Edgar Filing: Allied World Assurance Co Holdings, AG

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2013

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

For the transition period from to

Commission file number: 001-32938

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

(Exact Name of Registrant as Specified in Its Charter)


Switzerland		98-0681223
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

Lindenstrasse 8

6340 Baar

Zug, Switzerland

(Address of Principal Executive Offices and Zip Code)

41-41-768-1080

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of July 26, 2013, 34,087,192 common shares were outstanding.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63

Item 4.	Controls and Procedures	65

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	66

Item 1A.	Risk Factors	66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 3.	Defaults Upon Senior Securities	66

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	67

SIGNATURES		68

EXHIBIT INDEX		69

-i-

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

as of June 30, 2013 and December 31, 2012

(Expressed in thousands, except share and per share amounts)


	As of			As of
	June 30,			December 31,
	2013			2012
ASSETS:
Fixed maturity investments trading, at fair value (amortized cost: 2013: $6,264,343; 2012: $6,473,429)	$	6,285,778		$	6,626,454
Equity securities trading, at fair value (cost: 2013: $594,025; 2012: $480,312)		640,925			523,949
Other invested assets		849,100			783,534

Total investments		7,775,803			7,933,937
Cash and cash equivalents		674,103			681,879
Restricted cash		194,046			183,485
Insurance balances receivable		814,620			510,532
Funds held		387,599			336,368
Prepaid reinsurance		339,936			277,406
Reinsurance recoverable		1,179,525			1,141,110
Accrued investment income		24,112			29,135
Net deferred acquisition costs		153,812			108,010
Goodwill		268,376			268,376
Intangible assets		50,098			51,365
Balances receivable on sale of investments		277,025			418,879
Net deferred tax assets		40,550			25,580
Other assets		85,272			63,884

Total assets	$	12,264,877		$	12,029,946

LIABILITIES:
Reserve for losses and loss expenses	$	5,696,865		$	5,645,549
Unearned premiums		1,586,327			1,218,021
Reinsurance balances payable		205,884			136,264
Balances due on purchases of investments		487,063			759,934
Senior notes		798,355			798,215
Dividends payable		17,127			—
Accounts payable and accrued liabilities		100,027			145,628

Total liabilities	$	8,891,648		$	8,703,611

Commitments and contingencies
SHAREHOLDERS’ EQUITY:
Common shares: 2013: par value CHF 12.30 per share and 2012: par value CHF 12.64 per share (2013: 35,429,423; 2012: 36,369,868 shares issued and 2013: 34,175,831; 2012: 34,797,781 shares outstanding)		430,397			454,980
Treasury shares, at cost (2013: 1,253,592; 2012: 1,572,087)		(91,661	)		(113,818	)
Retained earnings		3,034,493			2,985,173

Total shareholders’ equity		3,373,229			3,326,335

Total liabilities and shareholders’ equity	$	12,264,877		$	12,029,946

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE (LOSS) INCOME

for the three and six months ended June 30, 2013 and 2012

(Expressed in thousands, except share and per share amounts)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
REVENUES:
Gross premiums written	$	765,200		$	646,870		$	1,602,281		$	1,327,799
Premiums ceded		(183,978	)		(152,160	)		(326,007	)		(244,136	)

Net premiums written		581,222			494,710			1,276,274			1,083,663
Change in unearned premiums		(73,951	)		(64,963	)		(305,775	)		(252,026	)

Net premiums earned		507,271			429,747			970,499			831,637
Net investment income		37,635			42,451			71,023			89,660
Net realized investment (losses) gains		(115,198	)		8,663			(35,561	)		142,244

		429,708			480,861			1,005,961			1,063,541

EXPENSES:
Net losses and loss expenses		275,128			240,380			530,306			465,582
Acquisition costs		64,617			51,588			121,302			98,726
General and administrative expenses		80,585			73,979			163,265			144,345
Amortization of intangible assets		634			634			1,267			1,267
Interest expense		14,188			14,001			28,322			27,757
Foreign exchange loss (gain)		490			(1,019	)		3,008			(1,100	)

		435,642			379,563			847,470			736,577

(Loss) income before income taxes		(5,934	)		101,298			158,491			326,964
Income tax (benefit) expense		(4,072	)		4,947			1,361			12,457

NET (LOSS) INCOME		(1,862	)		96,351			157,130			314,507

Other comprehensive loss:
Unrealized gains on investments arising during the period net of applicable deferred income tax benefit for the three and six months ended June 30, 2012: $68 and $96, respectively		—			231			—			179
Reclassification adjustment for net realized investment gains included in net (loss) income, net of applicable income tax		—			(1,142	)		—			(13,249	)

Other comprehensive loss		—			(911	)		—			(13,070	)

COMPREHENSIVE (LOSS) INCOME	$	(1,862	)	$	95,440		$	157,130		$	301,437

PER SHARE DATA
Basic (loss) earnings per share	$	(0.05	)	$	2.66		$	4.55		$	8.56
Diluted (loss) earnings per share	$	(0.05	)	$	2.59		$	4.45		$	8.41
Weighted average common shares outstanding		34,422,553			36,288,596			34,517,552			36,746,881
Weighted average common shares and common share equivalents outstanding		34,422,553			37,189,722			35,316,595			37,395,559
Dividends paid per share	$	—		$	0.375		$	0.375		$	0.750

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

for the six months ended June 30, 2013 and 2012

(Expressed in thousands)


	Share Capital			Additional Paid-in Capital			Treasury Shares			Accumulated Other Comprehensive Income			Retained Earnings			Total
December 31, 2012	$	454,980		$	—		$	(113,818	)	$	—		$	2,985,173		$	3,326,335
Net income		—			—			—			—			157,130			157,130
Dividends — par value reduction		(12,981	)		—			—			—			—			(12,981	)
Dividends		—			—			—			—			(17,127	)		(17,127	)
Stock compensation (1)		—			—			22,157			—			(19,714	)		2,443
Share repurchases		—			—			(82,571	)		—			—			(82,571	)
Shares cancelled		(11,602	)		—			82,571			—			(70,969	)		—

June 30, 2013	$	430,397		$	—		$	(91,661	)	$	—		$	3,034,493		$	3,373,229


December 31, 2011	$	557,153		$	78,225		$	(136,590	)	$	14,484		$	2,635,750		$	3,149,022
Net income		—			—			—			—			314,507			314,507
Dividends — par value reduction		(13,701	)		—			—			—			—			(13,701	)
Other comprehensive loss		—			—			—			(13,070	)		—			(13,070	)
Stock compensation (1)		—			(25,410	)		32,011			—			—			6,601
Share repurchases		—			—			(159,458	)		—			—			(159,458	)

June 30, 2012	$	543,452		$	52,815		$	(264,037	)	$	1,414		$	2,950,257		$	3,283,901

(1)	Includes stock compensation expense for the period and shares issued out of treasury for awards exercised or vested.

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the six months ended June 30, 2013 and 2012

(Expressed in thousands)


	Six Months Ended
	June 30,
	2013			2012
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income	$	157,130		$	314,507
Adjustments to reconcile net income to cash provided by operating activities:
Net realized gains on sales of investments		(62,921	)		(46,834	)
Mark to market adjustments		95,698			(94,732	)
Stock compensation expense		6,566			9,294
Undistributed income of equity method investments		(2,316	)		—
Changes in:
Reserve for losses and loss expenses, net of reinsurance recoverables		12,901			81,682
Unearned premiums, net of prepaid reinsurance		305,776			252,026
Insurance balances receivable		(304,088	)		(187,038	)
Funds held		(51,231	)		(6,467	)
Reinsurance balances payable		69,620			3,767
Net deferred acquisition costs		(45,802	)		(29,484	)
Net deferred tax assets		(14,970	)		(3,458	)
Accounts payable and accrued liabilities		(45,601	)		(19,978	)
Other items, net		12,880			28,488

Net cash provided by operating activities		133,642			301,773

CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchases of trading securities		(3,186,162	)		(4,005,352	)
Purchases of other invested assets		(141,805	)		(17,778	)
Sales of available for sale securities		—			214,015
Sales of trading securities		3,171,977			3,959,204
Sales of other invested assets		126,491			108,759
Purchases of fixed assets		(3,363	)		(879	)
Change in restricted cash		(10,561	)		(156,768	)

Net cash (used in) provided by investing activities		(43,423	)		101,201

CASH FLOWS USED IN FINANCING ACTIVITIES:
Dividends paid — partial par value reduction		(12,981	)		(28,003	)
Proceeds from the exercise of stock options		5,293			6,697
Share repurchases		(82,571	)		(148,949	)

Net cash used in financing activities		(90,259	)		(170,255	)

Effect of exchange rate changes on foreign currency cash		(7,736	)		(2,265	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(7,776	)		230,454
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		681,879			633,996

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	674,103		$	864,450

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	12,671		$	8,257
Cash paid for interest expense	$	27,000		$	27,000

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1. GENERAL

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

2. BASIS OF PREPARATION AND CONSOLIDATION

These unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Company’s financial statements include, but are not limited to:

•

The premium estimates for certain reinsurance agreements,

•

Recoverability of deferred acquisition costs,

•

The reserve for outstanding losses and loss expenses,

•

Valuation of ceded reinsurance recoverables,

•

Determination of impairment of goodwill and other intangible assets, and

•

Valuation of financial instruments.

Intercompany accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the consolidation. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

3. NEW ACCOUNTING PRONOUNCEMENTS

In December 2011 (with a clarification amendment issued in January 2013), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The objective of ASU 2011-11 was to enhance disclosures about derivatives, repurchase agreements and reverse repurchase agreements, securities borrowing and securities lending transactions to the extent they are subject to master netting arrangements or similar agreements. The Company adopted ASU 2011-11 on January 1, 2013. The adoption of ASU 2011-11 did not have an impact on the presentation of the financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

4. INVESTMENTS

a) Trading Securities

Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive (loss) income (“consolidated income statements”) by category are as follows:


	June 30, 2013				December 31, 2012
	Fair Value		Amortized Cost		Fair Value		Amortized Cost
U.S. Government and Government agencies	$	2,049,212	$	2,060,490	$	1,865,913	$	1,854,198
Non-U.S. Government and Government agencies		233,301		242,487		261,627		253,657
States, municipalities and political subdivisions		33,621		33,328		40,444		39,342
Corporate debt:
Financial institutions		794,552		781,788		866,140		835,587
Industrials		1,089,904		1,087,425		1,153,909		1,139,706
Utilities		66,684		66,684		69,153		67,463
Mortgage-backed		1,589,021		1,564,838		1,958,373		1,877,854
Asset-backed		429,483		427,303		410,895		405,622

Total fixed maturity investments	$	6,285,778	$	6,264,343	$	6,626,454	$	6,473,429


	June 30, 2013				December 31, 2012
	Fair Value		Original Cost		Fair Value		Original Cost
Equity securities	$	640,925	$	594,025	$	523,949	$	480,312
Other invested assets		714,391		635,632		655,888		606,521

	$	1,355,316	$	1,229,657	$	1,179,837	$	1,086,833

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

b) Other Invested Assets

In general, the Company has invested in hedge funds that require at least 30 days’ notice of redemption and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending on the fund. Certain hedge funds have lock-up periods ranging from one to three years from initial investment. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, called a “gate.” The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the fund’s net assets. The gate is a method for executing an orderly redemption process to reduce the possibility of adversely affecting investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash sometime after the redemption date. Certain funds may impose a redemption fee on early redemptions. Interests in private equity funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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


Fund Type	Carrying Value as of June 30, 2013		Investments with Redemption Restrictions		Estimated Remaining Restriction Period		Investments without Redemption Restrictions⁽¹⁾		Redemption Frequency ⁽¹⁾		Redemption Notice Period⁽¹⁾		Unfunded Commitments
Private equity	$	125,950	$	125,950		3 - 10 Years	$	—					$	160,490
Mezzanine debt		55,232		55,232		8 - 10 Years		—						209,623
Distressed		8,890		8,890		4 - 5 Years		—						6,174

Total private equity structures		190,072		190,072				—						376,287

Distressed		136,779		112,119		1 - 2 Years		24,660		Quarterly		45 - 65 Days		—
Equity long/short		110,889		—				110,889		Quarterly		30 - 60 Days		—
Multi-strategy		127,107		—				127,107		Quarterly		45 - 90 Days		—
Global macro		19,842		—				19,842		Monthly		3 Days		—
Event driven		22,430		—				22,430		Annual		60 Days		—
Relative value credit		75,109		—				75,109		Quarterly		60 Days		—

Total hedge funds		492,156		112,119				380,037						—

Other private securities		134,709		—				134,709						5,000
High yield loan fund		32,163		—				32,163		Monthly		30 Days		—

Total other invested assets	$	849,100	$	302,191			$	546,909					$	381,287

(1)	The redemption frequency and notice periods only apply to the investments without redemption restrictions. Some or all of these investments may be subject to a gate.

•

Private equity funds: Primary funds may invest in companies and general partnership interests. Secondary funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

•

Mezzanine debt funds: Mezzanine debt funds primarily focus on providing capital to upper middle market and middle market companies and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity; however, the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

•

Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. Certain funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund.

•

Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and by their targeted net long position.

•

Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading.

•

Global macro funds: These funds focus on a top-down analysis of global markets as influenced by major political and economic trends or events. Global macro managers develop investment strategies that aim to forecast movements in interest rates, fund flows, political changes and other wide-ranging systematic factors. The portfolios of these funds can include long or short positions in equities, fixed-income securities, currencies and commodities in the form of cash or derivatives instruments.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

•

Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one or more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include mergers and acquisitions (arbitrage), corporate restructurings and spin-offs, and capital structure arbitrage.

•

Relative value credit funds: These funds seek to take exposure to credit-sensitive securities, long and/or short, based upon credit analysis of issuers and securities and credit market views.

•

Other private securities: These securities include strategic non-controlling minority investments in private asset management companies and other insurance related investments that are accounted for using the equity method of accounting.

•

High yield loan fund: A long-only private mutual fund that invests in high yield fixed income securities.

c) Net Investment Income


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Fixed maturity investments	$	32,662		$	37,219		$	65,187		$	84,105
Equity securities		4,409			4,963			7,608			8,495
Other invested assets		3,843			3,681			5,307			4,223
Cash and cash equivalents		529			550			1,017			1,157
Expenses		(3,808	)		(3,962	)		(8,096	)		(8,320	)

Net investment income	$	37,635		$	42,451		$	71,023		$	89,660

Net investment income from other invested assets included the distributed and undistributed net income from investments accounted for using the equity method of accounting for the three and six months ended June 30, 2013.

d) Components of Realized Gains and Losses


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Gross realized gains on sale of invested assets	$	58,223		$	52,775		$	102,472		$	91,944
Gross realized losses on sale of invested assets		(35,077	)		(14,762	)		(42,042	)		(36,669	)
Net realized and unrealized gains (losses) on derivatives		8,538			(5,914	)		7,561			770
Mark-to-market gains (losses):
Fixed maturity investments, trading		(115,113	)		(24,287	)		(131,588	)		44,203
Equity securities, trading		(34,330	)		(182	)		(1,357	)		19,603
Other invested assets, trading		2,561			1,033			29,393			22,393

Net realized investment (losses) gains	$	(115,198	)	$	8,663		$	(35,561	)	$	142,244

Proceeds from sale of available for sale securities	$	—		$	14,308		$	—		$	213,716

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

e) Pledged Assets

As of June 30, 2013 and December 31, 2012, $2,226,680 and $2,141,249, respectively, of cash and cash equivalents and investments were deposited, pledged or held in trust accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.

In addition, as of June 30, 2013 and December 31, 2012, a further $1,135,658 and $1,225,155, respectively, of cash and cash equivalents and investments were pledged as collateral for the Company’s letter of credit facilities. See Note 8(d) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for details on the Company’s credit facilities.

5. DERIVATIVE INSTRUMENTS

As of June 30, 2013 and December 31, 2012, none of the Company’s derivatives were designated as hedges. The following table summarizes information on the location and amounts of derivative fair values on the unaudited condensed consolidated balance sheets (“consolidated balance sheets”):


	June 30, 2013								December 31, 2012
	Asset				Liability				Asset				Liability
	Derivative		Asset		Derivative		Liability		Derivative		Asset		Derivative		Liability
	Notional		Derivative		Notional		Derivative		Notional		Derivative		Notional		Derivative
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Put options	$	—	$	—	$	—	$	—	$	5,152	$	532	$	—	$	—
Foreign exchange contracts		307,191		9,248		171,906		4,612		127,712		1,713		194,566		2,656
Interest rate swaps		—		—		33,000		161		—		—		—		—

Total derivatives	$	307,191	$	9,248	$	204,906	$	4,773	$	132,864	$	2,245	$	194,566	$	2,656

Derivative assets and derivative liabilities relating to the put options are classified within “equity securities trading, at fair value” on the consolidated balance sheets. All other asset and liability derivatives are classified within “other assets” or “accounts payable and accrued liabilities” on the consolidated balance sheets.

