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

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

Commission file number: 001-32938

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG

(Exact Name of Registrant as Specified in Its Charter)

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

Lindenstrasse 8, 6340 Baar, Zug, Switzerland
(Address of Principal Executive Offices and Zip Code)

41-41-768-1080
(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

     As of May 2, 2011, 37,919,865 common shares were outstanding.

 

 

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 2011 and December 31, 2010
(Expressed in thousands of United States dollars, except share and per share amounts)

		As of				As of
		March 31,				December 31,
		2011				2010
ASSETS
Fixed maturity investments available for sale, at fair value (amortized cost: 2011: $505,638; 2010: $828,544)		$	543,808			$	891,849
Fixed maturity investments trading, at fair value			5,960,830				5,769,097
Equity securities trading, at fair value			271,057				174,976
Other invested assets trading, at fair value			469,999				347,632
Total investments			7,245,694				7,183,554
Cash and cash equivalents			693,980				756,995
Restricted cash			52,022				96,373
Insurance balances receivable			569,836				529,927
Prepaid reinsurance			175,348				187,287
Reinsurance recoverable			975,523				927,588
Accrued investment income			41,328				40,520
Net deferred acquisition costs			113,097				96,803
Goodwill			268,376				268,376
Intangible assets			56,109				56,876
Balances receivable on sale of investments			363,151				188,408
Net deferred tax assets			20,618				19,740
Other assets			93,697				75,184
Total assets		$	10,668,779			$	10,427,631
LIABILITIES:
Reserve for losses and loss expenses		$	5,100,643			$	4,879,188
Unearned premiums			1,096,260				962,203
Reinsurance balances payable			91,852				99,732
Balances due on purchases of investments			567,918				506,978
Senior notes			797,761				797,700
Accounts payable and accrued liabilities			63,392				106,010
Total liabilities		$	7,717,826			$	7,351,811
SHAREHOLDERS’ EQUITY:
Common shares: par value CHF 15.00 per share (2011: 40,003,642; 2010: 40,003,642 shares issued and 2011: 37,899,699; 2010: 38,089,226 shares outstanding)			600,055				600,055
Additional paid-in capital			75,166				170,239
Treasury shares, at cost (2011: 2,103,943; 2010: 1,914,416)			(127,053	)			(112,811	)
Retained earnings			2,369,822				2,361,202
Accumulated other comprehensive income: net unrealized gains on investments, net of tax			32,963				57,135
Total shareholders’ equity			2,950,953				3,075,820
Total liabilities and shareholders’ equity		$	10,668,779			$	10,427,631

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
for the three months ended March 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share and per share amounts)

		Three Months Ended
		March 31,
		2011				2010
REVENUES:
Gross premiums written		$	560,688			$	504,163
Premiums ceded			(79,817	)			(70,871	)
Net premiums written			480,871				433,292
Change in unearned premiums			(145,995	)			(94,968	)
Net premiums earned			334,876				338,324
Net investment income			50,208				68,902
Net realized investment gains			50,376				77,487
Net impairment charges recognized in earnings:
Total other-than-temporary impairment charges			—				(168	)
Portion of loss recognized in other comprehensive income, before taxes			—				—
Net impairment charges recognized in earnings			—				(168	)
Other income			—				297
			435,460				484,842
EXPENSES:
Net losses and loss expenses			304,452				232,154
Acquisition costs			38,082				40,784
General and administrative expenses			67,956				63,463
Amortization and impairment of intangible assets			767				892
Interest expense			13,742				9,528
Foreign exchange (gain) loss			(442	)			1,076
			424,557				347,897
Income before income taxes			10,903				136,945
Income tax expense			2,283				3,205
NET INCOME			8,620				133,740
Other comprehensive income:
Unrealized (losses) gains on investments arising during the period net of applicable deferred income tax (expense) benefit for the three months ended March 31, 2011: $(964); 2010: $219			(8,044	)			37,470
Reclassification adjustment for net realized investment gains included in net income, net of applicable income tax			(16,128	)			(45,035	)
Other comprehensive loss			(24,172	)			(7,565	)
COMPREHENSIVE (LOSS) INCOME		$	(15,552	)		$	126,175
PER SHARE DATA
Basic earnings per share		$	0.23			$	2.67
Diluted earnings per share		$	0.21			$	2.52
Weighted average common shares outstanding			38,199,867				50,023,816
Weighted average common shares and common share equivalents outstanding			40,383,523				53,115,756
Dividends declared per share		$	—			$	0.20

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the three months ended March 31, 2011 and 2010
(Expressed in thousands of United States dollars)

