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, 2007

OR

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

For the transition period from                      to                     

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

(Exact Name of Registrant as Specified in Its Charter)

Bermuda		98-0481737
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

(Address of Principal Executive Offices and Zip Code)

(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 o

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

Large Accelerated Filer o      Accelerated Filer o      Non-Accelerated Filer þ

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

     The number of outstanding common shares, par value $0.03 per share, of Allied World Assurance Company Holdings, Ltd as of August 3, 2007 was 60,412,446.

 

 

PART I
FINANCIAL INFORMATION

Item 1.      Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 2007 and December 31, 2006
(Expressed in thousands of United States dollars, except share and per share amounts)

		As of				As of
		June 30,				December 31,
		2007				2006
ASSETS:
Fixed maturity investments available for sale, at fair value (amortized cost: 2007: $5,737,857; 2006: $5,188,379)		$	5,689,348			$	5,177,812
Other invested assets available for sale, at fair value (cost: 2007: $202,016; 2006: $245,657)			227,173				262,557
Total investments			5,916,521				5,440,369
Cash and cash equivalents			270,571				366,817
Restricted cash			51,896				138,223
Securities lending collateral			503,517				304,742
Insurance balances receivable			450,612				304,261
Prepaid reinsurance			209,522				159,719
Reinsurance recoverable			679,198				689,105
Accrued investment income			56,355				51,112
Deferred acquisition costs			131,368				100,326
Intangible assets			3,920				3,920
Balances receivable on sale of investments			53,089				16,545
Net deferred tax assets			3,863				5,094
Other assets			45,175				40,347
Total assets		$	8,375,607			$	7,620,580
LIABILITIES:
Reserve for losses and loss expenses		$	3,743,680			$	3,636,997
Unearned premiums			1,018,347				813,797
Unearned ceding commissions			35,612				23,914
Reinsurance balances payable			122,344				82,212
Securities lending payable			503,517				304,742
Balances due on purchase of investments			21				—
Senior notes			498,629				498,577
Accounts payable and accrued liabilities			35,271				40,257
Total liabilities		$	5,957,421			$	5,400,496
SHAREHOLDERS’ EQUITY:
Common shares, par value $0.03 per share, issued and outstanding 2007: 60,405,307 shares and 2006: 60,287,696 shares			1,812				1,809
Additional paid-in capital			1,833,737				1,822,607
Retained earnings			608,300				389,204
Accumulated other comprehensive (loss) income:
net unrealized (losses) gains on investments, net of tax			(25,663	)			6,464
Total shareholders’ equity			2,418,186				2,220,084
Total liabilities and shareholders’ equity		$	8,375,607			$	7,620,580

See accompanying notes to the unaudited condensed consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the three and six months ended June 30, 2007 and 2006
(Expressed in thousands of United States dollars, except share and per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
REVENUES:
Gross premiums written		$	530,549			$	518,316			$	968,955			$	1,016,436
Premiums ceded			(143,962	)			(147,978	)			(224,524	)			(218,595	)
Net premiums written			386,587				370,338				744,431				797,841
Change in unearned premiums			(83,468	)			(64,821	)			(154,746	)			(183,381	)
Net premiums earned			303,119				305,517				589,685				614,460
Net investment income			73,937				54,943				146,585				116,944
Net realized investment losses			(1,481	)			(10,172	)			(7,965	)			(15,408	)
			375,575				350,288				728,305				715,996
EXPENSES:
Net losses and loss expenses			176,225				179,844				342,220				385,804
Acquisition costs			31,872				32,663				61,068				69,135
General and administrative expenses			34,432				26,257				67,635				46,579
Interest expense			9,482				7,076				18,856				13,527
Foreign exchange loss (gain)			532				(475	)			564				70
			252,543				245,365				490,343				515,115
Income before income taxes			123,032				104,923				237,962				200,881
Income tax (recovery) expense			(255	)			2,553				754				390
NET INCOME			123,287				102,370				237,208				200,491
Other comprehensive (loss)
Unrealized (losses) on investments arising during the period net of applicable deferred income tax recovery for three months 2007: $1,475; 2006: $312; and six months 2007: $2,292; 2006: $656			(58,625	)			(28,328	)			(40,092	)			(73,044	)
Reclassification adjustment for net realized losses included in net income			1,481				10,172				7,965				15,408
Other comprehensive loss			(57,144	)			(18,156	)			(32,127	)			(57,636	)
COMPREHENSIVE INCOME		$	66,143			$	84,214			$	205,081			$	142,855
PER SHARE DATA
Basic earnings per share		$	2.04			$	2.04			$	3.95			$	4.00
Diluted earnings per share		$	1.96			$	2.02			$	3.81			$	3.96
Weighted average common shares outstanding			60,397,591				50,162,842				60,028,523				50,162,842
Weighted average common shares and common share equivalents outstanding			62,874,235				50,682,557				62,277,010				50,637,809
Dividends declared per share		$	0.15			$	—			$	0.30			$	—

See accompanying notes to the unaudited condensed consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the six months ended June 30, 2007 and 2006
(Expressed in thousands of United States dollars)

										Accumulated
						Additional				Other
		Share				Paid-in				Comprehensive				Retained
		Capital				Capital				Income (Loss)				Earnings				Total
December 31, 2006		$	1,809			$	1,822,607			$	6,464			$	389,204			$	2,220,084
Net income			—				—				—				237,208				237,208
Dividends			—				—				—				(18,112	)			(18,112	)
Other comprehensive loss			—				—				(32,127	)			—				(32,127	)
Stock compensation			3				11,130				—				—				11,133
June 30, 2007		$	1,812			$	1,833,737			$	(25,663	)		$	608,300			$	2,418,186
										Accumulated				Retained
						Additional				Other				Earnings
		Share				Paid-in				Comprehensive				(Accumulated
		Capital				Capital				Loss				Deficit)				Total
December 31, 2005		$	1,505			$	1,488,860			$	(25,508	)		$	(44,591	)		$	1,420,266
Net income			—				—				—				200,491				200,491
Long-term incentive plan			—				1,941				—				—				1,941
Other comprehensive loss			—				—				(57,636	)			—				(57,636	)
June 30, 2006		$	1,505			$	1,490,801			$	(83,144	)		$	155,900			$	1,565,062

See accompanying notes to the unaudited condensed consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 2007 and 2006
(Expressed in thousands of United States dollars)

		Six Months Ended
		June 30,
		2007				2006
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	237,208			$	200,491
Adjustments to reconcile net income to cash provided by operating activities:
Net realized (gains) losses on sales of investments			(4,358	)			10,476
Impairment charges for other-than-temporary impairments on investments			12,323				4,932
Amortization of premiums net of accrual of discounts on fixed maturities			(1,970	)			7,489
Amortization and depreciation of fixed assets			3,992				1,780
Deferred income taxes			(1,062	)			853
Stock compensation expense			11,763				5,675
Debt issuance expense			—				98
Amortization of discount and expenses on senior notes			210				—
Cash settlements on interest rate swaps			—				7,340
Mark to market on interest rate swaps			—				(6,896	)
Insurance balances receivable			(146,351	)			(133,428	)
Prepaid reinsurance			(49,803	)			(58,247	)
Reinsurance recoverable			9,907				74,904
Accrued investment income			(5,243	)			(3,459	)
Deferred acquisition costs			(31,042	)			(29,940	)
Net deferred tax assets			2,293				(621	)
Other assets			(6,199	)			4,320
Reserve for losses and loss expenses			106,683				54,389
Unearned premiums			204,550				241,628
Unearned ceding commissions			11,698				2,261
Reinsurance balances payable			40,132				40,876
Accounts payable and accrued liabilities			(5,619	)			(6,475	)
Net cash provided by operating activities			389,112				418,446
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of fixed maturity investments			(1,797,082	)			(3,085,731	)
Purchases of other invested assets			(4,882	)			(123,555	)
Sales of fixed maturity investments			1,203,750				2,656,152
Sales of other invested assets			48,967				164,924
Changes in securities lending collateral received			(198,775	)			(224,906	)
Purchase of fixed assets			(4,651	)			(7,406	)
Change in restricted cash			86,327				28,168
Net cash used in investing activities			(666,346	)			(592,354	)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Changes in securities lending collateral			198,775				224,906
Dividends paid			(18,112	)			—
Net cash provided by financing activities			180,663				224,906
Effect of exchange rate changes on cash and cash equivalents			325				225
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(96,246	)			51,223
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			366,817				172,379
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	270,571			$	223,602
Supplemental disclosure of cash flow information:
— Cash paid for income taxes		$	2,808			$	—
— Cash paid for interest expense			19,271				13,499
— Change in balance receivable on sale of investments			(36,544	)			1,200
— Change in balance payable on purchase of investments			21				76,779

See accompanying notes to the unaudited condensed consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

1.      GENERAL

     Allied World Assurance Company Holdings, Ltd (“Holdings”) was incorporated in Bermuda on November 13, 2001. Holdings, through its wholly-owned subsidiaries (collectively, the “Company”), provides property and casualty insurance and reinsurance on a worldwide basis.