The following table provides the net realized and unrealized gains (losses) on derivatives not designated as hedges recorded on the consolidated income statements:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Foreign exchange contracts	$	1,989		$	(359	)	$	1,245		$	580

Total included in foreign exchange (loss) gain		1,989			(359	)		1,245			580

Put options		(90	)		—			(3,822	)		(336	)
Foreign exchange contracts		4,274			4,415			6,089			2,110
Interest rate futures and swaps		4,354			(10,329	)		5,294			(1,004	)

Total included in net realized investment gains		8,538			(5,914	)		7,561			770

Total realized and unrealized gains (losses) on derivatives	$	10,527		$	(6,273	)	$	8,806		$	1,350

Derivative Instruments Not Designated as Hedging Instruments

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

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

The Company also purchases options to actively manage the Company’s equity portfolio.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

•

Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

•

Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table shows the fair value of the Company’s financial instruments and where in the fair value hierarchy the fair value measurements are included as of the dates indicated below:


June 30, 2013	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
U.S. Government and Government agencies	$	2,049,212	$	2,049,212	$	1,709,513	$	339,699	$	—
Non-U.S. Government and Government agencies		233,301		233,301		—		233,301		—
States, municipalities and political subdivisions		33,621		33,621		—		33,621		—
Corporate debt		1,951,140		1,951,140		—		1,951,140		—
Mortgage-backed		1,589,021		1,589,021		—		1,391,018		198,003
Asset-backed		429,483		429,483		—		368,198		61,285

Total fixed maturity investments		6,285,778		6,285,778		1,709,513		4,316,977		259,288

Equity securities		640,925		640,925		587,426		—		53,499
Other invested assets		714,391		714,391		—		—		714,391

Total investments	$	7,641,094	$	7,641,094	$	2,296,939	$	4,316,977	$	1,027,178

Derivative assets:
Foreign exchange contracts	$	9,248	$	9,248	$	—	$	9,248	$	—

Derivative liabilities:
Foreign exchange contracts	$	4,612	$	4,612	$	—	$	4,612	$	—
Interest rate swaps		161		161		—		161		—

Senior notes	$	798,355	$	903,660	$	—	$	903,660	$	—


December 31, 2012	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
U.S. Government and Government agencies	$	1,865,913	$	1,865,913	$	1,529,158	$	336,755	$	—
Non-U.S. Government and Government agencies		261,627		261,627		—		261,627		—
States, municipalities and political subdivisions		40,444		40,444		—		40,444		—
Corporate debt		2,089,202		2,089,202		—		2,089,202		—
Mortgage-backed		1,958,373		1,958,373		—		1,790,548		167,825
Asset-backed		410,895		410,895		—		348,649		62,246

Total fixed maturity investments		6,626,454		6,626,454		1,529,158		4,867,225		230,071

Equity securities		523,949		523,949		469,269		—		54,680
Other invested assets		655,888		655,888		—		—		655,888

Total investments	$	7,806,291	$	7,806,291	$	1,998,427	$	4,867,225	$	940,639

Derivative assets:
Foreign exchange contracts	$	1,713	$	1,713	$	—	$	1,713	$	—

Derivative liabilities:
Foreign exchange contracts	$	2,656	$	2,656	$	—	$	2,656	$	—

Senior notes	$	798,215	$	918,627	$	—	$	918,627	$	—

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

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

U.S. Government and Government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company’s U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.

Non-U.S. Government and Government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.

States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.

Corporate debt: Comprised of bonds issued by corporations that are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-term are priced using spread above the London Interbank Offered Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.

Mortgage-backed: Primarily comprised of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agencies. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market or broker-dealer quotes. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

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

Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value of the funds as reported by the fund manager that the Company believes is an unobservable input, and as such, the fair values of those funds are included in the Level 3 fair value hierarchy. The Company does not measure investments that are accounted for using the equity method of accounting at fair value.

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

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3):


	Other invested assets			Mortgage-backed			Asset-backed			Equities
Three Months Ended June 30, 2013
Opening balance	$	710,140		$	155,420		$	40,903		$	57,787
Realized and unrealized gains (losses) included in net income		11,709			(6,188	)		(289	)		(4,288	)
Purchases		96,742			72,261			23,527			—
Sales		(104,200	)		(27,887	)		(1,727	)		—
Transfers into Level 3 from Level 2		—			11,197			—			—
Transfers out of Level 3 into Level 2 (1)		—			(6,800	)		(1,129	)		—

Ending balance	$	714,391		$	198,003		$	61,285		$	53,499

Three Months Ended June 30, 2012
Opening balance	$	522,065		$	178,374		$	242,394		$	—
Realized and unrealized (losses) gains included in net income		(641	)		1,780			(220	)		—
Purchases		16,728			40,352			23,267			—
Sales		(17,262	)		(34,755	)		(47,537	)		—
Transfers into Level 3 from Level 2		—			3,707			8,654			—
Transfers out of Level 3 into Level 2 (1)		—			(31,499	)		(108,972	)		—

Ending balance	$	520,890		$	157,959		$	117,586		$	—

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Other invested assets			Mortgage-backed			Asset-backed			Equities
Six Months Ended June 30, 2013
Opening balance	$	655,888		$	167,825		$	62,246		$	54,680
Realized and unrealized gains (losses) included in net income		43,962			(7,613	)		(382	)		(1,181	)
Purchases		169,952			71,752			24,782			—
Sales		(155,411	)		(29,864	)		(18,478	)		—
Transfers into Level 3 from Level 2		—			7,109			—			—
Transfers out of Level 3 into Level 2 (1)		—			(11,206	)		(6,883	)		—

Ending balance	$	714,391		$	198,003		$	61,285		$	53,499

Six Months Ended June 30, 2012
Opening balance	$	540,409		$	249,204		$	94,745		$	—
Realized and unrealized gains included in net income		14,882			4,324			904			—
Purchases		17,778			41,376			31,580			—
Sales		(52,179	)		(108,165	)		(48,133	)		—
Transfers into Level 3 from Level 2		—			4,495			55,498			—
Transfers out of Level 3 into Level 2 (1)		—			(33,275	)		(17,008	)		—

Ending balance	$	520,890		$	157,959		$	117,586		$	—

(1)	Transfers out of Level 3 are primarily attributable to the availability of market observable information.

The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs, then such securities have been transferred to the Level 3 fair value hierarchy. The Company believes the prices obtained from the broker-dealers are the best estimate of fair value of the securities being priced as the broker-dealers are typically involved in the initial pricing of the security, and the Company has compared the price per the broker-dealer to other pricing sources and noted no material differences. The Company recognizes transfers between levels at the end of the reporting period. There were no transfers between Level 1 and Level 2 during the period.

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

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

The Company records the unadjusted price provided and validates this price through a process that includes, but is not limited to, monthly and/or quarterly: (i) comparison of prices between two independent sources, with significant differences requiring additional price sources; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to their target benchmark, with

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value, including a review of the inputs used for pricing; (iv) comparing the price to the Company’s knowledge of the current investment market; and (v) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company’s external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 report) in conjunction with regular discussion and analysis of the investment portfolio’s structure and performance.

7. RESERVE FOR LOSSES AND LOSS EXPENSES

The reserve for losses and loss expenses consists of the following:


	June 30,		December 31,
	2013		2012
Outstanding loss reserves	$	1,509,350	$	1,539,114
Reserves for losses incurred but not reported		4,187,515		4,106,435

Reserve for losses and loss expenses	$	5,696,865	$	5,645,549

The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Gross liability at beginning of period	$	5,673,220		$	5,331,418		$	5,645,549		$	5,225,143
Reinsurance recoverable at beginning of period		(1,163,503	)		(1,056,780	)		(1,141,110	)		(1,002,919	)

Net liability at beginning of period		4,509,717			4,274,638			4,504,439			4,222,224

Net losses incurred related to:
Current year		323,556			282,302			622,804			546,986
Prior years		(48,428	)		(41,922	)		(92,498	)		(81,404	)

Total incurred		275,128			240,380			530,306			465,582

Net paid losses related to:
Current year		21,003			18,226			24,584			19,840
Prior years		241,764			186,891			482,885			362,411

Total paid		262,767			205,117			507,469			382,251

Foreign exchange revaluation		(4,738	)		(5,995	)		(9,936	)		(1,649	)

Net liability at end of period		4,517,340			4,303,906			4,517,340			4,303,906
Reinsurance recoverable at end of period		1,179,525			1,073,612			1,179,525			1,073,612

Gross liability at end of period	$	5,696,865		$	5,377,518		$	5,696,865		$	5,377,518

For the three months ended June 30, 2013, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the 2007 through 2010 loss years across most lines of business. In addition, the reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years.

For the six months ended June 30, 2013, the Company had net favorable reserve development in its international and reinsurance segments due to actual loss emergence being lower than initially expected, primarily for loss years 2004 to 2008. The reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years for certain errors and omissions and director’s and officers’ classes of business.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

For the three months ended June 30, 2012, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized by each segment in the 2004 through 2009 loss years across most lines of business.

For the six months ended June 30, 2012, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the international insurance and reinsurance segments in the 2004 through 2008 loss years.

While the Company has experienced favorable reserve development in its insurance and reinsurance lines, there is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. It is not appropriate to extrapolate future redundancies based on prior years’ development. The methodology of estimating loss reserves is periodically reviewed to ensure that the key assumptions used in the actuarial models continue to be appropriate.

8. INCOME TAXES

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

Under current Bermuda law, Allied World Assurance Company Holdings, Ltd (“Allied World Bermuda”) and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Allied World Bermuda and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Allied World Bermuda and Allied World Assurance Company, Ltd will be exempted until March 2035.

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

Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12 months of June 30, 2013.

9. SHAREHOLDERS’ EQUITY

a) Authorized shares

The issued share capital consists of the following:


	June 30,		December 31,
	2013		2012
Common shares issued and fully paid, 2013: CHF 12.30 per share; 2012: CHF 12.64 per share		35,429,423		36,369,868

Share capital at end of period	$	430,397	$	454,980

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Six Months Ended June 30, 2013
Shares issued at beginning of period		36,369,868
Shares cancelled		(940,445	)

Total shares issued at end of period		35,429,423

Treasury shares issued at beginning of period		1,572,087
Shares repurchased		940,445
Shares issued out of treasury		(318,495	)
Shares cancelled		(940,445	)

Total treasury shares at end of period		1,253,592

Total shares outstanding at end of period		34,175,831

During the six months ended June 30, 2013, 940,445 voting shares repurchased and designated for cancellation were constructively retired and cancelled.

Allied World Switzerland’s articles of association authorized its Board of Directors to increase the share capital by a maximum of up to CHF 92,259 or 7,500,728 voting shares.

b) Dividends

The Company paid the following dividend during the six months ended June 30, 2013:


Dividend Paid	Partial Par Value Reduction Per Share		Dividend Per Share		Total Amount Paid
March 12, 2013		CHF 0.34	$	0.375	$	12,981

On May 3, 2012, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution by way of par value reductions. The aggregate reduction amount was paid to shareholders in four installments of $0.375 per share, with the last of such quarterly dividend payments being made on March 12, 2013.

On May 2, 2013, the shareholders approved the Company’s proposal to pay cash dividends in the form of a distribution out of general legal reserve from capital contributions. The distribution amount will be paid to shareholders in quarterly installments of $0.50 per share. The first installment of the dividend was paid on July 3, 2013. The Company expects to distribute the remaining installments of the dividend in October 2013, January 2014 and April 2014.

c) Share Repurchases

In May 2012, the Company established a new share repurchase program in order to repurchase up to $500,000 of its common shares. Repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position, legal requirements and other factors. Under the terms of this new share repurchase program, common shares repurchased shall be designated for cancellation at acquisition and shall be cancelled upon shareholder approval.

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

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company’s share repurchases were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Common shares repurchased		508,328		905,383		940,445		2,336,187
Total cost of shares repurchased	$	46,326	$	66,435	$	82,571	$	159,458
Average price per share	$	91.13	$	73.38	$	87.80	$	68.26

10. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013		2012
Basic (loss) earnings per share:
Net (loss) income	$	(1,862	)	$	96,351	$	157,130	$	314,507
Weighted average common shares outstanding		34,422,553			36,288,596		34,517,552		36,746,881

Basic (loss) earnings per share	$	(0.05	)	$	2.66	$	4.55	$	8.56


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013		2012
Diluted (loss) earnings per share:
Net (loss) income	$	(1,862	)	$	96,351	$	157,130	$	314,507
Weighted average common shares outstanding		34,422,553			36,288,596		34,517,552		36,746,881
Share equivalents:
Options		—			440,811		493,225		413,702
Restricted stock units and performance-based equity awards		—			460,315		304,529		234,976
Employee share purchase plan		—			—		1,289		—

Weighted average common shares and common share equivalents outstanding — diluted		34,422,553			37,189,722		35,316,595		37,395,559

Diluted (loss) earnings per share	$	(0.05	)	$	2.59	$	4.45	$	8.41

For the three months ended June 30, 2013, there were no common share equivalents included in calculating diluted earnings per share as there was a net loss and any additional shares would be anti-dilutive. For the three months ended June 30, 2012, a weighted average of 337,153 employee stock options and restricted stock units (“RSUs”) were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share, respectively.

For the six months ended June 30, 2013 and 2012, a weighted average of 0 and 343,726 employee stock options and RSUs were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share, respectively.

11. SEGMENT INFORMATION

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

The U.S. insurance segment includes the Company’s direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The international insurance segment includes the Company’s direct insurance operations in Bermuda, Europe, Singapore and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts from the Bermuda office and direct property and specialty casualty insurance to our non-North American domiciled accounts from the European, Singapore and Hong Kong offices. The reinsurance segment includes the Company’s reinsurance operations in the United States, Bermuda, Europe, Singapore and Hong Kong. This segment provides reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. The Company presently writes reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.

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

Management measures results for each segment on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio” and the “combined ratio.” The “loss and loss expense ratio” is derived by dividing net losses and loss expenses by net premiums earned. The “acquisition cost ratio” is derived by dividing acquisition costs by net premiums earned. The “general and administrative expense ratio” is derived by dividing general and administrative expenses by net premiums earned. The “combined ratio” is the sum of the “loss and loss expense ratio,” the “acquisition cost ratio” and the “general and administrative expense ratio.”

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following tables provide a summary of the segment results:


				International
Three Months Ended June 30, 2013	U.S. Insurance			Insurance			Reinsurance			Total
Gross premiums written	$	307,297		$	192,593		$	265,310		$	765,200
Net premiums written		221,419			106,394			253,409			581,222
Net premiums earned		197,436			87,041			222,794			507,271
Net losses and loss expenses		(124,364	)		(30,968	)		(119,796	)		(275,128	)
Acquisition costs		(27,270	)		358			(37,705	)		(64,617	)
General and administrative expenses		(38,302	)		(24,135	)		(18,148	)		(80,585	)

Underwriting income		7,500			32,296			47,145			86,941
Net investment income											37,635
Net realized investment losses											(115,198	)
Amortization of intangible assets											(634	)
Interest expense											(14,188	)
Foreign exchange loss											(490	)

Loss before income taxes										$	(5,934	)


Loss and loss expense ratio		63.0	%		35.6	%		53.8	%		54.2	%
Acquisition cost ratio		13.8	%		(0.4	%)		16.9	%		12.7	%
General and administrative expense ratio		19.4	%		27.7	%		8.1	%		15.9	%

Combined ratio		96.2	%		62.9	%		78.8	%		82.8	%


				International
Three Months Ended June 30, 2012	U.S. Insurance			Insurance			Reinsurance			Total
Gross premiums written	$	265,974		$	183,593		$	197,303		$	646,870
Net premiums written		196,661			111,342			186,707			494,710
Net premiums earned		162,785			82,605			184,357			429,747
Net losses and loss expenses		(103,074	)		(22,233	)		(115,073	)		(240,380	)
Acquisition costs		(21,250	)		582			(30,920	)		(51,588	)
General and administrative expenses		(34,730	)		(21,648	)		(17,601	)		(73,979	)

Underwriting income		3,731			39,306			20,763			63,800
Net investment income											42,451
Net realized investment gains											8,663
Amortization of intangible assets											(634	)
Interest expense											(14,001	)
Foreign exchange gain											1,019

Income before income taxes										$	101,298


Loss and loss expense ratio		63.3	%		26.9	%		62.4	%		55.9	%
Acquisition cost ratio		13.1	%		(0.7	%)		16.8	%		12.0	%
General and administrative expense ratio		21.3	%		26.2	%		9.5	%		17.2	%

Combined ratio		97.7	%		52.4	%		88.7	%		85.1	%

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


				International
Six Months Ended June 30, 2013	U.S. Insurance			Insurance			Reinsurance			Total
Gross premiums written	$	563,315		$	321,109		$	717,857		$	1,602,281
Net premiums written		413,672			184,139			678,463			1,276,274
Net premiums earned		385,875			171,255			413,369			970,499
Net losses and loss expenses		(257,688	)		(59,903	)		(212,715	)		(530,306	)
Acquisition costs		(50,398	)		1,207			(72,111	)		(121,302	)
General and administrative expenses		(77,898	)		(48,924	)		(36,443	)		(163,265	)

Underwriting (loss) income		(109	)		63,635			92,100			155,626
Net investment income											71,023
Net realized investment losses											(35,561	)
Amortization of intangible assets											(1,267	)
Interest expense											(28,322	)
Foreign exchange loss											(3,008	)

Income before income taxes										$	158,491


Loss and loss expense ratio		66.8	%		35.0	%		51.5	%		54.6	%
Acquisition cost ratio		13.1	%		(0.7	%)		17.4	%		12.5	%
General and administrative expense ratio		20.2	%		28.6	%		8.8	%		16.8	%

Combined ratio		100.1	%		62.9	%		77.7	%		83.9	%


				International
Six Months Ended June 30, 2012	U.S. Insurance			Insurance			Reinsurance			Total
Gross premiums written	$	470,185		$	297,183		$	560,431		$	1,327,799
Net premiums written		350,507			183,951			549,205			1,083,663
Net premiums earned		316,143			162,476			353,018			831,637
Net losses and loss expenses		(200,778	)		(60,333	)		(204,471	)		(465,582	)
Acquisition costs		(41,222	)		1,110			(58,614	)		(98,726	)
General and administrative expenses		(65,774	)		(44,049	)		(34,522	)		(144,345	)

Underwriting income		8,369			59,204			55,411			122,984
Net investment income											89,660
Net realized investment gains											142,244
Amortization of intangible assets											(1,267	)
Interest expense											(27,757	)
Foreign exchange gain											1,100

Income before income taxes										$	326,964


Loss and loss expense ratio		63.5	%		37.1	%		57.9	%		56.0	%
Acquisition cost ratio		13.0	%		(0.7	%)		16.6	%		11.9	%
General and administrative expense ratio		20.8	%		27.1	%		9.8	%		17.3	%

Combined ratio		97.3	%		63.5	%		84.3	%		85.2	%

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table shows an analysis of the Company’s gross premiums written by geographic location of the Company’s subsidiaries. All intercompany premiums have been eliminated.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
United States	$	440,151	$	349,577	$	918,594	$	738,548
Bermuda		211,040		193,195		439,712		375,358
Europe		60,234		60,008		146,743		135,384
Singapore		48,918		40,128		87,031		69,311
Hong Kong		4,857		3,962		10,201		9,198

Total gross premiums written	$	765,200	$	646,870	$	1,602,281	$	1,327,799

Europe includes gross premiums written attributable to Switzerland of $5,868 and $4,071 for the three months ended June 30, 2013 and 2012, respectively, and $46,674 and $33,435 for the six months ended June 30, 2013 and 2012, respectively.

