


37.8



32.6



15.6







Foreign exchange (gain) loss


(0.8
)


0.6



2.2



(0.3
)


(4.9
)Income tax expense (recovery)


1.1



5.0



(0.4
)


(2.2
)


6.9Net income (loss)

$
469.2


$
442.8


$
(159.8
)

$
197.2


$
288.4Per Share Data:Earnings (loss) per share(1):Basic

$
7.84


$
8.09


$
(3.19
)

$
3.93


$
5.75Diluted


7.53



7.75



(3.19
)


3.83



5.66Weighted average number of common shares outstanding:Basic


59,846,987



54,746,613



50,162,842



50,162,842



50,162,842Diluted


62,331,165



57,115,172



50,162,842



51,425,389



50,969,715Dividends paid per share

$
0.63


$
0.15


$
9.93







   Year Ended December 31,2007


2006


2005


2004


2003Selected Ratios:Loss and loss expense ratio(2)


58.8
%


59.0
%


105.7
%


76.5
%


65.3
%Acquisition cost ratio(3)


10.3



11.3



11.3



12.9



13.9General and administrative expense ratio(4)


12.2



8.5



7.4



6.5



5.7Expense ratio(5)


22.5



19.8



18.7



19.4



19.6Combined ratio(6)


81.3



78.8



124.4



95.9



84.9   48




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##### Table of Contents



As of December 31,2007


2006


2005


2004


2003($ in millions, except per share amounts)Summary Balance Sheet Data:Cash and cash equivalents

$
202.6


$
366.8


$
172.4


$
190.7


$
66.1Investments at fair market value


6,029.3



5,440.3



4,687.4



4,087.9



3,184.9Reinsurance recoverable


682.8



689.1



716.3



259.2



93.8Total assets


7,899.1



7,620.6



6,610.5



5,072.2



3,849.0Reserve for losses and loss expenses


3,919.8



3,637.0



3,405.4



2,037.1



1,058.7Unearned premiums


811.1



813.8



740.1



795.3



725.5Total debt


498.7



498.6



500.0







Total shareholders equity


2,239.8



2,220.1



1,420.3



2,138.5



1,979.1Book value per share(7):Basic

$
45.95


$
36.82


$
28.31


$
42.63


$
39.45Diluted


42.53



35.26



28.20



41.58



38.83     (1)
    
    Please refer to Note 10 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.(7)
    
    Basic book value per share is defined as total
    shareholders equity available to common shareholders
    divided by the number of common shares outstanding as at the end
    of the period, giving no effect to dilutive securities. Diluted
    book value per share is a non-GAAP financial measure and is
    defined as total shareholders equity available to common
    shareholders divided by the number of common shares and common
    share equivalents outstanding at the end of the period,
    calculated using the treasury stock method for all potentially
    dilutive securities. When the effect of dilutive securities
    would be anti-dilutive, these securities are excluded from the
    calculation of diluted book value per share. Certain warrants
    that were anti-dilutive were excluded from the calculation of
    the diluted book value per share as of December 31, 2005.
    The number of warrants that were anti-dilutive were 5,873,500 as
    of December 31, 2005.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Form 10-K Form 10-K Form 10-K.
 49




---



##### Table of Contents



Overview
  Our
    Business
      Recent
    Developments
      Relevant
    Factors
  Revenues
    Expenses
    
    losses paid, which are actual cash payments to insureds, 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 50




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##### Table of Contents




    IBNR, which are reserves established by us for claims that are
    not yet reported but can reasonably be expected to have occurred
    based on industry information, managements experience and
    actuarial evaluation. The portion recoverable from reinsurers is
    deducted from the gross estimated loss.      Ratios
    Critical
    Accounting Policies
    Reserve
    for Losses and Loss Expenses
       51




---



##### Table of Contents



As of December 31,2007


2006


2005($ in millions)Case reserves

$
963.4


$
935.2


$
921.2IBNR


2,956.4



2,701.8



2,484.2Reserve for losses and loss expenses


3,919.8



3,637.0



3,405.4Reinsurance recoverables


(682.8
)


(689.1
)


(716.3
)Net reserve for losses and loss expenses

$
3,237.0


$
2,947.9


$
2,689.1                52




---



##### Table of Contents



Paid Loss Development Method.
  Reported Loss Development Method.
  Expected Loss Ratio Method.
  Bornhuetter-Ferguson Paid Loss Method.
 53




---



##### Table of Contents



Bornhuetter-Ferguson Reported Loss Method.
             54




---



##### Table of Contents



Reinsurance
    Recoverable
      Premiums
   55




---



##### Table of Contents



Other-than-Temporary
    Impairment of Investments
    other-than-temporarily
  Results
    of Operations
    Year Ended December 31,2007


2006


2005($ in millions)Gross premiums written

$
1,505.5


$
1,659.0


$
1,560.3Net premiums written

$
1,153.1


$
1,306.6


$
1,222.0Net premiums earned

$
1,159.9


$
1,252.0


$
1,271.5Net investment income


297.9



244.4



178.6Net realized investment losses


(7.6
)


(28.7
)


(10.2
)$
1,450.2


$
1,467.7


$
1,439.9Net losses and loss expenses

$
682.3


$
739.1


$
1,344.6Acquisition costs


119.0



141.5



143.4General and administrative expenses


141.6



106.1



94.3Interest expense


37.8



32.6



15.6Foreign exchange (gain) loss


(0.8
)


0.6



2.2$
979.9


$
1,019.9


$
1,600.1Income (loss) before income taxes

$
470.3


$
447.8


$
(160.2
)Income tax expense (recovery)


1.1



5.0



(0.4
)Net income (loss)

$
469.2


$
442.8


$
(159.8
) 56




---



##### Table of Contents



Year Ended December 31,2007


2006


2005($ in millions)RatiosLoss and loss expense ratio


58.8
%


59.0
%


105.7
%Acquisition cost ratio


10.3



11.3



11.3General and administrative expense ratio


12.2



8.5



7.4Expense ratio


22.5



19.8



18.7Combined ratio


81.3



78.8



124.4   Comparison
    of Years Ended December 31, 2007 and 2006
  Premiums
    
    The non-renewal of business that did not meet our underwriting
    requirements (which included pricing
    and/or
    policy terms and conditions), increased competition and
    decreasing rates for new and renewal business in each of our
    operating segments.
    A reduction in the amount of upward adjustments on estimated
    reinsurance premiums. Net upward adjustments on estimated
    reinsurance premiums were lower by approximately
    $69.0 million during the year ended December 31, 2007
    compared to the year ended December 31, 2006. Net upward
    adjustments on estimated reinsurance premiums were
    $14.2 million for the year ended December 31, 2007
    compared to $83.2 million for the year ended
    December 31, 2006. As our historical experience develops,
    we may have fewer or smaller adjustments to our estimated
    premiums.
    We reduced the amount of gross premiums written in our energy
    line of business by $44.7 million, or 31.7%, in response to
    deteriorating market conditions.    Year EndedDecember,


Dollar


Percentage2007


2006


Change


Change($ in millions)Bermuda

$
1,065.9


$
1,208.1


$
(142.2
)


(11.8
)%Europe


246.9



278.5



(31.6
)


(11.3
)United States


192.7



172.4



20.3



11.8$
1,505.5


$
1,659.0


$
(153.5
)


(9.3
)%   and/or
   57




---



##### Table of Contents




    In our casualty segment, we increased the percentage of ceded
    premiums on our general casualty business and began to cede a
    portion of our healthcare business and professional liability
    business. We have increased the amount we ceded as we have been
    able to obtain adequate protection at cost-effective levels and
    in order to reduce the overall volatility of our insurance
    operations.
    Partially offsetting the increased cessions in our casualty
    segment was lower cessions in our property segment. In our
    property segment, we renewed our property catastrophe
    reinsurance treaty effective May 1, 2007 for a lower
    premium rate than the previous treaty, and did not renew our
    energy treaty, which expired June 1, 2007. Partially
    offsetting these reductions in the property segment was an
    increase in the percentage of ceded premiums on our general
    property treaty and the purchase of property catastrophe
    reinsurance protection on our international general property
    business. We also amended the general property treaty to include
    certain energy classes during 2007.      Gross


NetPremiums Written


Premiums EarnedYear Ended December 31,2007


2006


2007


2006Property


26.0
%


28.0
%


15.6
%


15.2
%Casualty


38.4



37.5



41.0



42.7Reinsurance


35.6



34.5



43.4



42.1     Net
    Investment Income and Realized Gains/Losses
     58




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##### Table of Contents




    A write-down of $23.9 million related to our investment in
    the Goldman Sachs Global Alpha Hedge 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
    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 Global Alpha Fund, we could not reasonably
    estimate when recovery would occur, and as such recorded an
    other-than-temporary
    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 have
    submitted a redemption notice to sell our shares in this fund
    and as a result have recognized an
    other-than-temporary
    impairment charge at December 31, 2007. We expect the sale
    of shares to occur on February 29, 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
    charge should be recognized.
    The remaining write-downs of $15.0 million were solely due
    to changes in interest rates.      Year Ended December 31,2007


2006($ in millions)Net loss on investments

$
(7.6
)

$
(29.1
)Net gain on interest rate swaps






0.4Net realized investment losses

$
(7.6
)

$
(28.7
)   Net
    Losses and Loss Expenses
      
    Net favorable reserve development of $70.6 million for our
    casualty segment, which consisted of $153.7 million of
    favorable reserve development primarily related to low loss
    emergence in our professional liability line of business for the
    2003 through 2006 loss years, low loss emergence in our
    healthcare line of business for the 2002 through 2006 loss years
    and low loss emergence in our general casualty business for the
    2004 loss year. These favorable 59




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##### Table of Contents



reserve developments were partially offset by $83.1 million
    of unfavorable reserve development due to higher than
    anticipated loss emergence in our general casualty line of
    business for the 2003 and 2005 loss years and our professional
    liability line of business for the 2002 loss year.  
    We recognized net favorable reserve development of
    $35.1 million related to the 2005 windstorms and net
    favorable reserve development of $4.0 million related to
    the 2004 windstorms. We recognized the net favorable reserve
    development for the 2004 and 2005 windstorms due to less than
    anticipated reported loss activity over the past 12 months.
    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.
    Net favorable reserve development of $10.1 million,
    excluding the 2004 and 2005 windstorms, for our property segment
    which consisted of $28.3 million in favorable reserve
    development that was primarily the result of general property
    business actual loss emergence being lower than the initial
    expected loss emergence for the 2003 and 2006 loss years,
    partially offset by unfavorable reserve development of
    $18.2 million that was primarily the result of increased
    loss activity for our general property business for the 2004 and
    2005 loss years and our energy business for the 2006 loss year.
    Net favorable reserve development of $3.3 million,
    excluding the 2004 and 2005 windstorms, 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 loss years.    
    Net favorable reserve development of $63.4 million was
    recognized due to continued low loss emergence on 2002 through
    2004 loss year business in our casualty segment.
    Net favorable reserve development of $31.0 million was
    recognized in our property segment primarily due to favorable
    loss emergence on 2004 loss year general property and energy
    business, as well as 2005 loss year general property business.
    Net favorable reserve development of $16.3 million was
    recognized in our reinsurance segment, relating to business
    written on our behalf by IPCRe Underwriting Services Limited
    (IPCUSL) as well as certain workers compensation
    business.      Year EndedDecember 31,