     On July 11, 2006, Holdings sold 8,800,000 common shares in its initial public offering (“IPO”) at a public offering price of $34.00 per share. On July 19, 2006, Holdings sold an additional 1,320,000 common shares at $34.00 per share in connection with the exercise in full by the underwriters of their over-allotment option. In connection with the IPO, a 1-for-3 reverse stock split of Holdings’ common shares was consummated on July 7, 2006. All share and per share amounts related to common shares, warrants, options and restricted stock units (“RSUs”) included in these condensed consolidated financial statements and footnotes have been restated to reflect the reverse stock split. The reverse stock split has been retroactively applied to the Company’s condensed consolidated financial statements.

2.      BASIS OF PREPARATION AND CONSOLIDATION

     These condensed consolidated financial statements include the accounts of Holdings and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission. 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 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 losses and loss expenses,
	•		Valuation of ceded reinsurance recoverables and
	•		Determination of other-than-temporary impairment of investments.

     Intercompany accounts and transactions have been eliminated on consolidation, and all entities meeting consolidation requirements have been included in the consolidation. Certain reclassifications have been made to the prior period’s amounts to conform to the current period’s presentation.

     These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financials statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

3.      NEW ACCOUNTING PRONOUNCEMENTS

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 157, “Fair Value Measurements” (“FAS 157”). This statement defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 is effective for financial statements issued for fiscal years

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

3.      NEW ACCOUNTING PRONOUNCEMENTS — (continued)

beginning after November 15, 2007, and interim periods within those fiscal years. The Company has determined that FAS 157 will not have a material impact on its financial statements upon its adoption for the Company’s fiscal year beginning January 1, 2008.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes.” Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not have an effect on the Company’s results of operations or financial condition as of June 30, 2007.

     In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The fair value option established will permit all entities to choose to measure eligible items at fair value at specified election dates. An entity shall record unrealized gains and losses on items for which the fair value option has been elected through net income in the statement of operations at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the provisions of FAS 159 and its potential impact on future financial statements.

     In May 2007, the FASB issued FASB Staff Position FIN 46(R)-7 “Application of FASB Interpretation No. 46(R) to Investment Companies” (“FSP FIN 46(R)-7”). FSP FIN 46(R)-7 states that investments shall not be subject to the consolidation requirements of FASB Interpretation No. 46(R) if such investments are accounted for in accordance with specialized accounting guidance published by the American Institute of Certified Public Accounting (“AICPA”) Audit and Accounting Guide, Investment Companies (the “Investment Companies Guide”). The Company is currently evaluating the provisions of FSP FIN 46(R)-7 and its potential impact on future financial statements.

     In June 2007, the AICPA issued Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investees for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining whether an entity is within the scope of the Investment Companies Guide. For those entities that are investment companies under SOP 07-1, it also addresses whether the specialized industry accounting principles of the Investment Companies Guide, referred to as investment company accounting, should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity. SOP 07-1 is effective for fiscal years beginning on or after December 15, 2007. The Company is currently evaluating the provisions of SOP 07-1 and its potential impact on future financial statements.

4.      INVESTMENTS

     The Company regularly reviews the carrying value of its investments to determine if a decline in value is considered to be other than temporary. This review involves consideration of several factors including: (i) the significance of the decline in value and the resulting unrealized loss position; (ii) the time period for which there has been a significant decline in value; (iii) an analysis of the issuer of the investment, including its liquidity, business prospects and overall financial position; and (iv) the Company’s intent and ability to hold the investment for a sufficient period of time for the value to recover. The identification of potentially impaired investments involves significant management judgment that includes the determination of their fair value and the assessment of whether any decline in value is other than temporary. If the decline in value is determined to be other than temporary, then the Company records a realized loss in the statements of operations and comprehensive income in the period that it is determined.

     As of June 30, 2007, the unrealized losses from the securities held in the Company’s investment portfolio were primarily the result of rising interest rates. Following the Company’s review of the securities in its investment portfolio, 73 and 375 securities were

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

4.      INVESTMENTS — (continued)

considered to be other-than-temporarily impaired for the three and six months ended June 30, 2007, respectively. Consequently, the Company recorded an other-than-temporary impairment charge, within “net realized investment losses” on the condensed consolidated statements of operations and comprehensive income, of $2,941 and $12,323 for the three and six months ended June 30, 2007, respectively. The Company recorded an other-than-temporary impairment charge, within “net realized investment losses” on the condensed consolidated statements of operations and comprehensive income, of $4,932 for the three and six months ended June 30, 2006.

     The following table summarizes the market value of those investments in an unrealized loss position for periods less than and greater than 12 months:

		June 30, 2007								December 31, 2006
						Gross								Gross
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
Less than 12 months
U.S. Government and Government agencies		$	972,209			$	(13,768	)		$	381,989			$	(2,961	)
Non U.S. Government and Government agencies			81,602				(1,259	)			51,330				(620	)
Corporate			857,208				(12,078	)			545,902				(3,115	)
Mortgage backed			1,402,874				(25,005	)			856,533				(6,243	)
Asset backed			105,284				(33	)			—				—
		$	3,419,177			$	(52,143	)		$	1,835,754			$	(12,939	)
More than 12 months
U.S. Government and Government agencies		$	271,603			$	(4,617	)		$	338,072			$	(6,645	)
Non U.S. Government and Government agencies			22,666				(650	)			515				(9	)
Corporate			295,641				(4,272	)			316,526				(4,527	)
Mortgage backed			373,059				(4,006	)			389,761				(4,121	)
Asset backed			27,858				(5	)			107,049				(456	)
		$	990,827			$	(13,550	)		$	1,151,923			$	(15,758	)
		$	4,410,004			$	(65,693	)		$	2,987,677			$	(28,697	)

     On June 30, 2007, the Company sold its shares in the Goldman Sachs Liquid Trading Opportunities Fund Offshore, Ltd. (the “LTO Fund”). At the time of sale, the LTO Fund had a cost of $45,493 and an estimated fair value of $45,977. The gain on the sale amounted to $484, which has been included in “net realized investment losses” in the condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2007. The estimated fair value of $45,977 has been included in “balances receivable on sale of investments” on the condensed consolidated balance sheets as of June 30, 2007. The Company received $41,379 from this sale on July 9, 2007 with the remainder being paid on July 23, 2007.

5.      DEBT AND FINANCING ARRANGEMENTS

     On July 21, 2006, the Company issued $500,000 aggregate principal amount of 7.50% Senior Notes due August 1, 2016 (“Senior Notes”), with interest on the Senior Notes payable on August 1 and February 1 of each year, commencing on February 1, 2007. The Senior Notes were offered by the underwriters at a price of 99.707% of their principal amount, providing an effective yield to investors of 7.542%. The Company used a portion of the proceeds from the Senior Notes to repay the outstanding amount of the existing credit agreement as well as to provide additional capital to its subsidiaries and for other general corporate purposes. As of June 30, 2007, the fair value of the Senior Notes as published by Bloomberg was 104.0% of their principal amount, or $520,000, providing an effective yield of 6.9%.

     The Senior Notes can be redeemed by the Company prior to maturity subject to payment of a “make-whole” premium. The Company has no current expectations of calling the Senior Notes prior to maturity. The Senior Notes contain certain covenants that include: (i) limitations on liens on stock of designated subsidiaries; (ii) limitation as to the disposition of stock of designated subsidiaries; and (iii) limitations on mergers, amalgamations, consolidations or sale of assets.