12. COMMITMENTS AND CONTINGENCIES

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. These legal proceedings generally relate to claims asserted by or against the Company in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under these proceedings are included in the reserve for losses and loss expenses in the Company’s consolidated balance sheets. As of June 30, 2013, the Company was not a party to any material legal proceedings arising outside the ordinary course of business that management believes will have a material adverse effect on the Company’s results of operations, financial position or cash flow.

13. CONDENSED CONSOLIDATED GUARANTOR FINANCIAL STATEMENTS

The following tables present unaudited condensed consolidating financial information as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 for Allied World Switzerland (the “Parent Guarantor”) and Allied World Bermuda (the “Subsidiary Issuer”). The Subsidiary Issuer is a direct, 100%-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees the senior notes issued by the Subsidiary Issuer.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Unaudited Condensed Consolidating Balance Sheet:


	Allied World		Allied World
	Switzerland		Bermuda			Other Allied						Allied World
	(Parent		(Subsidiary			World			Consolidating			Switzerland
As of June 30, 2013	Guarantor)		Issuer)			Subsidiaries			Adjustments			Consolidated
ASSETS:
Investments	$	—	$	—		$	7,775,803		$	—		$	7,775,803
Cash and cash equivalents		3,676		8,299			662,128			—			674,103
Insurance balances receivable		—		—			814,620			—			814,620
Funds held		—		—			387,599			—			387,599
Reinsurance recoverable		—		—			1,179,525			—			1,179,525
Net deferred acquisition costs		—		—			153,812			—			153,812
Goodwill and intangible assets		—		—			318,474			—			318,474
Balances receivable on sale of investments		—		—			277,025			—			277,025
Investments in subsidiaries		3,357,144		4,480,926			—			(7,838,070	)		—
Due (to) from subsidiaries		29,968		(2,234	)		(27,734	)		—			—
Other assets		1,144		5,410			677,362			—			683,916

Total assets	$	3,391,932	$	4,492,401		$	12,218,614		$	(7,838,070	)	$	12,264,877

LIABILITIES:
Reserve for losses and loss expenses	$	—	$	—		$	5,696,865		$	—		$	5,696,865
Unearned premiums		—		—			1,586,327			—			1,586,327
Reinsurance balances payable		—		—			205,884			—			205,884
Balances due on purchases of investments		—		—			487,063			—			487,063
Senior notes		—		798,355			—			—			798,355
Other liabilities		18,703		18,246			80,205			—			117,154

Total liabilities		18,703		816,601			8,056,344			—			8,891,648

Total shareholders’ equity		3,373,229		3,675,800			4,162,270			(7,838,070	)		3,373,229

Total liabilities and shareholders’ equity	$	3,391,932	$	4,492,401		$	12,218,614		$	(7,838,070	)	$	12,264,877

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Allied World			Allied World
	Switzerland			Bermuda			Other Allied					Allied World
	(Parent			(Subsidiary			World		Consolidating			Switzerland
As of December 31, 2012	Guarantor)			Issuer)			Subsidiaries		Adjustments			Consolidated
ASSETS:
Investments	$	—		$	—		$	7,933,937	$	—		$	7,933,937
Cash and cash equivalents		19,997			11,324			650,558		—			681,879
Insurance balances receivable		—			—			510,532		—			510,532
Funds held		—			—			336,368		—			336,368
Reinsurance recoverable		—			—			1,141,110		—			1,141,110
Net deferred acquisition costs		—			—			108,010		—			108,010
Goodwill and intangible assets		—			—			319,741		—			319,741
Balances receivable on sale of investments		—			—			418,879		—			418,879
Investments in subsidiaries		3,337,446			4,768,769			—		(8,106,215	)		—
Due (to) from subsidiaries		(23,864	)		(7,173	)		31,037		—			—
Other assets		1,499			6,081			571,910		—			579,490

Total assets	$	3,335,078		$	4,779,001		$	12,022,082	$	(8,106,215	)	$	12,029,946

LIABILITIES:
Reserve for losses and loss expenses	$	—		$	—		$	5,645,549	$	—		$	5,645,549
Unearned premiums		—			—			1,218,021		—			1,218,021
Reinsurance balances payable		—			—			136,264		—			136,264
Balances due on purchases of investments		—			—			759,934		—			759,934
Senior notes		—			798,215			—		—			798,215
Other liabilities		8,743			17,727			119,158		—			145,628

Total liabilities		8,743			815,942			7,878,926		—			8,703,611

Total shareholders’ equity		3,326,335			3,963,059			4,143,156		(8,106,215	)		3,326,335

Total liabilities and shareholders’ equity	$	3,335,078		$	4,779,001		$	12,022,082	$	(8,106,215	)	$	12,029,946

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Unaudited Condensed Consolidating Income Statement:


	Allied World			Allied World
	Switzerland			Bermuda			Other Allied						Allied World
	(Parent			(Subsidiary			World			Consolidating			Switzerland
Three Months Ended June 30, 2013	Guarantor)			Issuer)			Subsidiaries			Adjustments			Consolidated
Net premiums earned	$	—		$	—		$	507,271		$	—		$	507,271
Net investment income		1			2			37,632			—			37,635
Net realized investment losses		—			—			(115,198	)		—			(115,198	)
Net losses and loss expenses		—			—			(275,128	)		—			(275,128	)
Acquisition costs		—			—			(64,617	)		—			(64,617	)
General and administrative expenses		(8,566	)		(455	)		(71,564	)		—			(80,585	)
Amortization of intangible assets		—			—			(634	)		—			(634	)
Interest expense		—			(13,835	)		(353	)		—			(14,188	)
Foreign exchange gain (loss)		2			(628	)		136			—			(490	)
Income tax (expense) benefit		—			—			4,072			—			4,072
Equity in earnings of consolidated subsidiaries		6,701			21,147			—			(27,848	)		—

NET INCOME (LOSS)	$	(1,862	)	$	6,231		$	21,617		$	(27,848	)	$	(1,862	)

Other comprehensive income		—			—			—			—			—

COMPREHENSIVE INCOME (LOSS)	$	(1,862	)	$	6,231		$	21,617		$	(27,848	)	$	(1,862	)


	Allied World			Allied World
	Switzerland			Bermuda			Other Allied						Allied World
	(Parent			(Subsidiary			World			Consolidating			Switzerland
Three Months Ended June 30, 2012	Guarantor)			Issuer)			Subsidiaries			Adjustments			Consolidated
Net premiums earned	$	—		$	—		$	429,747		$	—		$	429,747
Net investment income		5			8			42,438			—			42,451
Net realized investment gains		—			—			8,663			—			8,663
Net losses and loss expenses		—			—			(240,380	)		—			(240,380	)
Acquisition costs		—			—			(51,588	)		—			(51,588	)
General and administrative expenses		(4,278	)		(1,302	)		(68,399	)		—			(73,979	)
Amortization of intangible assets		—			—			(634	)		—			(634	)
Interest expense		—			(14,001	)		—			—			(14,001	)
Foreign exchange gain (loss)		460			(42	)		601			—			1,019
Income tax (expense) benefit		(373	)		—			(4,574	)		—			(4,947	)
Equity in earnings of consolidated subsidiaries		100,537			115,102			—			(215,639	)		—

NET INCOME (LOSS)	$	96,351		$	99,765		$	115,874		$	(215,639	)	$	96,351

Unrealized gains on investments arising during the period net of applicable deferred income tax benefit of $68		231			—			231			(231	)		231
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax		(1,142	)		—			(1,142	)		1,142			(1,142	)

Other comprehensive loss		(911	)		—			(911	)		911			(911	)

COMPREHENSIVE INCOME (LOSS)	$	95,440		$	99,765		$	114,963		$	(214,728	)	$	95,440

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Allied World			Allied World
	Switzerland			Bermuda			Other Allied						Allied World
	(Parent			(Subsidiary			World			Consolidating			Switzerland
Six Months Ended June 30, 2013	Guarantor)			Issuer)			Subsidiaries			Adjustments			Consolidated
Net premiums earned	$	—		$	—		$	970,499		$	—		$	970,499
Net investment income		8			4			71,011			—			71,023
Net realized investment losses		—			—			(35,561	)		—			(35,561	)
Net losses and loss expenses		—			—			(530,306	)		—			(530,306	)
Acquisition costs		—			—			(121,302	)		—			(121,302	)
General and administrative expenses		(19,552	)		(912	)		(142,801	)		—			(163,265	)
Amortization of intangible assets		—			—			(1,267	)		—			(1,267	)
Interest expense		—			(27,665	)		(657	)		—			(28,322	)
Foreign exchange loss (gain)		274			(723	)		(2,559	)		—			(3,008	)
Income tax (expense) benefit		—			—			(1,361	)		—			(1,361	)
Equity in earnings of consolidated subsidiaries		176,400			202,627			—			(379,027	)		—

NET INCOME (LOSS)	$	157,130		$	173,331		$	205,696		$	(379,027	)	$	157,130

Other comprehensive income		—			—			—			—			—

COMPREHENSIVE INCOME (LOSS)	$	157,130		$	173,331		$	205,696		$	(379,027	)	$	157,130


	Allied World			Allied World
	Switzerland			Bermuda			Other Allied						Allied World
	(Parent			(Subsidiary			World			Consolidating			Switzerland
Six Months Ended June 30, 2012	Guarantor)			Issuer)			Subsidiaries			Adjustments			Consolidated
Net premiums earned	$	—		$	—		$	831,637		$	—		$	831,637
Net investment income		14			11			89,635			—			89,660
Net realized investment gains		—			—			142,244			—			142,244
Net losses and loss expenses		—			—			(465,582	)		—			(465,582	)
Acquisition costs		—			—			(98,726	)		—			(98,726	)
General and administrative expenses		(8,234	)		(2,454	)		(133,657	)		—			(144,345	)
Amortization of intangible assets		—			—			(1,267	)		—			(1,267	)
Interest expense		—			(27,757	)		—			—			(27,757	)
Foreign exchange gain (loss)		549			(67	)		618			—			1,100
Income tax (expense) benefit		71			—			(12,528	)		—			(12,457	)
Equity in earnings of consolidated subsidiaries		322,107			349,409			—			(671,516	)		—

NET INCOME (LOSS)	$	314,507		$	319,142		$	352,374		$	(671,516	)	$	314,507

Unrealized gains on investments arising during the period net of applicable deferred income tax expense of $3,051		179			—			179			(179	)		179
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax		(13,249	)		—			(13,249	)		13,249			(13,249	)

Other comprehensive loss		(13,070	)		—			(13,070	)		13,070			(13,070	)

COMPREHENSIVE INCOME (LOSS)	$	301,437		$	319,142		$	339,304		$	(658,446	)	$	301,437

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Unaudited Condensed Consolidating Cash Flows:


	Allied World			Allied World
	Switzerland			Bermuda			Other Allied					Allied World
	(Parent			(Subsidiary			World			Consolidating		Switzerland
Six Months Ended June 30, 2013	Guarantor)			Issuer)			Subsidiaries			Adjustments		Consolidated
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES	$	73,938		$	(3,025	)	$	54,993		$	—	$	125,906

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases trading securities		—			—			(3,186,162	)		—		(3,186,162	)
Purchases of other invested assets		—			—			(141,805	)		—		(141,805	)
Sales of available for sale securities		—			—			—			—		—
Sales of trading securities		—			—			3,171,977			—		3,171,977
Sales of other invested assets		—			—			126,491			—		126,491
Other		—			—			(13,924	)		—		(13,924	)

Net cash provided by (used in) investing activities		—			—			(43,423	)		—		(43,423	)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Partial par value reduction		(12,981	)		—			—			—		(12,981	)
Proceeds from the exercise of stock options		5,293			—			—			—		5,293
Share repurchases		(82,571	)		—			—			—		(82,571	)

Net cash provided by (used in) financing activities		(90,259	)		—			—			—		(90,259	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(16,321	)		(3,025	)		11,570			—		(7,776	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		19,997			11,324			650,558			—		681,879

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,676		$	8,299		$	662,128		$	—	$	674,103

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Allied World			Allied World
	Switzerland			Bermuda		Other Allied					Allied World
	(Parent			(Subsidiary		World			Consolidating		Switzerland
Six Months Ended June 30, 2012	Guarantor)			Issuer)		Subsidiaries			Adjustments		Consolidated
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:	$	81,902		$	10,326	$	207,280		$	—	$	299,508

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of available for sale securities		—			—		—			—		—
Purchases of trading securities		—			—		(4,005,352	)		—		(4,005,352	)
Purchases of other invested assets		—			—		(17,778	)		—		(17,778	)
Sales of available for sale securities		—			—		214,015			—		214,015
Sales of trading securities		—			—		3,959,204			—		3,959,204
Sales of other invested assets		—			—		108,759			—		108,759
Other		—			—		(157,647	)		—		(157,647	)

Net cash provided by (used in) investing activities		—			—		101,201			—		101,201

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Partial par value reduction		(28,003	)		—		—			—		(28,003	)
Proceeds from the exercise of stock options		6,697			—		—			—		6,697
Share repurchases		(148,949	)		—		—			—		(148,949	)
Repurchase of founder warrants		—			—		—			—		—
Other		—			—		—			—		—

Net cash provided by (used in) financing activities		(170,255	)		—		—			—		(170,255	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(88,353	)		10,326		308,481			—		230,454
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		112,672			8,886		512,438			—		633,996

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	24,319		$	19,212	$	820,919		$	—	$	864,450

Notes to Parent Company Condensed Financial Information

a) Dividends

Allied World Switzerland received cash dividends from its subsidiaries of $155,000 and $200,000 for the six months ended June 30, 2013 and 2012, respectively.

14. SUBSEQUENT EVENTS

On July 3, 2013, the Company paid a quarterly dividend of $0.50 per share to shareholders of record on June 25, 2013.

Effective July 9, 2013, the Company cancelled 29,240 non-voting shares held in treasury and 1,538,686 shares previously repurchased and constructively retired, following a required filing with the Swiss Commercial Register in Zug.

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

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

Note on Forward-Looking Statement

This Form 10-Q and other publicly available documents may include, and our officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections and statements may address, among other things, our strategy for growth, product development, financial results and reserves. Actual results and financial condition may differ, possibly materially, from these projections and statements and therefore you should not place undue reliance on them. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in “Risk Factors” in Item 1A. of Part I of our 2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2013 (the “2012 Form 10-K”). We are under no obligation (and expressly disclaim any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.

Overview

Our Business

We write a diversified portfolio of property and casualty insurance and reinsurance internationally through our subsidiaries and branches based in Bermuda, Europe, Hong Kong, Singapore and the United States as well as our Lloyd’s Syndicate 2232. We manage our business through three operating segments: U.S. insurance, international insurance and reinsurance. As of June 30, 2013, we had approximately $12.3 billion of total assets, $3.4 billion of total shareholders’ equity and $4.2 billion of total capital, which includes shareholders’ equity and senior notes.

During the three months ended June 30, 2013, we continued to experience rate increases on property lines that had experienced significant loss activity in the prior year. We also continued to see rate improvement during the quarter on some of our casualty lines of business in certain jurisdictions. We believe that there are opportunities where certain products have attractive premium rates and that the expanded breadth of our operations allows us to target those classes of business.

Our consolidated gross premiums written increased by $118.3 million, or 18.3%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. Our net income decreased by $98.3 million to a net loss of $1.9 million compared to the three months ended June 30, 2012. The decrease was due to net realized investment gains (losses) that decreased by $123.8 million for the three months ended June 30, 2013 compared to the same period in 2012, partially offset by an increase in underwriting income of $23.1 million.

Our consolidated gross premiums written increased by $274.5 million, or 20.7%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. Our net income decreased by $157.4 million to $157.1 million compared to the six months ended June 30, 2012. The decrease was due to net realized investment gains (losses) that decreased by $177.8 million for the six months ended June 30, 2013 compared to the same period in 2012, partially offset by a $32.6 million increase in underwriting income.

Financial Highlights


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	($ in millions except share, per share and percentage data)
Gross premiums written	$	765.2		$	646.9		$	1,602.3		$	1,327.8
Underwriting income		86.9			63.8			155.6			123.0
Net (loss) income		(1.9	)		96.4			157.1			314.5
Operating income		103.5			87.3			187.7			178.8
Basic earnings per share:
Net (loss) income	$	(0.05	)	$	2.66		$	4.55		$	8.56
Operating income	$	3.01		$	2.41		$	5.44		$	4.87
Diluted earnings per share:
Net (loss) income	$	(0.05	)*	$	2.59		$	4.45		$	8.41
Operating income	$	2.95		$	2.35		$	5.31		$	4.78
Weighted average common shares outstanding:
Basic		34,422,553			36,288,596			34,517,552			36,746,881
Diluted		35,136,296	*		37,189,722			35,316,595			37,395,559
Basic book value per common share	$	98.70		$	91.36		$	98.70		$	91.36
Diluted book value per common share	$	96.18		$	88.24		$	96.18		$	88.24
Annualized return on average equity (ROAE), net (loss) income		(0.2	%)		11.8	%		9.4	%		19.6	%
Annualized ROAE, operating income		12.2	%		10.7	%		11.2	%		11.1	%

*	Diluted weighted average common shares outstanding were only used in the calculation of diluted operating income per share. There were no common share equivalents included in calculating diluted earnings per share as there was a net loss and any additional shares would be anti-dilutive.