Dollar2007


2006


Change($ in millions)Net losses paid

$
397.9


$
482.7


$
(84.8
)Net change in reported case reserves


38.0



(35.6
)


73.6Net change in IBNR


246.4



292.0



(45.6
)Net losses and loss expenses

$
682.3


$
739.1


$
(56.8
)    60




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##### Table of Contents



Year EndedDecember 31,2007


2006($ in millions)Net reserves for losses and loss expenses, January 1

$
2,947.9


$
2,689.1Incurred related to:Current period non-catastrophe


805.4



849.8Current period property catastrophe






Prior period non-catastrophe


(84.0
)


(106.1
)Prior period property catastrophe


(39.1
)


(4.6
)Total incurred

$
682.3


$
739.1Paid related to:Current period non-catastrophe


32.6



27.7Current period property catastrophe






Prior period non-catastrophe


266.8



237.2Prior period property catastrophe


98.5



217.8Total paid

$
397.9


$
482.7Foreign exchange revaluation


4.7



2.4Net reserve for losses and loss expenses, December 31


3,237.0



2,947.9Losses and loss expenses recoverable


682.8



689.1Reserve for losses and loss expenses, December 31

$
3,919.8


$
3,637.0   Acquisition
    Costs
    General
    and Administrative Expenses
    
    Salary and employee welfare costs increased approximately
    $23.3 million. This included an increase in stock-based
    compensation costs of $11.7 million for the year ended
    December 31, 2007 compared to the year ended
    December 31, 2006. The stock-based compensation costs for
    the year ended December 31, 2006 included a one-time
    expense of $2.8 million related to our IPO, of which
    $2.6 million related to our stock options and
    $0.2 million 61




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##### Table of Contents



related to our RSUs. See Note 9 of the consolidated
    financial statements included elsewhere in this
    Form 10-K.
    We also increased our average staff count by approximately 11.6%.  
    Rent and amortization of leaseholds and furniture and fixtures
    increased by approximately $5.0 million due to our new
    offices in Bermuda and Boston, additional office space in New
    York and the rental of the Lloyds of London box.
    Information technology costs increased by approximately
    $5.0 million due to the amortization of hardware and
    software, as well as consulting costs required as part of the
    development of our technological infrastructure.
    Expenses of $1.5 million incurred in relation to the
    evaluation of potential business opportunities.
    There was also a $2.0 million reduction in the estimated
    early termination fee associated with the termination of an
    administrative service agreement with a subsidiary of AIG during
    the year ended December 31, 2006. The final termination fee
    of $3.0 million, which was less than the $5.0 million
    accrued and expensed during the year ended December 31,
    2005, was agreed to and paid on April 25, 2006 and thereby
    reduced our general and administrative expenses for the year
    ended December 31, 2006.      Interest
    Expense
      Net
    Income
    Comparison
    of Years Ended December 31, 2006 and 2005
  Premiums
   62




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##### Table of Contents



Year EndedDecember 31,


Dollar


Percentage2006


2005


Change


Change($ in millions)Bermuda

$
1,208.1


$
1,159.2


$
48.9



4.2
%Europe


278.5



265.0



13.5



5.1United States


172.4



136.1



36.3



26.7$
1,659.0


$
1,560.3


$
98.7



6.3
%      63




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##### Table of Contents



Gross


NetPremiums


PremiumsWritten


EarnedYear Ended December 31,2006


2005


2006


2005Property


28.0
%


26.5
%


15.2
%


17.8
%Casualty


37.5



40.6



42.7



45.7Reinsurance


34.5



32.9



42.1



36.5     Net
    Investment Income and Realized Gains/Losses
  dividends-in-kind
       64




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##### Table of Contents



Year Ended December 31,2006


2005($ in millions)Net loss on fixed income investments

$
(29.1
)

$
(15.0
)Net gain on interest rate swaps


0.4



4.8Net realized investment losses

$
(28.7
)

$
(10.2
)       Net
    Losses and Loss Expenses
    
    Approximately $456.0 million in property losses accrued in
    relation to Hurricanes Katrina, Rita and Wilma, which occurred
    in August, September and October 2005, respectively, as well as
    a general liability loss of $25.0 million that related to
    Hurricane Katrina;
    Loss and loss expenses of approximately $13.4 million
    related to Windstorm Erwin, which occurred in the first quarter
    of 2005;
    Net adverse development of approximately $62.5 million
    related to the windstorms of 2004; and
    Net favorable development related to prior years of
    approximately $111.5 million, excluding development related
    to the 2004 windstorms. This net favorable development was
    primarily due to actual loss emergence in the non-casualty lines
    and the casualty claims-made lines being lower than the initial
    expected loss emergence.     65




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##### Table of Contents




    Higher loss and loss expense ratios for our property lines in
    2005 in comparison to 2006, which reflected the impact of rate
    decreases and increases in reported loss activity; and
    Costs incurred in relation to our property catastrophe
    reinsurance protection were approximately $9.7 million
    greater in the year ended December 31, 2005 than for 2006,
    primarily due to charges incurred to reinstate our coverage
    after Hurricanes Katrina and Rita. The higher charge in 2005
    resulted in lower net premiums earned and, thus, increased the
    loss and loss expense ratio.    Year EndedDecember 31,


Dollar2006


2005


Change($ in millions)Net losses paid

$
482.7


$
430.1


$
52.6Net change in reported case reserves


(35.6
)


410.1



(445.7
)Net change in IBNR


292.0



504.4



(212.4
)Net losses and loss expenses

$
739.1


$
1,344.6


$
(605.5
)        66




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##### Table of Contents



Year EndedDecember 31,2006


2005($ in millions)Net reserves for losses and loss expenses, January 1

$
2,689.1


$
1,777.9Incurred related to:Current period non-catastrophe


849.8



924.2Current period property catastrophe






469.4Prior period non-catastrophe


(106.1
)


(111.5
)Prior period property catastrophe


(4.6
)


62.5Total incurred

$
739.1


$
1,344.6Paid related to:Current period non-catastrophe


27.7



40.8Current period property catastrophe






84.2Prior period non-catastrophe


237.2



194.7Prior period property catastrophe


217.8



110.4Total paid

$
482.7


$
430.1Foreign exchange revaluation


2.4



(3.3
)Net reserve for losses and loss expenses, December 31


2,947.9



2,689.1Losses and loss expenses recoverable


689.1



716.3Reserve for losses and loss expenses, December 31

$
3,637.0


$
3,405.4   Acquisition
    Costs
      General
    and Administrative Expenses
   67




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##### Table of Contents



Interest
    Expense
    Net
    Income
    Underwriting
    Results by Operating Segments
    Property Segment.
  Casualty Segment. and/or
  Reinsurance Segment.
 68




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##### Table of Contents



Property
    Segment
    Year Ended December 31,2007


2006


2005($ in millions)RevenuesGross premiums written

$
391.0


$
463.9


$
412.9Net premiums written


176.4



193.7



170.8Net premiums earned


180.5



190.8



226.8ExpensesNet losses and loss expenses

$
105.7


$
115.0


$
410.3Acquisition costs


(0.1
)


(2.2
)


5.7General and administrative expenses


34.2



26.3



20.2Underwriting income (loss)


40.7



51.7



(209.4
)RatiosLoss and loss expense ratio


58.6
%


60.3
%


180.9
%Acquisition cost ratio


(0.1
)


(1.2
)


2.5General and administrative expense ratio


18.9



13.8



8.9Expense ratio


18.8



12.6



11.4Combined ratio


77.4



72.9



192.3   Comparison
    of Years Ended December 31, 2007 and 2006
  Premiums. and/or
    Year EndedDecember 31,


Dollar


Percentage2007


2006


Change


Change($ in millions)General property

$
293.5


$
321.6


$
(28.1
)


(8.7
)%Energy


96.1



140.8



(44.7
)


(31.7
)Other


1.4



1.5



(0.1
)


(6.7
)$
391.0


$
463.9


$
(72.9
)


(15.7
)%    69




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##### Table of Contents



Net losses and loss expenses.
    
    Net favorable reserve development of $30.4 million was
    recognized related to the 2005 windstorms and net favorable
    reserve development of $4.9 million was recognized related
    to the 2004 windstorms. We recognized the net favorable reserve
    development for the 2004 and 2005 windstorms due to less than
    anticipated reported loss activity over the past 12 months.
    Net favorable reserve development of $10.1 million,
    excluding the 2004 and 2005 windstorms, consisted of
    $28.3 million in favorable reserve development that was
    primarily the result of general property business actual loss
    emergence being lower than the initial expected loss emergence
    for the 2003 and 2006 loss years, partially offset by
    unfavorable reserve development of $18.2 million that was
    primarily the result of increased loss activity for our general
    property business for the 2004 and 2005 loss years and our
    energy business for the 2006 loss year.    
    Favorable loss emergence on 2004 loss year general property and
    energy business;
    Excluding the losses related to the 2005 windstorms, lighter
    than expected loss emergence on 2005 loss year general property
    business, offset partially by unfavorable reserve development on
    our energy business for that loss year;
    Anticipated recoveries of approximately $3.4 million
    recognized under our property catastrophe reinsurance protection
    related to Hurricane Frances; and
    Unfavorable loss reserve development of approximately
    $2.7 million relating to the 2005 windstorms due to updated
    claims information that increased our reserves for this segment.     70




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##### Table of Contents



Year EndedDecember 31,2007


2006($ in millions)Net reserves for losses and loss expenses, January 1

$
423.9


$
543.7Incurred related to:Current period non-catastrophe


151.1



146.0Current period property catastrophe






Prior period non-catastrophe


(10.1
)


(30.3
)Prior period property catastrophe


(35.3
)


(0.7
)Total incurred

$
105.7


$
115.0Paid related to:Current period non-catastrophe


20.6



12.9Current period property catastrophe






Prior period non-catastrophe


84.6



121.5Prior period property catastrophe


68.5



102.8Total paid

$
173.7


$
237.2Foreign exchange revaluation


4.7



2.4Net reserve for losses and loss expenses, December 31


360.6



423.9Losses and loss expenses recoverable


400.1



468.4Reserve for losses and loss expenses, December 31

$
760.7


$
892.3   Acquisition costs.
  General and administrative expenses.
  Comparison
    of Years Ended December 31, 2006 and 2005
  Premiums.
 71




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##### Table of Contents




    Premiums ceded in relation to our property catastrophe
    reinsurance protection for the property segment were
    $42.3 million for the year ended December 31, 2006,
    which was a $14.7 million increase over the prior year. The
    increase in cost was due to market rate increases resulting from
    the 2004 and 2005 windstorms and changes in the level of
    coverage obtained, as well as internal changes in the structure
    of the program. These increases were partially offset by
    additional premiums ceded in 2005 to reinstate our coverage
    following losses incurred from Hurricanes Katrina and Rita; no
    such reinstatement premiums were incurred in 2006.
    We now cede a portion of the gross premiums written in our
    U.S. offices on a quota share basis under our property
    treaties.    Net losses and loss expenses.
  