																		Accumulated
										Additional								Other
		Share Capital				Share Capital				Paid-in				Treasury				Comprehensive				Retained
		USD				CHF				Capital				Shares				Income				Earnings				Total
December 31, 2010		$	—				600,055			$	170,239			$	(112,811	)		$	57,135			$	2,361,202			$	3,075,820
Net income			—				—				—				—				—				8,620				8,620
Dividends			—				—				—				—				—								—
Other comprehensive loss			—				—				—				—				(24,172	)			—				(24,172	)
Stock compensation			—				—				(41,453	)			45,758				—				—				4,305
Share repurchases			—				—				—				(60,000	)			—				—				(60,000	)
Repurchase of founder warrants			—				—				(53,620	)			—				—				—				(53,620	)
March 31, 2011		$	—				600,055			$	75,166			$	(127,053	)		$	32,963			$	2,369,822			$	2,950,953
																		Accumulated
										Additional								Other
		Share Capital				Share Capital				Paid-in				Treasury				Comprehensive				Retained
		USD				CHF				Capital				Shares				Income				Earnings				Total
December 31, 2009		$	1,492				—			$	1,359,934			$	—			$	149,849			$	1,702,020			$	3,213,295
Net income			—				—				—				—				—				133,740				133,740
Dividends			—				—				—				—				—				(10,092	)			(10,092	)
Other comprehensive loss			—				—				—				—				(7,565	)			—				(7,565	)
Stock compensation			22				—				9,407				—				—				—				9,429
March 31, 2010		$	1,514				—			$	1,369,341			$	—			$	142,284			$	1,825,668			$	3,338,807

See accompanying notes to the consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2011 and 2010
(Expressed in thousands of United States dollars)

		Three Months Ended
		March 31,
		2011				2010
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	8,620			$	133,740
Adjustments to reconcile net income to cash provided by operating activities:
Net realized gains on sales of investments			(21,624	)			(45,261	)
Mark to market adjustments			(34,248	)			(32,226	)
Net impairment charges recognized in earnings			—				168
Stock compensation expense			5,850				9,527
Insurance balances receivable			(39,909	)			(98,154	)
Prepaid reinsurance			11,939				15,662
Reinsurance recoverable			(47,935	)			(489	)
Accrued investment income			(808	)			(1,486	)
Net deferred acquisition costs			(16,294	)			(9,608	)
Net deferred tax assets			86				4,779
Other assets			(978	)			(6,073	)
Reserve for losses and loss expenses			221,455				91,587
Unearned premiums			134,057				79,307
Reinsurance balances payable			(7,880	)			(20,296	)
Accounts payable and accrued liabilities			(42,618	)			(33,695	)
Other items, net			5,202				(2,182	)
Net cash provided by operating activities			174,915				85,300
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Purchases of fixed maturity investments — available for sale			(352	)			(85,767	)
Purchases of fixed maturity investments — trading			(2,332,315	)			(2,075,196	)
Purchases of equity securities			(97,893	)			(19,517	)
Purchases of other invested assets			(171,048	)			(52,285	)
Sales of fixed maturity investments — available for sale			340,418				1,304,598
Sales of fixed maturity investments — trading			2,036,961				960,823
Sales of equity securities			12,509				—
Sales of other invested assets			40,135				884
Purchases of fixed assets			(1,639	)			(3,168	)
Change in restricted cash			44,351				42,123
Net cash (used in) provided by investing activities			(128,873	)			72,495
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from the exercise of stock options			3,224				2,735
Share repurchase			(60,000	)			—
Repurchase of founder warrants			(53,620	)			—
Net cash (used in) provided by financing activities			(110,396	)			2,735
Effect of exchange rate changes on foreign currency cash			1,339				(584	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(63,015	)			159,946
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			756,995				292,188
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	693,980			$	452,134
Supplemental disclosure of cash flow information:
— Cash paid for income taxes		$	—			$	3,627
— Cash paid for interest expense			18,750				18,750

See accompanying notes to the consolidated financial statements.

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

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

     On November 26, 2010, the Company received approval from the Supreme Court of Bermuda to change the place of incorporation of the ultimate parent company from Bermuda to Switzerland (the “Redomestication”), which was completed on December 1, 2010. The ultimate parent company is now Allied World Switzerland which wholly owns Allied World Assurance Company Holdings, Ltd (“Allied World Bermuda”). After the Redomestication, the Company continues to report under accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the Company’s common shares continue to trade on the New York Stock Exchange under the symbol “AWH,” the same symbol under which the common shares were listed prior to the Redomestication. In addition, the Company remains subject to U.S. Securities and Exchange Commission (“SEC”) reporting requirements and continues to report consolidated financial results in U.S. dollars. The Company believes the Redomestication provides the ability to maintain a competitive worldwide effective corporate tax rate. See Note 11(b) for further details of the Redomestication.

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

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

	•		The premium estimates for certain reinsurance agreements,
	•		Recoverability of deferred acquisition costs,
	•		The reserve for outstanding losses and loss expenses,
	•		Valuation of ceded reinsurance recoverables,
	•		Determination of impairment of goodwill and other intangible assets,
	•		Valuation of financial instruments, and
	•		Determination of other-than-temporary impairment of investments.

     Inter-company accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the consolidation.