Non-GAAP Financial Measures

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

Operating income and operating income per share

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013		2012
	($ in millions, except share, per share and percentage data)
Net (loss) income	$	(1.9	)	$	96.4		$	157.1	$	314.5
Add after tax effect of:
Net realized investment losses (gains)		104.9			(8.1	)		27.6		(134.6	)
Foreign exchange loss (gain)		0.5			(1.0	)		3.0		(1.1	)

Operating income	$	103.5		$	87.3		$	187.7	$	178.8

Basic per share data:
Net (loss) income	$	(0.05	)	$	2.66		$	4.55	$	8.56
Add after tax effect of:
Net realized investment losses (gains)		3.05			(0.22	)		0.80		(3.66	)
Foreign exchange loss (gain)		0.01			(0.03	)		0.09		(0.03	)

Operating income	$	3.01		$	2.41		$	5.44	$	4.87

Diluted per share data:
Net (loss) income	$	(0.05	)*	$	2.59		$	4.45	$	8.41
Add after tax effect of:
Net realized investment losses (gains)		2.99			(0.22	)		0.78		(3.60	)
Foreign exchange loss (gain)		0.01			(0.02	)		0.08		(0.03	)

Operating income	$	2.95		$	2.35		$	5.31	$	4.78

*	Diluted weighted average common shares outstanding were only used in the calculation of diluted operating income per share. There were no common share equivalents included in calculating diluted earnings per share as there was a net loss and any additional shares would be anti-dilutive.

Diluted book value per share

We have included diluted book value per share because it takes into account the effect of dilutive securities; therefore, we believe it is an important measure of calculating shareholder returns.


	As of June 30,
	2013			2012
	($ in millions, except share and
	per share data)
Price per share at period end	$	91.51		$	79.47
Total shareholders’ equity	$	3,373.2		$	3,283.9
Basic common shares outstanding		34,175,831			35,942,964
Add:
Unvested restricted share units		83,730			185,809
Performance based equity awards		270,853			510,530
Employee share purchase plan		10,622			—
Dilutive options outstanding		1,111,266			1,365,245
Weighted average exercise price per share	$	47.65		$	46.04
Deduct:
Options bought back via treasury method		(578,610	)		(790,888	)

Common shares and common share equivalents outstanding		35,073,692			37,213,660
Basic book value per common share	$	98.70		$	91.36
Diluted book value per common share	$	96.18		$	88.24

Annualized return on average equity

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

Annualized operating return on average shareholders’ equity is calculated using operating income and average shareholders’ equity, excluding the average after tax unrealized gains or losses on investments.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	($ in millions except percentage data)
Opening shareholders’ equity	$	3,432.0		$	3,245.8		$	3,326.3		$	3,149.0
Deduct: accumulated other comprehensive income		—			(2.3	)		—			(14.5	)

Adjusted opening shareholders’ equity	$	3,432.0		$	3,243.5		$	3,326.3		$	3,134.5

Closing shareholders’ equity	$	3,373.2		$	3,283.9		$	3,373.2		$	3,283.9
Deduct: accumulated other comprehensive income		—			(1.4	)		—			(1.4	)

Adjusted closing shareholders’ equity	$	3,373.2		$	3,282.5		$	3,373.2		$	3,282.5

Average shareholders’ equity	$	3,402.6		$	3,263.0		$	3,349.8		$	3,208.5

Net (loss) income available to shareholders	$	(1.9	)	$	96.4		$	157.1		$	314.5
Annualized return on average shareholders’ equity — net (loss) income available to shareholders		(0.2	%)		11.8	%		9.4	%		19.6	%


Operating income available to shareholders	$	103.5		$	87.3		$	187.7		$	178.8
Annualized return on average shareholders’ equity — operating income available to shareholders		12.2	%		10.7	%		11.2	%		11.1	%

Relevant Factors

Revenues

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

Expenses

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

•

losses paid, which are actual cash payments to insureds and reinsureds, net of recoveries from reinsurers;

•

outstanding loss or case reserves, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and

•

reserves for losses incurred but not reported, or “IBNR”, which are reserves (in addition to case reserves) established by us that we believe are needed for the future settlement of claims. The portion recoverable from reinsurers is deducted from the gross estimated loss.

Acquisition costs are comprised of commissions, brokerage fees, insurance taxes and other acquisition related costs such as profit commissions. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business. Acquisition costs are reported after (1) deducting commissions received on ceded reinsurance, (2) deducting the part of deferred acquisition costs relating to the successful acquisition of new and renewal insurance and reinsurance contracts and (3) including the amortization of previously deferred acquisition costs.

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

Ratios

Management measures results for each segment on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio,” “expense ratio” and the “combined ratio.” Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written. The loss and loss expense ratio is derived by dividing net losses and loss expenses by net premiums earned. The acquisition cost ratio is derived by dividing acquisition costs by net premiums earned. The general and administrative expense ratio is derived by dividing general and administrative expenses by net premiums earned. The expense ratio is the sum of the acquisition cost ratio and the general and administrative expense ratio. The combined ratio is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.

Critical Accounting Policies

It is important to understand our accounting policies in order to understand our financial position and results of operations. Our unaudited condensed consolidated financial statements reflect determinations that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If events or other factors cause actual results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to reserves for losses and loss expenses, reinsurance recoverables, premiums and acquisition costs, valuation of financial instruments and goodwill and other intangible asset impairment valuation. For a detailed discussion of our critical accounting policies, please refer to our 2012 Form 10-K. There were no material changes in the application of our critical accounting estimates subsequent to that report.

Results of Operations

The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	($ in millions)
Revenues
Gross premiums written	$	765.2		$	646.9		$	1,602.3		$	1,327.8

Net premiums written	$	581.2		$	494.7		$	1,276.3		$	1,083.7

Net premiums earned	$	507.3		$	429.7		$	970.5		$	831.6
Net investment income		37.6			42.5			71.0			89.7
Net realized investment (losses) gains		(115.2	)		8.6			(35.6	)		142.2

	$	429.7		$	480.8		$	1,005.9		$	1,063.5

Expenses
Net losses and loss expenses	$	275.2		$	240.4		$	530.3		$	465.6
Acquisition costs		64.6			51.6			121.3			98.7
General and administrative expenses		80.6			73.9			163.3			144.3
Amortization of intangible assets		0.6			0.6			1.2			1.3
Interest expense		14.2			14.0			28.3			27.7
Foreign exchange loss (gain)		0.4			(1.0	)		3.0			(1.1	)

	$	435.6		$	379.5		$	847.4		$	736.5

(Loss) income before income taxes		(5.9	)		101.3			158.5			327.0
Income tax benefit (expense)		(4.0	)		4.9			1.4			12.5

Net (loss) income	$	(1.9	)	$	96.4		$	157.1		$	314.5

Ratios
Loss and loss expense ratio		54.2	%		55.9	%		54.6	%		56.0	%
Acquisition cost ratio		12.7	%		12.0	%		12.5	%		11.9	%
General and administrative expense ratio		15.9	%		17.2	%		16.8	%		17.3	%

Expense ratio		28.6	%		29.2	%		29.3	%		29.2	%

Combined ratio		82.8	%		85.1	%		83.9	%		85.2	%

Comparison of Three Months Ended June 30, 2013 and 2012

Premiums

Gross premiums written increased by $118.3 million, or 18.3%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The overall increase in gross premiums written was primarily the result of the following:

•

U.S. insurance: Gross premiums written increased by $41.3 million, or 15.5%. The increase in gross premiums written was primarily due to new business across existing lines that added $102.0 million during the quarter combined with premium rate increases in all lines of business and a further $4.2 million from new lines of business. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition;

•

International insurance: Gross premiums written increased by $9.0 million, or 4.9%. We saw continued growth from new products combined with strong new business writings. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition; and

•

Reinsurance: Gross premiums written increased by $68.0 million, or 34.5%. The increase was driven by new business, from both new products and new regions, combined with increased participations on renewing business and rate increases for certain lines of business. This was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

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


	Three Months Ended June 30,				Dollar Change		Percentage Change
	2013		2012		Dollar Change		Percentage Change
			($ in millions)
United States	$	440.2	$	349.5	$	90.7		26.0	%
Bermuda		211.0		193.3		17.7		9.2	%
Europe		60.3		60.0		0.3		0.5	%
Singapore		48.9		40.1		8.8		21.9	%
Hong Kong		4.8		4.0		0.8		20.0	%

	$	765.2	$	646.9	$	118.3		18.3	%

Net premiums written increased by $86.5 million, or 17.5%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase in net premiums written was due to the increase in gross premiums written. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 24.0% of gross premiums written for the three months ended June 30, 2013 compared to 23.5% for the same period in 2012. We purchased a new property catastrophe coverage for U.S. insurance and international insurance segments that increased ceded premium by $4.2 million and increased the ceding percentage by 0.5 percentage points.

Net premiums earned increased by $77.6 million, or 18.1%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 as a result of higher net premiums written in 2012 and 2013.

We evaluate our business by segment, distinguishing between U.S. insurance, international insurance and reinsurance. The following table illustrates the mix of our business on both a gross premiums written and net premiums earned basis.


	Gross Premiums Written						Net Premiums Earned
	Three Months Ended June 30,						Three Months Ended June 30,
	2013			2012			2013			2012
U.S. insurance		40.1	%		41.1	%		39.0	%		37.9	%
International insurance		25.2	%		28.4	%		17.1	%		19.2	%
Reinsurance		34.7	%		30.5	%		43.9	%		42.9	%

Total		100.0	%		100.0	%		100.0	%		100.0	%

Net Investment Income

Net investment income decreased by $4.9 million, or 11.5%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The decrease was due to lower yields on our fixed maturity investments caused by reinvesting cash flows from the sale and maturity of fixed maturity investments into lower-yielding fixed maturity investments, as well as an increased allocation to other invested assets that contribute to our total return but carry little or no current yield. The annualized period book yield of the investment portfolio for the three months ended June 30, 2013 and 2012 was 1.8% and 2.1%, respectively.

As of June 30, 2013, we held 9.9% of our total investments and cash equivalents in other invested assets compared to 6.0% as of June 30, 2012.

Investment management expenses of $3.8 million and $4.0 million were incurred during the three months ended June 30, 2013 and 2012, respectively. Investment expenses have decreased as we have renegotiated investment management agreements with our investment advisors, or changed advisors, to manage our expenses.

As of June 30, 2013, approximately 89.6% of our fixed income investments consisted of investment grade securities. As of June 30, 2013 and December 31, 2012, the average credit rating of our fixed income portfolio was AA- as rated by Standard & Poor’s and Aa3 as rated by Moody’s.

Realized Investment Gains (Losses)

Net realized investment gains (losses) were comprised of the following:


	Three Months Ended June 30,
	2013			2012
	($ in millions)
Net realized gains (losses) on sale:
Fixed maturity investments, trading	$	7.6		$	52.8
Equity securities, trading		6.4			(14.8	)
Other invested assets: hedge funds and private equity, trading		9.1			38.0

Total net realized gains on sale		23.1			76.0


Net realized and unrealized gains (losses) on derivatives		8.5			(5.9	)

Mark-to-market gains (losses):
Fixed maturity investments, trading		(115.1	)		(24.3	)
Equity securities, trading		(34.3	)		(0.2	)
Other invested assets: hedge funds and private equity, trading		2.6			(37.0	)

Total mark-to-market gains		(146.8	)		(61.5	)

Net realized investment (losses) gains	$	(115.2	)	$	8.6

The total return of our investment portfolio was (0.9)% and 0.6% for the three months ended June 30, 2013 and 2012, respectively. The decrease in total return is primarily due to mark-to-market losses on our fixed maturity and equity securities and lower realized gains from the sale of investments. The mark-to-market losses on our fixed maturity securities were caused by higher interest rates combined with widening of credit spreads on our fixed income portfolio during the three months ended June 30, 2013 compared to the same period in 2012. The 10-year U.S. Treasury rate increased by 66 basis points during the current quarter, and the U.S. fixed income market, as measured by the Barclay’s Aggregate Bond Index, had a return of negative 2.3%; only the second time since the first quarter of 1994 that the index was down more than 2%. The rising interest rate environment also negatively impacted our dividend focused equity portfolio, which underperformed the S&P 500 for the quarter.

Net Losses and Loss Expenses

Net losses and loss expenses increased by $34.8 million, or 14.5%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The loss and loss expense ratio decreased by 1.7 percentage points for the same period. The increase in net loss and loss expenses was due to growth in net premiums earned, partially offset by higher net favorable prior year reserve development in 2013.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 63.7% and 65.7% for the three months ended June 30, 2013 and 2012, respectively. The decrease in the loss and loss expense ratio of 2.0 points was primarily due to fewer current year reported large losses in the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

We classify catastrophe losses as those losses that result from a major singular event or series of similar events (such as tornadoes) which are assigned a catastrophe loss number by industry data services, where our consolidated losses are expected to be at least $10 million per loss event or series of similar events and where we believe it is important to our investors’ understanding of our operations.


	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012						Dollar			Change in Percentage
	Amount			% of NPE⁽¹⁾			Amount			% of NPE⁽¹⁾			Change			Points
							($ in millions)
Non-catastrophe	$	323.6			63.7	%	$	282.3			65.7	%	$	41.3			(2.0	)Pts
Property catastrophe		—			—			—			—			—			—

Current period		323.6			63.7			282.3			65.7			41.3			(2.0	)
Prior period		(48.4	)		(9.5	)		(41.9	)		(9.8	)		(6.5	)		0.3

Net losses and loss expenses	$	275.2			54.2	%	$	240.4			55.9	%	$	34.8			(1.7	)Pts

(1)	“NPE” means net premiums earned.

We recorded net favorable reserve development related to prior years of $48.4 million during the three months ended June 30, 2013 compared to net favorable reserve development of $41.9 million for the three months ended June 30, 2012, as shown in the tables below.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Three Months Ended June 30, 2013
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			2012			Total
	($ in millions)
U.S. insurance	$	—		$	(0.9	)	$	(1.4	)	$	0.4		$	(6.1	)	$	(10.5	)	$	(0.3	)	$	(7.2	)	$	13.2		$	9.9		$	(2.9	)
International insurance		6.4			(5.6	)		2.9			(4.9	)		(7.5	)		(2.8	)		(4.2	)		(3.0	)		(2.1	)		(4.9	)		(25.7	)
Reinsurance		(0.3	)		(1.3	)		(1.0	)		1.3			—			(3.9	)		1.4			0.1			2.6			(18.7	)		(19.8	)

	$	6.1		$	(7.8	)	$	0.5		$	(3.2	)	$	(13.6	)	$	(17.2	)	$	(3.1	)	$	(10.1	)	$	13.7		$	(13.7	)	$	(48.4	)

The unfavorable reserve development for the 2011 and 2012 loss years for our U.S. insurance segment was due to higher than expected loss emergence, primarily in our private/not for profit directors’ and officers’ (“D&O”) and healthcare products. The healthcare emergence was largely driven by one large claim and loss emergence in medical malpractice products due to higher than expected loss frequency. The emergence in the private/not for profit D&O is due to higher than expected loss frequency. In response to what we have seen in these lines, we continue to take rate action, as well as make changes to terms and conditions, resulting in flat premium and reduced exposures.

The additions to the 2011 and 2012 loss years noted above are consistent with our practice of addressing unfavorable loss emergence early in our casualty lines of business. We tend to recognize favorable loss emergence more slowly in our casualty lines once actual loss emergence and data provides greater confidence around the adequacy of ultimate estimates.

The favorable reserve development for the 2012 loss year for our reinsurance segment was due to lower than expected reported losses in our property reinsurance line of business.

The following table shows the net favorable reserve development by loss year for each of our segments for the three months ended June 30, 2012.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Three Months Ended June 30, 2012
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			Total
	($ in millions)
U.S. insurance	$	(0.4	)	$	(1.5	)	$	(0.2	)	$	(3.9	)	$	(9.3	)	$	0.8		$	(2.7	)	$	4.5		$	6.5		$	(6.2	)
International insurance		6.2			(3.3	)		(7.5	)		(11.4	)		(7.5	)		(3.1	)		(1.2	)		—			(1.3	)		(29.1	)
Reinsurance		1.2			(1.7	)		(0.3	)		(4.8	)		(5.3	)		(0.7	)		1.0			(5.8	)		9.8			(6.6	)

	$	7.0		$	(6.5	)	$	(8.0	)	$	(20.1	)	$	(22.1	)	$	(3.0	)	$	(2.9	)	$	(1.3	)	$	15.0		$	(41.9	)

The following table shows the components of net losses and loss expenses for each of the periods indicated.


	Three Months Ended June 30,					Dollar
	2013			2012		Change
				($ in millions)
Net losses paid	$	262.9		$	205.2	$	57.7
Net change in reported case reserves		(18.2	)		14.0		(32.2	)
Net change in IBNR		30.5			21.2		9.3

Net losses and loss expenses	$	275.2		$	240.4	$	34.8

The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.


	Three Months Ended June 30,
	2013			2012
	($ in millions)
Net reserves for losses and loss expenses, April 1	$	4,509.7		$	4,274.6
Incurred related to:
Current period non-catastrophe		323.6			282.3
Prior period		(48.4	)		(41.9	)

Total incurred		275.2			240.4

Paid related to:
Current period non-catastrophe		21.0			18.2
Prior period		241.9			187.0

Total paid		262.9			205.2
Foreign exchange revaluation		(4.7	)		(5.9	)

Net reserve for losses and loss expenses, June 30		4,517.3			4,303.9
Losses and loss expenses recoverable		1,179.6			1,073.6

Reserve for losses and loss expenses, June 30	$	5,696.9		$	5,377.5

Acquisition Costs

Acquisition costs increased by $13.0 million, or 25.2%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase in acquisition costs was consistent with the growth in premiums. Acquisition costs as a percentage of net premiums earned were 12.7% for the three months ended June 30, 2013 compared to 12.0% for the same period in 2012. The increase was due to a higher acquisition cost ratio for our U.S. insurance segment as a result of a $2.5 million increase in estimated profit commissions related to program business which increased the acquisition cost ratio by 0.5 percentage points.

General and Administrative Expenses

General and administrative expenses increased by $6.7 million, or 9.1%, for the three months ended June 30, 2013 compared to the same period in 2012. Our general and administrative expense ratio was 15.9% and 17.2% for the three months ended June 30, 2013 and 2012, respectively. The increase in general and administrative expenses was primarily due to increased salary and related costs as average headcount increased by 17% to support our continued growth. This was partially offset by lower stock-based compensation expense. We have granted cash equivalent restricted stock units and performance-based equity awards to certain key employees, and we measure the value of each award at the period ending share price. Changes in our share price are recognized as increases or decreases in our compensation expense ratably over the service period. Our share price decreased 1% for the three months ended June 30, 2013, compared to the 16% increase for the same period in 2012.