     Events of default include: (i) the default in the payment of any interest or principal on any outstanding notes, and the continuance of such default for a period of 30 days; (ii) the default in the performance, or breach, of any of the covenants in the indenture (other than a covenant added solely for the benefit of another series of debt securities) and continuance of such default or breach for a period

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

5.      DEBT AND FINANCING ARRANGEMENTS — (continued)

of 60 days after the Company has received written notice specifying such default or breach; and (iii) certain events of bankruptcy, insolvency or reorganization. Where an event of default occurs and is continuing, either the trustee of the Senior Notes or the holders of not less than 25% in principal amount of the Senior Notes may have the right to declare that all unpaid principal amounts and accrued interest then outstanding be due and payable immediately.

6.      INCOME TAXES

     Certain subsidiaries of Holdings file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom (“U.K.”) and Ireland. Holdings’ Bermuda subsidiaries currently do not file tax returns in Bermuda. The tax years open to examination by the U.S. Internal Revenue Service for the U.S. subsidiaries are the fiscal years from 2003 to the present. The tax years open to examination by the Inland Revenue for the U.K. branches are fiscal years from 2005 to the present. The Company began operations in Ireland with the incorporation of Allied World Assurance Company (Europe) Limited on September 25, 2002, and remains subject to examinations by the Irish Revenue Commissioners for all years since the date of incorporation. To the best of the Company’s knowledge, there are no examinations pending by the U.S. Internal Revenue Service, the Inland Revenue or the Irish Revenue Commissioners.

     On January 1, 2007, the Company adopted the provisions of FIN 48. As a result of the implementation of FIN 48, the Company did not record any unrecognized tax benefits or expenses. Management has deemed all material tax provisions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company will recognize interest accrued related to unrecognized tax benefits in “interest expense” and penalties in “general and administrative expenses” in the condensed consolidated statements of operations and comprehensive income. The Company has not recorded any interest or penalties during the three and six month periods ended June 30, 2007 and 2006 and has not accrued any payment of interest and penalties as of June 30, 2007 and December 31, 2006.

     The Company does not expect any material unrecognized tax benefits within 12 months of January 1, 2007.

7.      SHAREHOLDERS’ EQUITY

a)      Authorized shares

     The authorized share capital of the Company as of June 30, 2007 and December 31, 2006 was $10,000.

     The issued share capital consists of the following:

		June 30,				December 31,
		2007				2006
Common shares issued and fully paid, par value $0.03 per share			60,405,307				60,287,696
Share capital at end of period		$	1,812			$	1,809

     As of June 30, 2007, there were outstanding 32,295,898 voting common shares and 28,109,409 non-voting common shares.

b)      Dividends

     In March 2007, the Company declared a quarterly dividend of $0.15 per common share that was paid on April 5, 2007 to shareholders of record on March 20, 2007. The total dividend paid amounted to $9,052.

     In May 2007, the Company declared a quarterly dividend of $0.15 per common share that was paid on June 14, 2007 to shareholders of record on May 29, 2007. The total dividend paid amounted to $9,060.

8.      EMPLOYEE BENEFIT PLANS

a)      Employee option plan

     In 2001, the Company implemented the Allied World Assurance Company Holdings, Ltd 2001 Employee Warrant Plan, which was subsequently amended and restated and renamed the Allied World Assurance Company Holdings, Ltd Amended and Restated 2001 Employee Stock Option Plan (the “Plan”). The Plan was converted into a stock option plan as part of the IPO and the warrants

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

8.      EMPLOYEE BENEFIT PLANS — (continued)

a)      Employee option plan — (continued)

that were previously granted thereunder were converted to options and remain outstanding with the same exercise price and vesting period. Under the Plan, up to 2,000,000 common shares of Holdings may be issued. These options are exercisable in certain limited conditions, expire after 10 years, and generally vest pro-rata over four years from the date of grant. During the period from November 13, 2001 to December 31, 2002, the exercise price of the options issued was $24.27 per share, after giving effect to the extraordinary dividend mentioned below. The exercise prices of options issued subsequent to December 31, 2002 and prior to the IPO were based on the per share book value of the Company. In accordance with the Plan, the exercise prices of the options issued prior to the declaration of the extraordinary dividend in March 2005 were reduced by the per share value of the dividend declared. The exercise price of options issued subsequent to the IPO are determined by the compensation committee of the Board of Directors but shall not be less than 100% of the fair market value of the common shares of Holdings on the date the option award is granted.

		Six Months Ended						Year Ended
		June 30, 2007						December 31, 2006
Outstanding at beginning of period				1,195,990						1,036,322
Granted				252,150						179,328
Exercised				(160,280	)					(10,118	)
Forfeited				(23,296	)					(9,542	)
Outstanding at end of period				1,264,564						1,195,990
Weighted average exercise price per option			$	30.95					$	27.59

     The following table summarizes the exercise prices for outstanding employee stock options as of June 30, 2007.

						Weighted Average								Intrinsic Value
		Options				Remaining				Options				on Options
Exercise Price Range		Outstanding				Contractual Life				Exercisable				Exercisable
$23.61 - $26.94			424,083				4.97	years			424,083			$	11,444
$28.08 - $31.47			402,248				7.64				189,841				4,112
$31.77 - $35.01			185,583				7.68				86,002				1,576
$41.00 - $43.50			234,150				9.52				—				—
$45.93 - $47.07			18,500				9.87				—				—
			1,264,564								699,926			$	17,132

     Prior to the second quarter of 2006, the calculation of the compensation expense associated with the options had been made by reference to the book value per share of the Company as of the end of each period, and was deemed to be the difference between such book value per share and the exercise price of the individual options. The book value of the Company approximated its fair value. The use of a fair value other than the book value was first implemented for the period ended June 30, 2006. The fair value of each option outstanding at June 30, 2006 was determined using the Black-Scholes option-pricing model. Although the IPO was subsequent to June 30, 2006, the best estimate of the fair value of the common shares at that time was the IPO price of $34.00 per share. This amount was used in the model for June 30, 2006, and the Plan was accounted for as a “liability plan” in accordance with FAS No. 123(R) “Share Based Payment” (“FAS 123(R)”). The compensation expense recorded for the three and six months ended June 30, 2006 includes a one-time expense of $2,582, which is the difference between the fair value of the options using the Black-Scholes option-pricing model and the amount previously expensed.

     The combined amendment to the Plan and the IPO constituted a “modification” to the Plan in accordance with FAS 123(R). The modification to the Plan qualifies it as an “equity plan” in accordance with FAS 123(R) and as such, associated liabilities at the time of the modification have been, and future compensation expense will be, included in “additional paid-in capital” on the condensed consolidated balance sheets.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

8.      EMPLOYEE BENEFIT PLANS — (continued)

a)      Employee option plan — (continued)

     Assumptions used in the option-pricing model for the options revalued at the time of the IPO, and for those issued subsequent to the IPO are as follows:

										Options granted
		Options revalued				Options granted after				during the six
		as part of the IPO				the IPO and prior to				months ended
		July 11, 2006				December 31, 2006				June 30, 2007
Expected term of option		6.25 years				6.25 years				6.25 years
Weighted average risk-free interest rate			5.11	%			4.64	%			4.60	%
Expected volatility			23.44	%			23.68	%			22.95	%
Dividend yield			1.50	%			1.50	%			1.50	%
Weighted average fair value on grant date		$	11.08			$	11.34			$	12.08

     There is limited historical data available for the Company to base the expected term of the options. As these options are considered to have standard characteristics, the Company has used the simplified method to determine the expected life as set forth in the SEC’s Staff Accounting Bulletin 107. Likewise, as the Company became a public company in July 2006, there is limited historical data available to it on which to base the volatility of its common shares. As such, the Company used the average of five volatility statistics from comparable companies in order to derive the volatility values above. The Company has assumed a nil forfeiture rate in determining the compensation expense. This assumption implies that all outstanding options are expected to fully vest over the vesting periods.

     Compensation expense of $627 and $2,582 relating to the options has been recognized in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the three months ended June 30, 2007 and 2006, respectively. Compensation expense of $1,316 and $2,582 relating to the options has been recognized in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2007 and 2006, respectively. As of June 30, 2007 and December 31, 2006, the Company has recorded in “additional paid-in capital” on the condensed consolidated balance sheets amounts of $10,134 and $9,349, respectively, in connection with all options granted.