     These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

3. NEW ACCOUNTING PRONOUNCEMENTS

     In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). ASU 2010-20 enhances disclosures about credit quality of financing receivables and the allowance of credit losses by requiring additional information regarding the Company’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The balance sheet related disclosures for ASU 2010-20 are effective for the year ended December 31, 2010 and the income statement related disclosures are effective for quarter ended March 31, 2011. Refer to Note 15 for the Company’s related disclosures.

     In October 2010, the FASB issued ASU 2010-26 “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”). ASU 2010-26 clarifies what costs associated with acquiring or renewing insurance contracts can be deferred and amortized over the coverage period. Under the revised guidance of ASU 2010-26, incremental direct costs that result directly from and are essential to the insurance contract and would not have been incurred had the insurance contract not been written are costs that may be capitalized, including costs relating to activities specifically performed by the Company such as underwriting, policy issuance and processing. ASU 2010-26 will be effective January 1, 2012 and early adoption is permitted. The Company has not elected early adoption and is currently evaluating the provisions of ASU 2010-26 and its potential impact on future financial statements.

     In January 2011, the FASB issued ASU 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20” (“ASU 2011-01”). In April 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” (“ASU 2011-02”). ASU 2011-02 provides further guidance on what constitutes a troubled debt restructuring. The guidance is effective for interim and annual periods beginning on or after June 15, 2011 and applies retrospectively to restructurings within the fiscal year of adoption. The Company is currently assessing the provisions of ASU 2011-02 and its potential impact on future financial statements.

4. INVESTMENTS

a) Available for Sale Securities

     The amortized cost, gross unrealized gains, gross unrealized losses and fair value of the Company’s available for sale investments by category as of March 31, 2011 and December 31, 2010 are as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
March 31, 2011
U.S. Government and Government agencies		$	37,745			$	985			$	(2	)		$	38,728
Non-U.S. Government and Government agencies			5,503				27				—				5,530
States, municipalities and political subdivisions			85,029				9,068				—				94,097
Corporate debt:
Financial institutions			44,055				2,123				(33	)			46,145
Industrials			222,470				15,460				—				237,930
Utilities			110,836				10,542				—				121,378
Total fixed maturity investments, available for sale		$	505,638			$	38,205			$	(35	)		$	543,808
December 31, 2010
U.S. Government and Government agencies		$	85,030			$	6,923			$	—			$	91,953
Non-U.S. Government and Government agencies			138,386				9,539				(2,541	)			145,384
States, municipalities and political subdivisions			107,289				10,901				(13	)			118,177
Corporate debt:
Financial institutions			66,660				6,776				(38	)			73,398
Industrials			310,664				20,548				(2	)			331,210
Utilities			120,515				11,212				—				131,727
Total fixed maturity investments, available for sale		$	828,544			$	65,899			$	(2,594	)		$	891,849

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

b) Trading Securities

     Securities accounted for at fair value with changes in fair value recognized in the consolidated income statements by category as of March 31, 2011 and December 31, 2010 are as follows:

		March 31, 2011				December 31, 2010
U.S. Government and Government agencies		$	1,107,059			$	1,229,720
Non-U.S. Government and Government agencies			170,663				120,793
States, municipalities and political subdivisions			105,778				127,436
Corporate debt
Financial institutions			1,461,364				1,261,219
Industrials			670,142				627,524
Utilities			117,440				101,472
Residential mortgage-backed
Non-agency residential			369,757				371,935
Agency residential			1,089,883				1,195,905
Commercial mortgage-backed			242,979				184,043
Asset-backed			625,765				549,050
Total fixed maturity investments, trading			5,960,830				5,769,097
Equity securities			271,057				174,976
Hedge funds			469,999				347,632
Total		$	6,701,886			$	6,291,705

c) Contractual Maturity Dates

     The contractual maturity dates of available for sale fixed maturity investments as of March 31, 2011 are as follows:

		Amortized Cost				Fair Value
Due within one year		$	31,931			$	32,270
Due after one year through five years			387,914				416,428
Due after five years through ten years			70,001				77,535
Due after ten years			15,792				17,575
		$	505,638			$	543,808

     Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

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

d) Other Invested Assets

     Included in other invested assets are the Company’s hedge fund investments. As of March 31, 2011, the Company held 19 hedge fund investments with a total fair value of $469,999, which comprised 5.9% of the total fair value of its investments and cash and cash equivalents and are summarized as follows by type of investment strategy:

										Long				Short
Hedge Fund		Fair Value as of				Unfunded				Exposure(1)				Exposure(2)				Gross				Net
Type		March 31, 2011				Commitments				(% of funded)				(% of funded)				Exposure(3)				Exposure(4)
Private equity funds		$	32,964			$	81,519				100	%			0	%			100	%			100	%
Mezzanine debt			1,978				33,022				100	%			0	%			100	%			100	%
Distressed			68,094				37,288				70	%			7	%			77	%			63	%
Equity long/short			128,589				—				108	%			65	%			173	%			43	%
Multi-strategy			154,930				—				113	%			61	%			174	%			52	%
Event driven			83,444				—				109	%			59	%			168	%			50	%
Total		$	469,999			$	151,829