    Loss and loss expenses of approximately $237.8 million
    accrued in relation to Hurricanes Katrina, Rita, and Wilma which
    occurred in August, September and October 2005, respectively;
    Net unfavorable reserve development of approximately
    $49.0 million related to the windstorms of 2004; and
    Net favorable reserve development related to prior years of
    approximately $71.8 million. This net favorable reserve
    development was primarily due to low loss emergence on our 2003
    and 2004 loss year general property and energy business,
    exclusive of the 2004 windstorms.    
    Favorable loss emergence on 2004 loss year general property and
    energy business;
    Excluding the losses related to the 2005 windstorms, lighter
    than expected loss emergence on 2005 loss year general property
    business, offset partially by unfavorable reserve development on
    our energy business for that loss year;
    Anticipated recoveries of approximately $3.4 million
    recognized under our property catastrophe reinsurance protection
    related to Hurricane Frances; and
    Unfavorable reserve development of approximately
    $2.7 million relating to the 2005 windstorms due to updated
    claims information that increased our reserves for this segment.   72




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##### Table of Contents



Year EndedDecember 31,2006


2005($ in millions)Net reserves for losses and loss expenses, January 1

$
543.7


$
404.2Incurred related to:Current period non-catastrophe


146.0



195.3Current period property catastrophe






237.8Prior period non-catastrophe


(30.3
)


(71.8
)Prior period property catastrophe


(0.7
)


49.0Total incurred

$
115.0


$
410.3Paid related to:Current period non-catastrophe


12.9



38.6Current period property catastrophe






36.6Prior period non-catastrophe


121.5



123.0Prior period property catastrophe


102.8



69.3Total paid

$
237.2


$
267.5Foreign exchange revaluation


2.4



(3.3
)Net reserve for losses and loss expenses, December 31


423.9



543.7Losses and loss expenses recoverable


468.4



515.1Reserve for losses and loss expenses, December 31

$
892.3


$
1,058.8   Acquisition costs.
   73




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##### Table of Contents



General and administrative expenses. start-up
  Casualty
    Segment
    Year Ended December 31,2007


2006


2005($ in millions)RevenuesGross premiums written

$
578.4


$
622.4


$
633.0Net premiums written


440.8



541.0



557.6Net premiums earned


475.5



534.3



581.3ExpensesNet losses and loss expenses

$
275.8


$
331.8


$
431.0Acquisition cost


17.3



30.4



33.5General and administrative expenses


68.3



52.8



44.3Underwriting income


114.1



119.3



72.5RatiosLoss and loss expense ratio


58.0
%


62.1
%


74.1
%Acquisition cost ratio


3.6



5.7



5.8General and administrative expense ratio


14.4



9.9



7.6Expense ratio


18.0



15.6



13.4Combined ratio


76.0



77.7



87.5   Comparison
    of Years Ended December 31, 2007 and 2006
  Premiums. and/or
 74




---



##### Table of Contents



Year EndedDecember 31,


Dollar


Percentage2007


2006


Change


Change($ in millions)Professional liability

$
269.3


$
280.6


$
(11.3
)


(4.0
)%General casualty


240.5



275.4



(34.9
)


(12.7
)Healthcare


52.8



62.1



(9.3
)


(15.0
)Other


15.8



4.3



11.5



267.4$
578.4


$
622.4


$
(44.0
)


(7.1
)%     Net losses and loss expenses.
    
    Favorable reserve development of $153.7 million related to
    low loss emergence primarily in our professional liability and
    healthcare lines of business for the 2003, 2004 and 2006 loss
    years and general casualty line of business for the 2004 loss
    year.
    Unfavorable reserve development of $83.1 million 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.       75




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##### Table of Contents



Year EndedDecember 31,2007


2006($ in millions)Net reserves for losses and loss expenses, January 1

$
1,691.2


$
1,419.1Incurred related to:Current period non-catastrophe


346.4



395.2Current period property catastrophe






Prior period non-catastrophe


(70.6
)


(63.4
)Prior period property catastrophe






Total incurred

$
275.8


$
331.8Paid related to:Current period non-catastrophe


0.1



Current period property catastrophe






Prior period non-catastrophe


88.7



34.7Prior period property catastrophe






25.0Total paid

$
88.8


$
59.7Foreign exchange revaluation






Net reserve for losses and loss expenses, December 31


1,878.2



1,691.2Losses and loss expenses recoverable


264.5



182.6Reserve for losses and loss expenses, December 31

$
2,142.7


$
1,873.8   Acquisition costs.
  General and administrative expenses.
  Comparison
    of Years Ended December 31, 2006 and 2005
  Premiums.
 76




---



##### Table of Contents



Net losses and loss expenses.
    Years EndedDecember 31,2006


2005($ in millions)Net reserves for losses and loss expenses, January 1

$
1,419.1


$
1,019.6Incurred related to:Current period non-catastrophe


395.2



428.7Current period catastrophe






25.0Prior period non-catastrophe


(63.4
)


(22.7
)Prior period catastrophe






Total incurred

$
331.8


$
431.0Paid related to:Current period non-catastrophe






Current period catastrophe






Prior period non-catastrophe


34.7



31.5Prior period catastrophe


25.0



Total paid

$
59.7


$
31.5Foreign exchange revaluation






Net reserve for losses and loss expenses, December 31


1,691.2



1,419.1Losses and loss expenses recoverable


182.6



128.6Reserve for losses and loss expenses, December 31

$
1,873.8


$
1,547.7   Acquisition costs.
 77




---



##### Table of Contents



General and administrative expenses. start-up
  Reinsurance
    Segment
    Year Ended December 31,2007


2006


2005($ in millions)RevenuesGross premiums written

$
536.1


$
572.7


$
514.4Net premiums written


535.9



572.0



493.5Net premiums earned


504.0



526.9



463.4ExpensesNet losses and loss expenses

$
300.9


$
292.4


$
503.3Acquisition costs


101.8



113.3



104.2General and administrative expenses


39.1



27.0



29.8Underwriting income (loss)


62.2



94.2



(173.9
)RatiosLoss and loss expense ratio


59.7
%


55.5
%


108.6
%Acquisition cost ratio


20.2



21.5



22.5General and administrative expense ratio


7.8



5.1



6.4Expense ratio


28.0



26.6



28.9Combined ratio


87.7



82.1



137.5   Comparison
    of Years Ended December 31, 2007 and 2006
  Premiums.
  
    A reduction in the amount of upward adjustments on estimated
    reinsurance premiums. Net upward adjustments on estimated
    reinsurance premiums were lower by approximately
    $69.0 million during the year ended December 31, 2007
    compared to the year ended December 31, 2006. Net upward
    adjustments on estimated reinsurance premiums were
    $14.2 million for the year ended December 31, 2007
    compared to $83.2 million for the year ended
    December 31, 2006. As our historical experience develops,
    we may have fewer or smaller adjustments to our estimated
    premiums.
    Non-renewal of business that did not meet our underwriting
    requirements (which included pricing
    and/or
    contract terms and conditions) and rate decreases from increased
    competition for new and renewal business.
    Offsetting these reductions was new business written and an
    increase in our participation on other treaties where the
    pricing and contract terms and conditions remained attractive. 78




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##### Table of Contents



Year EndedDecember 31,


Dollar


Percentage2007


2006


Change


Change($ in millions)Professional liability reinsurance

$
210.9


$
202.5


$
8.4



4.1
%General casualty reinsurance


126.5



136.4



(9.9
)


(7.3
)Property reinsurance


83.7



119.2



(35.5
)


(29.8
)International reinsurance


73.9



79.2



(5.3
)


(6.7
)Facultative reinsurance


33.0



30.6



2.4



7.8Other


8.1



4.8



3.3



68.8$
536.1


$
572.7


$
(36.6
)


(6.4
)%     Net losses and loss expenses.
    
    Net favorable reserve development of $3.8 million related
    to the 2004 and 2005 windstorms. We recognized favorable reserve
    development of $4.7 million related to the 2005 windstorms
    and unfavorable reserve development of $0.9 million related
    to the 2004 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.    
    Recognition of approximately $12.4 million of favorable
    reserve development. The majority of this development related to
    the 2003 and 2005 loss year business written on our behalf by
    IPCUSL, as well as certain workers compensation catastrophe
    business written during the period from 2002 to 2005.
    Net favorable reserve development related to the 2005 windstorms
    totaled approximately $2.8 million due to updated claims
    information that reduced our reserves for this segment.
    Anticipated recoveries of approximately $1.1 million on our
    property catastrophe reinsurance protection related to Hurricane
    Frances. 79




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##### Table of Contents



Year EndedDecember 31,2007


2006($ in millions)Net reserves for losses and loss expenses, January 1

$
832.8


$
726.3Incurred related to:Current period non-catastrophe


308.0



308.7Current period property catastrophe






Prior period non-catastrophe


(3.3
)


(12.4
)Prior period property catastrophe


(3.8
)


(3.9
)Total incurred

$
300.9


$
292.4Paid related to:Current period non-catastrophe


11.9



14.9Current period property catastrophe






Prior period non-catastrophe


93.5



56.0Prior period property catastrophe


30.1



115.0Total paid

$
135.5


$
185.9Foreign exchange revaluation






Net reserve for losses and loss expenses, December 31


998.2



832.8Losses and loss expenses recoverable


18.2



38.1Reserve for losses and loss expenses, December 31

$
1,016.4


$
870.9   Acquisition costs. excess-of-loss excess-of-loss
  General and administrative expenses.
 80




---



##### Table of Contents



Comparison
    of Years Ended December 31, 2006 and 2005
  Premiums.
      
    Increased net premiums written over the past two years. Premiums
    related to our reinsurance business earn slower than those
    related to our direct insurance business. Direct insurance
    premiums typically earn ratably over the term of a policy.
    Reinsurance premiums are often earned over the same period as
    the underlying policies, or risks, covered by the contract. As a
    result, the earning pattern may extend up to 24 months,
    reflecting the inception dates of the underlying policies.
    Net upward revisions to premium estimates on business written in
    prior years were significantly higher in 2006 in comparison with
    2005. As the adjustments relate to prior periods, the associated
    premiums make a proportionately larger contribution to net
    premiums earned.
    Premiums ceded in relation to the property catastrophe
    reinsurance protection were significantly lower in 2006. Net
    premiums earned during the year ended December 31, 2006
    were approximately $11.5 million higher as a result.   81




---



##### Table of Contents



Net losses and loss expenses.
  