     As of June 30, 2007, there was $5,818 of total unrecognized compensation expense related to unvested options granted under the Plan. This expense is expected to be recognized over a weighted-average period of 1.6 years. The total intrinsic value of options exercised during the six months ended June 30, 2007 was $3,048.

b)      Stock incentive plan

     On February 19, 2004, the Company implemented the Allied World Assurance Holdings, Ltd 2004 Stock Incentive Plan, which was subsequently amended and restated and renamed the Allied World Assurance Company Holdings, Ltd Amended and Restated 2004 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for grants of restricted stock, RSUs, dividend equivalent rights and other equity-based awards. A total of 2,000,000 common shares may be issued under the Stock Incentive Plan. To date only RSUs have been granted. These RSUs generally vest in the fourth or fifth year from the original grant date, or pro-rata over four years from the date of the grant.

		Six Months Ended				Year Ended
		June 30, 2007				December 31, 2006
Outstanding RSUs at beginning of period			704,372				127,163
RSUs granted			186,558				586,708
RSUs fully vested			(34,356	)			(1,666	)
RSUs forfeited			(27,917	)			(7,833	)
Outstanding RSUs at end of period			828,657				704,372

     For those RSUs outstanding at the time of the amendment, the modification to the Stock Incentive Plan required a revaluation of the RSUs based on the fair market value of the common shares at the time of the IPO. The vesting period remained the same. Subsequent to the IPO, compensation expense for the RSUs is based on the fair market value per common share of the Company as of the respective grant dates and is recognized over the vesting period. The modification of the Stock Incentive Plan changed the

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

8.      EMPLOYEE BENEFIT PLANS — (continued)

b)      Stock incentive plan — (continued)

accounting from a liability plan to an equity plan in accordance with FAS 123(R). As such, all accumulated amounts due under the Stock Incentive Plan were transferred to “additional paid-in capital” on the condensed consolidated balance sheet.

     Compensation expense of $1,859 and $745 relating to the issuance of the RSUs has been recognized in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the three months ended June 30, 2007 and 2006, respectively. Likewise, compensation expense of $3,846 and $1,152 relating to the issuance of RSUs has been recognized in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2007 and 2006, respectively.

     As of June 30, 2007 and December 31, 2006, the Company has recorded $8,775 and $5,031, respectively, in “additional paid-in capital” on the condensed consolidated balance sheets in connection with the RSUs awarded. As of June 30, 2007, there was $22,486 of total unrecognized compensation expense related to unvested RSUs awarded. This expense is expected to be recognized over a weighted-average period of 3.2 years.

c)      Long-term incentive plan

     On May 22, 2006, the Company implemented the Long-Term Incentive Plan (“LTIP”), which provides for performance based equity awards to key employees in order to promote the long-term growth and profitability of the Company. Each award represents the right to receive a number of common shares in the future, based upon the achievement of established performance criteria during the applicable three-year performance period. A total of 2,000,000 common shares may be issued under the LTIP. To date, 590,834 of these performance based equity awards have been granted. The awards granted in 2007 and 2006 will vest after the fiscal year ending December 31, 2009 and 2008, respectively, subject to the achievement of the performance conditions and terms of the LTIP.

		Six Months Ended				Year Ended
		June 30, 2007				December 31, 2006
Outstanding LTIP awards at beginning of period			228,334				—
LTIP awards granted			392,500				228,334
LTIP awards subjected to accelerated vesting			(30,000	)			—
LTIP awards forfeited			—				—
Outstanding LTIP awards at end of period			590,834				228,334

     Compensation expense of $2,960 and $1,941 relating to the LTIP has been recognized in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the three months ended June 30, 2007 and 2006, respectively. Compensation expense of $6,601 and $1,941 has been included in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2007 and 2006, respectively. The compensation expense for the LTIP is based on the fair market value of the Company’s common shares at the time of grant. For 2006, the Company’s IPO price per share of $34.00 was used. The LTIP is deemed to be an equity plan and as such, $10,482 and $3,882 has been included in “additional paid-in capital” on the condensed consolidated balance sheets as of June 30, 2007 and December 31, 2006, respectively. As of June 30, 2007, there was $26,063 of total unrecognized compensation expense related to unvested LTIP awards. This expense is expected to be recognized over a weighted-average period of 2.2 years.

     In calculating the compensation expense, and in the determination of share equivalents for the purpose of calculating diluted earnings per share, it is estimated that the maximum performance goals as set by the LTIP are likely to be achieved over the performance period. The performance period for the LTIP awards issued in 2007 and 2006 is defined as the three consecutive fiscal-year periods beginning January 1, 2007 and 2006, respectively. The expense is recognized over the performance period.

     The total compensation expense of $5,447 and $5,268 relating to the stock options, RSUs and LTIP has been recognized in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the three months ended June 30, 2007 and 2006, respectively. The total compensation expense of $11,763 and $5,675 relating to the stock options, RSUs and LTIP has been recognized in “general and administrative expenses” in the Company’s condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2007 and 2006, respectively.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

9.      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,
		2007				2006				2007				2006
Basic earnings per share
Net income		$	123,287			$	102,370			$	237,208			$	200,491
Weighted average common shares outstanding			60,397,591				50,162,842				60,028,523				50,162,842
Basic earnings per share		$	2.04			$	2.04			$	3.95			$	4.00

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Diluted earnings per share
Net income		$	123,287			$	102,370			$	237,208			$	200,491
Weighted average common shares outstanding			60,397,591				50,162,842				60,028,523				50,162,842
Share equivalents:
Warrants and options			1,833,078				229,959				1,651,842				225,736
RSUs			340,305				213,645				351,913				211,175
LTIP awards			303,261				76,111				244,732				38,056
Weighted average common shares and common share equivalents outstanding — diluted			62,874,235				50,682,557				62,277,010				50,637,809
Diluted earnings per share		$	1.96			$	2.02			$	3.81			$	3.96

     For the three-month period ended June 30, 2007, a weighted average of 6,500 employee stock options were considered antidilutive and were therefore excluded from the calculation of the diluted earnings per share. For the six-month period ended June 30, 2007, a weighted average of 3,250 employee stock options were considered antidilutive and were therefore excluded from the calculation of the diluted earnings per share.

     For the three and six-month periods ended June 30, 2006, a weighted average of 5,500,000 founder warrants and 17,334 employee warrants that were anti-dilutive have been excluded from the calculation of the diluted earnings per share.

10.      LEGAL PROCEEDINGS

     On or about November 8, 2005, the Company received a Civil Investigative Demand (“CID”) from the Antitrust and Civil Medicaid Fraud Division of the Office of the Attorney General of Texas relating to an investigation into (1) the possibility of restraint of trade in one or more markets within the State of Texas arising out of our business relationships with American International Group, Inc. (“AIG”) and The Chubb Corporation (“Chubb”), and (2) certain insurance and insurance brokerage practices, including those relating to contingent commissions and false quotes, which are also the subject of industry-wide investigations and class action litigation. The CID also sought information regarding (i) contingent commission, placement service or other agreements that the Company may have had with brokers or producers, and (ii) the possibility of the provision of any non-competitive bids by the Company in connection with the placement of insurance. In April 2007, the Company reached a settlement of all matters under investigation by the Antitrust and Civil Medicaid Fraud Division of the Office of the Attorney General of Texas. This settlement amounted to $2,100 which had been reserved for and included in “general and administrative expenses” in the consolidated statement of operations and comprehensive income for the year ended December 31, 2006. This amount was paid to the State of Texas on April 16, 2007.

     On April 4, 2006, a complaint was filed in the U.S. District Court for the Northern District of Georgia (Atlanta Division) by a group of several corporations and certain of their related entities in an action entitled New Cingular Wireless Headquarters, LLC et al, as plaintiffs, against certain defendants, including Marsh & McLennan Companies, Inc., Marsh Inc. and Aon Corporation, in their capacities as insurance brokers, and 78 insurers, including Holdings’ insurance subsidiary in Bermuda, Allied World Assurance Company, Ltd.