	•		Private equity funds: These funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. The Company has invested in three private equity funds to purchase those primary limited partnership interests. The fair values of the investments in this class have been estimated using the net asset value per share of the investments. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. The remaining restriction period for these funds ranges from seven to ten years.
	•		Mezzanine debt funds: Mezzanine debt funds invest primarily in privately negotiated mezzanine investments. The funds’ strategies will focus primarily on providing capital to upper middle market and middle market companies, and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity, however the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in one mezzanine debt fund which cannot be redeemed at this time because the investments include restrictions that do not allow for redemption until termination of the fund. The remaining restriction period for this fund is approximately ten years.
	•		Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in five distressed funds, three of which (representing approximately 35% of the value of the funds in this class) are not currently eligible for redemption due to imposed lock-up periods with remaining periods ranging from three months to seven years. Funds representing approximately 39% of the value of the funds in this class are currently eligible for quarterly redemption with a 65-day notification period, subject to redemption limitations. Funds representing approximately 26% of the value of the funds in this class are currently eligible for quarterly redemption with a 45-day notification period and redemption fee if redeemed prior to January 2012.

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

	•		Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and target net long position. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in four equity long/short funds, one of which (representing approximately 21% of the value of the funds in this class) is not currently eligible for redemption due to an imposed lock-up period with a remaining period of twelve months, at which time the funds will be eligible for quarterly redemption with a 45-day notification period. The remaining three funds, representing approximately 79% of the value of the funds in this class, are currently eligible for quarterly redemption, one with a 30-day notification period or monthly redemption with a 30-day notification period and redemption fee, one with a 45 day notification period and redemption fee if redeemed prior to July 2012 and one with a 60-day notification period.
	•		Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in four equity long/short funds, three of which (representing approximately 72% of the value of the funds in this class) are currently eligible for quarterly redemption one with a 60-day notification period and the others with a 90-day notification period. The remaining fund, representing approximately 28% of the value of the funds in this class, is currently eligible for redemption of one third of the net asset value with a 65-day notification period.
	•		Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one or more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include mergers and acquisitions (arbitrage), corporate restructurings and spin-offs and capital structure arbitrage. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in two event driven funds. Approximately 51% of the value of the funds is not currently eligible for redemption due to an imposed two year lock-up period from initial investment. The remaining 49% of the value of the funds in this class is currently eligible for quarterly redemption, but is subject to redemption fees and limitations.

     Six of the Company’s hedge funds, three equity long/short funds, two multi-strategy funds and one event driven fund, had long exposure greater than 100% of the funds’ net asset value (indicating explicit leverage) of 120%, 110%, 107%, 166%, 105% and 130%, respectively, as of March 31, 2011.

e) Net Investment Income

		For the Three Months Ended
		March 31,
		2011				2010
Fixed maturity investments		$	50,946			$	71,098
Equity securities and other invested assets			2,196				306
Cash and cash equivalents			318				52
Expenses			(3,252	)			(2,554	)
Net investment income		$	50,208			$	68,902

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

f) Components of Realized Gains and Losses

     Components of realized gains for the three months ended March 31, 2011 and 2010 are summarized in the following table:

		For the Three Months Ended
		March 31,
		2011				2010
Gross realized gains on sale of securities		$	43,557			$	51,667
Gross realized losses on sale of securities			(21,932	)			(6,406	)
Futures not designated as hedges			(5,496	)			—
Mark-to-market changes: debt securities trading			13,464				27,731
Mark-to-market changes: hedge funds and equity securities			20,783				4,495
Net realized investment gains		$	50,376			$	77,487
Proceeds from sale of available for sale securities		$	343,520			$	1,306,625
Proceeds from sale of trading securities		$	2,209,598			$	1,215,553

g) Pledged Assets

     As of March 31, 2011 and December 31, 2010, $272,880 and $280,175, respectively, of cash and cash equivalents and investments were on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with relevant insurance regulations. In addition, the Company has set up trust accounts to meet security requirements for inter-company reinsurance transactions. These trusts contained assets of $1,206,251 and $1,377,266 as of March 31, 2011 and December 31, 2010, respectively, and are included in fixed maturity investments.

     The Company also has facilities available for the issuance of letters of credit collateralized against the Company’s investment portfolio. The collateralized portion of these facilities is up to $1,300,000 as of March 31, 2011 and December 31, 2010. See Note 8 “Debt and Financing Arrangements” for details on the facilities.