    Losses and loss expenses of approximately $13.4 million as
    a result of Windstorm Erwin, which occurred in the first quarter
    of 2005;
    Losses and loss expenses of approximately $218.2 million
    accrued in relation to Hurricanes Katrina, Rita and Wilma, which
    occurred in August, September and October 2005, respectively;
    Net unfavorable reserve development of approximately
    $13.5 million related to the windstorms of 2004; and
    Net favorable reserve development related to prior years of
    approximately $17.0 million, which was primarily due to low
    loss emergence on our 2003 and 2004 property reinsurance
    business, exclusive of the 2004 windstorms.    
    Recognition of approximately $12.4 million of favorable
    reserve development. The majority of this development related to
    2003 and 2005 loss year business written on our behalf by
    IPCUSL, as well as certain workers compensation catastrophe
    business written during the period from 2002 to 2005.
    Net favorable reserve development related to the 2005 windstorms
    totaled approximately $2.8 million due to updated claims
    information that reduced our reserves for this segment; and
    Anticipated recoveries of approximately $1.1 million on our
    property catastrophe reinsurance protection related to Hurricane
    Frances.     82




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##### Table of Contents



Year EndedDecember 31,2006


2005($ in millions)Net reserves for losses and loss expenses, January 1

$
726.3


$
354.1Incurred related to:Current period non-catastrophe


308.7



275.2Current period property catastrophe






231.6Prior period non-catastrophe


(12.4
)


(17.0
)Prior period property catastrophe


(3.9
)


13.5Total incurred

$
292.4


$
503.3Paid related to:Current period non-catastrophe


14.9



2.1Current period property catastrophe






47.6Prior period non-catastrophe


56.0



40.3Prior period property catastrophe


115.0



41.1Total paid

$
185.9


$
131.1Foreign exchange revaluation






Net reserve for losses and loss expenses, December 31


832.8



726.3Losses and loss expenses recoverable


38.1



72.6Reserve for losses and loss expenses, December 31

$
870.9


$
798.9   Acquisition costs.
  General and administrative expenses.
   83




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##### Table of Contents



Reserves
    for Losses and Loss Expenses
    Property


Casualty


Reinsurance


TotalDecember 31,


December 31,


December 31,


December 31,2007


2006


2005


2007


2006


2005


2007


2006


2005


2007


2006


2005($ in millions)Case reserves

$
480.0


$
562.2


$
602.8


$
270.7


$
175.0


$
77.6


$
212.7


$
198.0


$
240.8


$
963.4


$
935.2


$
921.2IBNR


280.7



330.1



456.0



1,872.0



1,698.8



1,470.1



803.7



672.9



558.1



2,956.4



2,701.8



2,484.2Reserve for losses and loss expenses


760.7



892.3



1,058.8



2,142.7



1,873.8



1,547.7



1,016.4



870.9



798.9



3,919.8



3,637.0



3,405.4Reinsurance recoverables


(400.1
)


(468.4
)


(515.1
)


(264.5
)


(182.6
)


(128.6
)


(18.2
)


(38.1
)


(72.6
)


(682.8
)


(689.1
)


(716.3
)Net reserve for losses and loss expenses

$
360.6


$
423.9


$
543.7


$
1,878.2


$
1,691.2


$
1,419.1


$
998.2


$
832.8


$
726.3


$
3,237.0


$
2,947.9


$
2,689.1       Reserve for Losses and Loss ExpensesGross of Reinsurance Recoverable(1)Carried


Low


HighReserves


Estimate


Estimate($ in millions)Property

$
760.7


$
602.2


$
863.5Casualty


2,142.7



1,581.3



2,524.5Reinsurance


1,016.4



715.5



1,186.7   Reserve for Losses and Loss ExpensesNet of Reinsurance Recoverable(1)Carried


Low


HighReserves


Estimate


Estimate($ in millions)Property

$
360.6


$
282.6


$
425.2Casualty


1,878.2



1,383.5



2,218.8Reinsurance


998.2



714.3



1,184.1     (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.     84




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##### Table of Contents



Form 10-K.
  Ceded
    Reinsurance
    Gross Premiums Written andPremiums CededYear Ended December 31,2007


2006


2005($ in millions)Gross

$
1,505.5


$
1,659.0


$
1,560.3Ceded


(352.4
)


(352.4
)


(338.3
)Net

$
1,153.1


$
1,306.6


$
1,222.0Ceded as percentage of gross


23.4
%


21.2
%


21.7
%     Year Ended December 31,2007


2006


2005($ in millions)Premiums written ceded


352.4



352.4



338.3Premiums earned ceded


348.3



332.4



344.2Losses and loss expenses ceded


189.8



244.8



602.1Acquisition costs ceded


66.4



61.6



66.9      85




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##### Table of Contents




    Our property segment has purchased quota share reinsurance
    almost from inception. We have ceded from 35% to 55% (during
    2007 we ceded 55%) of up to $10 million of each applicable
    general property policy limit, and we have ceded from 58.5% to
    66% of up to $20 million of each applicable energy policy
    limit. During 2007, we did not renew our energy treaty, but
    amended our general property treaty to cede a portion of certain
    energy classes. We also purchase reinsurance to provide
    protection for specified catastrophes insured by our property
    segment. The limits for catastrophe protection have decreased
    from 2003 to 2007 as a result of the strengthening of our
    capital base and with the increased reinsurance cessions on our
    general property reinsurance treaty. We also purchased property
    catastrophe reinsurance protection on our international general
    property business effective September 1, 2007, which covers
    all territories except the U.S. and Canada. We have also
    purchased a limited amount of facultative reinsurance for
    general property and energy policies.
    Our casualty segment has purchased variable quota share
    reinsurance for general casualty business since December 2002.
    Typically we ceded about 10% to 12% of policies with limits less
    than or equal to $25 million (or its currency equivalent).
    During 2007, we increased the cession of policies with limits
    less than or equal to $25 million (or its currency
    equivalent) to 25% for policies written by our Bermuda and
    European offices, and to 28% for policies written by our
    U.S. offices. For policies with limits greater than
    $25 million (or its currency equivalent), 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 2007, the
    cession percentage was 100%. Historically, we have purchased a
    limited amount of facultative reinsurance to lessen volatility
    in our professional liability book of business, but during 2007
    we also purchased quota share reinsurance protection for
    policies written by our Bermuda and U.S. offices. We cede
    10% of policies written by the Bermuda office and 40% of
    policies written by our U.S. offices with limits of
    $25 million. We also purchased variable quota share
    reinsurance protection for our healthcare line of business
    written by our Bermuda and U.S. offices. In 2007, we ceded
    30% of policies with limits greater than $10 million up to
    $25 million written by our Bermuda office and 30% of
    policies with limits of $15 million by our
    U.S. offices.
    We have purchased a limited amount of retrocession coverage for
    our reinsurance segment.    Reinsurance RecoverableAs of December 31,2007


2006($ in millions)Ceded case reserves

$
289.2


$
303.9Ceded IBNR reserves


393.6



385.2Reinsurance recoverable

$
682.8


$
689.1     Liquidity
    and Capital Resources
  General
   86




---



##### Table of Contents



Restrictions
    and Specific Requirements
           87




---



##### Table of Contents



Form S-3 (No. 333-148409)
        Sources
    and Uses of Funds
     88




---



##### Table of Contents



other-than-temporary
  December 31,


December 31,2007


2006($ in millions)Due in one year or less

$
474.1


$
146.6Due after one year through five years


1,982.1



2,461.6Due after five years through ten years


869.0



335.3Due after ten years


99.5



172.0Mortgage-backed


2,117.5



1,823.9Asset-backed


164.9



238.4Total

$
5,707.1


$
5,177.8      89




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##### Table of Contents



Financial
    Strength Ratings
  and/or
    A.M. Best

A/stableMoodys

A2/stable*Standard & Poors

A-/stable     *
    
    Moodys financial strength ratings are for the
    companys Bermuda and U.S. insurance subsidiaries.    A.M. Best

bbb/stableMoodys

Baa1/stableStandard & Poors

BBB/stable   Long-Term
    Debt
      
    limitations on liens on stock of designated subsidiaries;
    limitations as to the disposition of stock of designated
    subsidiaries; and
    limitations on mergers, amalgamations, consolidations or sale of
    assets.   90




---



##### Table of Contents



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)

$
837.5


$
37.5


$
75.0


$
75.0


$
650.0Operating lease obligations


114.5



9.6



20.3



18.8



65.8Investment commitments outstanding


7.5







7.5







Gross reserve for losses and loss expenses


3,919.8



1,044.8



1,175.0



461.2



1,238.8Total

$
4,879.3


$
1,091.9


$
1,277.8


$
555.0


$
1,954.6     Off-Balance
    Sheet Arrangements
    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

$
6,403.9


$
6,221.2


$
6,130.4


$
6,029.3


$
5,949.9


$
5,860.3


$
5,680.6Market value change from base


374.6



191.9



101.1



0



(79.4
)


(169.0
)


(348.7
)Change in unrealized appreciation/(depreciation)


6.2
%


3.2
%


1.7
%


0.0
%


(1.3
)%


(2.8
)%


(5.8
)%    91




---



##### Table of Contents



non-U.S. currencies non-U.S. currency, non-U.S. currency
      Year Ended December 31,2007


2006


2005($ in millions)Realized exchange gains (losses)

$
1.6


$
1.4


$
(0.2
)Unrealized exchange losses


(0.8
)


(2.0
)


(2.0
)Foreign exchange gains (losses)

$
0.8


$
(0.6
)

$
(2.2
)   Item 8.
    Financial
    Statements and Supplementary Data.  S-1 S-5
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  Disclosure
    Controls and Procedures
  Rule 13a-15(e)
 92




---



##### Table of Contents



Managements
    Annual Report on Internal Control Over Financial
    Reporting
  Rule 13a-15(f).
      Changes
    in Internal Control Over Financial Reporting
  Rule 13a-15(f),
 93




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 
  
 94




---



##### Table of Contents



Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance.    Form 8-K.
  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.  page F-1 Form 10-K,
  page E-1 Form 10-K.
 95




---



##### Table of Contents



SIGNATURES    ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
  By:
    /s/  SCOTT
    A. CARMILANI   Title:
    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)

February 29, 2008/s/  JOAN
    H. DILLARDJoan H.
    Dillard

Senior Vice President and
    Chief Financial Officer (Principal Financial and Accounting Officer)

February 29, 2008/s/  BART
    FRIEDMANBart
    Friedman

Deputy Chairman of the Board

February 29, 2008/s/  JAMES F.
    DUFFYJames
    F. Duffy

Director

February 29, 2008/s/  SCOTT
    HUNTERScott
    Hunter

Director

February 29, 2008/s/  MICHAEL
    I.D. MORRISONMichael
    I.D. Morrison

Director

February 29, 2008/s/  MARK
    R. PATTERSONMark R.
    Patterson

Director

February 29, 2008/s/  SAMUEL
    J. WEINHOFFSamuel J.
    Weinhoff

Director

February 29, 2008  96




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##### Table of Contents



EXHIBIT INDEX  ExhibitNumber

Description3
.1(1)

Memorandum of Association3
.2(1)

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)

Shareholders Agreement, dated as of November 21, 200110
.2(1)

Amendment No. 1 to Shareholders Agreement, dated as of
    February 20, 200210
.3(1)

Amendment No. 2 to Shareholders Agreement, dated as of
    January 31, 200510
.4(1)