     The action generally relates to broker defendants’ placement of insurance contracts for plaintiffs with the 78 insurer defendants. Plaintiffs maintain that the defendants used a variety of illegal schemes and practices designed to, among other things, allocate customers, rig bids for insurance products and raise the prices of insurance products paid by the plaintiffs. In addition, plaintiffs allege

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

10.      LEGAL PROCEEDINGS — (continued)

that the broker defendants steered policyholders’ business to preferred insurer defendants. Plaintiffs claim that as a result of these practices, policyholders either paid more for insurance products or received less beneficial terms than the competitive market would have charged. The eight counts in the complaint allege, among other things, (i) unreasonable restraints of trade and conspiracy in violation of the Sherman Act, (ii) violations of the Racketeer Influenced and Corrupt Organizations Act, or RICO, (iii) that broker defendants breached their fiduciary duties to plaintiffs, (iv) that insurer defendants participated in and induced this alleged breach of fiduciary duty, (v) unjust enrichment, (vi) common law fraud by broker defendants and (vii) statutory and consumer fraud under the laws of certain U.S. states. Plaintiffs seek equitable and legal remedies, including injunctive relief, unquantified consequential and punitive damages, and treble damages under the Sherman Act and RICO. On October 16, 2006, the Judicial Panel on Multidistrict Litigation ordered that the litigation be transferred to the U.S. District Court for the District of New Jersey for inclusion in the coordinated or consolidated pretrial proceedings occurring in that court. Neither Allied World Assurance Company, Ltd nor any of the other defendants have responded to the complaint. Written discovery has begun but has not been completed. As a result of the court granting motions to dismiss in the related putative class action proceeding, prosecution of this case is currently stayed pending the court’s analysis of any amended pleading filed by the class action plaintiffs. While this matter is in an early stage, and it is not possible to predict its outcome, the Company does not currently believe that the outcome will have a material adverse effect on the Company’s operations or financial position.

11.      SEGMENT INFORMATION

     The determination of reportable segments is based on how senior management monitors the Company’s underwriting operations. The Company measures the results of its underwriting operations under three major business categories, namely property insurance, casualty insurance and reinsurance. All product lines fall within these classifications.

     The property segment includes the insurance of physical property and energy-related risks. These risks generally relate to tangible assets and are considered “short-tail” in that the time from a claim being advised to the date when the claim is settled is relatively short. The casualty segment includes the insurance of general liability risks, professional liability risks and healthcare risks. Such risks are “long-tail” in nature since the emergence and settlement of a claim can take place many years after the policy period has expired. The reinsurance segment includes any reinsurance of other companies in the insurance and reinsurance industries. The Company writes reinsurance on both a treaty and facultative basis.

     Responsibility and accountability for the results of underwriting operations are assigned by major line of business on a worldwide basis. Because the Company does not manage its assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments.

     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, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

11.      SEGMENT INFORMATION — (continued)

     The following table provides a summary of the segment results for the three and six months ended June 30, 2007 and 2006.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)

11.      SEGMENT INFORMATION — (continued)

Six Months Ended June 30, 2006		Property				Casualty				Reinsurance				Total
Gross premiums written		$	286,680			$	330,498			$	399,258			$	1,016,436
Net premiums written			111,953				286,919				398,969				797,841
Net premiums earned			95,057				265,303				254,100				614,460
Net losses and loss expenses			(58,048	)			(180,014	)			(147,742	)			(385,804	)
Acquisition costs			2,258				(16,274	)			(55,119	)			(69,135	)
General and administrative expenses			(11,960	)			(22,980	)			(11,639	)			(46,579	)
Underwriting income			27,307				46,035				39,600				112,942
Net investment income															116,944
Net realized investment losses															(15,408	)
Interest expense															(13,527	)
Foreign exchange loss															(70	)
Income before income taxes														$	200,881
Loss and loss expense ratio			61.1	%			67.9	%			58.1	%			62.8	%
Acquisition cost ratio			(2.4	)%			6.1	%			21.7	%			11.2	%
General and administrative expense ratio			12.6	%			8.7	%			4.6	%			7.6	%
Combined ratio			71.3	%			82.7	%			84.4	%			81.6	%

     The following table shows an analysis of the Company’s net premiums written by geographic location of the Company’s subsidiaries for the three and six months ended June 30, 2007 and 2006. All inter-company premiums have been eliminated.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Bermuda		$	302,480			$	267,735			$	593,082			$	624,125
United States			34,203				49,589				57,113				71,640
Europe			49,904				53,014				94,236				102,076
Total net premium written		$	386,587			$	370,338			$	744,431			$	797,841

12.      SUBSEQUENT EVENT

     On August 7, 2007, the Company declared a quarterly dividend of $0.15 per common share, payable on September 13, 2007 to shareholders of record on August 28, 2007.

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 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,” “our company,” “the company” or other similar terms mean the consolidated operations of Allied World Assurance Company Holdings, Ltd and its subsidiaries, unless the context requires otherwise. References in this Form 10-Q to the term “Holdings” means Allied World Assurance Company Holdings, Ltd only.

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 2006 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 19, 2007. 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 lines of business internationally through our insurance subsidiaries or branches based in Bermuda, the United States, Ireland and the United Kingdom. We manage our business through three operating segments: property, casualty and reinsurance. As of June 30, 2007, we had $8.4 billion of total assets, $2.4 billion of shareholders’ equity and $2.9 billion of total capital, which includes shareholders’ equity and senior notes.

     During the three months ended June 30, 2007, we continued to see rate declines and increased competition across all of our operating segments. Increased competition principally resulted from increased capacity in the insurance and reinsurance marketplaces. We believe the trend of increased capacity and decreasing rates will continue during the remainder of 2007. Given this trend, we continue to be selective in the policies and reinsurance contracts we underwrite. Our consolidated gross premiums written decreased $47.4 million, or 4.7%, for the six months ended June 30, 2007 compared to the six months ended June 30, 2006, while our consolidated gross premiums written increased $12.2 million, or 2.4%, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. The increase in gross premiums written during the three months ended June 30, 2007 was primarily due to increased gross premiums written for our reinsurance segment, partially offset by decreased gross premiums written in our property and casualty segments. Our net income for the three months ended June 30, 2007 increased $20.9 million, or 20.4%, to $123.3 million compared to $102.4 million for the three months ended June 30, 2006. Net income for the three months ended June 30, 2007 included net investment income of $73.9 million compared to $54.9 million for the three months ended June 30, 2006. Our net income for the six months ended June 30, 2007 increased $36.7 million, or 18.3%, to $237.2 million compared to $200.5 million for the six months ended June 30, 2006. Net income for the six months ended June 30, 2007 included net investment income of $146.6 million compared to $116.9 million for the six months ended June 30, 2006.

     Our direct insurance business (consisting of our property and casualty segments) made up 59.0% of our business mix on a gross premiums written basis for the six months ended June 30, 2007, compared to 60.7% for the six months ended June 30, 2006. The decrease in our business mix for our direct insurance business is primarily due to lower gross premiums written in our property and casualty segments for the reasons discussed herein. Our property, casualty and reinsurance segments comprised 26.7%, 32.3% and 41.0%, respectively, of gross premiums written for the six months ended June 30, 2007 compared to 28.2%, 32.5% and 39.3%, respectively, for the six months ended June 30, 2006.

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 gains or losses. Our investment portfolio is currently comprised primarily of fixed maturity investments, the income from which is a function of the amount of invested assets and relevant interest rates.

Expenses

     Our expenses consist largely of net losses and loss expenses, acquisition costs and general and administrative expenses. Net losses and loss expenses are comprised of paid losses and reserves for losses less recoveries from reinsurers. Losses and loss expenses reserves are estimated by management and reflect our best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. In accordance with accounting principles generally accepted in the United States of America, we reserve for catastrophic losses as soon as the loss event is known to have occurred. Acquisition costs consist principally of commissions, brokerage fees and insurance taxes that are typically a percentage of the premiums on insurance policies or reinsurance contracts written, net of any commissions received by us on risks ceded to reinsurers. General and administrative expenses include personnel expenses including stock-based compensation charges, rent expense, professional fees, information technology costs and other general operating expenses. We are experiencing increases in general and administrative expenses resulting from additional staff, increased stock-based compensation expense, increased rent expense for our new Bermuda premises and additional amortization expense for building-related and infrastructure expenditures. We believe this trend will continue during the remainder of 2007.

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” (acquisition cost ratio and general and administrative expense ratio combined) 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.

