##### 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, 2008ORo

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
  12b-2
  Large
    accelerated
    filer þ
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ
      DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K.




---



##### 





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


Business


1ITEM 1A.


Risk Factors


29ITEM 1B.


Unresolved Staff Comments


51ITEM 2.


Properties


51ITEM 3.


Legal Proceedings


52ITEM 4.


Submission of Matters to a Vote of Security
    Holders


52PART IIITEM 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


53ITEM 6.


Selected Financial Data


55ITEM 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


56ITEM 7A.


Quantitative and Qualitative Disclosures about
    Market Risk


110ITEM 8.


Financial Statements and Supplementary Data


111ITEM 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


111ITEM 9A.


Controls and Procedures


112ITEM 9B.


Other Information


115PART IIIITEM 10.


Directors, Executive Officers and Corporate
    Governance


115ITEM 11.


Executive Compensation


115ITEM 12.


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


115ITEM 13.


Certain Relationships and Related Transactions,
    and Director Independence


115ITEM 14.


Principal Accountant Fees and Services


115PART IVITEM 15.


Exhibits and Financial Statement Schedules


115SIGNATURES


116EXHIBITS


E-1CONSOLIDATED FINANCIAL STATEMENTS


F-1EX-10.40: AMENDED AND RESTATED EMPLOYMENT AGREEMENTEX-10.41: AMENDED AND RESTATED EMPLOYMENT AGREEMENTEX-21.1: SUBSIDIARIES OF THE REGISTRANTEX-23.1: CONSENT OF DELOITTE & TOUCHEEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




---



##### Table of Contents



PART I  References in this Annual Report on
    Form 10-K
    to the terms we, us, our,
    the company or other similar terms mean the
    consolidated operations of Allied World Assurance Company
    Holdings, Ltd and our consolidated subsidiaries, unless the
    context requires otherwise. References in this
    Form 10-K
    to the term Holdings means Allied World Assurance
    Company Holdings, Ltd only. References to our insurance
    subsidiaries may include our reinsurance subsidiaries.
    References in this
    Form 10-K
    to $ are to the lawful currency of the United States.
  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, 2008, 2007 and
    2006
  Year EndedDecember 31,2008


2007


2006($ in millions)Bermuda

$
793.7


$
1,065.9


$
1,208.1Europe


224.2



246.9



278.5United States


427.7



192.7



172.4$
1,445.6


$
1,505.5


$
1,659.0   Our
    Operating Segments
   2




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##### Table of Contents



Year Ended


Year Ended


Year EndedDecember 31, 2008


December 31, 2007


December 31, 2006Gross Premiums Written


Gross Premiums Written


Gross Premiums Written$ (in millions)


% of Total


$ (in millions)


% of Total


$ (in millions)


% of TotalOperating SegmentsProperty

$
327.5



22.7
%

$
391.0



26.0
%

$
463.9



28.0
%Casualty


688.0



47.6
%


578.4



38.4
%


622.4



37.5
%Reinsurance


430.1



29.7
%


536.1



35.6
%


572.7



34.5
%Total

$
1,445.6



100.0
%

$
1,505.5



100.0
%

$
1,659.0



100.0
%   Property
    Segment
  General
    Product
    Lines and Customer Base
  U.S.-domiciled
      Underwriting
    and Risk Management
  and/or
   3




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##### Table of Contents




    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 an industry-recognized modeling firm to
    analyze our property catastrophe exposure on a quarterly basis.
    Using data that we provide, we run numerous computer-simulated
    events that provide us with loss probabilities for our book of
    business.
    Gross Exposed Policy Limits.  Hurricane Katrina
    in 2005 demonstrated that reliance solely on the probable
    maximum loss results of the modeling companies was inappropriate
    given their failure to accurately predict the ultimate losses
    sustained from this catastrophe. As a result, we instituted
    gross exposed policy limits as an additional approach to
    determine our probable maximum loss. This approach focuses on
    our gross limits in each critical catastrophe zone and sets a
    maximum amount of gross accumulations we will accept in each
    zone. Once that limit has been reached, we cease writing
    business in that catastrophe zone for that particular year. We
    have an internal dedicated catastrophe team that monitors these
    limits and reports monthly to our underwriters and senior
    management. This team also has the ability to model an account
    before we price the business to see what impact that account
    will have on our zonal gross accumulations. We restrict our
    gross exposed policy limits in each critical property
    catastrophe zone to an amount consistent with our probable
    maximum loss and, subsequent to a catastrophic event, our
    capital preservation targets. We continue to use risk exposure
    models along with our gross exposed policy limits approach. It
    is our policy to use both the gross exposed policy limits
    approach and the risk exposure models and establish our probable
    maximum loss on the more conservative number generated.
    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. For more
    information on reinsurance we purchase for our property segment,
    see Item 7 Managements Discussion and Analysis
    of Financial Condition and Results of Operations 
    Ceded Reinsurance.
    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 i-bind
 4




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##### Table of Contents



Product
    Lines and Customer Base
  U.S.-domiciled non-U.S. domiciled
    U.S.-domiciled U.S.-based
   5




---



##### Table of Contents



i-bind i-bind
    Underwriting
    and Risk Management
      Reinsurance
    Segment
  General
      Product
    Lines and Customer Base
   6




---



##### Table of Contents



excess-of-loss
  excess-of-loss
          Underwriting
    and Risk Management
   7




---



##### Table of Contents



case-by-case
  Security
    Arrangements
    Business
    Strategy
    
    Diversifying Our 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.
    Continue to 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
    significantly in 2008 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. In 2008, we
    opened offices in Atlanta, Georgia and Costa Mesa and Los
    Angeles, California to expand our distribution capabilities into
    the Southeast and Western Regions of the United States. We also
    launched a new U.S. product strategy that realigns
    distribution along retail and wholesale broking channels in
    order to support deeper market penetration and encourage
    innovation and product development. 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. With our acquisition of Darwin in
    October 2008, we have significantly expanded and diversified our
    U.S. casualty platform, increasing our ability to serve
    small and middle-market accounts. With our acquisition of Finial
    Insurance Company in February 2008 (now Allied World Reinsurance
    Company), we have also expanded our reinsurance presence in the
    United States, allowing us to further diversify our reinsurance
    portfolios. 8




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##### Table of Contents




    Grow Our International Business.  We have
    focused and will continue to focus on business in the
    United Kingdom and Western Europe, where we believe the
    insurance and reinsurance markets are developed and stable. We
    also believe our recently opened Swiss office will allow us to
    penetrate other European and international markets. 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. In addition, during 2008 we made significant progress
    toward obtaining licensing for a branch office in Hong Kong. We
    believe this office will be operational in early 2009 and will
    enable us to offer property, general casualty and general
    liability products to the Asian marketplace.
    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. 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
 9




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##### Table of Contents



Our
    Financial Strength Ratings
    Rated A


Rated A2


Rated A-(Excellent) from


(Good) from


(Strong) fromSubsidiary

A.M. Best


Moodys


Standard & PoorsAllied World Assurance Company, Ltd


X



X



XAllied World Assurance Company (U.S.) Inc.


X



X



XAllied World National Assurance Company


X



X



XAllied World Reinsurance Company


X



X



XDarwin National Assurance Company


X







Darwin Select Insurance Company


X







Allied World Assurance Company (Europe) Limited


X







XAllied World Assurance Company (Reinsurance) Limited


X







X     Distribution
    of Our Insurance Products
   10




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##### Table of Contents



i-bind
    Percentage of GrossPremiums Writtenfor the Year EndedDecember 31, 2008BrokerMarsh & McLennan Companies, Inc.


28%Aon Corporation (including Benfield Group, Ltd)


26%Willis Group Holdings Ltd.


10%All Others


36%100%   Claims
    Management
      Reserve
    for Losses and Loss Expenses
   11




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##### Table of Contents



12




---



##### 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


2007


2008(1)($ in thousands)As Originally Estimated:

$
213


$
310,508


$
1,058,653


$
2,037,124


$
3,405,407


$
3,636,997


$
3,919,772


$
4,576,828Liability Re-estimated as of:One Year Later


213



253,691



979,218



1,929,571



3,318,359



3,469,216



3,537,721Two Years Later


213



226,943



896,649



1,844,258



3,172,105



3,137,712Three Years Later


213



217,712



842,976



1,711,212



2,837,384Four Years Later


213



199,860



809,117



1,503,070Five Years Later


213



205,432



704,436Six Years Later


213



196,495Seven Years Later


213Cumulative (Redundancy)






(114,013
)


(354,217
)


(534,054
)


(568,023
)


(499,285
)


(382,051
)(2)Cumulative Claims Paid as of:One Year Later






54,288



138,793



372,823



712,032



544,180



561,386
(3)Two Years Later






83,465



237,394



571,149



1,142,878



962,971Three Years Later






100,978



300,707



721,821



1,434,437Four Years Later


18



124,109



371,638



838,807Five Years Later


18



163,516



437,950Six Years Later


18



180,580Seven Years Later


18     (1)
    
    Reserve for losses and loss
    expenses includes the reserves for losses and loss expenses of
    Finial Insurance Company (renamed Allied World Reinsurance
    Company), which we acquired in February 2008, and Darwin, which
    we acquired in October 2008.(2)
    
    The cumulative (redundancy) on the
    original balance as of December 31, 2007 includes reserve
    development of Darwin subsequent to our acquisition of the
    company.(3)
    
    The cumulative claims paid includes
    paid development of Finial Insurance Company and Darwin
    subsequent to our acquisition of each company.  Development
    of Reserve for Losses and Loss Expenses
    Cumulative Deficiency (Redundancy)Gross Losses
  Year Ended December 31,2001


2002


2003


2004


2005


2006


2007Liability Re-estimated as of:One Year Later


100
%


82
%


92
%


95
%


97
%


95
%


90
%Two Years Later


100
%


73
%


85
%


91
%


93
%


86
%Three Years Later


100
%


70
%


80
%


84
%


83
%Four Years Later


100
%


64
%


76
%


74
%Five Years Later


100
%


66
%


67
%Six Years Later


100
%


63
%Seven Years Later


100
%Cumulative (Redundancy)






(37
)%


(33
)%


(26
)%


(17
)%


(14
)%


(10
)%Gross Loss and Loss Expense Cumulative Paid as a Percentage
    of Originally Estimated LiabilityCumulative Claims Paid as of:One Year Later


0
%


17
%


13
%


18
%


21
%


15
%


14
%Two Years Later


0
%


27
%


22
%


28
%


34
%


26
%Three Years Later


0
%


33
%


28
%


35
%


42
%Four Years Later


8
%


40
%


35
%


41
%Five Years Later


8
%


53
%


41
%Six Years Later


8
%


58
%Seven Years Later


8
%  13




---



##### Table of Contents



Losses
    Net of Reinsurance
  December 31,2001


2002


2003


2004


2005


2006


2007


2008(1)($ in thousands)As Originally Estimated:

$
213


$
299,946


$
964,810


$
1,777,953


$
2,688,526


$
2,947,892


$
3,237,007


$
3,688,514Liability Re-estimated as of:One Year Later


213



243,129



885,375



1,728,868



2,577,808



2,824,815



2,956,912Two Years Later


213



216,381



830,969



1,626,334



2,474,788



2,570,194Three Years Later


213



207,945



771,781



1,528,620



2,215,504Four Years Later


213



191,471



745,289



1,338,931Five Years Later


213



197,656



649,305Six Years Later


213



188,733Seven Years Later


213Cumulative (Redundancy)






(111,213
)


(315,505
)


(439,022
)


(473,022
)


(377,698
)


(280,095
)(2)Cumulative Claims Paid as of:One Year Later






52,077



133,286



305,083



455,079



365,251



395,163
(3)Two Years Later






76,843



214,384



478,788



747,253



674,263Three Years Later






93,037



271,471



620,760



973,091Four Years Later


18



116,494



342,349



728,246Five Years Later


18



155,904



407,163Six Years Later


18



172,974Seven Years Later


18    (1)
    
    Reserve for losses and loss
    expenses net includes the reserves for losses and loss expenses
    of Finial Insurance Company (renamed Allied World Reinsurance
    Company), which we acquired in February 2008, and Darwin, which
    we acquired in October 2008.(2)
    
    The cumulative (redundancy) on the
    original balance as of December 31, 2007 includes reserve
    development of Darwin subsequent to our acquisition of the
    company.(3)
    
    The cumulative claims paid includes
    paid development of Finial Insurance Company and Darwin
    subsequent to our acquisition of each company.  Losses
    Net of Reinsurance
  Year Ended December 31,2001


2002


2003


2004


2005


2006


2007Liability Re-estimated as of:One Year Later


100
%


81
%


92
%


97
%


96
%


96
%


91
%Two Years Later


100
%


72
%


86
%


91
%


92
%


87
%Three Years Later


100
%


69
%


80
%


86
%


82
%Four Years Later


100
%


64
%


77
%


75
%Five Years Later


100
%


66
%


67
%Six Years Later


100
%


63
%Seven Years Later


100
%Cumulative (Redundancy)






(37
)%


(33
)%


(25
)%


(18
)%


(13
)%


(9
)%Net Loss and Loss Expense Cumulative Paid as a Percentage of
    Originally Estimated LiabilityCumulative Claims Paid as of:One Year Later


0
%


17
%


14
%


17
%


17
%


12
%


12
%Two Years Later


0
%


26
%


22
%


27
%


28
%


23
%Three Years Later


0
%


31
%


28
%


35
%


36
%Four Years Later


8
%


39
%


35
%


41
%Five Years Later


8
%


52
%


42
%Six Years Later


8
%


58
%Seven Years Later


8
%     Year Ended December 31,2008


2007


2006($ in thousands)Gross liability at beginning of year

$
3,919,772


$
3,636,997


$
3,405,353Reinsurance recoverable at beginning of year


(682,765
)


(689,105
)


(716,333
)Net liability at beginning of year


3,237,007



2,947,892



2,689,020Acquisition of net reserve for losses and loss expenses


298,927







Net losses incurred related to:Current year


921,217



805,417



849,850Prior years


(280,095
)


(123,077
)


(110,717
)Total incurred


641,122



682,340



739,133Net paid losses related to:Current year


79,037



32,599



27,748Prior years


395,163



365,251



455,079Total paid


474,200



397,850



482,827Foreign exchange revaluation


(14,342
)


4,625



2,566Net liability at end of year


3,688,514



3,237,007



2,947,892Reinsurance recoverable at end of year


888,314



682,765



689,105Gross liability at end of year

$
4,576,828


$
3,919,772


$
3,636,997  14




---



##### Table of Contents



Investments
  Investment
    Strategy and Guidelines
  short-to-medium
      Investment
    Committee and Investment Managers
    day-to-day
  Our
    Portfolio
  Composition
    as of December 31, 2008
   15