Amendment No. 3 to Shareholders Agreement, dated as of
    June 20, 200510
.5(1)

Form of Termination Consent among Allied World Assurance Company
    Holdings, Ltd and the shareholders named therein10
.6(1)

Registration Rights Agreement by and among Allied World
    Assurance Company Holdings, Ltd and the shareholders named
    therein10
.7(1)

Amended and Restated Administrative Services Agreement, dated as
    of January 1, 2006, among Allied World National Assurance
    Company (formerly Newmarket Underwriters Insurance Company),
    Allied World Assurance Company (U.S.) Inc. and Lexington
    Insurance Company10
.8(1)

Schedule of Discretionary Investment Management Agreements
    between Allied World Assurance Company Holdings, Ltd entities
    and Goldman Sachs entities10
.9(1)

Placement Agency Agreement, dated October 25, 2001, among
    Allied World Assurance Company Holdings, Ltd, American
    International Group, Inc., The Chubb Corporation, GS Capital
    Partners 2000, L.P. and Goldman, Sachs & Co.10
.10(1)

Underwriting Agency Agreement, dated December 1, 2001,
    between Allied World Assurance Company, Ltd and IPCRe
    Underwriting Services Limited10
.11(1)

Amended and Restated Amendment No. 1 to Underwriting Agency
    Agreement, dated as of April 19, 200410
.12(1)

Amendment No. 2 to Underwriting Agency Agreement, as
    amended, dated as of March 28, 200310
.13(1)

Amendment No. 3 to Underwriting Agency Agreement, as
    amended, dated as of October 31, 200310
.14(1)

Amendment No. 4 to Underwriting Agency Agreement, as
    amended, dated as of October 26, 200510
.15(4)

Amendment No. 5 to Underwriting Agency Agreement, as
    amended, dated as of December 1, 200610
.16(1)

Guarantee, dated May 22, 2006, of Allied World Assurance
    Company, Ltd in favor of American International Group, Inc.10
.17(9)

Amended and Restated Software License Agreement, effective as of
    November 17, 2006, by and between Transatlantic Holdings,
    Inc. and Allied World Assurance Company, Ltd E-1




---



##### Table of Contents



ExhibitNumber

Description10
.18(1)

Surplus Lines Program Administrator Agreement, effective
    June 11, 2002, between Allied World Assurance Company
    (U.S.) Inc. and Chubb Custom Market, Inc.10
.19(1)

Surplus Lines Program Administrator Agreement, effective
    June 11, 2002, between Allied World National Assurance
    Company (formerly Newmarket Underwriters Insurance Company) and
    Chubb Custom Market, Inc.10
.20(1)

Allied World Assurance Company Holdings, Ltd Amended and
    Restated 2004 Stock Incentive Plan10
.21(1)

Form of RSU Award Agreement under the Allied World Assurance
    Company Holdings, Ltd Amended and Restated 2004 Stock Incentive
    Plan10
.22(1)

Allied World Assurance Company Holdings, Ltd Amended and
    Restated 2001 Employee Stock Option Plan10
.23(1)

Form of Option Grant Notice and Option Agreement under the
    Allied World Assurance Company Holdings, Ltd Amended and
    Restated 2001 Employee Stock Option Plan10
.24

Allied World Assurance Company Holdings, Ltd Amended and
    Restated Long-Term Incentive Plan10
.25(1)

Form of Participation Agreement under the Allied World Assurance
    Company Holdings, Ltd Amended and Restated Long-Term Incentive
    Plan10
.26(1)

Letter Agreement, dated October 1, 2004, between Allied
    World Assurance Company Holdings, Ltd and Michael Morrison10
.27(5)

Form of Indemnification Agreement10
.28(6)

Form of Employment Agreement10
.29(3)

Addendum to Schedule B, effective as of September 25,
    2006, to the Master Services Agreement by and between Allied
    World Assurance Company, Ltd and AIG Technologies, Inc.10
.30(7)

Lease, dated November 29, 2006, by and between American
    International Company Limited and Allied World Assurance
    Company, Ltd10
.31(8)

Allied World Assurance Company (U.S.) Inc. Supplemental
    Executive Retirement Plan10
.32(10)

Letter Agreement, dated as of February 28, 2007, by and
    between Allied World Assurance Company, Ltd and AIG
    Technologies, Inc., terminating the Master Services Agreement by
    and between the parties effective as of December 18, 200610
.33(11)

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
.34(11)

Pledge Agreement, dated as of February 28, 2007, by and
    between Allied World Assurance Company, Ltd and Citibank Europe
    plc10
.35(11)

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
.36(12)

Retirement and Consulting Agreement, dated effective as of
    March 31, 2007, by and between Allied World Assurance
    Company Holdings, Ltd and G. William Davis, Jr.10
.37(13)

Amended and Restated Contract of Employment by and between
    Allied World Assurance Company (Europe) Limited and John Redmond10
.38(14)

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
.39(14)

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
.40(14)

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
.41(14)

Account Control Agreement, dated November 27, 2007, by and
    among Allied World Assurance Company, Ltd, as pledgor, Mellon
    Bank, N.A., as custodian, and Wachovia Bank, National
    Association, as administrative agent10
.42(15)

Stock Purchase Agreement, dated as of December 14, 2007, by
    and between Allied World Assurance Company Holdings, Ltd and
    American International Group, Inc. E-2




---



##### Table of Contents



ExhibitNumber

Description21
.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.(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 December 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 August 7, 2006.(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 November 6, 2006.(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 1, 2006.(8)
    
    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, 2007.(9)
    
    Incorporated herein by reference to the Current Report on
    Form 8-K
    of Allied World Assurance Company Holdings, Ltd filed with the
    SEC on February 21, 2007.(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 March 2, 2007.(11)
    
    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.(12)
    
    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 23, 2007.(13)
    
    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 9, 2007.(14)
    
    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.(15)
    
    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.
    
    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




---



##### 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, 2007 and 2006


F-3Consolidated Statements of Operations and
    Comprehensive Income for the years ended December 31, 2007,
    2006 and 2005


F-4Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2007, 2006 and
    2005


F-5Consolidated Statements of Cash Flows for the
    years ended December 31, 2007, 2006 and 2005


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




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the Board
    of Directors and Shareholders of
            
  
 F-2




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTDCONSOLIDATED BALANCE SHEETS as
    of December 31, 2007 and 2006
    (Expressed in thousands of United States dollars, except share
    and per share amounts)
  As of


As ofDecember 31,


December 31,2007


2006ASSETS:Fixed maturity investments available for sale, at fair value
    (amortized cost: 2007: $5,595,943; 2006: $5,188,379)

$
5,707,143


$
5,177,812Other invested assets available for sale, at fair value (cost:
    2007: $291,458; 2006: $245,657)


322,144



262,557Total investments


6,029,287



5,440,369Cash and cash equivalents


202,582



366,817Restricted cash


67,886



138,223Securities lending collateral


147,241



304,742Insurance balances receivable


304,499



304,261Prepaid reinsurance


163,836



159,719Reinsurance recoverable


682,765



689,105Accrued investment income


55,763



51,112Deferred acquisition costs


108,295



100,326Intangible assets


3,920



3,920Balances receivable on sale of investments


84,998



16,545Net deferred tax assets


4,881



5,094Other assets


43,155



40,347Total assets

$
7,899,108


$
7,620,580LIABILITIES:Reserve for losses and loss expenses

$
3,919,772


$
3,636,997Unearned premiums


811,083



813,797Unearned ceding commissions


28,831



23,914Reinsurance balances payable


67,175



82,212Securities lending payable


147,241



304,742Balances due on purchase of investments


141,462



Senior notes


498,682



498,577Accounts payable and accrued liabilities


45,020



40,257Total liabilities

$
5,659,266


$
5,400,496SHAREHOLDERS EQUITY:Common shares, par value $0.03 per share, issued and outstanding
    2007: 48,741,927 shares and 2006: 60,287,696 shares


1,462



1,809Additional paid-in capital


1,281,832



1,822,607Retained earnings


820,334



389,204Accumulated other comprehensive income:net unrealized gains on investments, net of tax


136,214



6,464Total shareholders equity


2,239,842



2,220,084Total liabilities and shareholders equity

$
7,899,108


$
7,620,580    F-3




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTDCONSOLIDATED STATEMENTS OF OPERATIONS AND
    COMPREHENSIVE INCOME for
    the years ended December 31, 2007, 2006 and 2005
    (Expressed in thousands of United States dollars, except share
    and per share amounts)
  2007


2006


2005REVENUES:Gross premiums written

$
1,505,509


$
1,659,025


$
1,560,326Premiums ceded


(352,399
)


(352,429
)


(338,375
)Net premiums written


1,153,110



1,306,596



1,221,951Change in unearned premiums


6,832



(54,586
)


49,560Net premiums earned


1,159,942



1,252,010



1,271,511Net investment income


297,932



244,360



178,560Net realized investment losses


(7,617
)


(28,678
)


(10,223
)1,450,257



1,467,692



1,439,848EXPENSES:Net losses and loss expenses


682,340



739,133



1,344,600Acquisition costs


118,959



141,488



143,427General and administrative expenses


141,641



106,075



94,270Interest expense


37,848



32,566



15,615Foreign exchange (gain) loss


(817
)


601



2,156979,971



1,019,863



1,600,068Income (loss) before income taxes


470,286



447,829



(160,220
)Income tax expense (recovery)


1,104



4,991



(444
)NET INCOME (LOSS)


469,182



442,838



(159,776
)Other comprehensive income (loss)Unrealized gains (losses) on investments arising during the year
    net of applicable deferred income tax (expense) recovery 2007:
    ($5,839); 2006: ($342); 2005: $838


122,133



3,294



(68,902
)Reclassification adjustment for net realized investment losses
    included in net income


7,617



28,678



10,223Other comprehensive income (loss) net of tax


129,750



31,972



(58,679
)COMPREHENSIVE INCOME (LOSS)

$
598,932


$
474,810


$
(218,455
)PER SHARE DATABasic earnings (loss) per share

$
7.84


$
8.09


$
(3.19
)Diluted earnings (loss) per share

$
7.53


$
7.75


$
(3.19
)Weighted average common shares outstanding


59,846,987



54,746,613



50,162,842Weighted average common shares and common share equivalents
    outstanding


62,331,165



57,115,172



50,162,842    F-4




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTDCONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY for
    the years ended December 31, 2007, 2006 and 2005
    (Expressed in thousands of United States dollars)
  Accumulated


RetainedAdditional


Other


EarningsShare


Paid-in


Comprehensive


(AccumulatedCapital


Capital


Income (Loss)


Deficit)


TotalDecember 31, 2004

$
1,505


$
1,488,860


$
33,171


$
614,985


$
2,138,521Net loss














(159,776
)


(159,776
)Dividends














(499,800
)


(499,800
)Other comprehensive loss










(58,679
)






(58,679
)December 31, 2005

$
1,505


$
1,488,860


$
(25,508
)

$
(44,591
)