Critical Accounting Policies

     It is important to understand our accounting policies in order to understand our financial position and results of operations. Our 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 and other-than-temporary impairment of investments. For a detailed discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC. There were no material changes in the application of our critical accounting estimates subsequent to that report, except as discussed below related to our reserve for losses and loss expenses.

Reserve for Losses and Loss Expenses

     The reserve for losses and loss expenses is comprised of two main elements: outstanding loss reserves, also known as “case reserves” and reserves for losses incurred but not reported or “IBNR”. Outstanding loss reserves relate to known claims and represent management’s best estimate of the likely loss settlement. There is a significant amount of estimation involved in determining the likely loss payment. IBNR reserves require substantial judgment because they relate to unreported events that, based on industry information, management’s experience and actuarial evaluation, can reasonably be expected to have occurred and are reasonably likely to result in a loss to our company. IBNR also includes a provision for the development of losses that are known to have occurred, but for which a specific amount has not yet been reported. IBNR may also include a provision for estimated development of known case reserves.

     The reserve for IBNR is estimated by management for each line of business based on various factors, including underwriters’ expectations about loss experience, actuarial analysis, comparisons with the results of industry benchmarks and loss experience to date. Our actuaries employ generally accepted actuarial methodologies to determine estimated ultimate loss reserves.

     Reserves for losses and loss expenses as of June 30, 2007 and December 31, 2006 were comprised of the following:

		As of				As of
		June 30,				Dec. 31,
		2007				2006
		($ in millions)
Case reserves		$	903.9			$	935.2
IBNR			2,839.8				2,701.8
Reserve for losses and loss expenses			3,743.7				3,637.0
Reinsurance recoverable			(679.2	)			(689.1	)
Net reserve for losses and loss expenses		$	3,064.5			$	2,947.9

     Estimating reserves for our property segment relies primarily on traditional loss reserving methodologies, utilizing selected paid and reported loss development factors. In property lines of business, claims are generally reported and paid within a relatively short period of time (“shorter tail lines”) during and following the policy coverage period. This generally enables us to determine with greater certainty our estimate of ultimate losses and loss expenses.

     Our casualty segment includes general liability risks, healthcare and professional liability risks. Our average attachment points for these lines are high, making reserving for these lines of business more difficult than shorter tail lines. Claims may be reported or settled several years after the coverage period has terminated (“longer tail lines”). We establish a case reserve when sufficient information is gathered to make a reasonable estimate of the liability, which often requires a significant amount of information and time. Due to the lengthy reporting pattern of these casualty lines, reliance is placed on industry benchmarks of expected loss ratios and reporting patterns in addition to our own experience.

     Our reinsurance segment is comprised of shorter tail lines similar to our property segment and longer tail lines similar to our casualty segment. Our reinsurance treaties are reviewed individually, based upon individual characteristics and loss experience emergence.

     Loss reserves on assumed reinsurance have unique features that make them more difficult to estimate. Reinsurers have to rely upon the cedents and reinsurance intermediaries to report losses in a timely fashion. Reinsurers must rely upon cedents to price the underlying business appropriately. Reinsurers have less predictable loss emergence patterns than direct insurers, particularly when writing excess of loss treaties. We establish loss reserves upon receipt of advice from a cedent that a reserve is merited. Our claims staff may establish additional loss reserves where, in their judgment, the amount reported by a cedent is potentially inadequate.

     For excess of loss treaties, cedents generally are required to report in timely fashion losses that either exceed 50% of the retention, have a reasonable probability of exceeding the retention or meet serious injury reporting criteria. All reinsurance claims that are reserved are reviewed at least every six months. For proportional treaties, cedents are required to give a periodic statement of account, generally monthly or quarterly. These periodic statements typically include information regarding written premiums, earned premiums, unearned premiums, ceding commissions, brokerage amounts, applicable taxes, paid losses and outstanding losses. They can be submitted 60 to 90 days after the close of the reporting period. Some proportional treaties have specific language regarding earlier notice of serious claims.

     Reinsurance generally has a greater time lag than direct insurance in the reporting of claims. The time lag is caused by the claim first having to be reported to the cedent, then the intermediary (such as a broker) and finally the reinsurer. This lag can be up to six months or longer in certain cases. There is also a time lag because the insurer may not be required to report claims to the reinsurer until certain reporting criteria are met. In some instances this could be several years, while a claim is being litigated. We use reporting factors from the Reinsurance Association of America to adjust for time lags. We also use historical treaty-specific reporting factors when applicable. Loss and premium information are entered into our reinsurance system by our claims department and our accounting department.

     We record the individual case reserves sent to us by the cedents through reinsurance intermediaries. Individual claims are

reviewed by our reinsurance claims department and adjusted as deemed appropriate. The loss data received from reinsurance intermediaries is checked for reasonableness and for any known events. The loss listings are reviewed during routine claim audits.

     The expected loss ratios that we assign to each treaty are based upon analysis and modeling performed by a team of actuaries. The historical data reviewed by the team of pricing actuaries is considered in setting the reserves for all treaty years with each cedent. The historical data in the submissions is matched against our carried reserves for our historical treaty years.

     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 actuarial and statistical projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined as experience develops and as claims are reported and resolved. In addition, the relatively long periods between when a loss occurs and when it may be reported to our claims department for our casualty insurance and reinsurance lines of business also increase the uncertainties of our reserve estimates in such lines.

     We utilize a variety of standard actuarial methods in our analysis. The selections from these various methods are based on the loss development characteristics of the specific line of business. For lines of business with extremely long reporting periods such as casualty reinsurance, we may rely more on an expected loss ratio method (as described below) until losses begin to develop. The actuarial methods we utilize include:

     Paid Loss Development Method. We estimate ultimate losses by calculating past paid loss development factors and applying them to exposure periods with further expected paid loss development. The paid loss development method assumes that losses are paid at a consistent rate. It provides an objective test of reported loss projections because paid losses contain no reserve estimates. In some circumstances, paid losses for recent periods may be too varied for accurate predictions. For many coverages, claim payments are made very slowly and it may take years for claims to be fully reported and settled. These payments may be unreliable for determining future loss projections because of shifts in settlement patterns or because of large settlements in the early stages of development. Choosing an appropriate “tail factor” to determine the amount of payments from the latest development period to the ultimate development period may also require considerable judgment, especially for coverages that have long payment patterns. As we have limited payment history, we have had to supplement our loss development patterns with other methods.

     Reported Loss Development Method. We estimate ultimate losses by calculating past reported loss development factors and applying them to exposure periods with further expected reported loss development. Since reported losses include payments and case reserves, changes in both of these amounts are incorporated in this method. This approach provides a larger volume of data to estimate ultimate losses than the paid loss development method. Thus, reported loss patterns may be less varied than paid loss patterns, especially for coverages that have historically been paid out over a long period of time but for which claims are reported relatively early and case loss reserve estimates established. This method assumes that reserves have been established using consistent practices over the historical period that is reviewed. Changes in claims handling procedures, large claims or significant numbers of claims of an unusual nature may cause results to be too varied for accurate forecasting. Also, choosing an appropriate “tail factor” to determine the change in reported loss from that latest development period to the ultimate development period may require considerable judgment. As we have limited reported history, we have had to supplement our loss development patterns with appropriate benchmarks.

     Expected Loss Ratio Method. To estimate ultimate losses under the expected loss ratio method, we multiply earned premiums by an expected loss ratio. The expected loss ratio is selected utilizing industry data, historical company data and professional judgment. This method is particularly useful for new insurance companies or new lines of business where there are no historical losses or where past loss experience is not credible.

     Bornhuetter-Ferguson Paid Loss Method. The Bornhuetter-Ferguson paid loss method is a combination of the paid loss development method and the expected loss ratio method. The amount of losses yet to be paid is based upon the expected loss ratios. These expected loss ratios are modified to the extent paid losses to date differ from what would have been expected to have been paid based upon the selected paid loss development pattern. This method avoids some of the distortions that could result from a large development factor being applied to a small base of paid losses to calculate ultimate losses. This method will react slowly if actual loss ratios develop differently because of major changes in rate levels, retentions or deductibles, the forms and conditions of reinsurance coverage, the types of risks covered or a variety of other changes.

     Bornhuetter-Ferguson Reported Loss Method. The Bornhuetter-Ferguson reported loss method is similar to the Bornhuetter-Ferguson paid loss method with the exception that it uses reported losses and reported loss development factors.