     The following table shows the Company’s trust accounts on deposit, as well as outstanding and remaining letter of credit facilities, and the collateral committed to support the letter of credit facilities as of March 31, 2011 and December 31, 2010:

		As of				As of
		March 31,				December 31,
		2011				2010
Total trust accounts on deposit		$	1,479,131			$	1,657,441
Total letter of credit facilities:
Citibank Europe plc			900,000				900,000
Credit Facility			800,000				800,000
Total letter of credit facilities			1,700,000				1,700,000
Total letter of credit facilities outstanding:
Citibank Europe plc			690,371				689,851
Credit Facility			158,983				158,983
Total letter of credit facilities outstanding			849,354				848,834
Total letter of credit facilities remaining:
Citibank Europe plc			209,629				210,149
Credit Facility (1)			641,017				641,017
Total letter of credit facilities remaining			850,646				851,166
Collateral committed to support the letter of credit facilities		$	1,064,449			$	1,121,345

     Total trust accounts on deposit includes available for sale securities, trading securities and cash and cash equivalents. The fair values of the combined total cash and cash equivalents and investments held under trust were $2,543,580 and $2,778,786 as of March 31, 2011 and December 31, 2010, respectively. Of the total letters of credit facilities outstanding as of March 31, 2011 and December 31, 2010, $7,295 was used to meet security requirements for inter-company transactions and the remaining letters of credit facilities outstanding of $842,059 and $841,539 was used for third-party beneficiaries, respectively.

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

h) Analysis of Unrealized Losses

     The following table summarizes the market value of those investments in an unrealized loss position for periods less than and greater than 12 months as of March 31, 2011 and December 31, 2010:

		March 31, 2011								December 31, 2010
		Gross Fair				Unrealized				Gross Fair				Unrealized
		Value				Loss				Value				Loss
Less than 12 months
U.S. Government and Government agencies		$	1,090			$	(2	)		$	—			$	—
Non-U.S. Government and Government agencies			—				—				34,204				(1,116	)
States, municipalities and political subdivisions			—				—				472				(13	)
Corporate debt
Financial institutions			2,784				(33	)			2,796				(38	)
Industrials			—				—				2,150				(2	)
		$	3,874			$	(35	)		$	39,622			$	(1,169	)
More than 12 months
Non-U.S. Government and Government agencies		$	—			$	—			$	10,998			$	(1,425	)
		$	—			$	—			$	10,998			$	(1,425	)
		$	3,874			$	(35	)		$	50,620			$	(2,594	)

     As of March 31, 2011 and December 31, 2010, there were approximately 2 and 9 securities, respectively, in an unrealized loss position. The decrease in the gross unrealized loss from December 31, 2010 to March 31, 2011 is primarily due to selling available for sale debt securities and reinvesting proceeds in trading debt securities thereby reducing unrealized gains/losses recognized in accumulated other comprehensive income.

i) Other-than-temporary impairment charges

     Following the Company’s review of the securities in the investment portfolio during the three months ended March 31, 2011 and 2010, no securities and one mortgage-backed security, respectively, were considered to be other-than-temporarily impaired due to the present value of the expected cash flows being lower than the amortized cost. The $168 of other than temporary impairment (“OTTI”) during the three months ended March 31, 2010 was recognized through earnings due to credit related losses.

     For the mortgage-backed security for which OTTI was recognized due to credit loss during the three months ended March 31, 2010, the significant inputs utilized to determine a credit loss were the estimated frequency and severity of losses of the underlying mortgages that comprise the mortgage-backed security. The frequency of losses was measured as the credit default rate, which includes such factors such as loan-to-value ratios and credit scores of borrowers. The severity of losses includes such factors as trends in overall housing prices and house prices that are obtained at foreclosure. The frequency and severity inputs were used in projecting the future cash flows of the mortgage backed security. For the security in which the Company recognized an OTTI due to credit loss, the credit default rate was 10.3% and the severity rate was 49.0%.

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

     The following table summarizes the amounts related to credit losses on debt securities for which a portion of the OTTI was recognized in other comprehensive income in the consolidated income statements for the three months ended March 31, 2011 and 2010:

		For the Three Months
		ended March 31,
		2011				2010
Beginning balance of credit losses		$	—			$	1,096
Additions for credit loss for which OTTI was not previously recognized			—				168
Reductions for securities sold during the period (realized)			—				—
Reductions for OTTI previously recognized due to intent to sell			—				—
Additions resulting from the increase in credit losses			—				—
Reductions resulting from the improvement in expected cash flows			—				—
Ending balance of credit losses		$	—			$	1,264

5. DERIVATIVE INSTRUMENTS

     The Company uses currency forward contracts and swaps to manage currency exposure. The U.S. dollar is the Company’s reporting currency and the functional currency of its operating subsidiaries. The Company enters into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, the Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar, primarily the Canadian dollar, Euro and British Sterling. For liabilities incurred in currencies other than U.S. dollars, U.S. dollars are converted to the currency of the loss at the time of claim payment. As a result, the Company has an exposure to foreign currency risk resulting from fluctuations in exchange rates. The Company has developed a hedging strategy using currency forward contracts and swaps to minimize the potential loss of value caused by currency fluctuations. These currency forward contracts and swaps are not designated as hedges and accordingly are carried at fair value on the consolidated balance sheets as a part of “other assets” or “accounts payable and accrued liabilities,” with the corresponding realized and unrealized gains and losses included in “foreign exchange (gain) loss” in the unaudited condensed consolidated statements of operations and comprehensive (loss) income. The fair value of the currency forward contracts and swaps as of March 31, 2011 was a net receivable of $1,088 and was included in “other assets” on the consolidated balance sheets. The fair value of the currency forward contracts as of December 31, 2010 was a net payable of $632 and was included in “accounts payable and accrued expenses” in the consolidated balance sheet.