---



##### Table of Contents



A-1/P-1.
    As of December 31,2008Fair


Average


PortfolioMarket Value


Rating


Percentage($ in thousands)Type of InvestmentCash and cash equivalents

$
706,267



AAA



10.3%U.S. government securities


817,769



AAA



11.9%U.S. government agencies


952,466



AAA



13.9%Non-U.S.
    government securities


280,156



AAA



4.1%Corporate securities:Financial Institutions


994,720



AA−



14.5%Industrials


295,428



A−



4.3%Utilities


71,822



BBB+



1.0%Total corporate securities


1,361,970







19.8%State, municipalities and political subdivisions


369,619



AAA



5.4%Mortgage-backed securities:Agency mortgage-backed securities


1,384,205



AAA



20.2%Non-agency Residential mortgage-backed securities


230,523



AAA



3.4%Commercial mortgage-backed securities


475,209



AAA



6.9%Total mortgage-backed securities


2,089,937



AAA



30.5%Asset-backed securities:Credit card receivables


66,006



AAA



1.0%Automobile loan receivables


88,503



AAA



1.2%Other


5,603



A



0.1%Total asset-backed securities


160,112







2.3%Global high-yield bond fund


55,199



B



0.8%Hedge funds


48,573



N/A



0.7%Equity securities


21,329



N/A



0.3%Total investment portfolio

$
6,863,397







100.0%   U.S.
    Government and Agencies
    Non-U.S.
    Government Securities
  Non-U.S. government non-U.S. governmental
 16




---



##### Table of Contents



Corporate
    Securities
    State,
    municipalities and political subdivisions
    Mortgage-Backed
    Securities
      Asset-Backed
    Securities
      Global
    High-Yield Bond Fund
   17




---



##### Table of Contents



Hedge
    Funds
    Equity
    Securities
    Ratings
    as of December 31, 2008
    Percentageof TotalAmortized


Fair Market


Fair MarketCost


Value


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

$
1,608.2


$
1,770.2



29.3
%AAA/Aaa

$
3,255.2


$
3,244.6



53.8
%AA/Aa

$
167.1


$
166.2



2.8
%A/A

$
677.3


$
685.5



11.4
%BBB/Baa

$
154.8


$
156.1



2.6
%BB

$
8.4


$
8.4



0.1
%B/B

$
1.0


$
1.0



0.0
%Total

$
5,872.0


$
6,032.0



100.0
%   Maturity
    Distribution as of December 31, 2008
    Percentageof TotalAmortized


Fair Market


Fair MarketCost


Value


Value($ in millions)MaturityDue within one year

$
272.9


$
274.2



4.5
%Due after one year through five years

$
1,826.1


$
1,887.1



31.3
%Due after five years through ten years

$
1,146.9


$
1,254.9



20.8
%Due after ten years

$
321.8


$
365.8



6.1
%Mortgage-backed securities

$
2,139.8


$
2,089.9



34.6
%Asset-backed securities

$
164.5


$
160.1



2.7
%Total

$
5,872.0


$
6,032.0



100.0
%  18




---



##### Table of Contents



Investment
    Returns for the Year Ended December 31, 2008
    Net investment income

$
308.8Net realized investment losses

$
(272.9
)Net change in unrealized gains and losses

$
(4.3
)Total net investment return

$
31.6Total
    return(1)


1.6
%Effective annualized
    yield(2)


4.7
%     (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.(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
   19




---



##### Table of Contents



Regulatory
    Matters
  General
      Bermuda
  General
    day-to-day
  Classification
    of Insurers
   20




---



##### Table of Contents



Cancellation
    of Insurers Registration
    Principal
    Representative
    Independent
    Approved Auditor
    Loss
    Reserve Specialist
    Financial
    Statements
   21




---



##### Table of Contents



Annual
    Statutory Financial Return
    Minimum
    Solvency Margin, Enhanced Capital Requirement 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;
    in addition, there is a requirement effective December 31,
    2008 to hold available statutory capital and surplus equal to or
    exceeding the enhanced capital requirement (an amount that must
    equal or exceed the minimum solvency margin). Allied World
    Assurance Company, Ltds enhanced capital requirement is
    determined by reference to the Bermuda Solvency Capital
    Requirement model (BSCR model) or an internal
    capital model approved by the BMA. The BSCR model is a
    risk-based capital model that provides a method for determining
    an insurers capital requirements (statutory capital and
    surplus) taking into account the risk characteristics of
    different aspects of the companys business. The BSCR
    formulas establish capital requirements for eight categories of
    risk: fixed income investment risk, equity investment risk,
    interest rate/liquidity risk, premium risk, reserve risk, credit
    risk, catastrophe risk and operational risk. For each category,
    the capital requirement is determined by applying factors to
    asset, premium, reserve, creditor, probable maximum loss and
    operation items, with higher factors applied to items with
    greater underlying risk and lower factors for less risky items.
    The capital and solvency return, which must be filed annually
    with the BMA, includes Allied World Assurance Company,
    Ltds BSCR model, a schedule of fixed income investments by
    rating categories, a schedule of net loss and loss expense
    provisions by line of business, a schedule of premiums written
    by line of business, a schedule of risk management and a
    schedule of fixed income securities;
    is prohibited from declaring or paying any dividends during any
    financial year if it is in breach of its minimum solvency
    margin, minimum liquidity ratio or enhanced capital requirement,
    or if the declaration or payment of those dividends would cause
    such a breach;
    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 22




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##### Table of Contents




    is required, at any time it fails to meet its enhanced capital
    requirement or minimum solvency margin, to file with the BMA a
    written report containing specified information.    Minimum
    Liquidity Ratio
    Supervision,
    Investigation and Intervention
    and/or
  Disclosure
    of Information
   23




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##### Table of Contents



Shareholder
    Controllers
      Selected
    Other Bermuda Law Considerations
     24




---



##### Table of Contents



Ireland
      United
    States
  Our
    U.S. Subsidiaries
     25




---



##### Table of Contents



Holding Company Regulation. 12-month
  12-month
  12-month
   26




---



##### Table of Contents



Guaranty Fund Assessments.
  Involuntary Pools.
  Risk-Based Capital.
  NAIC Ratios.
 27




---



##### Table of Contents



Surplus Lines Regulation. hard-to-place and/or
  Federal Initiatives. non-U.S. affiliates. and/or
   28




---



##### Table of Contents



Available
    Information
  Form 10-K.
  Form 10-K, Form 10-Q Form 8-K 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 significantly.
       29




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##### Table of Contents



Actual
    claims may exceed our reserves for losses and loss
    expenses.
        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.
   30




---



##### Table of Contents



The
    risk models we use to quantify catastrophe exposures and risk
    accumulations may prove inadequate in predicting all outcomes
    from potential catastrophe events.
    We
    could face losses from terrorism, political unrest and pandemic
    diseases.
    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.
   31




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##### Table of Contents



A
    prolonged recession and other adverse consequences as a result
    of the significant turmoil in the U.S. and international
    financial markets could harm our business, our liquidity and
    financial condition, and our share price.
    We may
    be impacted by claims relating to the current financial market
    turmoil, including subprime and other credit and insurance
    exposures.
  and/or
  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.
   32




---



##### Table of Contents



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.
    We may
    be unable to purchase reinsurance for our own account on
    commercially acceptable terms or to collect under any
    reinsurance we have purchased.
   33




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##### Table of Contents



Our
    investment performance may adversely affect our financial
    performance and ability to conduct business.
  mark-to-market other-than-temporary
        Any
    increase in interest rates and/or credit spread levels could
    result in significant losses in the fair value of our investment
    portfolio.
  non-U.S. Treasury
 34




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##### Table of Contents



Our
    valuation of fixed maturity securities may include
    methodologies, estimations and assumptions that are subject to
    differing interpretations and could result in changes to
    investment valuations that may materially adversely affect our
    results of operations or financial condition.
  period-to-period
  The
    determination of the impairments taken on our investments is
    highly subjective and could materially impact our financial
    position or results of operations.
   35




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##### 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 certain of our
    principal shareholders have continuing agreements and business
    relationships with us, and our principal shareholders may
    compete with us in several of our business lines.
     36




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##### Table of Contents



The
    anticipated benefits of the Darwin acquisition may not be
    realized fully or at all or may take longer to realize than
    expected.
    
    retaining existing employees, clients, brokers, agents and
    program administrators of Darwin,
    retaining and integrating management and other key employees of
    Darwin and
    potential charges to earnings resulting from the application of
    purchase accounting to the transaction.    Our
    business could be adversely affected if we lose any member of
    our management team or are unable to attract and retain our
    personnel.
    If a
    program administrator were to exceed its underwriting authority
    or otherwise breach obligations owed to us, we could be
    adversely affected.
    If we
    experience difficulties with our information technology and
    telecommunications systems and/or data security, our ability to
    conduct our business might be adversely affected.
  i-bind
 37




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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.
   38




---



##### Table of Contents



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
      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. 39




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##### Table of Contents



Risks
    Related to Laws and Regulations Applicable to Us
  Compliance
    by our insurance subsidiaries with the legal and regulatory
    requirements to which they are subject is expensive. Any failure
    to comply could have a material adverse effect on our
    business.
        
    require Allied World Assurance Company, Ltd to maintain minimum
    levels of capital and surplus,
    impose liquidity requirements which restrict the amount and type
    of investments it may hold,
    prescribe solvency standards that it must meet and
    restrict payments of dividends and reductions of capital and
    provide for the performance of periodic examinations of Allied
    World Assurance Company, Ltd and its financial condition.      1909-2000;
 40




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##### Table of Contents



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.
        30-day
 41




---



##### Table of Contents



Other
    legislative, regulatory and industry initiatives could adversely
    affect our business.
      
    provide insurance and reinsurance capacity in markets and to
    consumers that we target;
    require our participation in industry pools and guaranty
    associations;
    expand the scope of coverage under existing policies;
    increasingly mandate the terms of insurance and reinsurance
    policies;
    establish a new federal insurance regulator or financial
    industry systemic risk regulator;
    revise laws and regulations under which we operate, including a
    potential change to U.S. tax laws to disallow the current
    tax deduction for reinsurance premiums paid by our
    U.S. subsidiaries to our Bermuda insurance subsidiary with
    respect to
    U.S.-based
    risks; or
    disproportionately benefit the companies of one country over
    those of another.   42




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##### Table of Contents



Our
    business could be adversely affected by Bermuda employment
    restrictions.
  six-to-nine-year
  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
 43




---



##### Table of Contents



Our
    Bye-laws contain restrictions on ownership, voting and transfers
    of our common shares.
      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, 44




---



##### Table of Contents




    our directors may decline to register a transfer of shares if as
    a result of such transfer any U.S. person owns 10% or more
    of our shares by vote or value (other than some of our principal
    shareholders, whose share ownership may not exceed the percent
    of our common shares owned immediately after our initial public
    offering of common shares in July 2006 (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.
         45




---



##### 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. company non-U.S. company non-U.S. companies
    Ireland-United
 46




---



##### Table of Contents



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 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
 47




---



##### Table of Contents



non-U.S. subsidiaries non-U.S., 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. entities non-U.S. insurance non-U.S. insurance non-U.S. insurance non-U.S. entities,
   48




---



##### 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
  We may
    be subject to U.K. tax, which may have a material adverse effect
    on our results of operations.
     49




---



##### Table of Contents



We may
    be subject to Irish tax, which may have a material adverse
    effect on our results of operations.
     50




---



##### 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.    Item 2.
    Properties.  Form 10-K.
 51




---



##### Table of Contents



Item 3.
    Legal
    Proceedings.        Item 4.
    Submission
    of Matters to a Vote of Security Holders.   52




---



##### Table of Contents



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


Low2008:First quarter

$
50.24


$
38.29Second quarter

$
46.82


$
39.08Third quarter

$
42.93


$
34.67Fourth quarter

$
40.60


$
21.002007:First quarter

$
46.50


$
40.87Second quarter

$
52.00


$
42.10Third quarter

$
52.37


$
42.75Fourth quarter

$
53.48


$
43.44       Form 10-K.
   53




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##### Table of Contents



Performance
    Graph
      TOTAL
    RETURN TO SHAREHOLDERS
    (INCLUDES REINVESTMENT OF DIVIDENDS)
  COMPARISON OF CUMULATIVE TOTAL RETURN
  
 54




---



##### Table of Contents



Item 6.
    Selected
    Financial Data.  Form 10-K. Form 10-K,
  Year Ended December 31,2008


2007


2006


2005


2004($ in millions, except per share amounts and ratios)Summary Statement of Operations Data:Gross premiums written

$
1,445.6


$
1,505.5


$
1,659.0


$
1,560.3


$
1,708.0Net premiums written

$
1,107.2


$
1,153.1


$
1,306.6


$
1,222.0


$
1,372.7Net premiums earned

$
1,117.0


$
1,159.9


$
1,252.0


$
1,271.5


$
1,325.5Net investment income


308.8



297.9



244.4



178.6



129.0Net realized investment (losses) gains


(272.9
)


(7.6
)


(28.7
)


(10.2
)


10.8Other income


0.7















Net losses and loss expenses


641.1



682.3



739.1



1,344.6



1,013.4Acquisition costs


112.6



119.0



141.5



143.4



170.9General and administrative expenses


186.6



141.6



106.1



94.3



86.3Interest expense


38.7



37.8



32.6



15.6



Foreign exchange (gain) loss


(1.4
)


(0.8
)


0.6



2.2



(0.3
)Income tax (recovery) expense


(7.6
)


1.1



5.0



(0.4
)


(2.2
)Net income (loss)

$
183.6


$
469.2


$
442.8


$
(159.8
)

$
197.2Per Share Data:Earnings (loss) per share(1):Basic

$
3.75


$
7.84


$
8.09


$
(3.19
)

$
3.93Diluted


3.59



7.53



7.75



(3.19
)


3.83Weighted average number of common shares outstanding:Basic


48,936,912



59,846,987



54,746,613



50,162,842



50,162,842Diluted


51,147,215



62,331,165



57,115,172



50,162,842



51,425,389Dividends paid per share

$
0.72


$
0.63


$
0.15


$
9.93



   Year Ended December 31,2008


2007


2006


2005


2004Selected Ratios:Loss and loss expense ratio(2)


57.4
%


58.8
%


59.0
%


105.7
%


76.5
%Acquisition cost ratio(3)


10.1



10.3



11.3



11.3



12.9General and administrative expense ratio(4)


16.7



12.2



8.5



7.4



6.5Expense ratio(5)


26.8



22.5



19.8



18.7



19.4Combined ratio(6)


84.2



81.3



78.8



124.4



95.9   55




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##### Table of Contents



As of December 31,2008


2007


2006


2005


2004($ in millions, except per share amounts)Summary Balance Sheet Data:Cash and cash equivalents