Amortization of Intangible Assets

The amortization of intangible assets was unchanged for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Interest Expense

Interest expense increased by $0.2 million, or 1.4%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Net (Loss) Income

Net loss for the three months ended June 30, 2013 was $1.9 million compared to net income of $96.4 million for the three months ended June 30, 2012. The $98.3 million decrease was primarily the result of the $123.8 million decrease in realized investment gains for the three months ended June 30, 2013 compared to the same period in 2012. This was partially offset by an increase in underwriting income of $23.1 million.

Comparison of Six Months Ended June 30, 2013 and 2012

Premiums

Gross premiums written increased by $274.5 million, or 20.7%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The overall increase in gross premiums written was primarily the result of the following:

•

U.S. insurance: Gross premiums written increased by $93.1 million, or 19.8%. The increase in gross premiums written was primarily due to new business across existing lines that added $193.8 million, combined with premium rate increases in all lines of business. Growth from new lines of business introduced in 2013, such as primary construction and surety, contributed a further $8.2 million for the period. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition;

•

International insurance: Gross premiums written increased by $23.9 million, or 8.0%, primarily as a result of increased premiums from new initiatives, such as trade credit, retail property and small- to medium-sized enterprise (“SME”) insurance products, combined growth in existing lines of business and premium rate increases in select lines of business. This growth was partially offset by non-recurring business, the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition; and

•

Reinsurance: Gross premiums written increased by $157.5 million, or 28.1%. The increase in gross premiums written was primarily due to new business, both from new products and new regions, as well as increased participations on renewing business combined with premium rate increases. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

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


	Six Months Ended June 30,				Dollar Change		Percentage Change
	2013		2012		Dollar Change		Percentage Change
			($ in millions)
United States	$	918.6	$	738.5	$	180.1		24.4	%
Bermuda		439.7		375.4		64.3		17.1	%
Europe		146.8		135.4		11.4		8.4	%
Singapore		87.0		69.3		17.7		25.5	%
Hong Kong		10.2		9.2		1.0		10.9	%

	$	1,602.3	$	1,327.8	$	274.5		20.7	%

Net premiums written increased by $192.6 million, or 17.8%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase in net premiums written was due to the increase in gross premiums written. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 20.3% of gross premiums written for the six months ended June 30, 2013 compared to 18.4% for the same period in 2012. The increase was primarily due to our purchase of a new collateralized retrocessional catastrophe cover in our reinsurance segment and a new property catastrophe coverage for U.S. insurance and international insurance segments. Both of these reinsurance coverages increased the ceded percentage by 2.0 percentage points.

Net premiums earned increased by $138.9 million, or 16.7%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 as a result of higher net premiums written in 2012 and 2013.


	Gross Premiums Written						Net Premiums Earned
	Six Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
U.S. insurance		35.2	%		35.4	%		39.8	%		38.1	%
International insurance		20.0	%		22.4	%		17.6	%		19.5	%
Reinsurance		44.8	%		42.2	%		42.6	%		42.4	%

Total		100.0	%		100.0	%		100.0	%		100.0	%

Net Investment Income

Net investment income decreased by $18.7 million, or 20.8%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The decrease was due to lower yields on our fixed maturity investments caused by reinvesting cash flows from the sale and maturity of fixed maturity securities into lower-yielding fixed maturity securities, as well as an increased allocation to other invested assets, which contribute to our total return but carry little or no current yield. The annualized period book yield of the investment portfolio for the six months ended June 30, 2013 and 2012 was 1.7% and 2.2%, respectively.

Investment management expenses of $8.1 million and $8.3 million were incurred during the six months ended June 30, 2013 and 2012, respectively. Investment expenses have decreased as we have renegotiated investment management agreements with our investment advisors, or changed advisors, to manage our expenses.

Realized Investment Gains (Losses)

Net realized investment gains (losses) were comprised of the following:


	Six Months Ended June 30,
	2013			2012
	($ in millions)
Net realized gains (losses) on sale:
Fixed maturity investments, trading	$	29.5		$	64.5
Equity securities, trading		16.2			(1.0	)
Other invested assets: hedge funds and private equity, trading		14.7			(8.2	)

Total net realized gains on sale		60.4			55.3


Net realized and unrealized gains on derivatives		7.6			0.8

Mark-to-market gains (losses):
Fixed maturity investments, trading		(131.6	)		44.2
Equity securities, trading		(1.4	)		19.6
Other invested assets: hedge funds and private equity, trading		29.4			22.3

Total mark-to-market gains		(103.6	)		86.1

Net realized investment (losses) gains	$	(35.6	)	$	142.2

The total return of our investment portfolio was 0.4% and 2.6% for the six months ended June 30, 2013 and 2012, respectively. The decrease in total return is primarily due to mark-to-market losses on our fixed maturity investments and equity securities, partially offset by higher realized gains on the sale of investments. The mark-to-market losses on our fixed maturity investments were caused by higher interest rates combined with widening credit spreads on our fixed income portfolio. During the period, the yield on the 10-year U.S. treasury increased by 66 basis points, which contributed to the higher interest rates. The rising interest rate environment also negatively impacted our dividend focused equity portfolio, which underperformed the S&P 500 for the period.

Net Losses and Loss Expenses

Net losses and loss expenses increased by $64.7 million, or 13.9%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The loss and loss expense ratio decreased by 1.4 percentage points for the same period. The increase in net loss and loss expenses was due to the growth in net premiums earned, partially offset by higher net favorable prior year reserve development.

Excluding the prior year reserve development the loss and loss expense ratios would have been 64.1% and 65.8% for the six months ended June 30, 2013 and 2012, respectively. The decrease in the loss and loss expense ratio of 1.7 points was primarily due to fewer reported current year large losses in the six months ended June 30, 2013 compared to the same period in 2012.


	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012						Dollar			Change in Percentage
	Amount			% of NPE			Amount			% of NPE			Change			Points
							($ in millions)
Non-catastrophe	$	622.8			64.1	%	$	547.0			65.8	%	$	75.8			(1.7	)Pts
Property catastrophe		—			—			—			—			—			—

Current period		622.8			64.1			547.0			65.8			75.8			(1.7	)
Prior period		(92.5	)		(9.5	)		(81.4	)		(9.8	)		(11.1	)		0.3

Net losses and loss expenses	$	530.3			54.6	%	$	465.6			56.0	%	$	64.7			(1.4	)Pts

We recorded net favorable reserve development related to prior years of $92.5 million during the six months ended June 30, 2013 compared to net favorable reserve development of $81.4 million for the six months ended June 30, 2012, as shown in the tables below.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2013
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			2012			Total
	($ in millions)
U.S. insurance	$	(0.1	)	$	(2.1	)	$	(3.5	)	$	(1.1	)	$	(13.0	)	$	(14.2	)	$	(3.0	)	$	(7.3	)	$	17.7		$	34.2		$	7.6
International insurance		5.9			(2.9	)		(4.3	)		(10.9	)		(10.3	)		(9.9	)		(0.6	)		(5.5	)		(9.7	)		(7.2	)		(55.4	)
Reinsurance		0.2			(1.4	)		(3.1	)		1.1			(2.2	)		(6.9	)		0.4			(2.1	)		(2.9	)		(27.8	)		(44.7	)

	$	6.0		$	(6.4	)	$	(10.9	)	$	(10.9	)	$	(25.5	)	$	(31.0	)	$	(3.2	)	$	(14.9	)	$	5.1		$	(0.8	)	$	(92.5	)

The unfavorable reserve development for the 2011 and 2012 loss years for our U.S. insurance segment was due to higher than expected loss emergence, primarily in our private/not for profit D&O, healthcare and E&O products. The healthcare emergence was largely driven by three large claims, each in excess of $3 million. The emergence in the E&O and private/not for profit D&O is due to higher than expected loss frequency. In response to what we have seen in these lines, we continue to take rate action, as well as make changes to terms and conditions, resulting in flat premium and reduced exposures.

The favorable reserve development for the 2012 loss year for our reinsurance segment was due to lower than expected reported losses in our property reinsurance line of business.

The following table shows the net favorable reserve development by loss year for each of our segments for the six months ended June 30, 2012.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2012
	2003			2004			2005			2006			2007			2008			2009			2010			2011		Total
	($ in millions)
U.S. insurance	$	(0.1	)	$	(1.2	)	$	(3.8	)	$	(10.4	)	$	(18.4	)	$	1.1		$	(5.3	)	$	9.3		$	15.4	$	(13.4	)
International insurance		3.3			(5.8	)		(10.5	)		(28.3	)		(17.4	)		(5.4	)		(1.8	)		(6.6	)		23.1		(49.4	)
Reinsurance		0.8			(0.8	)		(7.6	)		(7.0	)		(11.5	)		(1.6	)		1.9			(1.3	)		8.5		(18.6	)

	$	4.0		$	(7.8	)	$	(21.9	)	$	(45.7	)	$	(47.3	)	$	(5.9	)	$	(5.2	)	$	1.4		$	47.0	$	(81.4	)

The net favorable reserve development is a result of actual loss emergence being lower than anticipated. The unfavorable reserve development in our U.S. insurance segment for the 2010 and 2011 loss years was due to adverse development on a terminated program and certain errors and omissions products. The unfavorable reserve development in our international insurance segment for the 2011 loss year was due to adverse development on an individual general casualty claim, estimated to reach our full limit of $20.0 million, net of reinsurance. The unfavorable reserve development in our reinsurance segment for the 2011 loss year was due to increased property catastrophe losses.

The following table shows the components of net losses and loss expenses for each of the periods indicated.


	Six Months Ended June 30,					Dollar
	2013			2012		Change
				($ in millions)
Net losses paid	$	507.5		$	382.3	$	125.2
Net change in reported case reserves		(9.2	)		47.0		(56.2	)
Net change in IBNR		32.0			36.3		(4.3	)

Net losses and loss expenses	$	530.3		$	465.6	$	64.7

The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables


	Six Months Ended June 30,
	2013			2012
	($ in millions)
Net reserves for losses and loss expenses, January 1	$	4,504.4		$	4,222.2
Incurred related to:
Current period non-catastrophe		622.8			547.0
Prior period		(92.5	)		(81.4	)

Total incurred		530.3			465.6

Paid related to:
Current period non-catastrophe		24.4			19.8
Prior period		483.0			362.5

Total paid		507.4			382.3
Foreign exchange revaluation		(9.9	)		(1.6	)

Net reserve for losses and loss expenses, June 30		4,517.4			4,303.9
Losses and loss expenses recoverable		1,179.6			1,073.6

Reserve for losses and loss expenses, June 30	$	5,697.0		$	5,377.5

Acquisition Costs

Acquisition costs increased by $22.6 million, or 22.9%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase in acquisition costs was consistent with the growth in premiums. Acquisition costs as a percentage of net premiums earned were 12.5% for the six months ended June 30, 2013 compared to 11.9% for the same period in 2012. The increase was due to a $5.0 million increase in estimated profit commissions related to our U.S. insurance and reinsurance segments which increased the acquisition cost ratio by 0.5 percentage points.

General and Administrative Expenses

General and administrative expenses increased by $19.0 million, or 13.2%, for the six months ended June 30, 2013 compared to the same period in June 30, 2012. The increase in general and administrative expenses was primarily due to increased salary and related costs as average headcount increased by 17% during the six months ended June 30, 2013 compared to the same period in 2012.

Our general and administrative expense ratio was 16.8% for the six months ended June 30, 2013 compared to 17.3% for the six months ended June 30, 2012. The decrease was due to the growth in net premiums earned being greater than the increase in expenses.

Amortization of Intangible Assets

The amortization of intangible assets was unchanged for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Interest Expense

Interest expense increased by $0.6 million, or 2.2%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Net Income

Net income for the six months ended June 30, 2013 was $157.1 million compared to $314.5 million for the six months ended June 30, 2012. The $157.4 million decrease was primarily the result of the $177.8 million decrease in realized investment gains for the six months ended June 30, 2013 compared to the same period in 2012, partially offset by the $32.6 million increase in underwriting income.

Underwriting Results by Operating Segments

Our company is organized into three operating segments:

U.S. Insurance Segment. The U.S. insurance segment includes our direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts.

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

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

U.S. Insurance Segment

The following table summarizes the underwriting results and associated ratios for the U.S. insurance segment for each of the periods indicated.


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	($ in millions)
Revenues
Gross premiums written	$	307.3		$	266.0		$	563.3		$	470.2
Net premiums written		221.4			196.7			413.7			350.5
Net premiums earned		197.5			162.8			385.9			316.1
Expenses
Net losses and loss expenses	$	124.4		$	103.1		$	257.7		$	200.8
Acquisition costs		27.3			21.3			50.4			41.2
General and administrative expenses		38.3			34.7			77.9			65.8
Underwriting income (loss)		7.5			3.7			(0.1	)		8.3
Ratios
Loss and loss expense ratio		63.0	%		63.3	%		66.8	%		63.5	%
Acquisition cost ratio		13.8	%		13.1	%		13.1	%		13.0	%
General and administrative expense ratio		19.4	%		21.3	%		20.2	%		20.8	%

Expense ratio		33.2	%		34.4	%		33.3	%		33.8	%

Combined ratio		96.2	%		97.7	%		100.1	%		97.3	%

Comparison of Three Months Ended June 30, 2013 and 2012

Premiums. Gross premiums written increased by $41.3 million, or 15.5%, for the three months ended June 30, 2013 compared to the same period in 2012. The increase in gross premiums written was primarily due to new business across existing lines that added $102.0 million during the quarter combined with premium rate increases in all lines of business. The increase in new business for the quarter was primarily driven by our general casualty, programs, where we added four new programs, and inland marine lines of business. Our new lines of business, primary construction and surety, contributed a further $4.2 million in new business. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

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


	Three Months Ended June 30,				Dollar Change			Percentage Change
	2013		2012		Dollar Change			Percentage Change
			($ in millions)
General casualty	$	97.4	$	78.3	$	19.1			24.4	%
Professional liability		64.4		66.7		(2.3	)		(3.4	%)
Healthcare		46.5		46.3		0.2			0.4	%
General property		35.6		37.1		(1.5	)		(4.0	%)
Programs		33.7		25.6		8.1			31.6	%
Other*		29.7		12.0		17.7			147.5	%

	$	307.3	$	266.0	$	41.3			15.5	%

*	Includes our inland marine, environmental, primary construction, mergers and acquisitions and surety lines of business

Net premiums written increased by $24.7 million, or 12.6%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase in net premiums written was primarily due to higher gross premiums written. We ceded 28.0% of gross premiums written for the three months ended June 30, 2013 compared to 26.1% for the same period in 2012. The increase was primarily due to the purchase of new reinsurance in our program line of business, and a new property catastrophe coverage.

Net premiums earned increased by $34.7 million, or 21.3%, for the three months ended June 30, 2013 compared to the same period in 2012. The increase was primarily due to the growth of our U.S. insurance operations during 2012 and 2013.

Net losses and loss expenses. Net losses and loss expenses increased by $21.3 million, or 20.7%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The loss and loss expense ratio decreased by 0.3 percentage points for the same period. The increase in net losses and loss expenses was mostly due to growth in the U.S. insurance segment, combined with lower favorable prior year reserve development in the current period compared to prior year.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 64.5% and 67.1% for the three months ended June 30, 2013 and 2012, respectively. The decrease in the loss and loss expense ratio of 2.6 points was due to the absence of any reported large losses in the three months ended June 30, 2013 compared to the three months ended June 30, 2012, which had a large property loss of $6.5 million.


	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012						Dollar		Change in Percentage
	Amount			% of NPE			Amount			% of NPE			Change		Points
	($ in millions)
Non-catastrophe	$	127.3			64.5	%	$	109.3			67.1	%	$	18.0		(2.6	)Pts
Property catastrophe		—			—			—			—			—		—

Current period		127.3			64.5			109.3			67.1			18.0		(2.6	)
Prior period		(2.9	)		(1.5	)		(6.2	)		(3.8	)		3.3		2.3

Net losses and loss expenses	$	124.4			63.0	%	$	103.1			63.3	%	$	21.3		(0.3	)Pts

Overall, our U.S. insurance segment recorded net favorable reserve development of $2.9 million during the three months ended June 30, 2013 compared to net favorable reserve development of $6.2 million for the three months ended June 30, 2012, as shown in the tables below.


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

	$	—	$	(0.9	)	$	(1.4	)	$	0.4		$	(6.1	)	$	(10.5	)	$	(0.3	)	$	(7.2	)	$	13.2		$	9.9	$	(2.9	)

The unfavorable reserve development for the 2011 and 2012 loss years was due to higher than expected loss emergence, primarily in our private/not for profit D&O and healthcare products. The healthcare emergence was largely driven by one large claim and loss emergence in medical malpractice products. The emergence in the private/not for profit D&O is due to higher than expected loss frequency. In response to what we have seen in these lines, we continue to take rate action, as well as make changes to terms and conditions, resulting in flat premium and reduced exposures.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Three Months Ended June 30, 2012
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			Total
	($ in millions)
General casualty	$	(0.2	)	$	(0.3	)	$	(0.3	)	$	(3.7	)	$	(0.1	)	$	(1.2	)	$	(0.4	)	$	(0.1	)	$	—		$	(6.3	)
Programs		—			—			—			(0.1	)		(0.1	)		—			(0.1	)		3.8			2.6			6.1
General property		—			0.4			(0.1	)		—			—			0.3			—			(0.1	)		—			0.5
Healthcare		(0.2	)		(1.6	)		0.4			(0.3	)		(0.8	)		1.1			(1.2	)		0.1			0.5			(2.0	)
Professional liability		—			—			(0.2	)		0.2			(8.3	)		0.6			(1.0	)		0.8			4.1			(3.8	)
Other		—			—			—			—			—			—			—			—			(0.7	)		(0.7	)

	$	(0.4	)	$	(1.5	)	$	(0.2	)	$	(3.9	)	$	(9.3	)	$	0.8		$	(2.7	)	$	4.5		$	6.5		$	(6.2	)

The unfavorable reserve development for the 2010 and 2011 loss years was due to adverse development on a program that commenced writing in 2008 and was terminated during 2011, and certain errors and omissions products.