$
1,420,266Stock issuance in initial public offering


304



315,485











315,789Net income














442,838



442,838Stock compensation plans






18,262











18,262Dividends














(9,043
)


(9,043
)Other comprehensive income










31,972







31,972December 31, 2006

$
1,809


$
1,822,607


$
6,464


$
389,204


$
2,220,084Net income














469,182



469,182Stock compensation plans


3



22,319











22,322Stock acquired


(350
)


(563,094
)










(563,444
)Dividends














(38,052
)


(38,052
)Other comprehensive income










129,750







129,750December 31, 2007

$
1,462


$
1,281,832


$
136,214


$
820,334


$
2,239,842    F-5




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 
  2007


2006


2005CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income (loss)

$
469,182


$
442,838


$
(159,776
)Adjustments to reconcile net income (loss) to cash provided by
    operating activities:Net realized (gains) losses on sales of investments


(37,001
)


4,800



10,223Impairment charges for
    other-than-temporary
    impairments on investments


44,618



23,878



Amortization of premiums net of accrual of discounts on fixed
    maturities


(2,960
)


11,981



38,957Amortization and depreciation of fixed assets


8,709



4,037



2,190Stock compensation expense


22,491



10,805



3,079Debt issuance expense






724



333Amortization of discount and expenses on senior notes


427



168



Cash settlements on interest rate swaps






7,340



(2,107
)Mark to market on interest rate swaps






(6,896
)


6,896Insurance balances receivable


(238
)


(86,217
)


(8,835
)Prepaid reinsurance


(4,117
)


(19,120
)


4,427Reinsurance recoverable


6,340



27,228



(457,162
)Accrued investment income


(4,651
)


(2,129
)


(9,550
)Deferred acquisition costs


(7,969
)


(5,769
)


8,428Net deferred tax assets


(5,626
)


(1,292
)


1,901Other assets


(2,941
)


7,987



(2,956
)Reserve for losses and loss expenses


282,775



231,644



1,368,229Unearned premiums


(2,714
)


73,706



(55,247
)Unearned ceding commissions


4,917



(3,551
)


(2,686
)Reinsurance balances payable


(15,037
)


53,645



(25,899
)Accounts payable and accrued liabilities


4,763



15,757



12,327Net cash provided by operating activities


760,968



791,564



732,772CASH FLOWS USED IN INVESTING ACTIVITIES:Purchases of fixed maturity investments


(4,282,638
)


(5,663,168
)


(3,891,935
)Purchases of other invested assets


(175,770
)


(132,011
)


(114,576
)Sales of fixed maturity investments


3,966,822



4,855,816



3,288,257Sales of other invested assets


106,713



165,250



2,879Changes in securities lending collateral received


157,501



152,050



(456,792
)Purchases of fixed assets


(9,666
)


(29,418
)


(2,661
)Change in restricted cash


70,337



(96,435
)


(31,714
)Net cash used in investing activities


(166,701
)


(747,916
)


(1,206,542
)CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:Dividends paid


(38,052
)


(9,043
)


(499,800
)(Payment of) proceeds from the exercise of stock options


(168
)






Stock acquired


(563,444
)






Gross proceeds from initial public offering






344,080



Issuance costs paid on initial public offering






(28,291
)


Proceeds from issuance of senior notes






498,535



(Repayment of) proceeds from long-term debt






(500,000
)


500,000Debt issuance costs paid






(3,250
)


(1,021
)Changes in securities lending collateral


(157,501
)


(152,050
)


456,792Net cash (used in) provided by financing activities


(759,165
)


149,981



455,971Effect of exchange rate changes on foreign currency cash


663



809



(560
)NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(164,235
)


194,438



(18,359
)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


366,817



172,379



190,738CASH AND CASH EQUIVALENTS, END OF YEAR

$
202,582


$
366,817


$
172,379Supplemental disclosure of cash flow information: Cash paid for income taxes

$
3,814


$
707


$
313 Cash paid for interest expense


38,021



15,495



15,399 Change in balance receivable on sale of investments


(68,453
)


(12,912
)


(3,633
) Change in balance payable on purchase of investments


141,462







    F-6




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
   1.  GENERAL
    1-for-3
  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; and
    Determination of
    other-than-temporary
    impairment of investments.      a)  Premiums
    and Acquisition Costs
   F-7




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.  SIGNIFICANT
    ACCOUNTING POLICIES  (continued)
  
 a)  Premiums
    and Acquisition Costs  (continued)
        b)  Reserve
    for Losses and Loss Expenses
        c)  Reinsurance
   F-8




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.  SIGNIFICANT
    ACCOUNTING POLICIES  (continued)
  
 c)  Reinsurance  (continued)
        d)  Investments
           F-9




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.  SIGNIFICANT
    ACCOUNTING POLICIES  (continued)
  
 d)  Investments 
    (continued)
    e)  Translation
    of Foreign Currencies
    f)  Cash
    and Cash Equivalents
    g)  Income
    Taxes
      h)  Employee
    Stock Option Compensation Plan
    i)  Restricted
    Stock Units
   F-10




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.  SIGNIFICANT
    ACCOUNTING POLICIES  (continued)
  
 i)Restricted
    Stock Units  (continued)
    j)  Long-Term
    Incentive Plan Awards
    k)  Intangible
    Assets
    l)  Derivative
    Instruments
     F-11




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.  SIGNIFICANT
    ACCOUNTING POLICIES  (continued)
  
 l)
    Derivative
    Instruments  (continued)      m)  Securities
    Lending
      n)  Earnings
    Per Share
    o)  New
    Accounting Pronouncements
   F-12




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.  SIGNIFICANT
    ACCOUNTING POLICIES  (continued)
  o)
    New Accounting Pronouncements 
    (continued)    lock-up lock-up
           F-13




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2.  SIGNIFICANT
    ACCOUNTING POLICIES  (continued)
  o)
    New Accounting Pronouncements 
    (continued)       F-14




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   3.
    INVESTMENTS  a)  Fixed
    Maturity Investments
    Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair ValueDecember 31, 2007U.S. Government and Government agencies

$
1,987,577


$
65,653


$
(6
)

$
2,053,224Non-U.S. Government and Government agencies


100,440



18,694



(291
)


118,843Corporate


1,248,338



10,114



(5,835
)


1,252,617Mortgage backed


2,095,561



22,880



(902
)


2,117,539Asset backed


164,027



897



(4
)


164,920$
5,595,943


$
118,238


$
(7,038
)

$
5,707,143December 31, 2006U.S. Government and Government agencies

$
1,704,911


$
4,747


$
(9,606
)

$
1,700,052Non-U.S. Government and Government agencies


93,741



4,209



(630
)


97,320Corporate


1,322,893



2,884



(7,641
)


1,318,136Mortgage backed


1,828,526



5,745



(10,364
)


1,823,907Asset backed


238,308



545



(456
)


238,397$
5,188,379


$
18,130


$
(28,697
)

$
5,177,812    b)  Contractual
    Maturity Dates
    Amortized Cost


Fair ValueDecember 31, 2007Due within one year

$
468,555


$
474,083Due after one year through five years


1,931,123



1,982,146Due after five years through ten years


840,665



868,972Due after ten years


96,012



99,483Mortgage backed


2,095,561



2,117,539Asset backed


164,027



164,920$
5,595,943


$
5,707,143    F-15




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.
    INVESTMENTS 
    (continued)  c)  Other
    Invested Assets
    2007


2006Fair





FairCost


Value


Cost


ValueGlobal high yield fund

$
75,125


$
79,549


$
27,707


$
33,031Hedge funds


215,173



241,435



217,950



229,526Other invested assets


1,160



1,160







$
291,458


$
322,144


$
245,657


$
262,557     d)  Net
    Investment Income
  2007


2006


2005Fixed maturities and other investments

$
283,888


$
221,847


$
157,209Other invested assets


1,230



11,307



18,995Cash and cash equivalents


18,644



16,169



6,726Expenses


(5,830
)


(4,963
)


(4,370
)Net investment income

$
297,932


$
244,360


$
178,560    e)  Components
    of Realized Gains and Losses
    2007


2006


2005Gross realized gains

$
39,049


$
31,030


$
8,458Gross realized losses


(46,666
)


(60,152
)


(23,470
)Realized gains on interest rate swaps






7,340



(2,107
)Unrealized loss on interest rate swaps






(6,896
)


6,896Net realized investment losses

$
(7,617
)

$
(28,678
)

$
(10,223
)    f)  Pledged
    Assets
     F-16




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.
    INVESTMENTS 
    (continued)  f)
    Pledged Assets  (continued)      g)  Change
    in Unrealized Gains and Losses
  2007


2006


2005Net change in unrealized gains and losses, net of taxes

$
129,750


$
31,972


$
(58,679
)    h)  Analysis
    of Unrealized Losses
      2007


2006Gross


Unrealized


Gross


UnrealizedFair Value


Losses


Fair Value


LossesLess than 12 monthsU.S. Government and Government agencies

$



$



$
381,989


$
(2,961
)Non-U.S. Government and Government agencies










51,330



(620
)Corporate


359,880



(5,734
)


545,902



(3,115
)Mortgage backed


172,673



(835
)


856,533



(6,243
)Asset backed


11,536



(4
)






Hedge funds


51,512



(988
)






$
595,601


$
(7,561
)

$
1,835,754


$
(12,939
)More than 12 monthsU.S. Government and Government agencies

$
71,404


$
(6
)

$
338,072


$
(6,645
)Non-U.S. Government and Government agencies


33,227



(291
)


515



(9
)Corporate


22,544



(101
)


316,526



(4,527
)Mortgage backed


13,805



(67
)


389,761



(4,121
)Asset backed










107,049



(456
)$
140,980


$
(465
)

$
1,151,923


$
(15,758
)$
736,581


$
(8,026
)

$
2,987,677


$
(28,697
)    F-17




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.
    INVESTMENTS 
    (continued)  h)
    Analysis of Unrealized Losses 
    (continued)  other-than-temporarily other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary
  other-than-temporarily other-than-temporary
  i)
    Securities
    Lending    4.
    RESERVE
    FOR LOSSES AND LOSS EXPENSES    2007


2006OSLR

$
963,438


$
935,214IBNR


2,956,334



2,701,783Reserve for losses and loss expenses

$
3,919,772


$
3,636,997     F-18




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    4.
    RESERVE
    FOR LOSSES AND LOSS EXPENSES  (continued)  2007


2006


2005Gross liability at beginning of year

$
3,636,997


$
3,405,353


$
2,037,124Reinsurance recoverable at beginning of year


(689,105
)


(716,333
)


(259,171
)Net liability at beginning of year


2,947,892



2,689,020



1,777,953Net losses incurred related to:Current year


805,417



849,850



1,393,685Prior years


(123,077
)


(110,717
)


(49,085
)Total incurred


682,340



739,133



1,344,600Net paid losses related to:Current year


32,599



27,748



125,018Prior years


365,251



455,079



305,082Total paid


397,850



482,827



430,100Foreign exchange revaluation


4,625



2,566



(3,433
)Net liability at end of year


3,237,007



2,947,892



2,689,020Reinsurance recoverable at end of year


682,765



689,105



716,333Gross liability at end of year

$
3,919,772


$
3,636,997


$
3,405,353        F-19




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    4.
    RESERVE
    FOR LOSSES AND LOSS EXPENSES  (continued)      5.
    CEDED
    REINSURANCE    2007