$
655.8


$
202.6


$
366.8


$
172.4


$
190.7Investments at fair market value


6,157.1



6,029.3



5,440.3



4,687.4



4,087.9Reinsurance recoverable


888.3



682.8



689.1



716.3



259.2Total assets


9,072.1



7,899.1



7,620.6



6,610.5



5,072.2Reserve for losses and loss expenses


4,576.8



3,919.8



3,637.0



3,405.4



2,037.1Unearned premiums


930.4



811.1



813.8



740.1



795.3Total debt


742.5



498.7



498.6



500.0



Total shareholders equity


2,416.9



2,239.8



2,220.1



1,420.3



2,138.5Book value per share(7):Basic

$
49.29


$
45.95


$
36.82


$
28.31


$
42.63Diluted


46.05



42.53



35.26



28.20



41.58     (1)
    
    Please refer to Note 13 of the notes to consolidated
    financial statements for the calculation of basic and diluted
    earnings per share.(2)
    
    Calculated by dividing net losses and loss expenses by net
    premiums earned.(3)
    
    Calculated by dividing acquisition costs by net premiums earned.(4)
    
    Calculated by dividing general and administrative expenses by
    net premiums earned.(5)
    
    Calculated by combining the acquisition cost ratio and the
    general and administrative expense ratio.(6)
    
    Calculated by combining the loss ratio, acquisition cost ratio
    and general and administrative expense ratio.(7)
    
    Basic book value per share is defined as total
    shareholders equity available to common shareholders
    divided by the number of common shares issued and 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 issued and 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 and options that were anti-dilutive were
    excluded from the calculation of the diluted book value per
    share as of December 31, 2008 and 2005. As of
    December 31, 2008, the number of options that were
    anti-dilutive were 487,000. As of December 31, 2005, the
    number of warrants that were anti-dilutive were 5,873,500.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Form 10-K Form 10-K Form 10-K.
 56




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##### Table of Contents



Overview
  Our
    Business
      Recent
    Developments
  Darwin
    Acquisition
    Financial
    Markets
   57




---



##### Table of Contents



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
    IBNR, which are reserves established by us for changes in the
    values of claims that have been reported to us but are not yet
    settled, as well as claims that have occurred but have not yet
    been reported. The portion recoverable from reinsurers is
    deducted from the gross estimated loss.   58




---



##### Table of Contents



Ratios
    Critical
    Accounting Policies
    Reserve
    for Losses and Loss Expenses
       59




---



##### Table of Contents



As of December 31,2008


2007


2006($ in millions)Case reserves

$
1,132.9


$
963.4


$
935.2IBNR


3,443.9



2,956.4



2,701.8Reserve for losses and loss expenses


4,576.8



3,919.8



3,637.0Reinsurance recoverables


(888.3
)


(682.8
)


(689.1
)Net reserve for losses and loss expenses

$
3,688.5


$
3,237.0


$
2,947.9            60




---



##### Table of Contents



Paid Loss Development Method.
  Reported Loss Development Method.
 61




---



##### Table of Contents



Expected Loss Ratio Method.
  Bornhuetter-Ferguson Paid Loss Method.
  Bornhuetter-Ferguson Reported Loss Method.
         62




---



##### Table of Contents



As of December 31,2008


2007Loss Year2002


4.0
%


6.0
%2003


6.0
%


8.0
%2004


8.0
%


10.0
%2005


10.0
%


10.0
%2006


10.0
%


10.0
%2007


10.0
%


10.0
%2008


10.0
%


    63




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##### Table of Contents



Reinsurance
    Recoverable
      As of December 31,2008


2007


2006($ in millions)Property

$
309.5


$
400.1


$
468.4Casualty


575.6



264.5



182.6Reinsurance


3.2



18.2



38.1Total reinsurance recoverable

$
888.3


$
682.8


$
689.1       Premiums
    and Acquisition Costs
   64




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##### Table of Contents



Fair
    Value of Financial Instruments
    
    Level 1: Observable inputs to the valuation
    methodology that are quoted prices (unadjusted) for identical
    assets or liabilities in active markets.
    Level 2: Observable inputs to the valuation
    methodology other than quoted market prices (unadjusted) for
    identical assets or liabilities in active markets. Level 2
    inputs include quoted prices for similar assets and liabilities
    in active markets, quoted prices for identical assets in markets
    that are not active and inputs other than quoted prices that are
    observable for the asset or liability, either directly or
    indirectly, for substantially the full term of the asset or
    liability.
    Level 3: Inputs to the valuation methodology that
    are unobservable for the asset or liability.    U.S. government and U.S. government agencies
  Non-U.S. government
    and government agencies non-U.S. governmental
 65




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##### Table of Contents



Corporate:
  States, municipalities and political subdivisions:
  Mortgage-backed: non-U.S. government
  Asset-backed:
  Other invested assets available for sale:
  Other invested assets, at fair value: lock-up lock-up lock-up
 66




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##### Table of Contents



Fair Value ofFixed Maturity


Percentage of


SFAS 157 FairInvestments as of


Total Fixed


ValueDecember 31, 2008


Maturity


Hierarchy(In millions)


Investments


LevelPricing SourcesBarclay indices

$
3,902.7



64.7
%


1 and 2Interactive Data Pricing


837.6



13.9



2Reuters pricing service


645.2



10.7



2Standard & Poors


324.1



5.4



2Merrill Lynch indices


102.9



1.7



2International indices


74.0



1.2



2Other (including broker/dealer quotes)


145.5



2.4



2$
6,032.0



100.0
%   Barclay indices:
  Interactive Data Pricing:
  Reuters pricing service:
  Standard & Poors:
  Merrill Lynch Index: non-U.S. government
  International indices: non-U.S. government
  Other (including broker/dealer quotes):
   67




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##### Table of Contents



Other-than-Temporary
    Impairment of Investments
        Year Ended December 31,2008


2007($ in millions)U.S. government and government agencies

$
21.1


$
8.3Non-U.S.
    government and government agencies


2.8



0.1Corporate


83.5



3.0States, municipalities and political subdivisions


0.8



Mortgage backed


95.8



5.4Asset backed


8.9



0.4Total other-than-temporary impairment charges

$
212.9


$
17.2    68




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##### Table of Contents



Results
    of Operations
    Year Ended December 31,2008


2007


2006($ in millions)Gross premiums written

$
1,445.6


$
1,505.5


$
1,659.0Net premiums written

$
1,107.2


$
1,153.1


$
1,306.6Net premiums earned

$
1,117.0


$
1,159.9


$
1,252.0Net investment income


308.8



297.9



244.4Net realized investment losses


(272.9
)


(7.6
)


(28.7
)Other income


0.7







$
1,153.6


$
1,450.2


$
1,467.7Net losses and loss expenses

$
641.1


$
682.3


$
739.1Acquisition costs


112.6



119.0



141.5General and administrative expenses


186.6



141.6



106.1Interest expense


38.7



37.8



32.6Foreign exchange (gain) loss


(1.4
)


(0.8
)


0.6$
977.6


$
979.9


$
1,019.9Income before income taxes

$
176.0


$
470.3


$
447.8Income tax (recovery) expense


(7.6
)


1.1



5.0Net income

$
183.6


$
469.2


$
442.8RatiosLoss and loss expense ratio


57.4
%


58.8
%


59.0
%Acquisition cost ratio


10.1



10.3



11.3General and administrative expense ratio


16.7



12.2



8.5Expense ratio


26.8



22.5



19.8Combined ratio


84.2



81.3



78.8  69




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##### Table of Contents



Comparison
    of Years Ended December 31, 2008 and 2007
  Premiums
    
    The non-renewal of business that did not meet our underwriting
    requirements (which included pricing
    and/or
    policy and contract terms and conditions), increased competition
    and decreasing rates for renewal business in each of our
    operating segments. This included a reduction in gross premiums
    written in our energy line of business, within our property
    segment, by $40.1 million, or 41.7%, and a reduction in the
    amount of gross premiums written for certain energy classes of
    business within our casualty segment by $9.9 million in
    response to deteriorating market conditions.
    In our reinsurance segment, adjustments on estimated premiums
    were lower by $33.7 million during the year ended
    December 31, 2008 compared to the year ended
    December 31, 2007. We recognized net downward adjustments
    of $19.5 million during the year ended December 31,
    2008 compared to net upward adjustments of $14.2 million
    during the year ended December 31, 2007.
    Offsetting these reductions were higher gross premiums written
    in our casualty segment of $109.6 million, or 18.9%,
    primarily due to increased gross premiums written by our
    U.S. offices as well as the inclusion of Darwins
    gross premiums written for the period from October 20, 2008
    to December 31, 2008. Gross premiums written by our
    U.S. offices, including Darwin, increased by
    $124.6 million, or 93.4%, for the year ended
    December 31, 2008 compared to the year ended December 31,
    2007. The total gross premiums written by Darwin were
    $68.9 million for the period from October 20, 2008 to
    December 31, 2008.    Year EndedDecember,


Dollar


Percentage2008


2007


Change


Change($ in millions)Bermuda

$
793.7


$
1,065.9


$
(272.2
)


(25.5
)%Europe


224.2



246.9



(22.7
)


(9.2
)United States


427.7



192.7



235.0



122.0$
1,445.6


$
1,505.5


$
(59.9
)


(4.0
)%   and/or
   70




---



##### Table of Contents



Gross


NetPremiums Written


Premiums EarnedYear Ended December 31,2008


2007


2008


2007Property


22.7
%


26.0
%


15.6
%


15.6
%Casualty


47.6



38.4



42.8



41.0Reinsurance


29.7



35.6



41.6



43.4     Net
    Investment Income and Net Realized Losses
        
    A write-down of $212.9 million related to declines in the
    market value of securities in our available for sale portfolio
    that were considered to be other than temporary. The declines in
    the market value of these securities were primarily due to the
    write-down of residential and commercial mortgage-backed
    securities and corporate bonds due to the widening of credit
    spreads caused by the continued decline in the U.S. housing
    market and the current turmoil in the financial markets. Of the
    total other-than-temporary impairment charge of
    $212.9 million recognized during the year ended
    December 31, 2008, $164.0 million was due to our
    investment portfolio managers having the discretion to sell
    certain investments, and therefore we could not assert we have
    the intent to hold certain investments in an unrealized loss
    until recovery. In addition we recognized an
    other-than-temporary impairment charge of $48.9 million for
    certain debt securities with 71




---



##### Table of Contents



unrealized losses that we planned to sell subsequent to the
    reporting period. The following shows the other-than-temporary
    impairment charge for our fixed maturity investments by category:  Other-than-temporaryimpairment chargesfor the Year EndedDecember 31,2008($ in millions)U.S. government and government agencies

$
21.1Non-U.S.
    government and government agencies


2.8Corporate


83.5States, municipalities and political subdivisions


0.8Mortgage backed


95.8Asset backed


8.9Total other-than-temporary impairment charges

$
212.9   
    Net realized investment losses of $77.7 million related to
    the mark-to-market of our hedge fund investments and equity
    securities. The net realized investment losses were due to the
    overall volatility of the financial markets. In January 2009,
    one of the funds received a notice of termination from one of
    its lenders and is expected to be liquidated during 2009. We do
    not expect to receive any proceeds at final redemption, and have
    taken a mark-to-market loss of $19.4 million during the
    year ended December 31, 2008. On January 1, 2008, we
    adopted Statement of Financial Accounting Standards No. 159
    The Fair Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115 (FAS 159) and elected to
    fair value our hedge fund investments. Also as part of our
    acquisition of Darwin, we elected the fair value option on the
    equity securities acquired. As a result, any change in the fair
    value of our hedge fund investments and equity securities is
    recognized as realized investment gains or losses in the
    consolidated statements of operations and comprehensive income
    at each reporting period. As we adopted FAS 159 in 2008,
    there were no realized investment gains or losses recognized
    from our hedge fund investments in the consolidated statement of
    operations and comprehensive income during the year ended
    December 31, 2007 as the change in fair value was included
    in accumulated other comprehensive income in the
    consolidated balance sheet.
    Other net realized investment gains of $17.7 million. This
    included net realized gains of $12.4 million from our
    investment in the Goldman Sachs Multi-Strategy VI, Ltd fund (the
    Portfolio VI Fund) and AIG Select Hedge Ltd. fund
    (the AIG Select Fund).
    Also included in net realized investment gains of
    $17.7 million are net realized investment losses recognized
    from the sale of fixed income securities issued by Lehman
    Brothers Holding Ltd of $45.0 million, Morgan Stanley of
    $15.0 million and Washington Mutual, Inc. of
    $1.7 million, in addition to realized gains from the sale
    of other fixed maturity securities, primarily U.S. Treasury
    securities.    
    A write-down of $23.9 million related to our investment in
    the 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 fund, we could not reasonably estimate when
    recovery would occur, and as such recorded an
    other-than-temporary
    impairment charge. We sold our shares in the Global Alpha Hedge
    on December 31, 2007 for proceeds of $31.5 million,
    which resulted in an additional realized loss of
    $2.1 million. 72




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##### Table of Contents




    A write-down of $3.5 million related to our investment in
    the Global Equity Opportunities Fund. We submitted a redemption
    notice in November 2007 to sell our shares in this fund and as a
    result recognized an other-than-temporary impairment charge at
    December 31, 2007. The sale of shares occurred in February,
    2008.
    A write-down of $2.2 million related to our investment in
    bonds issued by a mortgage lending institution. We performed an
    analysis of the issuer, including its liquidity, business
    prospects and overall financial position and concluded that an
    other-than-temporary impairment charge should be recognized.
    The remaining write-downs of $15.0 million were solely due
    to changes in interest rates.  Other
    Income
    Net
    Losses and Loss Expenses
      Loss Reserve Development by Loss Year2002


2003


2004


2005


2006


2007


Total($ in millions)Property

$
0.5


$
(5.3
)

$
(6.5
)

$
(5.2
)

$
(14.5
)

$
(12.8
)

$
(43.8
)Casualty


(9.2
)


(74.5
)


(67.8
)


(5.8
)


14.9



(1.4
)


(143.8
)Reinsurance


(0.2
)


(7.2
)


(19.7
)


(26.3
)


(2.2
)


(3.4
)


(59.0
)Total

$
(8.9
)

$
(87.0
)

$
(94.0
)

$
(37.3
)

$
(1.8
)

$
(17.6
)

$
(246.6
)     
    The net favorable non-catastrophe reserve development recognized
    in our property segment was primarily the result of the general
    property line of business actual loss emergence being lower than
    the initial expected loss emergence for the 2003 through 2007
    loss years.
    The net favorable reserve development recognized in our casualty
    segment primarily was a result of general casualty and
    healthcare lines of business actual loss emergence being lower
    than the initial expected loss emergence for the 2002 through
    2004 loss years and the professional liability line of business
    actual loss 73