     During the three months ended June 30, 2007, we adjusted our reliance on actuarial methods utilized for certain lines of business and loss years within our casualty segment from using a blend of the Bornhuetter-Ferguson reported loss method and the expected loss ratio method to using only the Bornhuetter-Ferguson reported loss method. Placing greater reliance on more responsive actuarial methods for certain lines of business and loss years within our casualty segment is a natural progression as we mature as a company and gain sufficient historical experience of our own that allows us to further refine our estimate of the reserve for losses and loss expenses. We believe utilizing only the Bornhuetter-Ferguson reported loss method for older loss years will more accurately reflect the reported loss activity we have had thus far in our ultimate loss ratio selections, and will better reflect how the ultimate losses will develop over time. We will continue to utilize the expected loss ratio method for the most recent loss years until we have sufficient historical experience to utilize other acceptable actuarial methodologies.

     We expect that the trend of placing greater reliance on more responsive actuarial methods, for example from the expected loss ratio method to the Bornhuetter-Ferguson reported loss method, to continue as both (1) our loss years mature and become more statistically reliable and (2) as we build databases of our internal loss development patterns. In this instance, the expected loss ratio remains a key assumption as the Bornhuetter-Ferguson methods rely upon an expected loss ratio selection and a loss development pattern selection.

     The maturing of our casualty segment loss reserves has caused us to reduce what we believe is a reasonably likely variance in the expected loss ratios for older loss years. As of June 30, 2007, we believe a reasonably likely variance in our expected loss ratio for the 2002 and 2003 loss years is six and eight percentage points, respectively. This is a reduction from ten percentage points as of December 31, 2006. We believe the reasonably likely variance in the expected loss ratio for all other loss years continues to be ten percentage points. As a result, we have lowered the reasonably likely variance of our aggregate expected loss ratio for our casualty insurance and casualty reinsurance lines of business to nine percentage points as of June 30, 2007 from ten percentage points as of December 31, 2006. If our final casualty insurance and reinsurance loss ratios vary by nine percentage points from the expected loss ratios in aggregate, our required net reserves after reinsurance recoverable would increase or decrease by approximately $374 million. The $374 million is greater than the reasonably likely variance as of December 31, 2006 due to a larger net earned premium base to which the change in the expected loss ratio was applied. Because we expect a small volume of large claims, it is more difficult to estimate the ultimate loss ratios, so we believe the variance of our loss ratio selection could be relatively wide. This would result in either an increase or decrease to net income and shareholders’ equity of approximately $374 million. As of June 30, 2007, this represented approximately 15.5% of shareholders’ equity. In terms of liquidity, our contractual obligations for reserve for losses and loss expenses would also decrease or increase by $374 million after reinsurance recoverable. If our obligations were to increase by $374 million, we believe we currently have sufficient cash and investments to meet those obligations. We believe showing the impact of an increase or decrease in the expected loss ratios is useful information despite the fact we have realized only net positive prior year loss development each calendar year. We continue to use industry benchmarks to determine our expected loss ratios, and these industry benchmarks have implicit in them both positive and negative loss development, which we incorporate into our selection of the expected loss ratios.

     While management believes that our case reserves and IBNR are sufficient to cover losses assumed by us there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e., unfavorable reserve development), and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses will be reduced (i.e., favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverables in the periods in which they are determined.

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,
		2007				2006				2007				2006
		($ in millions)
Gross premiums written		$	530.5			$	518.3			$	969.0			$	1,016.4
Net premiums written			386.6				370.3				744.4				797.8
Net premiums earned			303.1				305.5				589.7				614.5
Net investment income			73.9				54.9				146.6				116.9
Net realized investment losses			(1.5	)			(10.2	)			(8.0	)			(15.4	)
		$	375.5			$	350.2			$	728.3			$	716.0
Net losses and loss expenses		$	176.2			$	179.8			$	342.2			$	385.8
Acquisition costs			31.9				32.7				61.1				69.1
General and administrative expenses			34.4				26.2				67.6				46.6
Interest expense			9.5				7.1				18.9				13.5
Foreign exchange loss (gain)			0.5				(0.5	)			0.5				0.1
		$	252.5			$	245.3			$	490.3			$	515.1
Income before income taxes		$	123.0			$	104.9			$	238.0			$	200.9
Income tax (recovery) expense			(0.3	)			2.5				0.8				0.4
Net income		$	123.3			$	102.4			$	237.2			$	200.5
Ratios
Loss and loss expense ratio			58.1	%			58.9	%			58.0	%			62.8	%
Acquisition cost ratio			10.5				10.7				10.4				11.2
General and administrative expense ratio			11.4				8.6				11.5				7.6
Expense ratio			21.9				19.3				21.9				18.8
Combined ratio			80.0				78.2				79.9				81.6

Comparison of Three Months Ended June 30, 2007 and 2006

Premiums

     Gross premiums written increased by $12.2 million, or 2.4%, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. The increase was primarily the result of increased gross premiums written for our reinsurance segment, partially offset by decreased gross premiums written for our property and casualty segments. Our reinsurance segment increased gross premiums written by $34.5 million, or 22.8%, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 primarily as a result of the renewal of one large treaty, which previously renewed in the third quarter of 2006. Our property and casualty segments had a reduction in gross premiums written of $10.4 million, or 6.2%, and $11.9 million, or 6.0%, respectively, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. The reduced gross premiums written for our property and casualty segments was the result of the non-renewal of business that did not meet our underwriting requirements (which included pricing and/or policy terms and conditions), increased competition and decreasing rates for new and renewal business.

     The table below illustrates our gross premiums written by geographic location for the three months ended June 30, 2007 and 2006.

		Three Months
		Ended June 30,
										Dollar				Percentage
		2007				2006				Change				Change
		($ in millions)
Bermuda		$	392.4			$	379.7			$	12.7				3.3	%
Europe			81.6				79.1				2.5				3.2
United States			56.5				59.5				(3.0	)			(5.0	)
		$	530.5			$	518.3			$	12.2				2.4	%

     The increase in gross premiums written by our Bermuda office was primarily due to the renewal of one large reinsurance treaty discussed above, partially offset by lower property and casualty gross premiums written. The decrease in gross premiums written by

our U.S. offices was the result of lower gross premiums written by the general casualty and healthcare lines of business due to rate decreases from increased competition for new and renewal business partially offset by increased premiums for general property business.

     Net premiums written increased by $16.3 million, or 4.4%, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006, a higher percentage increase than that of gross premiums written. The difference between gross and net premiums written is the cost to us of purchasing reinsurance, both on a proportional and a non-proportional basis, including the cost of property catastrophe reinsurance coverage. We ceded 27.1% of gross premiums written for the three months ended June 30, 2007 compared to 28.6% for the same period in 2006. The lower percentage of ceded gross premiums written was due to the following:

	•		In our property segment, we renewed our property catastrophe reinsurance treaty effective May 1, 2007 and have increased our retention on the treaty with the strengthening of our capital base and with the increased reinsurance cessions on our general property reinsurance treaty. The increased retention as well as improved rates on the property catastrophe treaty resulted in approximately $23.0 million less annual premium being paid to our reinsurers than in the prior treaty year. In addition, we did not renew our energy treaty, which expired effective June 1, 2007. We increased reinsurance cessions on our general property reinsurance treaty from 45% to 55%, which partially offset these reductions.
	•		Since we did not purchase any retrocession coverage for our reinsurance segment during the three months ended June 30, 2007, the increase in gross premiums written in this segment had the affect of lowering the percentage of ceded premiums.
	•		Partially offsetting these factors was higher premium cessions in our casualty segment. In our casualty segment, we increased the percentage ceded on our general casualty business and began to cede a portion of our healthcare business and professional liability business during 2007. We increased the amount we cede as we have been able to obtain adequate protection at cost-effective levels and in order to reduce the overall volatility of our insurance operations.