     The Company also purchases and sells interest rate future contracts to actively manage the duration and yield curve positioning of its fixed income portfolio. Interest rate futures can efficiently increase or decrease the overall duration of the portfolio. Additionally, interest rate future contracts can be utilized to obtain the desired position along the yield curve in order to protect against certain future yield curve shapes (steeper, flatter). These interest rate futures are not designated as hedges and are marked to market daily with the corresponding realized gains and losses included in “net realized investment gains” in the unaudited condensed consolidated statements of operations and comprehensive (loss) income (“consolidated income statements”). For future contracts that were pending settlement at the period end (there were no future contracts traded during 2010), any associated gain or loss is reflected in the consolidated balance sheets as part of “balances receivable on sale of investments” for gains and “balances due on purchases of investments” for losses.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	•		Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•		Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

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

•

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

     The following table shows the fair value of the Company’s financial instruments and where in the fair value hierarchy the fair value measurements are included as of March 31, 2011:

										Fair value measurement using:
										Quoted prices
										in active								Significant
										markets for				Significant other				unobservable
		Carrying								identical assets				observable inputs				inputs
		amount				Total fair value				(Level 1)				(Level 2)				(Level 3)
Available for sale securities:
U.S. Government and Government agencies		$	38,728			$	38,728			$	38,728			$	—			$	—
Non-U.S. Government and Government agencies			5,530				5,530				—				5,530				—
States, municipalities and political subdivisions			94,097				94,097				—				94,097				—
Corporate debt			405,453				405,453				—				405,453				—
Total available for sale fixed maturity investments			543,808				543,808
Trading securities:
U.S. Government and Government agencies		$	1,107,059			$	1,107,059			$	969,815			$	137,244			$	—
Non-U.S. Government and Government agencies			170,663				170,663				—				170,663				—
States, municipalities and political subdivisions			105,778				105,778				—				105,778				—
Corporate debt			2,248,946				2,248,946				—				2,248,946				—
Mortgage-backed			1,702,619				1,702,619				—				1,468,532				234,087
Asset-backed			625,765				625,765				—				481,936				143,829
Total trading fixed maturity investments			5,960,830				5,960,830
Total fixed maturity investments			6,504,638				6,504,638
Hedge funds			469,999				469,999				—				—				469,999
Equity securities			271,057				271,057				271,057				—				—
Total investments		$	7,245,694			$	7,245,694			$	1,279,600			$	5,118,179			$	847,915
Senior notes		$	797,761			$	856,207			$	—			$	856,207			$	—

     The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of March 31, 2011.

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

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

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

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

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

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

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

     Hedge funds: Comprised of hedge funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager which the Company believes is an unobservable input, and as such, the fair values of those hedge funds are included in the Level 3 fair value hierarchy.

     Equity securities: The fair value of the equity securities are priced from market exchanges and therefore included in the Level 1 fair value hierarchy.

     Senior notes: The fair value of the senior notes is based on trades as reported in Bloomberg. As of March 31, 2011, the 7.50% Senior Notes and 5.50% Senior Notes (each as defined in Note 8) were traded at 111.7% and 99.2% of their principal amount, providing an effective yield of 5.0% and 5.6%, respectively. The fair value of the senior notes is included in the Level 2 fair value hierarchy.

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

     The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3) for the three months ended March 31, 2011:

		Fair value measurement using significant
		unobservable inputs (Level 3):
		Hedge funds				Mortgage-backed				Asset-backed
Three Months Ended March 31, 2011
Opening balance		$	347,632			$	172,558			$	48,707
Total realized and unrealized gains included in net income			16,449				2,374				118
Total realized and unrealized losses included in net income			(4,769	)			(827	)			(25	)
Purchases			151,048				32,777				83,009
Sales			(40,361	)			(8,957	)			(426	)
Transfers into Level 3			—				61,695				12,555
Transfers out of Level 3			—				(25,533	)			(109	)
Ending balance		$	469,999			$	234,087			$	143,829
Three Months Ended March 31, 2010
Opening balance		$	184,725			$	253,979			$	104,871
Total gains or losses included in earnings:
Realized losses			—				(1,358	)			—
Change in fair value of investments			4,362				4,646				142
Total unrealized gains included in OCI			—				3,696				23
Purchases or sales			53,048				(69,687	)			1,044
Transfers in and/or out of Level 3			—				42,391				(69,548	)
Ending balance		$	242,135			$	233,667			$	36,532

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

     During the three months ended March 31, 2011, the Company transferred $25,533 of mortgage-backed securities and $109 of asset-backed securities, respectively, from Level 3 to Level 2 in the fair value hierarchy. The Company transferred those securities as they no longer utilized broker-dealer quotes and instead used other pricing sources that have significant observable inputs. The Company recognizes transfers between levels at the end of the reporting period.