---



##### Table of Contents



emergence being lower than the initial expected loss emergence
    for the 2003 and 2004 loss years. This was partially offset by
    unfavorable reserve development recognized in the professional
    liability line of business for the 2002 and 2006 loss years due
    to increased loss activity in those loss years. We also
    recognized $11.3 million in net favorable reserve
    development related to Darwins business, which primarily
    relates to the 2006 and 2007 loss years.  
    The net favorable non-catastrophe reserve development recognized
    in our reinsurance segment was primarily the result of net
    favorable reserve development of $25.7 million for our
    professional liability reinsurance, general casualty
    reinsurance, accident and health reinsurance and facultative
    reinsurance lines of business and $33.3 million of net
    favorable reserve development for our property reinsurance and
    international reinsurance lines of business. The net favorable
    non-catastrophe reserve development for our professional
    liability reinsurance, general casualty reinsurance, accident
    and health reinsurance and facultative reinsurance lines of
    business was primarily the result of actual loss emergence being
    lower than the initial expected loss emergence for the 2003
    through 2005 loss years. The net favorable non-catastrophe
    reserve development for our property reinsurance and
    international reinsurance lines of business was primarily the
    result of actual loss emergence being lower than the initial
    expected loss emergence for the 2002 through 2007 loss years.      
    Net favorable 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 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 accident years.   74




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##### Table of Contents



Year EndedDecember 31,


Dollar2008


2007


Change($ in millions)Net losses paid

$
474.2


$
397.9


$
76.3Net change in reported case reserves


89.6



38.0



51.6Net change in IBNR


77.3



246.4



(169.1
)Net losses and loss expenses

$
641.1


$
682.3


$
(41.2
)    75




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##### Table of Contents



Year EndedDecember 31,2008


2007($ in millions)Net reserves for losses and loss expenses, January 1

$
3,237.0


$
2,947.9Acquisition of net reserve for losses and loss expenses


298.9



Incurred related to:Current period non-catastrophe


773.1



805.4Current period property catastrophe


148.1



Prior period non-catastrophe


(246.6
)


(84.0
)Prior period property catastrophe


(33.5
)


(39.1
)Total incurred

$
641.1


$
682.3Paid related to:Current period non-catastrophe


40.9



32.6Current period property catastrophe


38.1



Prior period non-catastrophe


355.6



266.8Prior period property catastrophe


39.6



98.5Total paid

$
474.2


$
397.9Foreign exchange revaluation


(14.3
)


4.7Net reserve for losses and loss expenses, December 31


3,688.5



3,237.0Losses and loss expenses recoverable


888.3



682.8Reserve for losses and loss expenses, December 31

$
4,576.8


$
3,919.8   Acquisition
    Costs
    General
    and Administrative Expenses
    
    Salary and employee welfare costs increased approximately
    $32.9 million due to our staff count increasing to 560 as
    of December 31, 2008 from 300 as of December 31, 2007.
    The increase in staff count includes 188 employees of
    Darwin. The increase also included a one-time expense of
    $4.5 million for the reimbursement of forfeited stock
    compensation and signing bonuses for new executives hired as
    part of the continued expansion of our U.S. operations and
    increased stock compensation costs of $5.7 million for all
    offices. We also recognized $3.1 million of salary and
    welfare costs related to the Darwin long-term incentive plan.
    The Darwin long-term incentive plan was for certain of its key
    employees and was based on underwriting profitability. Please
    see Note 12(c) of the notes to consolidated financial statements
    for further details on the Darwin long-term incentive plan.
    Rent and amortization of leaseholds and furniture and fixtures
    increased by approximately $4.3 million due to our new
    office space in New York, Farmington (CT) and Chicago and
    increased amortization of furniture and fixtures. 76




---



##### Table of Contents




    Information technology costs increased by approximately
    $2.8 million due to higher network fees and consulting
    costs in 2008 than 2007. This increase was due to the
    development of our technological infrastructure as well as an
    increase in the cost of hardware and software.
    Professional fees increased by approximately $1.6 million.      Interest
    Expense
    Net
    Income
    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.    77




---



##### Table of Contents



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
    
    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  78




---



##### Table of Contents



Net
    Investment Income and Realized Gains/Losses
        
    A write-down of $23.9 million related to our investment in
    the 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 impairment charge. We sold our shares in
    the Global Alpha Fund on December 31, 2007 for proceeds of
    $31.5 million, which resulted in an additional realized
    loss of $2.1 million.
    A write-down of $3.5 million related to our investment in
    the Global Equity Opportunities Fund. We submitted a redemption
    notice in November 2007 to sell our shares in this fund and as a
    result recognized an other-than-temporary impairment charge at
    December 31, 2007. The sale of shares occurred in February
    2008.
    A write-down of $2.2 million related to our investment in
    bonds issued by a mortgage lending institution. We performed an
    analysis of the issuer, including its liquidity, business
    prospects and overall financial position and concluded that an
    other-than-temporary impairment charge should be recognized.
    The remaining write-downs of $15.0 million were solely due
    to changes in interest rates.   79




---



##### Table of Contents



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 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. 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. 80




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##### Table of Contents




    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
)    81




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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 related to our RSUs. Please see Note 12
    of the consolidated financial statements 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 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. 82




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##### Table of Contents




    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
    Underwriting
    Results by Operating Segments
    Property Segment.
  Casualty Segment. and/or
 83




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##### Table of Contents



Reinsurance Segment.
  Property
    Segment
    Year Ended December 31,2008


2007


2006($ in millions)RevenuesGross premiums written

$
327.5


$
391.0


$
463.9Net premiums written


169.9



176.4



193.7Net premiums earned


173.7



180.5



190.8ExpensesNet losses and loss expenses

$
182.2


$
105.7


$
115.0Acquisition costs


1.9



(0.1
)


(2.2
)General and administrative expenses


39.3



34.2



26.3Underwriting (loss) income


(49.7
)


40.7



51.7RatiosLoss and loss expense ratio


104.9
%


58.6
%


60.3
%Acquisition cost ratio


1.1



(0.1
)


(1.2
)General and administrative expense ratio


22.6



18.9



13.8Expense ratio


23.7



18.8



12.6Combined ratio


128.6



77.4



72.9   Comparison
    of Years Ended December 31, 2008 and 2007
  Premiums. and/or
    Year EndedDecember 31,


Dollar


Percentage2008


2007


Change


Change($ in millions)General property

$
271.2


$
293.5


$
(22.3
)


(7.6
)%Energy


56.0



96.1



(40.1
)


(41.7
)Other


0.3



1.4



(1.1
)


(78.6
)$
327.5


$
391.0


$
(63.5
)


(16.2
)%    84




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##### Table of Contents




    We renewed our property catastrophe reinsurance treaty, which
    resulted in ceded written premiums of $26.1 million. The
    cost of the property catastrophe reinsurance treaty was higher
    than the expiring treaty by approximately $7.0 million. The
    increased cost of the property catastrophe reinsurance treaty
    was principally due to the new treaty expanding earthquake
    coverage in the United States and increased exposure due to
    changes in our general property quota share reinsurance treaty.
    Our international property catastrophe treaty was cancelled and
    rewritten effective May 1, 2008. This treaty covers
    worldwide losses, excluding the United States and Canada. The
    total ceded premiums written for the international property
    catastrophe treaty was $2.0 million for the year ended
    December 31, 2008 compared to $1.6 million for the
    year ended December 31, 2007.
    We purchased an excess-of-loss reinsurance treaty for our
    general property line of business with a limit of
    $15 million excess of $10 million or
    10 million excess of 10 million. The total
    ceded premiums written for the excess-of-loss treaty was
    $3.4 million. There was no excess-of-loss treaty in place
    during the year ended December 31, 2007.    Net losses and loss expenses.
    
    Net favorable reserve development of $43.8 million,
    excluding the 2004 and 2005 windstorms, was recognized primarily
    as a result of the general property line of business actual loss
    emergence being lower than the initial expected loss emergence
    for the 2003 through 2007 loss years.
    We recognized net favorable reserve development of
    $16.6 million related to the 2005 windstorms and net
    favorable reserve development of $0.8 million related to
    the 2004 windstorms due to lower than anticipated loss activity
    during the past year.    
    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 12 months prior
    to December 31, 2007.
    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.   85




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##### Table of Contents



Year EndedDecember 31,2008


2007($ in millions)Net reserves for losses and loss expenses, January 1

$
360.6


$
423.9Incurred related to:Current period non-catastrophe


136.1



151.1Current period property catastrophe


107.3



Prior period non-catastrophe


(43.8
)


(10.1
)Prior period property catastrophe


(17.4
)


(35.3
)Total incurred

$
182.2


$
105.7Paid related to:Current period non-catastrophe


28.5



20.6Current period property catastrophe


21.1



Prior period non-catastrophe


101.6



84.6Prior period property catastrophe


14.4



68.5Total paid

$
165.6


$
173.7Foreign exchange revaluation


(14.3
)


4.7Net reserve for losses and loss expenses, December 31


362.9



360.6Losses and loss expenses recoverable


309.5



400.1Reserve for losses and loss expenses, December 31

$
672.4


$
760.7   Acquisition costs.
  General and administrative expenses.
 86




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##### Table of Contents



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
)%     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 87




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##### Table of Contents



recognized the net favorable reserve development for the 2004
    and 2005 windstorms due to less than anticipated reported loss
    activity.  
    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.     88




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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.
 89




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##### Table of Contents



Casualty
    Segment
    Year Ended December 31,2008


2007


2006($ in millions)RevenuesGross premiums written

$
688.0


$
578.4


$
622.4Net premiums written


509.0



440.8



541.0Net premiums earned


478.6



475.5



534.3Other income


0.7







ExpensesNet losses and loss expenses

$
209.7


$
275.8


$
331.8Acquisition cost


19.7



17.3



30.4General and administrative expenses


103.7



68.3



52.8Underwriting income


146.2



114.1



119.3RatiosLoss and loss expense ratio


43.8
%


58.0
%


62.1
%Acquisition cost ratio


4.1



3.6



5.7General and administrative expense ratio


21.7



14.4



9.9Expense ratio


25.8



18.0



15.6Combined ratio


69.6



76.0



77.7   Comparison
    of Years Ended December 31, 2008 and 2007
  Premiums. and/or
    Year EndedDecember 31,


Dollar


Percentage2008


2007


Change


Change($ in millions)Professional liability

$
330.3


$
269.3


$
61.0



22.7
%General casualty


217.3



240.5



(23.2
)


(9.6
)Healthcare


101.7



52.8



48.9



92.6Programs


36.2



15.8



20.4



129.1Other


2.5







2.5



n/a*$
688.0


$
578.4


$
109.6



18.9
%     *
    
    n/a not applicable 90




---



##### Table of Contents



Other Income.
  Net losses and loss expenses.
    
    Favorable reserve development of $161.8 million related to
    low loss emergence in our general casualty and healthcare lines
    of business for the 2002 through 2004 loss years and our
    professional liability line of business for the 2003 and 2004
    loss years.
    Unfavorable reserve development of $33.9 million due to
    higher than anticipated loss emergence in our professional
    liability line of business for the 2002 and 2006 loss years and
    our general casualty line of business for the 2006 and 2007 loss
    years.
    Net favorable reserve development of $11.3 million related
    to the reserves for loss and loss expenses acquired as part of
    the acquisition of Darwin. The net favorable reserve development
    primarily relates to the 2006 and 2007 loss years.    
    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.   91




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Year EndedDecember 31,2008


2007($ in millions)Net reserves for losses and loss expenses, January 1

$
1,878.2


$
1,691.2Acquisition of net reserve for losses and loss expenses


315.5



Incurred related to:Current period non-catastrophe


353.5



346.4Current period property catastrophe






Prior period non-catastrophe


(143.8
)


(70.6
)Prior period property catastrophe






Total incurred

$
209.7


$
275.8Paid related to:Current period non-catastrophe


2.9



0.1Current period property catastrophe






Prior period non-catastrophe


147.1



88.7Prior period property catastrophe






Total paid

$
150.0


$
88.8Net reserve for losses and loss expenses, December 31


2,253.4



1,878.2Losses and loss expenses recoverable


575.6



264.5Reserve for losses and loss expenses, December 31

$
2,829.0


$
2,142.7     Acquisition costs.
 92




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##### Table of Contents



General and administrative expenses.
  Comparison
    of Years Ended December 31, 2007 and 2006
  Premiums. and/or
    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.
 93




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##### Table of Contents




    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.          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


$
59.7Net 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  94




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##### Table of Contents



Acquisition costs.
  General and administrative expenses.
  Reinsurance
    Segment
    Year Ended December 31,2008


2007


2006($ in millions)RevenuesGross premiums written

$
430.1


$
536.1


$
572.7Net premiums written


428.4



535.9



572.0Net premiums earned


464.5



504.0



526.9ExpensesNet losses and loss expenses

$
249.1


$
300.9


$
292.4Acquisition costs


91.0



101.8



113.3General and administrative expenses


43.5



39.1



27.0Underwriting income


80.9



62.2



94.2RatiosLoss and loss expense ratio


53.6
%


59.7
%


55.5
%Acquisition cost ratio


19.6



20.2



21.5General and administrative expense ratio


9.4



7.8



5.1Expense ratio


29.0



28.0



26.6Combined ratio


82.6



87.7



82.1   Comparison
    of Years Ended December 31, 2008 and 2007
  Premiums. and/or
   95




---



##### Table of Contents



Year EndedDecember 31,


Dollar


Percentage2008


2007


Change


Change($ in millions)Professional liability reinsurance

$
131.1


$
210.9


$
(79.8
)


(37.8
)%General casualty reinsurance


108.8



126.5



(17.7
)


(14.0
)International reinsurance


77.8



73.9



3.9



5.3Property reinsurance


77.3



83.7



(6.4
)


(7.6
)Facultative reinsurance


23.7



33.0



(9.3
)


(28.2
)Other


11.4



8.1



3.3



40.7$
430.1


$
536.1


$
(106.0
)


(19.8
)%     Net losses and loss expenses.
    