2006OSLR recoverable

$
289,212


$
303,945IBNR recoverable


393,553



385,160Reinsurance recoverable

$
682,765


$
689,105    F-20




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    5.
    CEDED
    REINSURANCE  (continued)    Losses andPremiums


Premiums


LossWritten


Earned


ExpensesDecember 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


$
682,340December 31, 2006Direct

$
1,086,290


$
1,051,317


$
699,528Assumed


572,735



533,089



284,368Ceded


(352,429
)


(332,396
)


(244,763
)$
1,306,596


$
1,252,010


$
739,133December 31, 2005Direct

$
1,045,954


$
1,130,020


$
1,370,816Assumed


514,372



485,733



575,905Ceded


(338,375
)


(344,242
)


(602,121
)$
1,221,951


$
1,271,511


$
1,344,600     6.
    DEBT AND
    FINANCING ARRANGEMENTS       F-21




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    6.
    DEBT AND
    FINANCING ARRANGEMENTS  (continued)          7.
    INCOME
    TAXES     F-22




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    7.
    INCOME
    TAXES  (continued)        2007


2006


2005Current income tax expense (recovery)

$
6,730


$
6,102


$
(1,715
)Deferred income tax (recovery) expense


(5,626
)


(1,111
)


1,271Income tax expense (recovery)

$
1,104


$
4,991


$
(444
)       2007


2006Deferred tax assets:Unearned premium

$
926


$
961Realized gains


254



686Deferred acquisition costs


4,050



Reserve for losses and loss expenses


4,014



3,470Equity compensation


1,183



Other deferred tax assets


336



20Total deferred tax assets


10,763



5,137Deferred tax liabilities:Unrealized (appreciation) depreciation and timing difference on
    investments


(1,025
)


562Unrealized translation on investments in foreign currency


(4,857
)


(605
)Total deferred tax liabilities


(5,882
)


(43
)Net deferred tax assets

$
4,881


$
5,094    F-23




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    7.
    INCOME
    TAXES  (continued)    2007


2006


2005Income (loss) before taxes

$
470,286


$
447,829


$
(160,220
)Expected tax rate


0.0
%


0.0
%


0.0
%Foreign taxes at local expected tax rates


0.3
%


1.1
%


0.9
%Statutory adjustments


0.0
%


0.0
%


(1.5
)%Disallowed expenses and capital allowances


0.2
%


0.0
%


0.0
%Prior year refunds and adjustments


(0.2
)%


(0.1
)%


0.9
%Other


(0.1
)%


0.1
%


0.0
%Effective tax rate


0.2
%


1.1
%


0.3
%    8.
    SHAREHOLDERS
    EQUITY  a)  Authorized
    Shares
    2007


2006Common shares issued and fully paid, par value $0.03 per share


48,741,927



60,287,696Share capital at end of year

$
1,462


$
1,809   1-for-3
  b)  Share
    Warrants
    c)  Dividends
     F-24




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    8.
    SHAREHOLDERS
    EQUITY  (continued)  d)  Shares
    acquired
    9.
    EMPLOYEE
    BENEFIT PLANS  a)  Employee
    Stock Option Plan
  Form S-8
  Year Ended December 31, 2007Weighted AverageOptions


Exercise PriceOutstanding at beginning of year


1,195,990


$
27.59Granted


261,650



43.72Exercised


(188,089
)


25.68Forfeited


(45,676
)


35.67Outstanding at end of year


1,223,875


$
31.03  F-25




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    EMPLOYEE
    BENEFIT PLANS  (continued)  a)    Employee Stock Option
    Plan  (continued)
    Weighted Average





Intrinsic ValueOptions


Remaining


Options


On OptionsExercise Price Range

Outstanding


Contractual Life


Exercisable


Exercisable$23.61 - $26.94


407,499



4.46 years



407,499


$
10,557$28.08 - $31.47


387,143



7.14 years



227,265



4,709$31.77 - $35.01


179,833



7.18 years



88,338



1,532$41.00 - $43.50


221,400



9.02 years



1,500



14$44.75 - $47.07


28,000



9.45 years







1,223,875







724,602


$
16,812         Options revalued


Options grantedat the time of


after the IPO and


Options grantedthe IPO on


prior to


during the year endedJuly 11, 2006


December 31, 2006


December 31, 2007Expected term of option


6.25
years


6.25
years


6.25
yearsWeighted average risk-free interest rate


5.11
%


4.64
%


4.60
%Weighted average expected volatility


23.44
%


23.68
%


22.82
%Dividend yield


1.50
%


1.50
%


1.50
%Weighted average fair value on grant date

$
11.08


$
11.34


$
12.05    F-26




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    EMPLOYEE
    BENEFIT PLANS  (continued)  a)    Employee Stock Option
    Plan  (continued)
          b)  Stock
    Incentive Plan
    Year Ended December 31,2007Weighted AverageGrant Date FairRSUs


ValueOutstanding RSUs at beginning of year


704,372


$
34.07RSUs granted


196,158



42.92RSUs fully vested


(38,472
)


34.38RSUs forfeited


(41,168
)


35.09Outstanding RSUs at end of year


820,890


$
36.09    F-27




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    EMPLOYEE
    BENEFIT PLANS  (continued)  b)  Stock Incentive
    Plan  (continued)
            c)  Long-Term
    Incentive Plan
    Year Ended December 31, 2007Weighted AverageGrant Date FairLTIP


ValueOutstanding LTIP awards at beginning of year


228,334


$
34.00LTIP awards granted


392,500



43.16LTIP awards subjected to accelerated vesting


(30,000
)


34.00LTIP awards forfeited






Outstanding LTIP awards at end of year


590,834


$
40.09    F-28




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    EMPLOYEE
    BENEFIT PLANS  (continued)  c)  Long-term Incentive
    Plan  (continued)
            d)  Pension
    Plans
    10.
    EARNINGS
    PER SHARE    2007


2006


2005Basic earnings per shareNet income (loss)

$
469,182


$
442,838


$
(159,776
)Weighted average common shares outstanding


59,846,987



54,746,613



50,162,842Basic earnings (loss) per share

$
7.84


$
8.09


$
(3.19
)   F-29




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    10.
    EARNINGS
    PER SHARE  (continued)  2007


2006


2005Diluted earnings per shareNet income (loss)

$
469,182


$
442,838


$
(159,776
)Weighted average common shares outstanding


59,846,987



54,746,613



50,162,842Share equivalents:Options and warrants


1,807,903



1,630,501



Restricted stock units


349,760



438,370



LTIP awards


326,515



299,688



Weighted average common shares and common share equivalents
    outstanding  diluted


62,331,165



57,115,172



50,162,842Diluted earnings (loss) per share

$
7.53


$
7.75


$
(3.19
)     11.
    RELATED
    PARTY TRANSACTIONS  a)  American
    International Group, Inc.
     F-30




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    11.
    RELATED
    PARTY TRANSACTIONS  (continued)  a)
    American International Group, Inc. 
    (continued)    2007


2006


2005Gross premiums written

$
106,705


$
108,343


$
120,942Brokerage and commissions


20,550



21,581



22,218Paid losses and loss expenses


95,722



134,872



203,100       2006


2005Gross premiums written

$
52,141


$
82,969Acquisition costs


8,791



12,994Paid losses and loss expenses


95,209



66,014     10-year
   F-31




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    11.
    RELATED
    PARTY TRANSACTIONS  (continued)  a)
    American International Group, Inc. 
    (continued)      b)
    Goldman,
    Sachs & Co.           F-32




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    11.
    RELATED
    PARTY TRANSACTIONS  (continued)  b)
    Goldman, Sachs & Co. 
    (continued)  lock-up
  lock-up
  and/or
      c)
    The
    Chubb Corporation   F-33




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    11.
    RELATED
    PARTY TRANSACTIONS  (continued)  c)
    The Chubb Corporation  (continued)    2007


2006


2005Gross premiums written

$
12,405


$
21,565


$
26,001Brokerage and commissions


3,074



4,919



5,009Paid losses and loss expenses


2,355



10,932



103     12.
    COMMITMENTS
    AND CONTINGENCIES  a)
    Concentrations
    of Credit Risk          b)
    Operating
    Leases    2008

$
9,5552009


10,2132010


10,0962011


9,4732012


9,3762013 through 2021


65,796$
114,509  F-34




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    12.
    COMMITMENTS
    AND CONTINGENCIES  (continued)  b)
    Operating Leases  (continued)    c)
    Brokers    d)
    Legal
    Proceedings      e)
    Investment
    Commitments   F-35




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   13.
    STATUTORY
    CAPITAL AND SURPLUS      and/or
     F-36




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    13.
    STATUTORY
    CAPITAL AND SURPLUS  (continued)      14.
    SEGMENT
    INFORMATION         F-37




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    14.
    SEGMENT
    INFORMATION  (continued)    2007

Property


Casualty


Reinsurance


TotalGross premiums written

$
391,017


$
578,433


$
536,059


$
1,505,509Net premiums written


176,420



440,802



535,888



1,153,110Net premiums earned


180,458



475,523



503,961



1,159,942Net losses and loss expenses


(105,662
)


(275,815
)


(300,863
)


(682,340
)Acquisition costs


114



(17,269
)


(101,804
)


(118,959
)General and administrative expenses


(34,185
)


(68,333
)


(39,123
)


(141,641
)Underwriting income


40,725



114,106



62,171



217,002Net investment income














297,932Net realized investment losses














(7,617
)Interest expense














(37,848
)Foreign exchange gain














817Income before income taxes













$
470,286Loss and loss expense ratio


58.6
%


58.0
%


59.7
%


58.8
%Acquisition cost ratio


(0.1
)%


3.6
%


20.2
%


10.3
%General and administrative expense ratio


18.9
%


14.4
%


7.8
%


12.2
%Combined ratio


77.4
%


76.0
%


87.7
%


81.3
%   2006

Property


Casualty


Reinsurance


TotalGross premiums written

$
463,903


$
622,387


$
572,735


$
1,659,025Net premiums written


193,655



540,980



571,961



1,306,596Net premiums earned


190,784



534,294



526,932



1,252,010Net losses and loss expenses


(114,994
)


(331,759
)


(292,380
)


(739,133
)Acquisition costs


2,247



(30,396
)


(113,339
)


(141,488
)General and administrative expenses


(26,294
)


(52,809
)


(26,972
)


(106,075
)Underwriting income


51,743



119,330



94,241



265,314Net investment income














244,360Net realized investment losses














(28,678
)Interest expense














(32,566
)Foreign exchange loss














(601
)Income before income taxes













$
447,829Loss and loss expense ratio


60.3
%


62.1
%


55.5
%


59.0
%Acquisition cost ratio


(1.2
)%


5.7
%


21.5
%


11.3
%General and administrative expense ratio


13.8
%


9.9
%


5.1
%


8.5
%Combined ratio


72.9
%


77.7
%


82.1
%


78.8
%   F-38




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    14.
    SEGMENT
    INFORMATION  (continued)  2005