Acquisition costs. Acquisition costs increased by $6.0 million, or 28.2%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase was driven by the growth in premiums, as well as $2.5 million estimated profit commission for one of our programs due to positive underwriting results. The acquisition cost ratio was 13.8% and 13.1% for the three months ended June 30, 2013 and 2012, respectively. The increase in the acquisition cost ratio was primarily due to the estimated profit commission.

General and administrative expenses. General and administrative expenses increased by $3.6 million, or 10.4%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase was due to the continued growth of the U.S. insurance operations as we continue to increase our headcount. The general and administrative ratio decreased to 19.4% for the three months ended June 30, 2013 from 21.3% for the same period in 2012, reflecting the higher growth in net premiums earned relative to expenses in 2013.

Comparison of Six Months Ended June 30, 2013 and 2012

Premiums. Gross premiums written increased by $93.1 million, or 19.8%, for the six months ended June 30, 2013 compared to the same period in 2012. The increase in gross premiums written was primarily due to new business across existing lines that added $193.8 million during the six months ended June 30, 2013, combined with premium rate increases in all lines of business. Growth from new products introduced in 2013, such as primary construction and surety, contributed a further $8.2 million for the period. This growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

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


	Six Months Ended June 30,				Dollar Change			Percentage Change
	2013		2012		Dollar Change			Percentage Change
			($ in millions)
General casualty	$	164.3	$	126.7	$	37.6			29.7	%
Professional liability		127.5		125.9		1.6			1.3	%
Healthcare		100.0		93.3		6.7			7.2	%
Programs		66.6		48.9		17.7			36.2	%
General property		55.3		55.6		(0.3	)		(0.5	%)
Other*		49.6		19.8		29.8			150.5	%

	$	563.3	$	470.2	$	93.1			19.8	%

*	Includes our inland marine, environmental, primary construction, mergers and acquisitions and surety lines of business

Net premiums written increased by $63.2 million, or 18.0%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase in net premiums written was primarily due to higher gross premiums written. We ceded 26.6% of gross premiums written for the six months ended June 30, 2013 compared to 25.5% for the same period in 2012. The increase in the ceded written percentage is primarily due to the purchase of new reinsurance in our program line of business, and a new property catastrophe coverage.

Net premiums earned increased by $69.8 million, or 22.1%, for the six months ended June 30, 2013 compared to the same period in 2012. The increase was primarily due to the growth of our U.S. insurance operations during 2013 and 2012.

Net losses and loss expenses. Net losses and loss expenses increased by $56.9 million, or 28.3%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The loss and loss expense ratio increased by 3.3 percentage points for the same period. The increase in net losses and loss expenses was primarily due to growth in the U.S. insurance segment and unfavorable prior year reserve development in 2013 compared to favorable prior year reserve development in 2012.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 64.8% and 67.7% for the six months ended June 30, 2013 and 2012, respectively. The decrease in the loss and loss expense ratio of 2.9 points was primarily due to fewer reported current year large losses in the six months ended June 30, 2013 compared to the same period in 2012.


	Six Months Ended June 30, 2013					Six Months Ended June 30, 2012						Dollar		Change in Percentage
	Amount		% of NPE			Amount			% of NPE			Change		Points
						($ in millions)
Non-catastrophe	$	250.1		64.8	%	$	214.2			67.7	%	$	35.9		(2.9	)Pts
Property catastrophe		—		—			—			—			—		—

Current period		250.1		64.8			214.2			67.7			35.9		(2.9	)
Prior period		7.6		2.0			(13.4	)		(4.2	)		21.0		6.2

Net losses and loss expenses	$	257.7		66.8	%	$	200.8			63.5	%	$	56.9		3.3	Pts

Overall, our U.S. insurance segment recorded net unfavorable reserve development of $7.6 million during the six months ended June 30, 2013 compared to net favorable reserve development of $13.4 million for the six months ended June 30, 2012, as shown in the tables below.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2013
	2003			2004			2005			2006			2007			2008			2009			2010			2011			2012		Total
	($ in millions)
General casualty	$	—		$	(0.7	)	$	(0.5	)	$	—		$	(4.5	)	$	(3.1	)	$	0.1		$	—		$	2.0		$	0.5	$	(6.2	)
Programs		—			—			—			(1.4	)		(3.3	)		0.2			(0.7	)		(2.7	)		(0.6	)		2.8		(5.7	)
General property		—			0.1			—			0.3			(0.2	)		(1.3	)		(1.3	)		(0.2	)		1.5			2.0		0.9
Healthcare		(0.1	)		(1.0	)		(1.6	)		(2.7	)		(2.3	)		(6.2	)		(1.2	)		(1.6	)		13.1			9.0		5.4
Professional liability		—			(0.5	)		(1.4	)		2.7			(2.7	)		(3.8	)		0.1			(2.7	)		2.1			18.3		12.1
Other		—			—			—			—			—			—			—			(0.1	)		(0.4	)		1.6		1.1

	$	(0.1	)	$	(2.1	)	$	(3.5	)	$	(1.1	)	$	(13.0	)	$	(14.2	)	$	(3.0	)	$	(7.3	)	$	17.7		$	34.2	$	7.6

The unfavorable reserve development for the 2011 and 2012 loss years was due to higher than expected loss emergence, primarily in our private/not for profit D&O, healthcare D&O and E&O products. The healthcare D&O emergence was largely driven by three large claims, each in excess of $3 million. The emergence in the E&O and private/not for profit D&O is due to higher than expected loss frequency. In response to what we have seen in these lines, we continue to take rate action, as well as make changes to terms and conditions, resulting in flat premium and reduced exposures.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2012
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			Total
	($ in millions)
General casualty	$	(0.4	)	$	0.9		$	(0.6	)	$	(8.1	)	$	(0.1	)	$	(1.0	)	$	(0.4	)	$	(0.1	)	$	—		$	(9.8	)
Programs		—			—			—			(0.1	)		(0.2	)		(0.6	)		—			7.3			3.8			10.2
General property		—			0.7			(0.3	)		—			(0.2	)		1.7			(0.4	)		(0.5	)		1.1			2.1
Healthcare		0.3			(2.7	)		(2.6	)		(2.3	)		(2.8	)		1.1			(1.7	)		3.5			0.5			(6.7	)
Professional liability		—			(0.1	)		(0.3	)		0.1			(15.1	)		(0.1	)		(2.8	)		(0.9	)		10.2			(9.0	)
Other		—			—			—			—			—			—			—			—			(0.2	)		(0.2	)

	$	(0.1	)	$	(1.2	)	$	(3.8	)	$	(10.4	)	$	(18.4	)	$	1.1		$	(5.3	)	$	9.3		$	15.4		$	(13.4	)

The unfavorable reserve development for the 2010 and 2011 loss years was primarily due to adverse development on a program that commenced writing in 2008 and was terminated during 2011, and certain errors and omissions products.

Acquisition costs. Acquisition costs increased by $9.2 million, or 22.3%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase was consistent with the growth in premiums. The acquisition cost ratio increased slightly to 13.1% for the six months ended June 30, 2013 from 13.0% for the same period in 2012.

General and administrative expenses. General and administrative expenses increased by $12.1 million, or 18.4%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012, due to the continued growth of our U.S. insurance operations. The general and administrative expense ratio decreased slightly to 20.2% for the six months ended June 30, 2013 from 20.8% in the same period in 2012 as a result of our increased net premiums earned.

International Insurance Segment

The following table summarizes the underwriting results and associated ratios for the international insurance segment for each of the periods indicated.


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	($ in millions)
Revenues
Gross premiums written	$	192.6		$	183.6		$	321.1		$	297.2
Net premiums written		106.4			111.3			184.1			184.0
Net premiums earned		87.0			82.6			171.2			162.5
Expenses
Net losses and loss expenses	$	31.0		$	22.2		$	59.9		$	60.3
Acquisition costs		(0.4	)		(0.6	)		(1.2	)		(1.1	)
General and administrative expenses		24.1			21.7			48.9			44.0
Underwriting income		32.3			39.3			63.6			59.3
Ratios
Loss and loss expense ratio		35.6	%		26.9	%		35.0	%		37.1	%
Acquisition cost ratio		(0.4	%)		(0.7	%)		(0.7	%)		(0.7	%)
General and administrative expense ratio		27.7	%		26.2	%		28.6	%		27.1	%

Expense ratio		27.3	%		25.5	%		27.9	%		26.4	%

Combined ratio		62.9	%		52.4	%		62.9	%		63.5	%

Comparison of Three Months Ended June 30, 2013 and 2012

Premiums. Gross premiums written increased by $9.0 million, or 4.9%, for the three months ended June 30, 2013 compared to the same period in 2012. The increase was driven by the continued build out of our Lloyd’s platform, new product initiatives and new business across all business units. Bermuda general property added $4.4 million with increased participations on renewing business combined with new business writings and rate increases. This was partially offset by the reduction in European general property as a result of increased competition. Professional liability added $4.5 million, driven by the expansion of new initiatives, such as our Bermuda employment practices liability and SME insurance products. However, this growth was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

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


	Three Months Ended June 30,				Dollar Change			Percentage Change
	2013		2012		Dollar Change			Percentage Change
			($ in millions)
General property	$	65.2	$	61.2	$	4.0			6.5	%
Professional liability		57.3		52.8		4.5			8.5	%
General casualty		44.3		43.2		1.1			2.5	%
Healthcare		21.2		20.3		0.9			4.4	%
Other*		4.6		6.1		(1.5	)		(24.6	%)

	$	192.6	$	183.6	$	9.0			4.9	%

*	Includes our trade credit line of business

Net premiums written decreased by $4.9 million, or 4.4%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, due to the increase in premiums ceded. We ceded to reinsurers 44.8% of gross premiums written for the three months ended June 30, 2013 compared to 39.4% for the three months ended June 30, 2012. The increase was due to higher quota share cessions on our 2013 renewals for general casualty, property and trade credit lines of business.

Net premiums earned increased by $4.4 million, or 5.3%, primarily due to higher net premiums written in the latter half of 2012 and the six months ended June 30, 2013.

Net losses and loss expenses. Net losses and loss expenses increased by $8.8 million, or 39.6%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The loss and loss expense ratio increased by 8.7 percentage points for the same period. The increase in net losses and loss expenses was primarily due to lower net favorable prior year reserve development in 2013 compared to the same period in 2012.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 65.1% and 62.1% for the three months ended June 30, 2013 and 2012, respectively. The increase was due to $5.4 million of large reported property losses in 2013 compared to $1.3 million in 2012 that increased the loss and loss expense ratio by approximately 4.7 percentage points.


	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012						Dollar		Change in Percentage
	Amount			% of NPE			Amount			% of NPE			Change		Points
							($ in millions)
Non-catastrophe	$	56.7			65.1	%	$	51.3			62.1	%	$	5.4		3.0	Pts
Property catastrophe		—			—			—			—			—		—

Current period		56.7			65.1			51.3			62.1			5.4		3.0
Prior period		(25.7	)		(29.5	)		(29.1	)		(35.2	)		3.4		5.7

Net losses and loss expenses	$	31.0			35.6	%	$	22.2			26.9	%	$	8.8		8.7	Pts

Overall, our international insurance segment recorded net favorable reserve development of $25.7 million during the three months ended June 30, 2013 compared to net favorable reserve development of $29.1 million for the three months ended June 30, 2012, as shown in the tables below.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Three Months Ended June 30, 2013
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			2012			Total
	($ in millions)
General casualty	$	6.6		$	(0.7	)	$	(1.4	)	$	(3.3	)	$	(2.4	)	$	(2.0	)	$	1.7		$	—		$	(0.2	)	$	—		$	(1.7	)
General property		—			—			(0.1	)		0.2			0.8			(0.4	)		(3.7	)		(2.7	)		(1.6	)		(4.9	)		(12.4	)
Professional liability		(0.2	)		(4.7	)		4.5			(1.4	)		(5.5	)		—			(6.1	)		(0.1	)		(0.1	)		—			(13.6	)
Healthcare		—			(0.2	)		(0.1	)		(0.4	)		(0.4	)		(0.4	)		3.9			(0.2	)		(0.2	)		—			2.0

	$	6.4		$	(5.6	)	$	2.9		$	(4.9	)	$	(7.5	)	$	(2.8	)	$	(4.2	)	$	(3.0	)	$	(2.1	)	$	(4.9	)	$	(25.7	)


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Three Months Ended June 30, 2012
	Prior			2004			2005			2006			2007			2008			2009			2010		2011			Total
	($ in millions)
General casualty	$	6.5		$	(1.9	)	$	(3.1	)	$	(2.5	)	$	(6.1	)	$	(3.1	)	$	—		$	—	$	—		$	(10.2	)
General property		—			0.1			(2.5	)		(0.2	)		0.2			(2.1	)		(1.2	)		—		(1.3	)		(7.0	)
Professional liability		(0.1	)		(1.2	)		(1.4	)		(8.3	)		(1.1	)		4.7			—			—		—			(7.4	)
Healthcare		(0.2	)		(0.3	)		(0.5	)		(0.4	)		(0.5	)		(2.6	)		—			—		—			(4.5	)

	$	6.2		$	(3.3	)	$	(7.5	)	$	(11.4	)	$	(7.5	)	$	(3.1	)	$	(1.2	)	$	—	$	(1.3	)	$	(29.1	)

Acquisition costs. Acquisition costs increased by $0.2 million, or 33.3%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The negative cost represents ceding commissions received on ceded premiums in excess of the brokerage fees and commissions paid on gross premiums written. The acquisition cost ratio was negative 0.4% for the three months ended June 30, 2013 compared to negative 0.7% for the three months ended June 30, 2012.

General and administrative expenses. General and administrative expenses increased by $2.4 million, or 11.1%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase in general and administrative expenses was primarily due to higher compensation costs as we increased headcount. The general and administrative expense ratio was 27.7% and 26.2% for the three months ended June 30, 2013 and 2012, respectively. The increase in the general and administrative expense ratio was due to the higher expenses that outpaced the growth in net premiums earned.

Comparison of Six Months Ended June 30, 2013 and 2012

Premiums. Gross premiums written increased by $23.9 million, or 8.0%, for the six months ended June 30, 2013 compared to the same period in 2012. The increase was driven by the continued expansion of new initiatives such as trade credit, and SME insurance products, which increased $2.5 million. Healthcare and professional liability added $7.4 million and $6.6 million, respectively, with increased participations on renewing business, as well as new business and rate increases. However, this increase was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions), and continued competition.

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


	Six Months Ended June 30,				Dollar Change		Percentage Change
	2013		2012		Dollar Change		Percentage Change
			($ in millions)
General property	$	103.9	$	98.0	$	5.9		6.0	%
Professional liability		90.4		83.8		6.6		7.9	%
General casualty		68.3		64.9		3.4		5.2	%
Healthcare		47.7		40.3		7.4		18.4	%
Other*		10.8		10.2		0.6		5.9	%

	$	321.1	$	297.2	$	23.9		8.0	%

*	Includes our trade credit line of business

Net premiums written increased by $0.1 million, or 0.1%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. We ceded to reinsurers 42.7% of gross premiums written for the six months ended June 30, 2013 compared to 38.1% for the six months ended June 30, 2012. The increase was due to the higher quota share cessions on our 2013 renewals for general casualty, general property and trade credit lines of business.

Net premiums earned increased by $8.7 million, or 5.4%, primarily due to higher net premiums written in the latter half of 2012 and for the six months ended June 30, 2013.

Net losses and loss expenses. Net losses and loss expenses decreased by $0.4 million, or 0.7%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The loss and loss expense ratio decreased by 2.1 percentage points for the same period driven by higher net favorable prior year reserve development.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 67.4% and 67.5% for the six months ended June 30, 2013 and 2012, respectively.


	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012						Dollar			Change in Percentage
	Amount			% of NPE			Amount			% of NPE			Change			Points
							($ in millions)
Non-catastrophe	$	115.3			67.4	%	$	109.7			67.5	%	$	5.6			(0.1	)Pts
Property catastrophe		—			—			—			—			—			—

Current period		115.3			67.4			109.7			67.5			5.6			(0.1	)
Prior period		(55.4	)		(32.4	)		(49.4	)		(30.4	)		(6.0	)		(2.0	)

Net losses and loss expenses	$	59.9			35.0	%	$	60.3			37.1	%	$	(0.4	)		(2.1	)Pts

Overall, our international insurance segment recorded net favorable reserve development of $55.4 million during the six months ended June 30, 2013 compared to net favorable reserve development of $49.4 million for the six months ended June 30, 2012, as shown in the tables below.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2013
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			2012			Total
	($ in millions)
General property	$	—		$	—		$	(0.1	)	$	(0.2	)	$	1.1		$	(1.0	)	$	(3.5	)	$	(4.0	)	$	(9.5	)	$	(8.1	)	$	(25.3	)
General casualty		6.3			2.4			(7.0	)		(6.7	)		(8.7	)		(4.7	)		(1.2	)		(0.2	)		—			0.9			(18.9	)
Professional liability		(0.3	)		(5.0	)		3.3			(2.9	)		(10.9	)		0.3			(6.5	)		(0.4	)		(0.1	)		—			(22.5	)
Healthcare		(0.1	)		(0.3	)		(0.5	)		(1.1	)		8.2			(4.5	)		10.6			(0.9	)		(0.1	)		—			11.3

	$	5.9		$	(2.9	)	$	(4.3	)	$	(10.9	)	$	(10.3	)	$	(9.9	)	$	(0.6	)	$	(5.5	)	$	(9.7	)	$	(7.2	)	$	(55.4	)

The net favorable reserve development for loss years 2004 to 2012 is a result of actual loss emergence being lower than anticipated. The unfavorable reserve development in our healthcare line in the 2007 and 2009 loss years was due to adverse development on individual claims.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2012
	Prior			2004			2005			2006			2007			2008			2009			2010			2011		Total
	($ in millions)
General casualty	$	4.2		$	(3.1	)	$	(4.8	)	$	(11.4	)	$	(7.2	)	$	(7.6	)	$	—		$	—		$	20.0	$	(9.9	)
General property		—			0.2			(1.5	)		(1.0	)		1.1			(2.2	)		(1.8	)		(6.6	)		3.1		(8.7	)
Professional liability		(0.2	)		(2.3	)		(3.1	)		(15.1	)		(7.2	)		7.0			—			—			—		(20.9	)
Healthcare		(0.7	)		(0.6	)		(1.1	)		(0.8	)		(4.1	)		(2.6	)		—			—			—		(9.9	)

	$	3.3		$	(5.8	)	$	(10.5	)	$	(28.3	)	$	(17.4	)	$	(5.4	)	$	(1.8	)	$	(6.6	)	$	23.1	$	(49.4	)

The net favorable reserve development for loss years 2004 to 2010 is a result of actual loss emergence being lower than anticipated. The unfavorable reserve development in our general casualty line for loss year 2011 was due to adverse development on an individual claim, that was estimated to reach our full limit of $20.0 million, net of reinsurance.