    Net favorable reserve development of $25.7 million for our
    professional liability reinsurance, general casualty
    reinsurance, accident and health reinsurance and facultative
    reinsurance lines of business. The net favorable reserve
    development for these lines of business was primarily the result
    of actual loss emergence being lower than the initial expected
    loss emergence for the 2003 through 2005 loss years.
    Net favorable reserve development of $33.3 million,
    excluding the 2004 and 2005 windstorms, for our property
    reinsurance and international reinsurance lines of business was
    primarily the result of actual loss emergence being lower than
    the initial expected loss emergence for the 2002 through 2007
    loss years.
    We recognized net favorable development of $16.1 million
    related to the 2004 and 2005 windstorms.    
    Net favorable reserve development of $3.8 million related
    to the 2004 and 2005 windstorms.
    Favorable reserve development of $3.3 million related to
    low loss emergence in our property and accident and health
    reinsurance lines of business for the 2004 and 2005 loss years. 96




---



##### Table of Contents



Year EndedDecember 31,2008


2007($ in millions)Net reserves for losses and loss expenses, January 1

$
998.2


$
832.8Acquisition of net reserve for losses and loss expenses


(16.6
)


Incurred related to:Current period non-catastrophe


283.4



308.0Current period property catastrophe


40.8



Prior period non-catastrophe


(59.0
)


(3.3
)Prior period property catastrophe


(16.1
)


(3.8
)Total incurred

$
249.1


$
300.9Paid related to:Current period non-catastrophe


9.5



11.9Current period property catastrophe


17.0



Prior period non-catastrophe


106.9



93.5Prior period property catastrophe


25.2



30.1Total paid

$
158.6


$
135.5Net reserve for losses and loss expenses, December 31


1,072.1



998.2Losses and loss expenses recoverable


3.2



18.2Reserve for losses and loss expenses, December 31

$
1,075.3


$
1,016.4  97




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##### Table of Contents



Acquisition costs.
  General and administrative expenses.
  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.    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
)%    98




---



##### Table of Contents



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.     99




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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


$
185.9Net 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.
  General and administrative expenses.
 100




---



##### Table of Contents



Reserves
    for Losses and Loss Expenses
    Property


Casualty


Reinsurance


TotalDecember 31,


December 31,


December 31,


December 31,2008


2007


2006


2008


2007


2006


2008


2007


2006


2008


2007


2006($ in millions)Case reserves

$
498.1


$
480.0


$
562.2


$
378.5


$
270.7


$
175.0


$
256.3


$
212.7


$
198.0


$
1,132.9


$
963.4


$
935.2IBNR


174.3



280.7



330.1



2,450.5



1,872.0



1,698.8



819.0



803.7



672.9



3,443.9



2,956.4



2,701.8Reserve for losses and loss expenses


672.4



760.7



892.3



2,829.0



2,142.7



1,873.8



1,075.3



1,016.4



870.9



4,576.8



3,919.8



3,637.0Reinsurance recoverables


(309.5
)


(400.1
)


(468.4
)


(575.6
)


(264.5
)


(182.6
)


(3.2
)


(18.2
)


(38.1
)


(888.3
)


(682.8
)


(689.1
)Net reserve for losses and loss expenses

$
362.9


$
360.6


$
423.9


$
2,253.4


$
1,878.2


$
1,691.2


$
1,072.1


$
998.2


$
832.8


$
3,688.5


$
3,237.0


$
2,947.9         Reserve for Losses and Loss ExpensesGross of Reinsurance Recoverable(1)Carried


Low


HighReserves


Estimate


Estimate($ in millions)Property

$
672.4


$
584.3


$
785.2Casualty


2,829.0



2,146.1



3,131.6Reinsurance


1,075.3



768.7



1,338.0   101




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##### Table of Contents



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


Low


HighReserves


Estimate


Estimate($ in millions)Property

$
362.9


$
315.8


$
419.4Casualty


2,253.4



1,696.5



2,514.1Reinsurance


1,072.1



766.1



1,334.8     (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.    Form 10-K.
  Ceded
    Reinsurance
    Gross Premiums Written andPremiums CededYear Ended December 31,2008


2007


2006($ in millions)Gross

$
1,445.6


$
1,505.5


$
1,659.0Ceded


(338.4
)


(352.4
)


(352.4
)Net

$
1,107.2


$
1,153.1


$
1,306.6Ceded as percentage of gross


23.4
%


23.4
%


21.2
%  102




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##### Table of Contents



Year Ended December 31,2008


2007


2006($ in millions)Premiums written ceded


338.4



352.4



352.4Premiums earned ceded


347.0



348.3



332.4Losses and loss expenses ceded


176.4



189.8



244.8Acquisition costs ceded


70.8



66.4



61.6         
    Our property segment has purchased quota share reinsurance
    almost from inception. We have ceded from 35% to 55% (during
    2008 we ceded 40% compared to 55% in 2007) of up to
    $10 million of each applicable general property policy
    limit. We also purchase reinsurance to provide protection for
    specified catastrophes insured by our property segment. We
    renewed our property catastrophe reinsurance treaty at a cost
    that was higher than the expiring treaty. The increased cost of
    the property catastrophe reinsurance treaty was principally due
    to the new treaty expanding earthquake coverage in the United
    States and increased exposure due to changes in our general
    property quota share reinsurance treaty. The treaty is an
    excess-of-loss reinsurance treaty with four layers. The first
    layer has a limit of $45 million excess of
    $80 million, which is 50% placed with reinsurers and the
    remainder is retained by us. The second layer has a limit of
    $50 million excess of $125 million, which is 100%
    placed with reinsurers. The third layer has a limit of
    $75 million excess of $175 million, which is 100%
    placed with reinsurers. The fourth layer has a limit of
    $100 million excess $250 million and covers only
    earthquakes, which is 100% placed with reinsurers. We also
    purchased property catastrophe reinsurance protection on our
    international general property business effective
    September 1, 2007, which covers all territories except the
    U.S. and Canada. This treaty was cancelled and rewritten
    effective May 1, 2008. The treaty is an excess-of-loss
    reinsurance treaty with a limit of $50 million excess of
    $50 million, which is 80% placed with reinsurers and the
    remainder is retained by us. In addition, we purchased an
    excess-of-loss reinsurance treaty for our general property line
    of business with a limit of $15 million excess of
    $10 million or 10 million excess of
    10 million. We have also purchased a limited amount
    of facultative reinsurance for general property and energy
    policies.
    Our casualty segment has purchased variable quota share
    reinsurance for general casualty business since December 2002.
    During 2008, we increased the cession of policies with limits
    less than or equal to $25 million (or its currency
    equivalent) to 35% (25% in 2007) for policies written by
    our Bermuda and European offices, and to 40% (28% in
    2007) 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 103




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##### Table of Contents



policy limit. During 2008, the cession percentage was 100% (100%
    in 2007). During 2007 we also began purchasing quota share
    reinsurance protection for professional liability policies
    written by our Bermuda and U.S. offices. During 2008, we
    ceded 9% (10% in 2007) of policies written by the Bermuda
    office and 32.5% (40% in 2007) of policies written by our
    U.S. offices with limits less than or equal to
    $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 2008, we ceded
    40% (30% in 2007) of policies with limits greater than
    $10 million up to $25 million written by our Bermuda
    office and 30% (30% in 2007) of policies with limits of
    less than or equal $15 million by our U.S. offices and
    30% for policies with limits greater than $15 million up to
    $25 million in certain limited cases. In addition, Darwin
    has purchased various fixed rate and variable rate excess of
    loss reinsurance.  
    We have purchased a limited amount of retrocession coverage for
    our reinsurance segment.    Reinsurance RecoverableAs of December 31,2008


2007($ in millions)Ceded case reserves

$
330.8


$
289.2Ceded IBNR reserves


557.5



393.6Reinsurance recoverable

$
888.3


$
682.8     Liquidity
    and Capital Resources
  General
       104




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Restrictions
    and Specific Requirements
         105




---



##### Table of Contents



Form S-3 (No. 333-148409)
     106




---



##### Table of Contents



Sources
    and Uses of Funds
           107




---



##### Table of Contents



December 31,


December 31,2008


2007($ in millions)Due in one year or less

$
274.2


$
474.1Due after one year through five years


1,887.1



1,982.1Due after five years through ten years


1,254.9



869.0Due after ten years


365.8



99.5Mortgage-backed


2,089.9



2,117.5Asset-backed


160.1



164.9Total

$
6,032.0


$
5,707.1       Financial
    Strength Ratings
  and/or
    A.M. Best

A/stableMoodys*

A2/negativeStandard & Poors**

A-/stable    *
    
    Moodys financial strength ratings are for Allied World
    Assurance Company, Ltd, Allied World Assurance Company (U.S.)
    Inc., Allied World National Assurance Company and Allied World
    Reinsurance Company.**
    
    Standard & Poors financial strength ratings are
    for Allied World Assurance Company, Ltd., Allied World Assurance
    Company (U.S.) Inc., Allied World National Assurance Company,
    Allied World Reinsurance Company, Allied World Assurance Company
    (Europe) Limited and Allied World Assurance Company
    (Reinsurance) Limited. 108




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##### Table of Contents



A.M. Best

bbb/stableMoodys

Baa1/negativeStandard & Poors

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

$
800.0


$
37.5


$
75.0


$
75.0


$
612.5Syndicated loan (including interest)


245.4



245.4











Operating lease obligations


110.1



12.0



22.3



19.5



56.3Investment commitments outstanding


50.0



50.0











Darwin LTIP


18.6



8.1



9.2



1.3



Gross reserve for losses and loss expenses


4,576.8



1,165.6



1,408.4



577.3



1,425.5Total

$
5,800.9


$
1,518.6


$
1,514.9


$
673.1


$
2,094.3      109




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##### Table of Contents



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

$
7,135.7


$
6,938.6


$
6,838.7


$
6,738.3


$
6,637.6


$
6,536.6


$
6,334.0Market value change from base


397.4



200.3



100.4



0



(100.7
)


(201.7
)


(404.3
)Change in unrealized appreciation/(depreciation)


5.9
%


3.0
%


1.5
%


0.0
%


(1.5
)%


(3.0
)%


(6.0
)%   non-U.S. treasury
  Credit Spread Shift in Basis Points-200


−100


−50


0


+50


+100


+200($ in millions)Total market value

$
5,492.7


$
5,353.3


$
5,283.7


$
5,214.3


$
5,144.3


$
5,074.7


$
4,935.3Market value change from base


278.4



139.0



69.4



0



(70.0
)


(139.6
)


(279.0
)Change in unrealized appreciation/(depreciation)


5.3
%


2.7
%


1.3
%


0.0
%


(1.3
)%


(2.7
)%


(5.4
)%      110




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##### Table of Contents



non-U.S. currencies non-U.S. currency, non-U.S. currency
      Year Ended December 31,2008


2007


2006($ in millions)Realized exchange (losses) gains

$
(4.1
)

$
1.6


$
1.4Unrealized exchange gains (losses)


5.5



(0.8
)


(2.0
)Foreign exchange gains (losses)

$
1.4


$
0.8


$
(0.6
)  Item 8.  Financial
    Statements and Supplementary Data.  S-1 S-5
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.   111




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##### Table of Contents



Item 9A.
    Controls
    and Procedures.  Disclosure
    Controls and Procedures
  Rule 13a-15(e)
  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),
 112




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
  Internal Control 
    Integrated Framework
        Internal Control  Integrated Framework
 113




---



##### Table of Contents



114




---



##### 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.
 115




---



##### 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 27, 2009/s/  JOAN
    H. DILLARDJoan
    H. Dillard

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

February 27, 2009/s/  PATRICK
    DE SAINT-AIGNANPatrick
    de Saint-Aignan

Director

February 27, 2009/s/  JAMES
    F. DUFFYJames
    F. Duffy

Director

February 27, 2009Bart
    Friedman

Deputy Chairman of the Board/s/  SCOTT
    HUNTERScott
    Hunter

Director

February 27, 2009/s/  MARK
    R. PATTERSONMark
    R. Patterson

Director

February 27, 2009/s/  SAMUEL
    J. WEINHOFFSamuel
    J. Weinhoff

Director

February 27, 2009  116




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##### Table of Contents



EXHIBIT INDEX  ExhibitNumber

Description3
.1(1)

Memorandum of Association3
.2(14)

Second Amended and Restated Bye-laws4
.1(1)

Specimen Common Share Certificate4
.2(1)

American International Group, Inc. Warrant, dated November 21,
    20014
.3(1)

The Chubb Corporation Warrant, dated November 21, 20014
.4(1)

GS Capital Partners 2000, L.P. Warrant, dated November 21, 20014
.5(1)

GS Capital Partners 2000 Offshore, L.P. Warrant, dated November
    21, 20014
.6(1)

GS Capital Partners 2000 Employee Fund, L.P. Warrant, dated
    November 21, 20014
.7(1)

GS Capital Partners 2000, GmbH & Co. Beteiligungs KG
    Warrant, dated November 21, 20014
.8(1)

Stone Street Fund 2000, L.P. Warrant, dated November 21, 20014
.9(1)

Bridge Street Special Opportunities Fund 2000, L.P. Warrant,
    dated November 21, 20014
.10(2)

Indenture, dated as of July 26, 2006, by and between Allied
    World Assurance Company Holdings, Ltd, as issuer, and The Bank
    of New York, as trustee4
.11(2)

First Supplemental Indenture, dated as of July 26, 2006, by and
    between Allied World Assurance Company, Ltd, as issuer, and The
    Bank of New York, as trustee4
.12(2)

Form of Note (Included as part of Exhibit 4.11)4
.13(3)

Amendment to Warrants to Purchase Common Shares of Allied World
    Assurance Company Holdings, Ltd, dated as of August 1, 2006, by
    and among Allied World Assurance Company Holdings, Ltd and GS
    Capital Partners 2000, L.P.; GS Capital Partners 2000 Offshore,
    L.P.; GS Capital Partners 2000, GmbH & Co. Beteiligungs KG;
    GS Capital Partners 2000 Employee Fund, L.P.; Stone Street Fund
    2000, L.P.; and Bridge Street Special Opportunities Fund 2000,
    L.P.10
.1(1)

Registration Rights Agreement by and among Allied World
    Assurance Company Holdings, Ltd and the shareholders named
    therein10
.2(1)

Underwriting Agency Agreement, dated December 1, 2001, between
    Allied World Assurance Company, Ltd and IPCRe Underwriting
    Services Limited10
.3(1)

Amended and Restated Amendment No. 1 to Underwriting Agency
    Agreement, dated as of April 19, 200410
.4(1)

Amendment No. 2 to Underwriting Agency Agreement, as amended,
    dated as of March 28, 200310
.5(1)

Amendment No. 3 to Underwriting Agency Agreement, as amended,
    dated as of October 31, 200310
.6(1)

Amendment No. 4 to Underwriting Agency Agreement, as amended,
    dated as of October 26, 200510
.7(4)

Amendment No. 5 to Underwriting Agency Agreement, as amended,
    dated as of December 1, 200610
.8(1)

Guarantee, dated May 22, 2006, of Allied World Assurance
    Company, Ltd in favor of American International Group, Inc.10
.9(7)

Amended and Restated Software License Agreement, effective as of
    November 17, 2006, by and between Transatlantic Holdings, Inc.
    and Allied World Assurance Company, Ltd10
.10(13)

Allied World Assurance Company Holdings, Ltd Amended and
    Restated Long-Term Incentive Plan10
.11(1)

Form of Participation Agreement under the Allied World Assurance
    Company Holdings, Ltd Amended and Restated Long-Term Incentive
    Plan10
.12(5)

Form of Indemnification Agreement10
.13(6)

Lease, dated November 29, 2006, by and between American
    International Company Limited and Allied World Assurance
    Company, Ltd10
.14(8)

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
.15(8)

Pledge Agreement, dated as of February 28, 2007, by and between
    Allied World Assurance Company, Ltd and Citibank Europe plc10
.16(8)

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.A E-1




---



##### Table of Contents



ExhibitNumber

Description10
.17(9)

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
.18(10)