7. RESERVE FOR LOSSES AND LOSS EXPENSES

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

		March 31,				December 31,
		2011				2010
Outstanding loss reserves		$	1,285,803			$	1,166,516
Reserves for losses incurred but not reported			3,814,840				3,712,672
Reserve for losses and loss expenses		$	5,100,643			$	4,879,188

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

     The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses as of March 31, 2011 and March 31, 2010. Losses incurred and paid are reflected net of reinsurance recoveries.

		For the Three Months Ended
		March 31,
		2011				2010
Gross liability at beginning of period		$	4,879,188			$	4,761,772
Reinsurance recoverable at beginning of period			(927,588	)			(919,991	)
Net liability at beginning of period			3,951,600				3,841,781
Net losses incurred related to:
Commutation of variable-rated reinsurance contracts			—				8,864
Current year			348,802				297,246
Prior years			(44,350	)			(73,956	)
Total incurred			304,452				232,154
Net paid losses related to:
Current year			1,699				6,706
Prior years			134,358				129,300
Total paid			136,057				136,006
Foreign exchange revaluation			5,125				(5,050	)
Net liability at end of period			4,125,120				3,932,879
Reinsurance recoverable at end of period			975,523				920,480
Gross liability at end of period		$	5,100,643			$	4,853,359

     For the three months ended March 31, 2011, the Company had net favorable reserve development in its international and reinsurance segments due to actual loss emergence being lower than the initial expected loss emergence. The majority of the net favorable reserve development was recognized in the international insurance and reinsurance segment in the 2005 through 2007 loss years related to the healthcare line of business as well as the general casualty and professional liability insurance and reinsurance lines of business. The Company had net unfavorable reserve development in its U.S. insurance segment due to actual loss emergence being higher than the initial expected loss emergence. The majority of the net unfavorable reserve development was recognized in the 2006 loss year related to the professional liability line of business.

     For the year ended December 31, 2010, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than the initial expected loss emergence. The majority of the net favorable reserve development was recognized in the international insurance segment in the 2004 through 2006 loss years related to the general casualty, healthcare and professional liability lines of business.

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

8. DEBT AND FINANCING ARRANGEMENTS

     In November 2010, Allied World Bermuda issued $300,000 aggregate principal amount of 5.50% Senior Notes due November 10, 2020 (“5.50% Senior Notes”), with interest on the notes payable on May 15 and November 15 of each year commencing on May 15, 2011. The 5.50% Senior Notes were offered by the underwriters at a price of 98.89% of their principal amount, providing an effective yield to investors of 5.56%. The net proceeds from the offering of the 5.50% Senior Notes were used for general corporate purposes, including the repurchase of the Company’s outstanding common shares. The 5.50% Senior Notes are Allied World Bermuda’s unsecured and unsubordinated obligations and rank equally in right of payment with all existing and future unsecured and unsubordinated indebtedness. Allied World Bermuda may redeem the 5.50% Senior Notes at any time or from time to time in whole or in part at a redemption price equal to the greater of the principal amount of the 5.50% Senior Notes to be redeemed or a make-whole price, plus accrued and unpaid interest. Allied World Bermuda has no current expectations of redeeming the notes prior to maturity. The 5.50% Senior Notes include covenants and events of default that are usual and customary, but do not contain any financial covenants.

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

     In 2006, Allied World Bermuda issued $500,000 aggregate principal amount of 7.50% Senior Notes due August 1, 2016 (“7.50% Senior Notes”), with interest on the notes payable on August 1 and February 1 of each year, commencing on February 1, 2007. The 7.50% Senior Notes were offered by the underwriters at a price of 99.71% of their principal amount, providing an effective yield to investors of 7.54%. The 7.50% Senior Notes can be redeemed by Allied World Bermuda prior to maturity subject to payment of a “make-whole” premium. Allied World Bermuda has no current expectations of redeeming the notes prior to maturity. The 7.50% Senior Notes include covenants and events of default that are usual and customary, but do not contain any financial covenants.

     The 5.50% Senior Notes and the 7.50% Senior Notes have been unconditionally and irrevocably guaranteed for the payment of the principal and interest by Allied World Switzerland.

     Allied World Assurance Company, Ltd has a collateralized amended letter of credit facility of $900,000 with Citibank Europe plc. that has been, and will continue to be, used to issue standby letters of credit.