Acquisition costs. Acquisition costs decreased by $0.1 million, or 9.1%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The acquisition cost ratio was negative 0.7% for the six months ended June 30, 2013 and negative 0.7% for the six months ended June 30, 2012.

General and administrative expenses. General and administrative expenses increased by $4.9 million, or 11.1%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase in general and administrative expenses was primarily due to increased salary and related costs incurred as we continue to expand internationally. The general and administrative expense ratios for the six months ended June 30, 2013 and 2012 were 28.6% and 27.1%, respectively. The increase was due to the growth in expenses outpacing growth in earned premiums.

Reinsurance Segment

The following table summarizes the underwriting results and associated ratios for the reinsurance segment for each of the periods indicated.


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	($ in millions)
Revenues
Gross premiums written	$	265.3		$	197.3		$	717.9		$	560.4
Net premiums written		253.4			186.7			678.5			549.2
Net premiums earned		222.8			184.3			413.4			353.0
Expenses
Net losses and loss expenses	$	119.8		$	115.1		$	212.7		$	204.5
Acquisition costs		37.7			30.9			72.1			58.6
General and administrative expenses		18.2			17.5			36.5			34.5
Underwriting income		47.1			20.8			92.1			55.4
Ratios
Loss and loss expense ratio		53.8	%		62.4	%		51.5	%		57.9	%
Acquisition cost ratio		16.9	%		16.8	%		17.4	%		16.6	%
General and administrative expense ratio		8.1	%		9.5	%		8.8	%		9.8	%

Expense ratio		25.0	%		26.3	%		26.2	%		26.4	%

Combined ratio		78.8	%		88.7	%		77.7	%		84.3	%

Comparison of Three Months Ended June 30, 2013 and 2012

Premiums. Gross premiums written increased by $68.0 million, or 34.5%, for the three months ended June 30, 2013 compared to the same period in 2012. The increase was driven by new business, combined with increased participations on renewing business and rate increases. Property reinsurance gross premiums written increased by $30.7 million as North American property reinsurance grew by $23.0 million. International property reinsurance gross premiums written contributed a further $7.7 million. Casualty gross premiums written increased by $23.9 million due to a combination of increased exposures, rates and new business. Within our specialty unit, crop reinsurance gross premiums written increased by $10.1 million and marine reinsurance contributed a further $3.2 million. This was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

The table below illustrates our gross premiums written by underwriter location for our reinsurance operations.


	Three Months Ended June 30,				Dollar			Percentage
	2013		2012		Change			Change
	($ in millions)
United States	$	132.9	$	83.6	$	49.3			59.0	%
Bermuda		74.7		59.6		15.1			25.3	%
Europe		11.0		15.4		(4.4	)		(28.6	%)
Singapore		46.7		38.7		8.0			20.7	%

	$	265.3	$	197.3	$	68.0			34.5	%

The decline in Europe was due to the transfer of business from Europe to the United States as we established our Lloyd’s coverholder in Miami.

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


	Three Months Ended June 30,				Dollar		Percentage
	2013		2012		Change		Change
			($ in millions)
Property	$	152.4	$	121.7	$	30.7		25.2	%
Casualty		76.7		52.8		23.9		45.3	%
Specialty		36.2		22.8		13.4		58.8	%

	$	265.3	$	197.3	$	68.0		34.5	%

Net premiums written increased by $66.7 million, or 35.7%, consistent with the increase in gross premiums written.

Net premiums earned increased by $38.5 million, or 20.9%, as a result of the increase in net premiums written during the year ended December 31, 2012 and the six months ended June 30, 2013. Premiums related to our reinsurance business earn at a slower rate than those related to our direct insurance business. Direct insurance premiums typically earn ratably over the term of a policy. Reinsurance premiums under a risks attaching reinsurance contract are typically earned over the same period as the underlying policies, or risks, covered by the contract. As a result, the earning pattern of a risks attaching reinsurance contract may extend up to 24 months, reflecting the inception dates of the underlying policies. Property catastrophe premiums, crop reinsurance premiums and premiums for other treaties written on a losses occurring basis generally earn ratably over the term of the reinsurance contract.

Net losses and loss expenses. Net losses and loss expenses increased by $4.7 million, or 4.1%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The loss and loss expense ratio decreased by 8.6 percentage points for the same period. The increase in net losses and loss expenses was due to growth in business written, partially offset by higher prior year net favorable reserve development for the three months ended June 30, 2013 compared to the same period in 2012.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 62.7% and 66.0% for the three months ended June 30, 2013 and 2012, respectively. The decrease in the loss and loss expense ratio of 3.3 points was primarily due to fewer reported current year large losses in the three months ended June 30, 2013 compared to the three months ended June 30, 2012.


	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012						Dollar			Change in Percentage
	Amount			% of NPE			Amount			% of NPE			Change			Points
							($ in millions)
Non-catastrophe	$	139.6			62.7	%	$	121.7			66.0	%	$	17.9			(3.3	)Pts
Property catastrophe		—			—			—			—			—			—

Current period		139.6			62.7			121.7			66.0			17.9			(3.3	)
Prior period		(19.8	)		(8.9	)		(6.6	)		(3.6	)		(13.2	)		(5.3	)

Net losses and loss expenses	$	119.8			53.8	%	$	115.1			62.4	%	$	4.7			(8.6	)Pts

Overall, our reinsurance segment recorded net favorable reserve development of $19.8 million during the three months ended June 30, 2013 compared to net favorable reserve development of $6.6 million for the three months ended June 30, 2012, as shown in the tables below.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Three Months Ended June 30, 2013
	Prior			2004			2005			2006		2007		2008			2009			2010			2011			2012			Total
	($ in millions)
Property	$	—		$	0.1		$	(0.5	)	$	0.1	$	—	$	(0.1	)	$	—		$	(0.6	)	$	(1.5	)	$	(22.6	)	$	(25.1	)
Casualty		(0.3	)		(1.1	)		(0.1	)		0.8		—		(1.1	)		(0.1	)		0.7			3.3			5.3			7.4
Specialty		—			(0.3	)		(0.4	)		0.4		—		(2.7	)		1.5			—			0.8			(1.4	)		(2.1	)

	$	(0.3	)	$	(1.3	)	$	(1.0	)	$	1.3	$	—	$	(3.9	)	$	1.4		$	0.1		$	2.6		$	(18.7	)	$	(19.8	)

The favorable reserve development for the 2012 loss year for our reinsurance segment was largely due to lower than expected reported losses in our property line of business. Our casualty reinsurance line of business experienced higher than expected loss emergence that caused the unfavorable loss reserve development in the 2011 and 2012 loss years.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Three Months Ended June 30, 2012
	Prior			2004			2005			2006			2007			2008			2009			2010			2011			Total
	($ in millions)
Property	$	—		$	(0.1	)	$	—		$	(0.1	)	$	(0.1	)	$	—		$	1.1		$	(5.9	)	$	5.4		$	0.3
Casualty		1.4			(0.5	)		1.1			(3.4	)		(3.6	)		(0.6	)		(0.1	)		(0.1	)		4.7			(1.1	)
Specialty		(0.2	)		(1.1	)		(1.4	)		(1.3	)		(1.6	)		(0.1	)		—			0.2			(0.3	)		(5.8	)

	$	1.2		$	(1.7	)	$	(0.3	)	$	(4.8	)	$	(5.3	)	$	(0.7	)	$	1.0		$	(5.8	)	$	9.8		$	(6.6	)

Acquisition costs. Acquisition costs increased by $6.8 million, or 22.0%, for the three months ended June 30, 2013 compared to the three months ended 2012, consistent with the increase in premiums. The acquisition cost ratio was 16.9% for the three months ended June 30, 2013 compared to 16.8% for the three months ended June 30, 2012.

General and administrative expenses. General and administrative expenses increased by $0.7 million, or 4.0%, for the three months ended June 30, 2013 compared to the same period in 2012. The general and administrative expense ratios for the three months ended June 30, 2013 and 2012 were 8.1% and 9.5%, respectively, reflecting the higher growth in net premiums earned relative to expenses in 2013.

Comparison of Six Months Ended June 30, 2013 and 2012

Premiums. Gross premiums written increased by $157.5 million, or 28.1%, for the six months ended June 30, 2013 compared to the same period in 2012. The increase in gross premiums written was primarily due to new business, from both new products and new regions, as well as increased participations on renewing business combined with premium rate increases. Property reinsurance gross premiums written increased by $88.7 million as North American property reinsurance grew by $66.6 million as we increased our participation on a large property catastrophe account. International property reinsurance gross premiums written contributed a further $22.1 million. Within our specialty unit, crop reinsurance gross premiums written increased by $29.3 million due to new business, increased participations and rate increases following the U.S. drought conditions in 2012 and marine reinsurance gross premiums written also increased $9.2 million. Casualty gross premiums written increased by $25.9 million due to a combination of increased exposures, rates and new business. This was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.

The table below illustrates our gross premiums written by underwriter location for our reinsurance operations.


	Six Months Ended June 30,				Dollar		Percentage
	2013		2012		Change		Change
			($ in millions)
United States	$	355.3	$	268.3	$	87.0		32.4	%
Bermuda		218.2		169.6		48.6		28.7	%
Singapore		84.4		67.3		17.1		25.4	%
Europe		60.0		55.2		4.8		8.7	%

	$	717.9	$	560.4	$	157.5		28.1	%

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


	Six Months Ended June 30,				Dollar		Percentage
	2013		2012		Change		Change
			($ in millions)
Property	$	364.0	$	275.3	$	88.7		32.2	%
Casualty		174.3		148.4		25.9		17.5	%
Specialty		179.6		136.7		42.9		31.4	%

	$	717.9	$	560.4	$	157.5		28.1	%

Net premiums written increased by $129.3 million, or 23.5% for the six months ended June 30, 2013 compared to the same period in 2012. The increase in net premiums written is lower than the increase in gross premiums due to purchasing a new collateralized retrocessional catastrophe cover, during the six months ended June 30, 2013, that provides $25 million limit per occurrence on a worldwide basis, with attachment points varying by risk and geography and a maximum indemnity of $100 million.

Net premiums earned increased by $60.4 million, or 17.1%, as a result of the increase in net premiums written during 2012 and the six months ended June 30, 2013 partially offset by the impact of the new retrocessional catastrophe cover.

Net losses and loss expenses. Net losses and loss expenses increased by $8.2 million, or 4.0%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The loss and loss expense ratio decreased by 6.4 percentage points for the same period. The increase in net losses and loss expenses was due to growth in business written, partially offset by higher net favorable prior year reserve development for the six months ended June 30, 2013 compared to the same period in 2012.

Excluding the prior year reserve development, the loss and loss expense ratios would have been 62.3% and 63.2% for the six months ended June 30, 2013 and 2012, respectively. The decrease in the loss and loss expense ratio of 0.9 points was primarily due to fewer reported current year large losses in the six months ended June 30, 2013 compared to the same period in 2012.


	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012						Dollar			Change in Percentage
	Amount			% of NPE			Amount			% of NPE			Change			Points
	($ in millions)
Non-catastrophe	$	257.4			62.3	%	$	223.1			63.2	%	$	34.3			(0.9	)Pts
Property catastrophe		—			—			—			—			—			—

Current period		257.4			62.3			223.1			63.2			34.3			(0.9	)
Prior period		(44.7	)		(10.8	)		(18.6	)		(5.3	)		(26.1	)		(5.5	)

Net losses and loss expenses	$	212.7			51.5	%	$	204.5			57.9	%	$	8.2			(6.4	)Pts

Overall, our reinsurance segment recorded net favorable reserve development of $44.7 million during the six months ended June 30, 2013 compared to net favorable reserve development of $18.6 million for the six months ended June 30, 2012, as shown in the tables below.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2013
	Prior		2004			2005			2006		2007			2008			2009			2010			2011			2012			Total
	($ in millions)
Property	$	—	$	0.1		$	(2.3	)	$	0.1	$	—		$	(0.2	)	$	(0.1	)	$	(2.9	)	$	(8.5	)	$	(35.5	)	$	(49.3	)
Casualty		0.2		(1.2	)		(0.3	)		0.7		(2.2	)		(3.6	)		(0.4	)		0.9			3.3			5.3			2.7
Specialty		—		(0.3	)		(0.5	)		0.3		—			(3.1	)		0.9			(0.1	)		2.3			2.4			1.9

	$	0.2	$	(1.4	)	$	(3.1	)	$	1.1	$	(2.2	)	$	(6.9	)	$	0.4		$	(2.1	)	$	(2.9	)	$	(27.8	)	$	(44.7	)

The favorable reserve development for the 2012 loss year for our reinsurance segment was largely due to lower than expected reported losses in our property line of business.


	(Favorable) and Unfavorable Loss Reserve Development by Loss Year
	For the Six Months Ended June 30, 2012
	2003			2004			2005			2006			2007			2008			2009			2010			2011			Total
	($ in millions)
Property	$	—		$	(0.8	)	$	0.2		$	(0.1	)	$	0.1		$	(0.3	)	$	2.0		$	(1.2	)	$	5.5		$	5.4
Casualty		1.1			3.2			(2.7	)		(5.1	)		(9.4	)		(1.2	)		(0.1	)		(0.1	)		5.0			(9.3	)
Specialty		(0.3	)		(3.2	)		(5.1	)		(1.8	)		(2.2	)		(0.1	)		—			—			(2.0	)		(14.7	)

	$	0.8		$	(0.8	)	$	(7.6	)	$	(7.0	)	$	(11.5	)	$	(1.6	)	$	1.9		$	(1.3	)	$	8.5		$	(18.6	)

Acquisition costs. Acquisition costs increased by $13.5 million, or 23.0%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012, consistent with the increase in premiums. The acquisition cost ratio was 17.4% for the six months ended June 30, 2013, compared to 16.6% for the six months ended June 30, 2012. The increase was due to a $2.5 million increase in estimated profit commissions for the six months ended June 30, 2013 which increased the acquisition cost ratio by 0.6 percentage points.

General and administrative expenses. General and administrative expenses increased by $2.0 million, or 5.8%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase was due to higher salary and related costs due to higher headcount to support our growing operations. The general and administrative expense ratios for the six months ended June 30, 2013 and 2012 were 8.8% and 9.8%, respectively, reflecting the higher growth in net premiums earned relative to expenses in 2013.

Reserves for Losses and Loss Expenses

Reserves for losses and loss expenses by segment were comprised of the following:


	U.S. Insurance						International Insurance						Reinsurance						Total
	Jun. 30, 2013			Dec. 31, 2012			Jun. 30, 2013			Dec. 31, 2012			Jun. 30, 2013			Dec. 31, 2012			Jun. 30, 2013			Dec. 31, 2012
	($ in millions)
Case reserves	$	539.0		$	508.8		$	505.7		$	550.5		$	464.7		$	479.8		$	1,509.4		$	1,539.1
IBNR		1,440.2			1,389.5			1,718.8			1,716.1			1,028.5			1,000.8			4,187.5			4,106.4

Reserve for losses and loss expenses		1,979.2			1,898.3			2,224.5			2,266.6			1,493.2			1,480.6			5,696.9			5,645.5
Reinsurance recoverables		(523.6	)		(517.3	)		(650.0	)		(620.6	)		(6.0	)		(3.2	)		(1,179.6	)		(1,141.1	)

Net reserve for losses and loss expenses	$	1,455.6		$	1,381.0		$	1,574.5		$	1,646.0		$	1,487.2		$	1,477.4		$	4,517.3		$	4,504.4

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

The following tables provide our ranges of loss and loss expense reserve estimates by business segment as of June 30, 2013:


	Reserve for Losses and Loss Expenses Gross of Reinsurance Recoverable
	Carried Reserves		Low Estimate		High Estimate
	($ in millions)
U.S. insurance	$	1,979.2	$	1,553.5	$	2,199.4
International insurance		2,224.5		1,737.2		2,492.3
Reinsurance		1,493.2		1,183.9		1,705.8
Consolidated ⁽¹⁾		5,696.9		4,581.4		6,290.8

	Reserve for Losses and Loss Expenses Net of Reinsurance Recoverable
	Carried Reserves		Low Estimate		High Estimate
	($ in millions)
U.S. insurance	$	1,455.6	$	1,141.0	$	1,644.0
International insurance		1,574.5		1,228.2		1,787.7
Reinsurance		1,487.2		1,177.9		1,698.9
Consolidated ⁽¹⁾		4,517.3		3,640.8		5,037.0

(1)	For statistical reasons, it is not appropriate to add together the ranges of each business segment in an effort to determine the low and high range around the consolidated loss reserves.