Amended and Restated Contract of Employment by and between
    Allied World Assurance Company (Europe) Limited and John Redmond10
.19(11)

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
.20(11)

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
.21(11)

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
.22(11)

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
.23(12)

Stock Purchase Agreement, dated as of December 14, 2007, by and
    between Allied World Assurance Company Holdings, Ltd and
    American International Group, Inc.10
.24(1)

Letter Agreement, dated October 1, 2004, between Allied
    World Assurance Company Holdings, Ltd and Michael Morrison10
.25(14)

Allied World Assurance Company Holdings, Ltd Deferred Fee Plan
    for Non-Employee Directors10
.26(14)

Allied World Assurance Company Holdings, Ltd Second Amended and
    Restated 2001 Employee Stock Option Plan10
.27(14)

Form of Option Grant Notice and Option Agreement under Allied
    World Assurance Company Holdings, Ltd Second Amended and
    Restated 2001 Employee Stock Option Plan10
.28(14)

Allied World Assurance Company Holdings, Ltd Second Amended and
    Restated 2004 Stock Incentive Plan10
.29(14)

Form of RSU Award Agreement for employees under the Allied World
    Assurance Company Holdings, Ltd Second Amended and Restated 2004
    Stock Incentive Plan10
.30(14)

Form of RSU Award Agreement for non-employee directors under the
    Allied World Assurance Company Holdings, Ltd Second Amended and
    Restated 2004 Stock Incentive Plan10
.31(14)

Allied World Assurance Company Holdings, Ltd 2008 Employee Share
    Purchase Plan10
.32(15)

Discretionary Investment Management Agreement, dated as of May
    14, 2008, by and between Allied World Reinsurance Company and
    Goldman Sachs Asset Management, L.P.10
.33(16)

Allied World Assurance Company (U.S.) Inc. Amended and Restated
    Supplemental Executive Retirement Plan10
.34(17)

Employment Agreement, dated as of October 1, 2008, by and
    between Allied World National Assurance Company and Richard E.
    Jodoin10
.35(18)

First Amended and Restated Discretionary Investment Management
    Agreement (Bermuda and Europe Form). Goldman Sachs Asset
    Management International entered into separate agreements with
    (i) Allied World Assurance Company, Ltd; (ii) Allied
    World Assurance Company (Reinsurance) Limited; and
    (iii) Allied World Assurance Company (Europe) Limited that
    are materially identical to the form incorporated herein by
    reference.10
.36(18)

First Amended and Restated Discretionary Investment Management
    Agreement (U.S. Form). Goldman Sachs Asset Management, L.P.
    entered into separate agreements with (i) Allied World
    Assurance Company (U.S.) Inc.; and (ii) Allied World
    National Assurance Company that are materially identical to the
    form incorporated herein by reference. E-2




---



##### Table of Contents



ExhibitNumber

Description10
.37(18)

First Amended and Restated Discretionary Investment Management
    Agreement (Trust Form). Goldman Sachs Asset Management, L.P.
    entered into separate agreements with (i) Allied World
    National Assurance Company and Allied World Assurance Company,
    Ltd; (ii) Allied World Assurance Company (U.S.) Inc. and
    Allied World Assurance Company, Ltd; (iii) Allied World
    Assurance Company, Ltd; (iv) Allied World Assurance Company
    (U.S.) Inc. relating to an account with Canadian assets; and
    (v) Allied World Assurance Company (U.S.) Inc. relating to
    an additional account with Canadian assets that are materially
    identical to the form incorporated herein by reference.10
.38(18)

Discretionary Investment Management Agreement, dated as of
    November 21, 2008, by and between Goldman Sachs Asset
    Management, L.P. and Allied World Reinsurance Company10
.39(19)

Letter Agreement, dated December 30, 2008, by and among Allied
    World Assurance Company, Ltd, Citibank Europe plc and The Bank
    of New York Mellon10
.40

Amended and Restated Employment Agreement, dated as of January
    16, 2008, by and between Allied World National Assurance Company
    and W. Gordon Knight10
.41(20)

Amended and Restated Employment Agreement -- Form for Bermuda
    Executive Officers10
.42(21)

Software License Agreement, dated November 21, 2003, by and
    between OneShield, Inc. and Darwin Professional Underwriters,
    Inc.21
.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 December 1, 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 February 21, 2007.(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 March 6, 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 March 23, 2007. E-3




---



##### Table of Contents



(10)
    
    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.(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 December 3, 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 December 17, 2007.(13)
    
    Incorporated herein by reference to the Annual Report on
    Form 10-K
    of Allied World Assurance Company Holdings, Ltd filed with the
    SEC on February 29, 2008.(14)
    
    Incorporated herein by reference to the Quarterly Report on
    Form 10-Q
    of Allied World Assurance Company Holdings, Ltd filed with the
    SEC on May 9, 2008.(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 May 16, 2008.(16)
    
    Incorporated herein by reference to the Quarterly Report on
    Form 10-Q
    of Allied World Assurance Company Holdings, Ltd filed with the
    SEC on August 8, 2008.(17)
    
    Incorporated herein by reference to the Current Report on
    Form 8-K
    of Allied World Assurance Company Holdings, Ltd filed with the
    SEC on October 7, 2008.(18)
    
    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 28, 2008.(19)
    
    Incorporated herein by reference to the Current Report on
    Form 8-K
    of Allied World Assurance Company Holdings, Ltd filed with the
    SEC on January 5, 2009.(20)
    
    Other than with respect to title, base salary, housing and
    utility allowance and commencement date, the amended and
    restated employment agreements, dated as of October 1,
    2008, for Scott A. Carmilani, Joan H. Dillard, Wesley D. Dupont
    and Marshall J. Grossack are identical to the form filed as
    Exhibit 10.41.(21)
    
    Incorporated herein by reference to the Registration Statement
    on
    Form S-1
    (Registration
    No. 333-132355)
    of Darwin Professional Underwriters, Inc. filed with the SEC on
    March 10, 2006, as amended, and declared effective by the
    SEC on May 18, 2006.
    
    Management contract or compensatory plan, contract or
    arrangement.*
    
    These certifications are being furnished solely pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
    (subsections (a) and (b) of Section 1350,
    chapter 63 of title 18 United States Code) and are not
    being filed as part of this report. E-4




---



##### 



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTSALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD Page No.Report of Independent Registered Public
    Accounting Firm


F-2Consolidated Balance Sheets as of
    December 31, 2008 and 2007


F-3Consolidated Statements of Operations and
    Comprehensive Income for the years ended December 31, 2008,
    2007 and 2006


F-4Consolidated Statements of Shareholders
    Equity for the years ended December 31, 2008, 2007 and
    2006


F-5Consolidated Statements of Cash Flows for the
    years ended December 31, 2008, 2007 and 2006


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           Internal Control  Integrated Framework
  
    F-2




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  CONSOLIDATED
    BALANCE SHEETS
    As of


As ofDecember 31,


December 31,2008


2007ASSETS:Fixed maturity investments available for sale, at fair value
    (amortized cost: 2008:$5,872,031; 2007: $5,595,943)

$
6,032,029


$
5,707,143Other invested assets, at fair value


69,902



Other invested assets available for sale, at fair value (cost:
    2008: $89,229; 2007: $291,458)


55,199



322,144Total investments


6,157,130



6,029,287Cash and cash equivalents


655,828



202,582Restricted cash


50,439



67,886Securities lending collateral


171,026



147,241Insurance balances receivable


347,941



304,499Prepaid reinsurance


192,582



163,836Reinsurance recoverable


888,314



682,765Accrued investment income


50,671



55,763Deferred acquisition costs


135,780



108,295Goodwill


268,532



Intangible assets


71,410



3,920Balances receivable on sale of investments


12,371



84,998Net deferred tax assets


22,452



4,881Other assets


47,603



43,155Total assets

$
9,072,079


$
7,899,108LIABILITIES:Reserve for losses and loss expenses

$
4,576,828


$
3,919,772Unearned premiums


930,358



811,083Unearned ceding commissions


49,599



28,831Reinsurance balances payable


95,129



67,175Securities lending payable


177,010



147,241Balances due on purchase of investments






141,462Syndicated loan


243,750



Senior notes


498,796



498,682Accounts payable and accrued liabilities


83,747



45,020Total liabilities

$
6,655,217


$
5,659,266SHAREHOLDERS EQUITY:Common shares, par value $0.03 per share, issued and outstanding
    2008: 49,036,159 shares and 2007: 48,741,927 shares

$
1,471


$
1,462Additional paid-in capital


1,314,785



1,281,832Retained earnings


994,974



820,334Accumulated other comprehensive income: net unrealized gains on
    investments, net of tax


105,632



136,214Total shareholders equity

$
2,416,862


$
2,239,842Total liabilities and shareholders equity

$
9,072,079


$
7,899,108    F-3




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  CONSOLIDATED
    STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
    2008


2007


2006REVENUES:Gross premiums written

$
1,445,584


$
1,505,509


$
1,659,025Premiums ceded


(338,356
)


(352,399
)


(352,429
)Net premiums written


1,107,228



1,153,110



1,306,596Change in unearned premiums


9,677



6,832



(54,586
)Net premiums earned


1,116,905



1,159,942



1,252,010Net investment income


308,775



297,932



244,360Net realized investment losses


(272,851
)


(7,617
)


(28,678
)Other income


746







1,153,575



1,450,257



1,467,692EXPENSES:Net losses and loss expenses


641,122



682,340



739,133Acquisition costs


112,569



118,959



141,488General and administrative expenses


186,560



141,641



106,075Interest expense


38,743



37,848



32,566Foreign exchange (gain) loss


(1,421
)


(817
)


601977,573



979,971



1,019,863Income before income taxes


176,002



470,286



447,829Income tax (recovery) expense


(7,633
)


1,104



4,991NET INCOME


183,635



469,182



442,838Other comprehensive (loss) incomeUnrealized (losses) gains on investments arising during the year
    net of applicable deferred income tax recovery (expense) 2008:
    $9,433; 2007: ($5,839); 2006: ($342)


(198,405
)


122,133



3,294Reclassification adjustment for net realized investment losses
    included in net income, net of applicable income tax recovery


194,085



7,617



28,678Other comprehensive (loss) income net of tax


(4,320
)


129,750



31,972COMPREHENSIVE INCOME

$
179,315


$
598,932


$
474,810PER SHARE DATABasic earnings per share

$
3.75


$
7.84


$
8.09Diluted earnings per share

$
3.59


$
7.53


$
7.75Weighted average common shares outstanding


48,936,912



59,846,987



54,746,613Weighted average common shares and common share equivalents
    outstanding


51,147,215



62,331,165



57,115,172Dividends declared per share

$
0.72


$
0.63


$
0.15    F-4




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
 CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY

for the years ended December 31, 2008, 2007 and 2006

(Expressed in thousands of United States dollars) Accumulated


RetainedAdditional


Other


EarningsShare


Paid-in


Comprehensive


(AccumulatedCapital


Capital


(Loss) Income


Deficit)


TotalDecember 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


$
2,239,842Net income














183,635



183,635Cumulative effect adjustment upon adoption of FAS 159










(26,262
)


26,262



Stock compensation plans


9



32,953











32,962Dividends














(35,257
)


(35,257
)Other comprehensive (loss)










(4,320
)






(4,320
)December 31, 2008

$
1,471


$
1,314,785


$
105,632


$
994,974


$
2,416,862    F-5




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
    2008


2007


2006CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income

$
183,635


$
469,182


$
442,838Adjustments to reconcile net income to cash provided by
    operating activities:Net realized (gains) losses on sales of investments


(17,768
)


(37,001
)


4,800Other-than-temporary impairment charges on investments


212,897



44,618



23,878Change in fair value of other invested assets


77,722







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


(12,006
)


(2,960
)


11,981Amortization and depreciation of fixed assets


9,619



8,709



4,037Stock compensation expense


28,186



22,491



10,805Debt issuance expense










724Amortization of discount and expenses on senior notes


459



427



168Cash settlements on interest rate swaps










7,340Mark to market on interest rate swaps










(6,896
)Insurance balances receivable


(2,809
)


(238
)


(86,217
)Prepaid reinsurance


11,479



(4,117
)


(19,120
)Reinsurance recoverable


55,621



6,340



27,228Accrued investment income


11,134



(4,651
)


(2,129
)Deferred acquisition costs


6,640



(7,969
)


(5,769
)Net deferred tax assets


(14,163
)


(5,626
)


(1,292
)Other assets


21,947



(2,941
)


7,987Reserve for losses and loss expenses


96,959



282,775



231,644Unearned premiums


(21,157
)


(2,714
)


73,706Unearned ceding commissions


(438
)


4,917



(3,551
)Reinsurance balances payable


3,177



(15,037
)


53,645Accounts payable and accrued liabilities


5,809



4,763



15,757Net cash provided by operating activities


656,943



760,968



791,564CASH FLOWS USED IN INVESTING ACTIVITIES:Purchases of fixed maturity investments


(4,558,664
)


(4,282,638
)


(5,663,168
)Purchases of other invested assets


(63,357
)


(175,770
)


(132,011
)Sales of fixed maturity investments


4,583,751



3,966,822



4,855,816Sales of other invested assets


158,857



106,713



165,250Net cash paid for acquisitions


(536,195
)






Changes in securities lending collateral received


(23,785
)


157,501



152,050Purchases of fixed assets


(21,190
)


(9,666
)


(29,418
)Change in restricted cash


17,447



70,337



(96,435
)Net cash used in investing activities


(443,136
)


(166,701
)


(747,916
)CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:Dividends paid


(35,257
)


(38,052
)


(9,043
)Proceeds from (payment of ) the exercise of stock options


4,046



(168
)


Stock acquired






(563,444
)


Gross proceeds from initial public offering










344,080Issuance costs paid on initial public offering










(28,291
)Proceeds from issuance of senior notes










498,535Repayment of long-term debt










(500,000
)Debt issuance costs paid










(3,250
)Proceeds from syndicated loan


243,750







Changes in securities lending collateral


29,769



(157,501
)


(152,050
)Net cash provided by (used in) financing activities


242,308



(759,165
)


149,981Effect of exchange rate changes on foreign currency cash


(2,869
)


663



809NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


453,246



(164,235
)


194,438CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


202,582



366,817



172,379CASH AND CASH EQUIVALENTS, END OF YEAR

$
655,828


$
202,582


$
366,817Supplemental disclosure of cash flow information: Cash paid for income taxes

$
3,658


$
3,814


$
707 Cash paid for interest expense


37,500



38,021



15,495Supplemental disclosure of non-cash flow information: Change in balance receivable on sale of investments


72,627



(68,453
)


(12,912
) Change in balance payable on purchase of investments


(141,462
)


141,462



    F-6




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
  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;
    Determination of impairment of goodwill and other intangible
    assets;
    Valuation of financial instruments; 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)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   2.
    SIGNIFICANT
    ACCOUNTING POLICIES  (continued)  
 a)
    Premiums
    and Acquisition Costs  (continued)          b)
    Reserve
    for Losses and Loss Expenses       F-8