     Net premiums earned decreased by $2.4 million, or 0.8%, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. This was due to lower net premiums earned for our casualty segment partially offset by increased net premiums earned for our property and reinsurance segments. The decrease in casualty net premiums earned was due to lower net premiums written. In our property segment, net premiums earned for the three months ended June 30, 2007 increased by $2.9 million due to premium returned on our prior property catastrophe reinsurance treaty that expired in May 2007. The returned premium was due to the final calculation of the deposit premium. We did not receive any returned premium during the three months ended June 30, 2006. The increased net premiums earned for our reinsurance segment was due to higher net premiums written, partially offset by the lower upward adjustments to premium estimates for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. Adjustments on estimated premiums also impact net premiums earned as they relate to prior years’ treaties, which have already been fully or partially earned.

     We evaluate our business by segment, distinguishing between property insurance, casualty insurance and reinsurance. The following chart illustrates the mix of our business on a gross premiums written basis and net premiums earned basis.

		Gross								Net
		Premiums Written								Premiums Earned
		Three Months Ended June 30,
		2007				2006				2007				2006
Property			29.5	%			32.2	%			15.9	%			15.0	%
Casualty			35.5				38.6				40.8				43.7
Reinsurance			35.0				29.2				43.3				41.3

     The percentage of property net premiums earned was considerably less than for gross premiums written because we cede a larger portion of our property business compared to casualty and reinsurance.

Net Investment Income and Realized Gains/Losses

     Our invested assets are managed by two investment managers affiliated with The Goldman Sachs Group, Inc., one of our principal shareholders. We also have investments in one hedge fund managed by a subsidiary of American International Group, Inc. (“AIG”). Our primary investment objective is the preservation of capital. A secondary objective is obtaining returns commensurate

with a benchmark, primarily defined as 35% of the Lehman U.S. Government Intermediate Index, 40% of the Lehman Corp. 1-5 year A3/A- or Higher Index and 25% of the Lehman Securitized Index.

     Investment income is principally derived from interest and dividends earned on investments, partially offset by investment management fees and fees paid to our custodian bank. Net investment income increased by $19.0 million, or 34.6%, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. The increase was primarily the result of increased interest rates and an approximate 21.0% increase in the market value of the average aggregate invested assets from June 30, 2006 to June 30, 2007. Our aggregate invested assets grew due to positive operating cash flows as well as the proceeds received from our initial public offering of common shares (“IPO”) in July 2006. Investment management fees of $1.6 million and $1.1 million were incurred during the three months ended June 30, 2007 and 2006, respectively.

     The annualized period book yield of the investment portfolio for the three months ended June 30, 2007 and 2006 was 4.8% and 4.2%, respectively. The increase in yield was primarily the result of increases in prevailing market interest rates over the past year. We continue to maintain a conservative investment posture. As of June 30, 2007, approximately 99% of our fixed income investments (which included individually held securities and securities held in a high-yield bond fund) consisted of investment grade securities. The average credit rating of our fixed income portfolio was AA as rated by Standard & Poor’s and Aa2 as rated by Moody’s Investors Service (“Moody’s”), with an average duration of approximately 2.96 years as of June 30, 2007.

     During the three months ended June 30, 2007, we recognized $1.5 million in net realized losses from the sale of securities, which included a write-down of approximately $2.9 million related to declines in market value of securities on our available for sale portfolio that were considered to be other than temporary. Comparatively, during the three months ended June 30, 2006, we recognized $10.2 million in net realized losses on investments, which included a write-down of approximately $4.9 million related to declines in market value of securities on our available for sale portfolio that were considered to be other than temporary. The declines in market value of these securities were solely due to changes in interest rates. Partially offsetting net realized losses for the three months ended June 30, 2007 were $0.5 million in realized gains from the sale of our shares in the Goldman Sachs Liquid Trading Opportunities Fund Offshore, Ltd.

 Net Losses and Loss Expenses

     Net losses and loss expenses incurred are comprised of three main components:

	•		losses paid, which are actual cash payments to insureds, net of recoveries from reinsurers;
	•		outstanding loss or case reserves, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and
	•		IBNR reserves, which are reserves established by us for claims that are not yet reported but can reasonably be expected to have occurred based on industry information, management’s experience and actuarial evaluation. The portion recoverable from reinsurers is deducted from the gross estimated loss.

     Net losses and loss expenses decreased by $3.6 million, or 2.0%, for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. The primary reasons for the reduction in these expenses were higher net favorable reserve development related to prior years and lower net premiums earned during the three months ended June 30, 2007 compared to the three months ended June 30, 2006. Because our net exposures tend to vary with net premiums earned, lower net premiums earned will reduce the ultimate loss reserve amount, and therefore, reduce the losses and loss expenses incurred. We were not subject to any material losses from catastrophes during the three months ended June 30, 2007 and 2006.

     We recognized net favorable reserve development related to prior years of approximately $32.4 million and $29.0 million during the three months ended June 30, 2007 and 2006, respectively. The following is a breakdown of the major factors contributing to the net favorable development for the three months ended June 30, 2007:

•

Net favorable reserve development of $30.4 million for our casualty segment was primarily comprised of $74.8 million of favorable reserve development related to low loss emergence in our professional liability and healthcare lines of business for the 2003, 2004 and 2006 accident years, and our general casualty line of business for the 2004 accident year.

			These favorable reserve developments were partially offset by $46.7 million of unfavorable reserve development due to higher than anticipated loss emergence in our general casualty line of business for the 2003 and 2005 accident years.
	•		Net unfavorable reserve development of $2.9 million, excluding the 2004 and 2005 windstorms, for our property segment was comprised of $16.0 million of unfavorable reserve development, which primarily related to higher loss emergence than expected in our general property line of business for the 2004 and 2005 accident years and in our energy line of business for the 2006 accident year, and which was partially offset by $13.1 million of favorable reserve development primarily in our general property line of business for the 2003 and 2006 accident years.
	•		Net favorable reserve development of $1.6 million for our European property business related to the 2004 windstorms. We had no prior year loss reserve development related to Hurricanes Katrina, Rita and Wilma during the three months ended June 30, 2007 and June 30, 2006, respectively.
	•		Net favorable reserve development of $3.3 million, excluding the 2004 and 2005 windstorms, for our reinsurance segment comprised of $1.6 million related to low loss emergence in our property reinsurance lines of business for the 2004 and 2005 accident years and $1.7 million related to low loss emergence in our accident and health reinsurance line of business for the 2004 and 2005 accident years.

     The following is a breakdown of the major factors contributing to the $29.0 million in net favorable reserve development for the three months ended June 30, 2006:

	•		Net reserves relating to casualty lines were favorably adjusted by approximately $16.2 million due to benign development on 2002 and 2003 accident year business written by our Bermuda and European offices, partially offset by some unfavorable reserve development on certain claims relating to casualty business written in the United States.
	•		Net reserves for our property segment were reduced by approximately $8.4 million. The reduction was primarily due to loss reserve development on our general property business for the 2004 and 2005 accident years, excluding the 2004 and 2005 windstorms, trending more favorably than anticipated. Partially offsetting this was an increase in reserves related to our energy business, which had increased claims costs as a result of rising commodity prices.
	•		In addition, net favorable reserve development of approximately $4.4 million was recognized in our reinsurance segment during the three months ended June 30, 2006 as loss activity on our property reinsurance book for the 2003 accident year developed at a lower than expected rate.

     We have estimated our net losses from catastrophes based on actuarial analysis of claims information received to date, industry modeling and discussions with individual insureds and reinsureds. Accordingly, actual losses may vary from those estimated and will be adjusted in the period in which further information becomes available.

     The loss and loss expense ratio for the three months ended June 30, 2007 was 58.1% compared to 58.9% for the three months ended June 30, 2006. Net favorable reserve development recognized in the three months ended June 30, 2007 reduced the loss and loss expense ratio by 10.7 percentage points. Thus, the loss and loss expense ratio related to the current period’s business was 68.8%. Net favorable reserve development recognized in the three months ended June 30, 2006 reduced the loss and loss expense ratio by 9.5 percentage points. Thus, the loss and loss expense ratio related to that period’s business was 68.4%.

     The following table shows the components of the decrease in net losses and loss expenses of $3.6 million for the three months ended June 30, 2007 from the three months ended June 30, 2006.

		Three Months Ended
		June 30,
										Dollar
		2007				2006				Change
		($ in millions)
Net losses paid		$	107.9			$	119.2			$	(11.3	)
Net change in reported case reserves			18.6				(14.8	)			33.4
Net change in IBNR			49.7				75.4				(25.7	)
Net losses and loss expenses		$	176.2			$	179.8			$	(3.6	)