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

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

Reinsurance Recoverable

The following table illustrates our reinsurance recoverable as of June 30, 2013 and December 31, 2012:


	June 30, 2013		December 31, 2012
	($ in millions)
Ceded case reserves	$	223.6	$	234.2
Ceded IBNR reserves		956.0		906.9

Reinsurance recoverable	$	1,179.6	$	1,141.1

We remain obligated for amounts ceded in the event our reinsurers do not meet their obligations. Accordingly, we have evaluated the reinsurers that are providing reinsurance protection to us and will continue to monitor their credit ratings and financial stability. We generally have the right to terminate our treaty reinsurance contracts at any time, upon prior written notice to the reinsurer, under specified circumstances, including the assignment to the reinsurer by A.M. Best of a financial strength rating of less than “A-.” Approximately 99% of ceded reserves as of June 30, 2013 were recoverable from reinsurers who had an A.M. Best rating of “A-” or higher.

Liquidity and Capital Resources

Liquidity

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

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

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

Historically, our operating subsidiaries have generated sufficient cash flows to meet all of their obligations. Because of the inherent volatility of our business, the seasonality in the timing of payments by insureds and cedents, the irregular timing of loss payments, and the impact of a change in interest rates and credit spreads on the investment income as well as seasonality in coupon payment dates for fixed income securities, cash flows from operating activities may vary between periods. In the unlikely event that paid losses exceed operating cash flows in any given period, we would use our cash balances available, or liquidate a portion of our investment portfolio in order to meet our short-term liquidity needs. As of June 30, 2013, we held $674.1 million of unrestricted cash and cash equivalents and $449.4 million of fixed income securities with a maturity of less than one year to meet short-term liquidity needs. Our remaining fixed income securities, equity securities and other invested assets are available to meet our long-term liquidity needs.

As of June 30, 2013, we had $150 million available under our revolving loan facility.

Dividend Restrictions

The jurisdictions in which our operating subsidiaries are licensed to write business impose regulations requiring companies to maintain or meet various defined statutory ratios, including solvency and liquidity requirements. Some jurisdictions also place restrictions on the declaration and payment of dividends and other distributions. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in the Company’s 2012 Form 10-K.

Cash Flows


	Six Months Ended June 30,
	2013			2012
	($ in millions)
Cash flows provided by operating activities	$	133.6		$	301.8
Cash flows (used in) provided by investing activities		(43.4	)		101.2
Cash flows used in financing activities		(90.3	)		(170.3	)
Effect of exchange rate changes on foreign currency cash		(7.7	)		(2.2	)

Net (decrease) increase in cash and cash equivalents		(7.8	)		230.5
Cash and cash equivalents, beginning of period		681.9			634.0

Cash and cash equivalents, end of period	$	674.1		$	864.5

The primary sources of cash inflows from operating activities are premiums received, loss payments from reinsurers and investment income. The primary sources of cash outflows from operating activities are ceded premiums paid to reinsurers, claims paid, commissions paid, operating expenses, interest expense and income taxes. The primary factor in our ability to generate positive operating cash flow is underwriting profitability. We have generated positive operating cash flow for more than 10 consecutive years.

The decrease in cash flows from operations was primarily due to the $125.1 million increase in paid losses for the six months ended June 30, 2013 as a result of the catastrophe losses from Superstorm Sandy and crop reinsurance losses combined with growth in operations. This was combined with the $44.7 million increase in the cash outflow for funds held for the six months ended June 30, 2013. The increase in funds held was due to our increased participation in a collateralized property catastrophe program.

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

Cash flows from investing activities consist primarily of proceeds on the sale of investments and payments for investments acquired in addition to changes in restricted cash. The decrease in cash flows provided by investing activities reflects the net purchase of securities during the six months ended June 30, 2013 compared to net sales during the same period in 2012.

Cash flows from financing activities consist primarily of capital raising activities, which include the issuance of common shares or debt, the repurchase of our shares, the payment of dividends and the repayment of debt. The decrease in cash flows used in financing activities was due to the $66.3 million decrease in share repurchases for the six months ended June 30, 2013 compared to the same period in 2012. Dividends paid decreased $15.0 million as the second quarter dividend for 2013 was not paid as of June 30, 2013.

Investments

Our funds are primarily invested in liquid, high-grade fixed income securities. As of June 30, 2013 and December 31, 2012, 89.6% and 89.2%, respectively, of our fixed income portfolio consisted of investment grade securities. The maturity distribution of our fixed-maturity portfolio (on a fair value basis) as of June 30, 2013 and December 31, 2012 was as follows:


	June 30, 2013		December 31, 2012
	($ in millions)
Due in one year or less	$	449.4	$	573.9
Due after one year through five years		3,106.7		2,835.9
Due after five years through ten years		647.6		774.4
Due after ten years		63.6		73.0
Mortgage-backed		1,589.0		1,958.4
Asset-backed		429.5		410.9

Total	$	6,285.8	$	6,626.5

We have investments in other invested assets, comprising interests in hedge funds, private equity funds, private securities and high yield loan funds, the carrying value of which was $849.1 million as of June 30, 2013. Some of these funds have redemption notice requirements. For each of our funds, liquidity is allowed after certain defined periods based on the terms of each fund. See Note 4(b) “Investments — Other Invested Assets” to our unaudited condensed consolidated financial statements for additional details on our other invested assets.

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

Credit Facilities

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

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

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

A portion of the Amended Secured Credit Facility may also be used for revolving loans for general corporate and working capital purposes, up to a maximum of $150 million. We may request that existing lenders under the Amended Secured Credit Facility make additional commitments from time to time, up to $150 million, subject to approval by the lenders. The Amended Secured Credit Facility contains representations, warranties and covenants customary for similar bank loan facilities, including certain covenants that, among other things, require us to maintain a certain leverage ratio and financial strength rating. We are in compliance with all covenants under the Amended Secured Credit Facility as of June 30, 2013.

As of June 30, 2013, we had a combined unused letters of credit capacity of $558.4 million from the Amended Secured Credit Facility and Citibank Europe plc. We believe that this remaining capacity is sufficient to meet our future letter of credit needs. During the six months ended June 30, 2013, we did not utilize the revolving loan available under the Amended Secured Credit Facility.

Pledged Assets

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

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

As of June 30, 2013 and December 31, 2012, $2,226.7 million and $2,141.2 million, respectively, of cash and cash equivalents and investments were deposited, pledged or held in escrow accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions, insurance laws and other contract provisions.

In addition, as of June 30, 2013 and December 31, 2012, a further $1,135.7 million and $1,225.2 million, respectively, of cash and cash equivalents and investments were pledged as collateral for our credit facilities.

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

Financial Strength Ratings

Financial strength ratings represent the opinions of rating agencies on our capacity to meet our obligations. In the event of a significant downgrade in ratings, our ability to write business and to access the capital markets could be impacted. Our financial strength ratings as of June 30, 2013 have not changed since December 31, 2012. See Item 1. “Business” in our 2012 Form 10-K.

In May 2013, S&P affirmed their financial strength rating of “A” of our operating subsidiaries with a stable outlook.

Capital Resources

The table below sets forth the capital structure of the Company as of June 30, 2013 and December 31, 2012:


	As of June 30, 2013			As of December 31, 2012
	($ in millions)
Senior notes	$	798.4		$	798.2
Shareholders’ equity		3,373.2			3,326.3

Total capitalization	$	4,171.6		$	4,124.5

Debt to total capitalization		19.1	%		19.4	%

On September 10, 2012, we filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission in which we may offer from time to time common shares of Allied World Switzerland, senior or subordinated debt securities of Allied World Bermuda, guarantees of debt securities of Allied World Bermuda, warrants to purchase common shares of Allied World Switzerland, warrants to purchase debt securities of Allied World Bermuda or units which may consist of any combination of the securities listed above. The registration statement is intended to provide us with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and our capital needs.

Share Repurchases

In May 2012, we established a $500 million share repurchase program. Under the terms of this new share repurchase program, common shares repurchased shall be designated for cancellation and shall be cancelled upon prior shareholder approval. As of June 30, 2013, approximately $327.7 million remained under this share repurchase authorization.

During the three and six months ended June 30, 2013, our share repurchases were as follows:


	Three Months Ended June 30, 2013		Six Months Ended June 30, 2013
Common shares repurchased		508,328		940,445
Total cost of shares repurchased	$	46,326	$	82,571
Average price per share	$	91.13	$	87.80

Long-Term Debt

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

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

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

Off-Balance Sheet Arrangements

As of June 30, 2013, we did not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We believe that we are principally exposed to three types of market risk: interest rate risk, credit risk and currency risk.

The fixed income securities in our investment portfolio are subject to interest rate risk and credit risk. Any changes in interest rates and credit spreads have a direct effect on the fair values of fixed income securities. As interest rates rise, the fair values fall, and vice versa. As credit spreads widen, the fair values fall, and vice versa.

In the table below changes in fair values as a result of changes in interest rates is determined by calculating hypothetical June 30, 2013 ending prices based on yields adjusted to reflect the hypothetical changes in interest rates, comparing such hypothetical ending prices to actual ending prices, and multiplying the difference by the principal amount of the security. The sensitivity analysis is based on estimates. The estimated changes of our fixed maturity investments and cash and cash equivalents are presented below and actual changes for interest rate shifts could differ significantly.


	Interest Rate Shift in Basis Points
	-200			-100			-50			—			+50			+100			+200
	($ in millions)
Total fair value	$	7,363.3		$	7,276.9		$	7,218.3		$	7,153.9		$	7,073.6		$	6,997.7		$	6,845.0
Fair value change from base		209.4			123.0			64.4			—			(80.3	)		(156.2	)		(308.9	)
Change in unrealized appreciation/(depreciation)		2.9	%		1.7	%		0.9	%		0	%		(1.1	%)		(2.2	%)		(4.3	%)

In the table below changes in fair values as a result of changes in credit spreads are determined by calculating hypothetical June 30, 2013 ending prices adjusted to reflect the hypothetical changes in credit spreads, comparing such hypothetical ending prices to actual ending prices, and multiplying the difference by the principal amount of the security. The sensitivity analysis is based on estimates. The estimated changes of our non-cash, non-U.S. Treasury fixed maturity investments are presented below and actual changes in credit spreads could differ significantly.


	Credit Spread Shift in Basis Points
	-200			-100			-50			—			+50			+100			+200
	($ in millions)
Total fair value	$	4,819.6		$	4,697.9		$	4,637.1		$	4,576.3		$	4,515.4		$	4,454.6		$	4,332.9
Fair value change from base		243.3			121.6			60.8			—			(60.9	)		(121.7	)		(243.4	)
Change in unrealized appreciation/(depreciation)		5.3	%		2.7	%		1.3	%		0	%		(1.3	%)		(2.7	%)		(5.3	%)

In addition to credit spread risk, our portfolio is also exposed to the risk of securities being downgraded or of issuers defaulting. In an effort to minimize this risk, our investment guidelines have been defined to ensure that the assets held are well diversified and are primarily high-quality securities.

The following table shows the types of securities in our portfolio, their fair market values, average rating and portfolio percentage as of June 30, 2013.


	Fair Value June 30, 2013		Average Rating	Portfolio Percentage
	($ in millions)
Cash and cash equivalents	$	868.1	AAA		10.0	%

U.S. government securities		1,709.5	AA+		19.7	%
U.S. government agencies		339.7	AA+		3.9	%
Non-U.S. government and government agencies		233.3	AA+		2.7	%
State, municipalities and political subdivisions		33.6	AA-		0.4	%
Mortgage-backed securities (“MBS”):
Agency MBS		1,037.4	AA+		12.0	%
Non-agency MBS		84.4	A-		1.0	%
Non-agency high yield mandate		181.6	CCC+		2.1	%
Commercial MBS		285.7	AA+		3.3	%

Total mortgage-backed securities		1,589.1			18.4	%
Corporate securities:
Financials		794.6	A+		9.2	%
Industrials		1,089.9	BBB		12.6	%
Utilities		66.7	BBB		0.8	%

Total corporate securities		1,951.2			22.6	%
Asset-backed securities:
Credit cards		24.6	AAA		0.3	%
Auto receivables		25.4	AAA		0.3	%
Student Loans		112.5	AA+		1.3	%
Collateralized loan obligations		213.6	AA+		2.5	%
Other		53.3	AAA		0.6	%

Total asset-backed securities		429.4			5.0	%
Other invested assets:
Private equity		190.1	N/A		2.2	%
Hedge funds		492.2	N/A		5.7	%
Other private securities		134.7	N/A		1.6	%
High yield loan fund		32.1	N/A		0.4	%

Total other invested assets		849.1			9.9	%
Equities		640.9	N/A		7.4	%

Total investment portfolio	$	8,644.0			100.0	%

As of June 30, 2013, we held $6.3 billion of fixed income securities. Of those assets, approximately 89.6% were rated investment grade (Baa3/BBB- or higher) with the remaining 10.4% rated in the below investment grade category. The average credit quality of the fixed maturity portfolios was AA- by Standard & Poor’s.

Our agency pass-through mortgage-backed securities are exposed to prepayment risk, which occurs when holders of individual mortgages increase the frequency with which they prepay the outstanding principal before the maturity date to refinance at a lower interest rate cost. Given the proportion that these securities comprise of the overall portfolio, and the current interest rate environment and condition of the credit market, prepayment risk is not considered significant at this time.

Our non-agency commercial mortgage-backed securities are subject to the risk of non-payment due to increased levels of delinquencies, defaults and losses on commercial loans that cumulatively create shortfalls beyond the level of subordination in our specific securities.

As of June 30, 2013, we held investments in other invested assets with a carrying value of $849.1 million. Included in other invested assets are private equity funds, hedge funds, other private securities and a high yield loan fund. Investments in these types of

assets involve certain risks related to, among other things, the illiquid nature of the fund shares, the limited operating history of these investments, as well as risks associated with the strategies employed by the managers of these investments. The funds’ objectives are generally to seek attractive long-term returns with lower volatility by investing in a range of diversified investment strategies. As our reserves and capital continue to build, we may consider additional investments in these or other alternative investments.

As of June 30, 2013, our direct exposure to European credit across all of Europe was $577.9 million as outlined in the table below and is included within “fixed maturity investments trading, at fair value” and “equity securities trading, at fair value” in the consolidated balance sheets. As of June 30, 2013, we had no direct sovereign exposure to Greece, Ireland, Italy, Portugal or Spain.


	June 30, 2013
	Sovereign and Sovereign Guaranteed		Structured Products		Corporate Bonds and Equities		Total Exposure
	($ in millions)
Belgium	$	—	$	—	$	18.9	$	18.9
France		—		3.5		41.0		44.5
Germany		55.2		5.9		7.9		69.0
Ireland		—		1.4		0.7		2.1
Italy		—		—		1.3		1.3
Luxembourg		—		—		16.9		16.9
Netherlands		36.0		—		63.8		99.8
Norway		6.7		—		26.2		32.9
Russia		—		—		14.5		14.5
Spain		—		—		19.0		19.0
Sweden		5.8		—		44.1		49.9
Switzerland		2.3		—		40.9		43.2
United Kingdom		29.0		17.1		119.8		165.9

Total exposure	$	135.0	$	27.9	$	415.0	$	577.9

The U.S. dollar is our reporting currency and the functional currency of all of our operating subsidiaries. However, we enter into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, we maintain a portion of our investments and liabilities in currencies other than the U.S. dollar, primarily Euro, British Sterling, Swiss Franc and the Canadian dollar. Receivables in non-U.S. currencies are generally converted into U.S. dollars at the time of receipt. When we incur a liability in a non-U.S. currency, we carry such liability on our books in the original currency. These liabilities are converted from the non-U.S. currency to U.S. dollars at the time of payment. As a result, we have an exposure to foreign currency risk resulting from fluctuations in exchange rates. We utilize a hedging strategy to minimize the potential loss of value caused by currency fluctuations by using foreign currency forward contract derivatives that expire in 90 days from purchase.

As of June 30, 2013 and December 31, 2012, less than 4.2% and 3.4%, respectively, of our total investments and cash and cash equivalents were denominated in currencies other than the U.S. dollar. Of our business written during the six months ended June 30, 2013 and 2012, approximately 11% and 12%, respectively, was written in currencies other than the U.S. dollar.

Item 4. Controls and Procedures.

In connection with the preparation of this quarterly report, our management has performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2013, our company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures.

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

No changes were made in our internal controls over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

Our business is subject to a number of risks, including those identified in Item 1A. of Part I of our 2012 Form 10-K, that could have a material adverse effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. There have been no material changes to the risk factors described in our 2012 Form 10-K. The risks described in our 2012 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could have a material adverse effect on our business, results of operations, financial condition and/or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
April 1 - 30, 2013		112,469	$	91.82		112,469	$	363.7 million
May 1 - 31, 2013		198,608		90.63		198,608		345.7 million
June 1 - 30, 2013		197,251		91.25		197,251		327.7 million

Total		508,328	$	91.13		508,328	$	327.7 million	(1)

(1)	At the 2012 Annual Shareholder Meeting on May 3, 2012, Holdings’ shareholders approved a new, two-year $500 million share repurchase program. Share repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit Number		Description
3.1(1)		Articles of Association of Allied World Assurance Company Holdings, AG, as amended and restated.

31.1		Certification by Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification by Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification by Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

101.1**		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 and (v) the Notes to the Consolidated Financial Statements.

(1)	Incorporated herein by reference to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on July 9, 2013.

*	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.

In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101.1 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act and otherwise is not subject to liability under these sections.

SIGNATURES

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


	ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
Dated: August 1, 2013
	By:	/s/ Scott A. Carmilani
		Name:	Scott A. Carmilani
		Title:	President and Chief Executive Officer
Dated: August 1, 2013
	By:	/s/ Thomas A. Bradley
		Name:	Thomas A. Bradley
		Title:	Executive Vice President and Chief Financial Officer
Dated: August 1, 2013
	By:	/s/ Kent W. Ziegler
		Name:	Kent W. Ziegler
		Title:	Senior Vice President, Finance and Chief Accounting Officer

EXHIBIT INDEX


Exhibit Number		Description
3.1(1)		Articles of Association of Allied World Assurance Company Holdings, AG, as amended and restated.

31.1		Certification by Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification by Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification by Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

101.1**		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 and (v) the Notes to the Consolidated Financial Statements.

(1)	Incorporated herein by reference to the Current Report on Form 8-K of Allied World Assurance Company Holdings, AG filed with the SEC on July 9, 2013.

*	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.