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   2.
    SIGNIFICANT
    ACCOUNTING POLICIES  (continued)  
 e)
    Translation
    of Foreign Currencies  (continued)    f)
    Cash
    and Cash Equivalents    g)
    Income
    Taxes      h)
    Employee
    Stock Option Compensation Plan    i)
    Restricted
    Stock Units    j)
    Long-Term
    Incentive Plan Awards   F-11




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   2.
    SIGNIFICANT
    ACCOUNTING POLICIES  (continued)  
 j)
    Long-Term
    Incentive Plan Awards  (continued)    k)
    Goodwill
    and Intangible Assets          l)
    Derivative
    Instruments     F-12




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   2.
    SIGNIFICANT
    ACCOUNTING POLICIES  (continued)  
 l)
    Derivative
    Instruments  (continued)      m)
    Securities
    Lending      n)
    Earnings
    Per Share    o)
    New
    Accounting Pronouncements   F-13




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   2.
    SIGNIFICANT
    ACCOUNTING POLICIES  (continued)  
 o)
    New
    Accounting
    Pronouncements  (continued)  157-3 (FSP 157-3). FSP 157-3 FSP 157-3
         F-14




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   2.
    SIGNIFICANT
    ACCOUNTING POLICIES  (continued)  
 o)
    New
    Accounting
    Pronouncements  (continued)  The Meaning of
    EITF 99-20-1 No. 99-20. EITF 99-20 EITF 99-20-1 EITF 99-20, EITF 99-20.
  3.
    ACQUISITIONS  a)
    Finial
    Insurance Company   F-15




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   3.
    ACQUISITIONS  (continued)  
 a)
    Finial
    Insurance Company  (continued)    b)
    Darwin
    Professional Underwriters, Inc.     F-16




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   3.
    ACQUISITIONS  (continued)  
 b)
    Darwin
    Professional Underwriters,
    Inc.  (continued)    Fair ValueFixed maturity investments

$
577,492Equity securities


10,686Cash and cash equivalents


57,979Insurance balances receivable


40,630Reinsurance recoverable


156,255Prepaid reinsurance


40,225Deferred acquisition costs


12,919Net deferred tax assets


12,878Intangible assets


56,200Goodwill


264,615Other assets


17,389Total assets acquired


1,247,268Reserve for losses and loss expenses


455,182Unearned premiums


140,432Reinsurance balances payable


24,776Balances due on purchase of investments


35,204Accounts payable and accrued liabilities


32,919Total liabilities acquired


688,513Net assets acquired

$
558,755     Intangible AssetsFair Value


Amortization PeriodRenewal rights

$
38,000



15 yearsTrademarks


7,400



15 yearsInternally developed software


1,600



3 yearsNon-compete covenants


1,200



2 yearsState insurance licenses


8,000



N/A$
56,200    F-17




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   3.
    ACQUISITIONS  (continued)  
 b)
    Darwin
    Professional Underwriters,
    Inc.  (continued)        For the Years Ended December 31,2008


2007Revenue

$
1,341,252


$
1,653,703Net income

$
215,309


$
498,879Basic earnings per share

$
4.40


$
8.34Diluted earnings per share

$
4.21


$
8.00    4.
    INVESTMENTS  a)
    Fixed
    Maturity Investments    Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair ValueDecember 31, 2008U.S. Government and Government agencies

$
1,608,230


$
162,556


$
(551
)

$
1,770,235Non-U.S.
    Government and Government agencies


272,186



12,738



(4,768
)


280,156Corporate


1,337,298



35,538



(10,866
)


1,361,970States, municipalities and political subdivisions


350,044



19,618



(43
)


369,619Mortgage backed


2,139,778



48,966



(98,807
)


2,089,937Asset backed


164,495



36



(4,419
)


160,112$
5,872,031


$
279,452


$
(119,454
)

$
6,032,029December 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
)

$
5,707,143  F-18




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   4.
    INVESTMENTS  (continued)  
 a)
    Fixed
    Maturity Investments  (continued)    b)
    Contractual
    Maturity Dates    Amortized Cost


Fair ValueDue within one year

$
272,937


$
274,175Due after one year through five years


1,826,080



1,887,142Due after five years through ten years


1,146,894



1,254,913Due after ten years


321,847



365,750Mortgage backed


2,139,778



2,089,937Asset backed


164,495



160,112$
5,872,031


$
6,032,029     c)
    Other
    Invested Assets    2008


2007Cost


Fair Value


Cost


Fair ValueHedge funds

$
48,573


$
48,573


$
215,173


$
241,435Global high-yield fund


89,229



55,199



75,125



79,549Equity securities


21,329



21,329







Other invested assets










1,160



1,160$
159,131


$
125,101


$
291,458


$
322,144      F-19




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   4.
    INVESTMENTS  (continued)  d)
    Net
    Investment Income  2008


2007


2006Fixed maturities and other investments

$
287,910


$
283,888


$
221,847Other invested assets


14,540



1,230



11,307Cash and cash equivalents


13,054



18,644



16,169Expenses


(6,729
)


(5,830
)


(4,963
)Net investment income

$
308,775


$
297,932


$
244,360    e)
    Components
    of Realized Gains and Losses    2008


2007


2006Gross realized gains

$
92,552


$
39,049


$
31,030Gross realized losses


(365,403
)


(46,666
)


(60,152
)Realized gains on interest rate swaps










7,340Unrealized loss on interest rate swaps










(6,896
)Net realized investment losses

$
(272,851
)

$
(7,617
)

$
(28,678
)     f)
    Pledged
    Assets       F-20




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   4.
    INVESTMENTS  (continued)  g)
    Change
    in Unrealized Gains and Losses  2008


2007


2006Net change in unrealized gains and losses, net of taxes

$
(4,320
)

$
129,750


$
31,972    h)
    Analysis
    of Unrealized Losses      2008


2007Gross


Unrealized


Gross


UnrealizedFair Value


Losses


Fair Value


LossesLess than 12 monthsU.S. Government and Government agencies

$
14,625


$
(551
)

$



$
Non-U.S.
    Government and Government agencies


52,646



(4,768
)






Corporate


297,099



(10,866
)


359,880



(5,734
)States, municipalities and political subdivisions


5,943



(43
)






Mortgage backed


490,976



(98,538
)


172,673



(835
)Asset backed


79,003



(4,419
)


11,536



(4
)Hedge funds










51,512



(988
)$
940,292


$
(119,185
)

$
595,601


$
(7,561
)More than 12 monthsU.S. Government and Government agencies

$



$




71,404



(6
)Non-U.S.
    Government and Government agencies










33,227



(291
)Corporate










22,544



(101
)States, municipalities and political subdivisions














Mortgage backed


2,078



(269
)


13,805



(67
)Global high-yield bond fund


89,229



(34,030
)






$
91,307


$
(34,299
)

$
140,980


$
(465
)$
1,031,599


$
(153,484
)

$
736,581


$
(8,026
)    F-21




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   4.
    INVESTMENTS  (continued)  
 h)
    Analysis
    of Unrealized Losses  (continued)          2008


2007U.S. government and government agencies

$
21,102


$
8,302Non-U.S.
    government and government agencies


2,779



63Corporate


83,467



2,966States, municipalities and political subdivisions


813



Mortgage backed


95,823



5,440Asset backed


8,913



447Total other-than-temporary impairment charges

$
212,897


$
17,218    i)
    Securities
    Lending   F-22




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   4.
    INVESTMENTS  (continued)  
 i)
    Securities
    Lending  (continued)    5.
    FAIR
    VALUE OF FINANCIAL INSTRUMENTS    
    Level 1: Observable inputs to the valuation
    methodology that are quoted prices (unadjusted) for identical
    assets or liabilities in active markets.  
    Level 2: Observable inputs to the valuation
    methodology other than quoted market prices (unadjusted) for
    identical assets or liabilities in active markets. Level 2
    inputs include quoted prices for similar assets and liabilities
    in active markets, quoted prices for identical assets in markets
    that are not active and inputs other than quoted prices that are
    observable for the asset or liability, either directly or
    indirectly, for substantially the full term of the asset or
    liability.
    Level 3: Inputs to the valuation methodology that
    are unobservable for the asset or liability.   F-23




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   5.
    FAIR
    VALUE OF FINANCIAL
    INSTRUMENTS  (continued)    Fair value measurement using:Quoted pricesin active


Significantmarkets for


other


Significantidentical


observable


unobservableCarrying


Total fair


assets


inputs


inputsamount


value


(Level 1)


(Level 2)


(Level 3)U.S. government and government agencies

$
1,770,235


$
1,770,235


$
817,769


$
952,466


$Non-U.S.
    government and government agencies


280,156



280,156







280,156Corporate


1,361,970



1,361,970







1,361,970States, municipalities and political subdivisions


369,619



369,619







369,619Mortgage backed


2,089,937



2,089,937







2,089,937Asset backed


160,112



160,112







160,112Total fixed maturity investments, available for sale


6,032,029



6,032,029Total other invested assets, fair value


69,902



69,902



21,329







48,573Total other invested assets, available for sale


55,199



55,199







55,199Total investments


6,157,130



6,157,130Senior notes


498,796



377,500







377,500     U.S. government and U.S. government agencies:
  Non-U.S. government
    and government agencies: non-U.S. governmental
  Corporate:
 F-24




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   5.
    FAIR
    VALUE OF FINANCIAL
    INSTRUMENTS  (continued)    States, municipalities and political subdivisions:
  Mortgage-backed: non-U.S. government
  Asset-backed:
  Other invested assets, at fair value: lock-up lock-up lock-up
  Other invested assets available for sale:
  Senior notes:
 F-25




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   5.
    FAIR
    VALUE OF FINANCIAL
    INSTRUMENTS  (continued)    Year EndedDecember 31,2008Opening balance

$
241,435Total gains or losses included in earnings:Realized gains


12,159Change in fair value of hedge fund investments


(77,886
)Purchases or (sales)


(127,135
)Transfers in and/or out of Level 3


Ending balance, December 31, 2008

$
48,573      6.
    RESERVE
    FOR LOSSES AND LOSS EXPENSES    2008


2007OSLR

$
1,132,931


$
963,438IBNR


3,443,897



2,956,334Reserve for losses and loss expenses

$
4,576,828


$
3,919,772  F-26




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   6.
    RESERVE
    FOR LOSSES AND LOSS
    EXPENSES  (continued)    2008


2007


2006Gross liability at beginning of year

$
3,919,772


$
3,636,997


$
3,405,353Reinsurance recoverable at beginning of year


(682,765
)


(689,105
)


(716,333
)Net liability at beginning of year


3,237,007



2,947,892



2,689,020Acquisition of net reserve for losses and loss expenses


298,927







Net losses incurred related to:Current year


921,217



805,417



849,850Prior years


(280,095
)


(123,077
)


(110,717
)Total incurred


641,122



682,340



739,133Net paid losses related to:Current year


79,037



32,599



27,748Prior years


395,163



365,251



455,079Total paid


474,200



397,850



482,827Foreign exchange revaluation


(14,342
)


4,625



2,566Net liability at end of year


3,688,514



3,237,007



2,947,892Reinsurance recoverable at end of year


888,314



682,765



689,105Gross liability at end of year

$
4,576,828


$
3,919,772


$
3,636,997        F-27




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   6.
    RESERVE
    FOR LOSSES AND LOSS
    EXPENSES  (continued)      7.
    CEDED
    REINSURANCE    2008


2007OSLR recoverable

$
330,816


$
289,212IBNR recoverable


557,498



393,553Reinsurance recoverable

$
888,314


$
682,765    F-28




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   7.
    CEDED
    REINSURANCE  (continued)    Losses andPremiums


Premiums


LossWritten


Earned


ExpensesDecember 31, 2008Direct

$
1,015,444


$
997,619


$
578,284Assumed


430,140



466,296



239,236Ceded


(338,356
)


(347,010
)


(176,398
)$
1,107,228


$
1,116,905


$
641,122December 31, 2007Direct

$
969,450


$
1,003,924


$
577,701Assumed


536,059



504,300



294,427Ceded


(352,399
)


(348,282
)


(189,788
)$
1,153,110


$
1,159,942


$
682,340December 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


$
739,133     8.
    DEBT AND
    FINANCING ARRANGEMENTS     F-29




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   8.
    DEBT AND
    FINANCING ARRANGEMENTS  (continued)               F-30




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   8.
    DEBT AND
    FINANCING ARRANGEMENTS  (continued)     9.
    GOODWILL
    AND INTANGIBLE ASSETS    Intangible assetswith indefinite


Intangible assetsGoodwill


lives


with finite lives


TotalNet balance at December 31, 2006

$



$
3,920


$



$
3,920Additions














Amortization














Net balance at December 31, 2007






3,920







3,920Additions


268,532



20,000



48,200



336,732Amortization










(710
)


(710
)Net balance at December 31, 2008


268,532



23,920



47,490



339,942Gross balances


268,532



23,920



48,200



340,652Accumulated amortization










(710
)


(710
)Net balance

$
268,532


$
23,920


$
47,490


$
339,942        10.
    INCOME
    TAXES     F-31




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   10.
    INCOME
    TAXES  (continued)        2008


2007


2006Current income tax expense

$
10,220


$
6,730


$
6,102Deferred income tax recovery


(17,853
)


(5,626
)


(1,111
)Income tax (recovery) expense

$
(7,633
)

$
1,104


$
4,991       2008


2007Deferred tax assets:Unearned premium

$
9,894


$
926Realized gains


1,286



254Deferred acquisition costs


896



4,050Reserve for losses and loss expenses


15,799



4,014Equity compensation


11,100



1,183Other-than-temporary impairments


15,329



Mark-to-market on securities acquired


11,114



Unrealized translation on investments in foreign currency


1,771



Other deferred tax assets






336Total deferred tax assets


67,189



10,763Deferred tax liabilities:Unrealized (appreciation) depreciation and timing difference on
    investments


(17,085
)


(1,025
)Intangible assets


(22,483
)


Market discount on bonds


(4,350
)


Unrealized translation on investments in foreign currency






(4,857
)Other deferred tax liabilities


(819
)


Total deferred tax liabilities


(44,737
)


(5,882
)Net deferred tax assets

$
22,452


$
4,881    F-32




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   10.
    INCOME
    TAXES  (continued)    2008