Property


Casualty


Reinsurance


TotalGross premiums written

$
412,879


$
633,075


$
514,372


$
1,560,326Net premiums written


170,781



557,622



493,548



1,221,951Net premiums earned


226,828



581,330



463,353



1,271,511Net losses and loss expenses


(410,265
)


(430,993
)


(503,342
)


(1,344,600
)Acquisition costs


(5,685
)


(33,544
)


(104,198
)


(143,427
)General and administrative expenses


(20,261
)


(44,273
)


(29,736
)


(94,270
)Underwriting (loss) income


(209,383
)


72,520



(173,923
)


(310,786
)Net investment income














178,560Net realized investment losses














(10,223
)Interest expense














(15,615
)Foreign exchange loss














(2,156
)Loss before income taxes













$
(160,220
)Loss and loss expense ratio


180.9
%


74.1
%


108.6
%


105.7
%Acquisition cost ratio


2.5
%


5.8
%


22.5
%


11.3
%General and administrative expense ratio


8.9
%


7.6
%


6.4
%


7.4
%Combined ratio


192.3
%


87.5
%


137.5
%


124.4
%     2007


2006


2005Bermuda

$
876,484


$
983,532


$
925,644United States


123,233



144,694



128,039Europe


153,393



178,370



168,268Total net premiums written

$
1,153,110


$
1,306,596


$
1,221,951    15.
    SUBSEQUENT
    EVENT     F-39




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   16.
    UNAUDITED
    QUARTERLY FINANCIAL DATA    Quarter EndedDecember 31,


September 30,


June 30,


March 31,2007


2007


2007


2007REVENUES:Gross premiums written

$
260,301


$
276,253


$
530,549


$
438,406Premiums ceded


(70,919
)


(56,956
)


(143,962
)


(80,562
)Net premiums written


189,382



219,297



386,587



357,844Change in unearned premiums


97,216



64,362



(83,468
)


(71,278
)Net premiums earned


286,598



283,659



303,119



286,566Net investment income


75,214



76,133



73,937



72,648Net realized investment gain (loss)


4,544



(4,196
)


(1,481
)


(6,484
)366,356



355,596



375,575



352,730EXPENSES:Net losses and loss expenses


166,874



173,246



176,225



165,995Acquisition costs


28,693



29,198



31,872



29,196General and administrative expenses


37,956



36,050



34,432



33,203Interest expense


9,511



9,481



9,482



9,374Foreign exchange (gain) loss


(405
)


(976
)


532



32242,629



246,999



252,543



237,800Income before income taxes


123,727



108,597



123,032



114,930Income tax expense (recovery)


712



(362
)


(255
)


1,009NET INCOME


123,015



108,959



123,287



113,921Basic earnings per share


2.11



1.80



2.04



1.89Diluted earnings per share


2.01



1.72



1.96



1.83Weighted average common shares outstanding


58,247,755



60,413,019



60,397,591



60,333,209Weighted average common shares and common share equivalents
    outstanding


61,133,206



63,250,024



62,874,235



62,207,941   F-40




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    16.
    UNAUDITED
    QUARTERLY FINANCIAL DATA  (continued)  Quarter EndedDecember 31,


September 30,


June 30,


March 31,2006


2006


2006


2006REVENUES:Gross premiums written

$
280,111


$
362,478


$
518,316


$
498,120Premiums ceded


(69,372
)


(64,462
)


(147,978
)


(70,617
)Net premiums written


210,739



298,016



370,338



427,503Change in unearned premiums


109,052



19,743



(64,821
)


(118,560
)Net premiums earned


319,791



317,759



305,517



308,943Net investment income


66,009



61,407



54,943



62,001Net realized investment loss


(4,190
)


(9,080
)


(10,172
)


(5,236
)381,610



370,086



350,288



365,708EXPENSES:Net losses and loss expenses


172,395



180,934



179,844



205,960Acquisition costs


34,568



37,785



32,663



36,472General and administrative expenses


33,856



25,640



26,257



20,322Interest expense


9,510



9,529



7,076



6,451Foreign exchange loss (gain)


1,092



(561
)


(475
)


545251,421



253,327



245,365



269,750Income before income taxes


130,189



116,759



104,923



95,958Income tax expense (recovery)


1,827



2,774



2,553



(2,163
)NET INCOME


128,362



113,985



102,370



98,121Basic earnings per share


2.13



1.95



2.04



1.96Diluted earnings per share


2.04



1.89



2.02



1.94Weighted average common shares outstanding


60,284,459



58,376,307



50,162,842



50,162,842Weighted average common shares and common share equivalents
    outstanding


62,963,243



60,451,643



50,682,557



50,485,556   F-41




---



##### Table of Contents



Schedule II  ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
    CONDENSED BALANCE SHEETS  PARENT COMPANY
    as of December 31, 2007 and 2006 (Expressed
    in thousands of United States dollars, except share and per
    share amounts)
  2007


2006ASSETS:Cash and cash equivalents

$
25,091


$
99,583Investments in subsidiaries


2,738,490



2,641,903Balances due from subsidiaries


2,152



25Other assets


5,888



5,612Total assets

$
2,771,621


$
2,747,123LIABILITIES:Accounts payable and accrued liabilities

$
230


$
196Interest payable


15,625



16,250Balances due to subsidiaries


17,242



12,016Senior notes


498,682



498,577Total liabilities


531,779



527,039SHAREHOLDERS EQUITY:Common shares, par value $0.03 per share, issued and outstanding
    2007: 48,741,927 shares and 2006: 60,287,696 shares


1,462



1,809Additional paid-in capital


1,281,832



1,822,607Retained earnings


820,334



389,204Accumulated other comprehensive income


136,214



6,464Total shareholders equity


2,239,842



2,220,084Total liabilities and shareholders equity

$
2,771,621


$
2,747,123    S-1




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
    CONDENSED STATEMENTS OF OPERATIONS AND
    COMPREHENSIVE INCOME  PARENT COMPANY for
    the Years Ended December 31, 2007, 2006 and 2005
    (Expressed in thousands of United States dollars)
  2007


2006


2005REVENUES:Net investment income

$
3,504


$
3,452


$
114Net realized gain on interest rate swaps






444



4,7893,504



3,896



4,903EXPENSES:General and administrative expenses


7,594



12,476



10,079Interest expense


37,848



32,566



15,61545,442



45,042



25,694Loss before equity in earnings (loss) of consolidated
    subsidiaries


(41,938
)


(41,146
)


(20,791
)Equity in earnings (loss) of consolidated subsidiaries


511,120



483,984



(138,985
)NET INCOME (LOSS)

$
469,182


$
442,838


$
(159,776
)Other comprehensive income (loss)Unrealized gains (losses) on investments arising during the year
    net of applicable deferred income tax (expense) recovery


122,133



3,294



(68,902
)Reclassification adjustment for net realized losses included in
    net income


7,617



28,678



10,223Other comprehensive income (loss) net of tax


129,750



31,972



(58,679
)COMPREHENSIVE INCOME (LOSS)

$
598,932


$
474,810


$
(218,455
)    S-2




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
    CONDENSED STATEMENTS OF CASH FLOWS  PARENT COMPANY for
    the Years Ended December 31, 2007, 2006 and 2005
    (Expressed in thousands of United States dollars)
  2007


2006


2005CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income (loss)

$
469,182


$
442,838


$
(159,776
)Adjustments to reconcile net income (loss) to cash provided by
    operating activities:Equity in earnings of consolidated subsidiaries


(511,120
)


(483,984
)


138,985Dividends received from subsidiaries


575,000



15,000



17,332Stock compensation expenses


743



10,805



3,079Amortization of discount on senior notes


427



42



Balance due from subsidiaries


(2,127
)






1,994Other assets


(598
)


3,851



(9,463
)Accounts payable and accrued liabilities


34



(502
)


605Interest payable


(625
)


16,250



Balances due to affiliates






(5,000
)


5,000Balances due to subsidiaries


5,226



9,543



2,473Net cash provided by operating activities


536,142



8,843



229CASH FLOWS USED IN INVESTING ACTIVITIES:Investment in subsidiaries


(11,200
)


(215,000
)


Net cash used in investing activities


(11,200
)


(215,000
)


CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:Dividends paid


(38,052
)


(9,043
)


(499,800
)(Payment of) proceeds from the exercise of stock options


(168
)






Stock acquired


(563,444
)






Gross proceeds from initial public offering






344,080



Issuance costs paid on initial public offering






(28,291
)


Proceeds from issuance of senior notes






498,535



(Repayment of) proceeds from long-term debt






(500,000
)


500,000Stock compensation funding due from subsidiaries


2,230







Net cash (used in) provided by financing activities


(599,434
)


305,281



200NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(74,492
)


99,124



429CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


99,583



459



30CASH AND CASH EQUIVALENTS, END OF YEAR

$
25,091


$
99,583


$
459    S-3




---



##### Table of Contents



Schedule III  ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  SUPPLEMENTARY
    INSURANCE INFORMATION
 (Expressed
    in thousands of United States dollars)
   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


WrittenProperty

$
16,786


$
760,668


$
166,683


$
180,458


$



$
105,662


$
(114
)

$
34,185


$
176,420Casualty


24,022



2,142,694



344,327



475,523







275,815



17,269



68,333



440,802Reinsurance


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   Year
    Ended December 31, 2006
  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


WrittenProperty

$
17,769


$
892,375


$
199,133


$
190,784


$



$
114,994


$
(2,247
)

$
26,294


$
193,655Casualty


22,701



1,873,733



346,350



534,294







331,759



30,396



52,809



540,980Reinsurance


59,856



870,889



268,314



526,932







292,380



113,339



26,972



571,961Corporate


















244,360















Total

$
100,326


$
3,636,997


$
813,797


$
1,252,010


$
244,360


$
739,133


$
141,488


$
106,075


$
1,306,596   Year
    Ended December 31, 2005
  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


WrittenProperty

$
16,683


$
1,060,634


$
176,752


$
226,828


$



$
410,265


$
5,685


$
20,261


$
170,781Casualty


26,169



1,547,403



334,522



581,330







430,993



33,544



44,273



557,622Reinsurance


51,705



797,316



228,817



463,353







503,342



104,198



29,736



493,548Corporate


















178,560















Total

$
94,557


$
3,405,353


$
740,091


$
1,271,511


$
178,560


$
1,344,600


$
143,427


$
94,270


$
1,221,951  S-4




---



##### Table of Contents



Schedule IV  ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  SUPPLEMENTARY
    REINSURANCE INFORMATION
 (Expressed
    in thousands of United States dollars)
  (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, 2007

$
969,450


$
352,399


$
536,059


$
1,153,110



46
%Year ended December 31, 2006

$
1,086,290


$
352,429


$
572,735


$
1,306,596



44
%Year ended December 31, 2005

$
1,045,954


$
338,375


$
514,372


$
1,221,951



42
%  S-5