2007


2006Income before taxes

$
176,002


$
470,286


$
447,829Expected tax rate


0.0
%


0.0
%


0.0
%Foreign taxes at local expected tax rates


(3.2
)%


0.3
%


1.1
%Statutory adjustments


0.0
%


0.0
%


0.0
%Disallowed expenses and capital allowances


0.3
%


0.2
%


0.0
%Prior year refunds and adjustments


(1.1
)%


(0.2
)%


(0.1
)%Other


(0.4
)%


(0.1
)%


0.1
%Effective tax rate


(4.4
)%


0.2
%


1.1
%    11.
    SHAREHOLDERS
    EQUITY  a)
    Authorized
    Shares    2008


2007Common shares issued and fully paid, par value $0.03 per share


49,036,159



48,741,927Share capital at end of year

$
1,471


$
1,462     b)
    Share
    Warrants    c)
    Dividends     F-33




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
  d)
    Shares
    acquired  trading-day
  12.
    EMPLOYEE
    BENEFIT PLANS  a)
    Employee
    Stock Option Plan  Form S-8
  Year Ended December 31, 2008WeightedAverage


Weighted Average


AggregateOptions


Exercise Price


Contractual Term


Intrinsic ValueOutstanding at beginning of year


1,223,875


$
31.03Granted


323,300



41.46Exercised


(148,488
)


(27.56
)Forfeited


(37,454
)


(39.75
)Expired


(3,082
)


(42.81
)Outstanding at end of year


1,358,151



33.63



6.5 years


$
10,807Exercisable at end of year


751,252


$
28.73



4.9 years


$
9,087    F-34




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   12.
    EMPLOYEE
    BENEFIT PLANS  (continued)  
 a)
    Employee
    Stock Option Plan  (continued)    Options revalued


Options grantedat the time of


after the IPO and


Options granted


Options grantedthe IPO on


prior to


During The Year Ended


During The Year EndedJuly 11, 2006


December 31, 2006


December 31, 2007


December 31, 2008Expected term of option


6.25 years



6.25 years



6.25 years



6.25 yearsWeighted average risk-free interest rate


5.11
%


4.64
%


4.60
%


2.58
%Weighted average expected volatility


23.44
%


23.68
%


22.82
%


24.22
%Dividend yield


1.50
%


1.50
%


1.50
%


1.66
%Weighted average fair value on grant date

$
11.08


$
11.34


$
12.05


$
9.63          F-35




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   12.
    EMPLOYEE
    BENEFIT PLANS  (continued)  
 a)
    Employee
    Stock Option Plan  (continued)    b)
    Stock
    Incentive Plan    Year Ended December 31, 2008Weighted AverageGrant DateRSUs


Fair ValueOutstanding RSUs at beginning of year


820,890


$
36.09RSUs granted


357,811



38.80RSUs fully vested


(144,686
)


(37.32
)RSUs forfeited


(62,308
)


(37.50
)Outstanding RSUs at end of year


971,707


$
36.81          F-36




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   12.
    EMPLOYEE
    BENEFIT PLANS  (continued)  c)
    Long-Term
    Incentive Plan    Year Ended December 31, 2008Weighted AverageGrant DateLTIP


Fair ValueOutstanding LTIP awards at beginning of year


590,834


$
40.09LTIP awards granted


507,152



43.27LTIP awards subject to accelerated vesting


(11,667
)


34.00LTIP awards forfeited


(20,000
)


43.40Outstanding LTIP awards at end of year


1,066,319


$
41.61        F-37




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   12.
    EMPLOYEE
    BENEFIT PLANS  (continued)  
 c)
    Long-Term
    Incentive Plan  (continued)    For the Years Ended December 31,2008


2007


2006Stock Options

$
2,405


$
2,551


$
3,164RSUs


7,988



7,418



3,759LTIP


17,820



12,522



3,882Total

$
28,213


$
22,491


$
10,805         d)
    Pension
    Plans   F-38




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   12.
    EMPLOYEE
    BENEFIT PLANS  (continued)  e)
    Employee
    Share Purchase Plan    13.
    EARNINGS
    PER SHARE    2008


2007


2006Basic earnings per shareNet income

$
183,635


$
469,182


$
442,838Weighted average common shares outstanding


48,936,912



59,846,987



54,746,613Basic earnings per share

$
3.75


$
7.84


$
8.09   2008


2007


2006Diluted earnings per shareNet income

$
183,635


$
469,182


$
442,838Weighted average common shares outstanding


48,936,912



59,846,987



54,746,613Share equivalents:Options and warrants


1,046,185



1,807,903



1,630,501Restricted stock units


419,936



349,760



438,370LTIP awards


744,182



326,515



299,688Weighted average common shares and common share equivalents
    outstanding  diluted


51,147,215



62,331,165



57,115,172Diluted earnings per share

$
3.59


$
7.53


$
7.75     14.
    RELATED
    PARTY TRANSACTIONS  a)
    American
    International Group, Inc.   F-39




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   14.
    RELATED
    PARTY TRANSACTIONS  (continued)  
 a)
    American
    International Group,
    Inc.  (continued)        2007


2006Gross premiums written

$
106,705


$
108,343Brokerage and commissions


20,550



21,581Paid losses and loss expenses


95,722



134,872         2006Gross premiums written

$
52,141Acquisition costs


8,791Paid losses and loss expenses


95,209    F-40




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ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   14.
    RELATED
    PARTY TRANSACTIONS  (continued)  
 a)
    American
    International Group,
    Inc.  (continued)    10-year
      b)
    The
    Chubb Corporation      2008


2007


2006Gross premiums written

$
10,541


$
12,405


$
21,565Brokerage and commissions


2,585



3,074



4,919Paid losses and loss expenses


6,808



2,355



10,932    F-41




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ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
  15.
    COMMITMENTS
    AND CONTINGENCIES  a)
    Concentrations
    of Credit Risk          b)
    Operating
    Leases    2008

$
12,0562009


11,8742010


10,4412011


9,6842012


9,8172013 through 2021


56,258$
110,130     c)
    Brokers   F-42




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ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   15.
    COMMITMENTS
    AND CONTINGENCIES  (continued)  
 c)
    Brokers  (continued)    d)
    Legal
    Proceedings      e)
    Investment
    Commitments    16.
    STATUTORY
    CAPITAL AND SURPLUS     F-43




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ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   16.
    STATUTORY
    CAPITAL AND SURPLUS  (continued)    and/or
       F-44




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ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   16.
    STATUTORY
    CAPITAL AND SURPLUS  (continued)    17.
    SEGMENT
    INFORMATION         F-45




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##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   17.
    SEGMENT
    INFORMATION  (continued)    2008

Property


Casualty


Reinsurance


TotalGross premiums written

$
327,490


$
687,954


$
430,140


$
1,445,584Net premiums written


169,887



508,960



428,381



1,107,228Net premiums earned


173,790



478,578



464,537



1,116,905Other income






746







746Net losses and loss expenses


(182,244
)


(209,739
)


(249,139
)


(641,122
)Acquisition costs


(1,948
)


(19,658
)


(90,963
)


(112,569
)General and administrative expenses


(39,290
)


(103,720
)


(43,550
)


(186,560
)Underwriting (loss) income


(49,692
)


146,207



80,885



177,400Net investment income














308,775Net realized investment losses














(272,851
)Interest expense














(38,743
)Foreign exchange gain














1,421Income before income taxes













$
176,002Loss and loss expense ratio


104.9
%


43.8
%


53.6
%


57.4
%Acquisition cost ratio


1.1
%


4.1
%


19.6
%


10.1
%General and administrative expense ratio


22.6
%


21.7
%


9.4
%


16.7
%Combined ratio


128.6
%


69.6
%


82.6
%


84.2
%   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
%  F-46




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   17.
    SEGMENT
    INFORMATION  (continued)  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
%     2008


2007


2006Bermuda

$
636,662


$
876,484


$
983,532United States


321,468



123,233



144,694Europe


149,098



153,393



178,370Total net premiums written

$
1,107,228


$
1,153,110


$
1,306,596    18.
    SUBSEQUENT
    EVENTS   F-47




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
  19.
    UNAUDITED
    QUARTERLY FINANCIAL DATA    Quarter EndedDecember 31,


September 30,


June 30,


March 31,2008


2008


2008


2008REVENUES:Gross premiums written

$
310,945


$
290,981


$
446,784


$
396,874Premiums ceded


(84,442
)


(57,078
)


(126,534
)


(70,302
)Net premiums written


226,503



233,903



320,250



326,572Change in unearned premiums


76,481



38,070



(51,374
)


(53,500
)Net premiums earned


302,984



271,973



268,876



273,072Net investment income


82,583



76,916



72,345



76,931Net realized investment (losses) gains


(120,047
)


(151,876
)


(4,393
)


3,465Other income


746











266,266



197,013



336,828



353,468EXPENSES:Net losses and loss expenses


143,531



176,010



178,084



143,497Acquisition costs


30,849



28,615



26,265



26,840General and administrative expenses


56,115



40,794



46,380



43,271Interest expense


10,205



9,515



9,513



9,510Foreign exchange loss (gain)


1,230



(2,728
)


(399
)


476241,930



252,206



259,843



223,594Income before income taxes


24,336



(55,193
)


76,985



129,874Income tax expense (recovery)


4,484



(8,826
)


(2,220
)


(1,071
)NET INCOME (LOSS)

$
19,852


$
(46,367
)

$
79,205


$
130,945Basic earnings (loss) per share

$
0.40


$
(0.95
)

$
1.62


$
2.68Diluted earnings (loss) per share

$
0.39


$
(0.95
)

$
1.56


$
2.55Weighted average common shares outstanding


49,028,249



49,007,389



48,897,931



48,811,932Weighted average common shares and common share equivalents
    outstanding


50,366,814



49,007,389



50,873,712



51,380,423   F-48




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Expressed
    in thousands of United States dollars, expect share, per share,
    percentage and ratio information)
   19.
    UNAUDITED
    QUARTERLY FINANCIAL DATA  (continued)  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 gains (losses)


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-49




---



##### Table of Contents



Schedule II  ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
    CONDENSED BALANCE SHEETS  PARENT COMPANY as
    of December 31, 2008 and 2007
    (Expressed in thousands of United States dollars, except share
    and per share amounts)
  2008


2007ASSETS:Cash and cash equivalents

$
296,984


$
25,091Investments in subsidiaries


2,888,149



2,738,490Balances due from subsidiaries


3,851



2,152Other assets


5,323



5,888Total assets

$
3,194,307


$
2,771,621LIABILITIES:Accounts payable and accrued liabilities

$
118


$
230Interest payable


16,312



15,625Balances due to subsidiaries


18,469



17,242Syndicated loan


243,750



Senior notes


498,796



498,682Total liabilities

$
777,445


$
531,779SHAREHOLDERS EQUITY:Common shares, par value $0.03 per share, issued and outstanding
    2008: 49,036,159 shares and 2007: 48,741,927 shares

$
1,471


$
1,462Additional paid-in capital


1,314,785



1,281,832Retained earnings


994,974



820,334Accumulated other comprehensive income


105,632



136,214Total shareholders equity

$
2,416,862


$
2,239,842Total liabilities and shareholders equity

$
3,194,307


$
2,771,621    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, 2008, 2007 and 2006
    (Expressed in thousands of United States dollars)
  2008


2007


2006REVENUES:Net investment income

$
1,744


$
3,504


$
3,452Net realized gain on interest rate swaps










4441,744



3,504



3,896EXPENSES:General and administrative expenses


7,285



7,594



12,476Interest expense


38,743



37,848



32,56646,028



45,442



45,042Loss before equity in earnings (loss) of consolidated
    subsidiaries


(44,284
)


(41,938
)


(41,146
)Equity in earnings of consolidated subsidiaries


227,919



511,120



483,984NET INCOME

$
183,635


$
469,182


$
442,838Other comprehensive (loss) incomeUnrealized (losses) gains on investments arising during the year
    net of applicable deferred income tax recovery (expense)


(198,405
)


122,133



3,294Reclassification adjustment for net realized losses included in
    net income, net of applicable income tax recovery


194,085



7,617



28,678Other comprehensive (loss) income net of tax


(4,320
)


129,750



31,972COMPREHENSIVE INCOME

$
179,315


$
598,932


$
474,810    S-2




---



##### Table of Contents



ALLIED
    WORLD ASSURANCE COMPANY HOLDINGS, LTD
    CONDENSED STATEMENTS OF CASH FLOWS  PARENT COMPANY for
    the Years Ended December 31, 2008, 2007 and 2006
    (Expressed in thousands of United States dollars)
  2008


2007


2006CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income

$
183,635


$
469,182


$
442,838Adjustments to reconcile net income to cash provided by
    operating activities:Equity in earnings of consolidated subsidiaries


(227,919
)


(511,120
)


(483,984
)Dividends received from subsidiaries


160,000



575,000



15,000Stock compensation expenses


543



743



10,805Amortization of discount on senior notes


459



427



42Balance due from subsidiaries


(1,699
)


(2,127
)


Other assets


219



(598
)


3,851Accounts payable and accrued liabilities


(112
)


34



(502
)Interest payable


687



(625
)


16,250Balances due to affiliates










(5,000
)Balances due to subsidiaries


1,227



5,226



9,543Net cash provided by operating activities


117,040



536,142



8,843CASH FLOWS USED IN INVESTING ACTIVITIES:Investment in subsidiaries


(60,137
)


(11,200
)


(215,000
)Net cash used in investing activities


(60,137
)


(11,200
)


(215,000
)CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:Dividends paid


(35,257
)


(38,052
)


(9,043
)Proceeds from (payment of) the exercise of stock options


4,046



(168
)


Stock acquired






(563,444
)


Gross proceeds from initial public offering










344,080Issuance costs paid on initial public offering










(28,291
)Proceeds from issuance of senior notes










498,535Repayment of long-term debt










(500,000
)Proceeds from syndicated loan


243,750







Stock compensation funding due from subsidiaries


2,451



2,230



Net cash provided by (used in) financing activities


214,990



(599,434
)


305,281NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


271,893



(74,492
)


99,124CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


25,091



99,583



459CASH AND CASH EQUIVALENTS, END OF YEAR

$
296,984


$
25,091


$
99,583    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, 2008
  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

$
13,559


$
672,443


$
136,586


$
173,790


$



$
182,244


$
1,948


$
39,290


$
169,887Casualty


64,186



2,829,109



532,681



478,578







209,739



19,658



103,720



508,960Reinsurance


58,035



1,075,276



261,091



464,537







249,139



90,963



43,550



428,381Corporate


















308,775















Total

$
135,780


$
4,576,828


$
930,358


$
1,116,905


$
308,775


$
641,122


$
112,569


$
186,560


$
1,107,228   Year
    Ended December 31, 2007
  Reserve for














Amortization ofDeferred


Losses





Net


Net


Losses and


Deferred


Other


NetAcquisition


and Loss


Unearned


Premiums


Investment


Loss


Acquisition


Operating


PremiumsCosts


Expenses


Premiums


Earned


Income


Expenses


Costs


Expenses


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  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, 2008

$
1,015,444


$
338,356


$
430,140


$
1,107,228



39
%Year ended December 31, 2007

$
969,450


$
352,399


$
536,059


$
1,153,110



46
%Year ended December 31, 2006

$
1,086,290


$
352,429


$
572,735


$
1,306,596



44
%  S-5