     In addition, Allied World Bermuda entered into an $800,000 five-year senior credit facility (the “Credit Facility”) with a syndication of lenders. The Credit Facility consists of a $400,000 secured letter of credit facility for the issuance of standby letters of credit (the “Secured Facility”) and a $400,000 unsecured facility for the making of revolving loans and for the issuance of standby letters of credit (the “Unsecured Facility”). Both the Secured Facility and the Unsecured Facility have options to increase the aggregate commitments by up to $200,000, subject to approval of the lenders. The Credit Facility will be used for general corporate purposes and to issue standby letters of credit. The Credit Facility contains representations, warranties and covenants customary for similar bank loan facilities, including a covenant to maintain a ratio of consolidated indebtedness to total capitalization as of the last day of each fiscal quarter or fiscal year of not greater than 0.35 to 1.0 and a covenant under the Unsecured Facility to maintain a certain consolidated net worth. In addition, each material insurance subsidiary must maintain a financial strength rating from A.M Best Company of at least A- under the Unsecured Facility and of at least B++ under the Secured Facility. Allied World Bermuda is in compliance with all covenants under the Credit Facility as of March 31, 2011 and December 31, 2010.

     There are a total of 13 lenders that make up the Credit Facility syndication and that have varying commitments ranging from $20,000 to $87,500. Of the 13 lenders, four have commitments of $87,500 each, four have commitments of $62,500 each, four have commitments of $45,000 each and one has a commitment of $20,000.

     In May 2010, Allied World Capital (Europe) Limited established an irrevocable standby letter of credit in order to satisfy funding requirements of the Company’s Lloyd’s Syndicate 2232. As of March 31, 2011 and December 31, 2010, the amount of the letter of credit was £53,700 ($86,307) and £53,700 ($82,838), respectively.

9. GOODWILL AND INTANGIBLE ASSETS

     The following table shows an analysis of goodwill and intangible assets for the three months ended March 31, 2011 and the year ended December 31, 2010:

						Intangible
						assets with				Intangible
						indefinite				assets with
		Goodwill				lives				finite lives				Total
Net balance at December 31, 2009		$	268,376			$	23,920			$	36,439			$	328,735
Additions			—				—				—				—
Amortization			—				—				(3,483	)			(3,483	)
Net balance at December 31, 2010			268,376				23,920				32,956				325,252
Additions			—				—				—				—
Amortization			—				—				(767	)			(767	)
Net balance at March 31, 2011			268,376				23,920				32,189				324,485
Gross balance			268,532				23,920				48,200				340,652
Accumulated amortization			—				—				(9,145	)			(9,145	)
Impairments			(156	)			—				(6,866	)			(7,022	)
Net balance		$	268,376			$	23,920			$	32,189			$	324,485

     The amortization of the intangible assets with definite lives for the remainder of 2011 and for the years ended December 31, 2012, 2013, 2014, 2015 and thereafter will be $2,211, $2,533, $2,533, $2,533, $2,533 and $19,846, respectively. The intangible assets will be amortized over a weighted average useful life of 12.5 years.

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

10. INCOME TAXES

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

     Under current Bermuda law, Allied World Bermuda and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Allied World Bermuda and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Allied World Bermuda and Allied World Assurance Company, Ltd will be exempted until March 28, 2016.

     Certain subsidiaries of Allied World Switzerland file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom, Ireland, Switzerland, Hong Kong and Singapore. The following tax years by jurisdiction are open to examination:

		Fiscal Years
U.S. Internal Revenue Service (“IRS”) for the U.S. subsidiaries			2007 – 2010
Inland Revenue for the U.K. branches			2009 – 2010
Irish Revenue Commissioners for the Irish subsidiaries			2006 – 2010
Swiss Federal Tax Administration for the Swiss branch			2008 – 2010
Inland Revenue Department for the Hong Kong branch			2009 – 2010
Inland Revenue Department for the Singapore branch			2010

     To the best of the Company’s knowledge, there are no examinations pending by any tax authority except for the IRS. The IRS is currently completing an examination of Darwin’s 2006 tax returns. The examination covers the tax return filed for the period subsequent to Darwin’s initial public offering on May 16, 2006 to December 31, 2006.

     Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12 months of January 2011.

11. SHAREHOLDERS’ EQUITY

a) Authorized shares

     The articles of association authorize the Board of Directors to increase the share capital by a maximum amount of 20% of the share capital registered in the commercial register up to CHF 119,404 or 7,690,260 voting shares, and create conditional capital of 7,200,000 voting shares. The issued share capital consists of the following:

		March 31,				December 31,
		2011				2010
Common shares issued and fully paid, CHF 15.00 per share			40,003,642				40,003,642
Share capital at end of period			600,055				600,055

		Three Months Ended
		March 31, 2011
Total shares issued at beginning and end of period			40,003,642
Treasury shares issued, balance at beginning of period			1,914,416
Shares repurchased			969,163
Shares issued out of treasury			(779,636	)
Total treasury shares at end of period			2,103,943
Total shares outstanding at end of period			37,899,699

     As of March 31, 2011, there were outstanding 37,855,839 voting common shares and 43,860 non-voting common shares.

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

b) Redomestication

     As of December 31, 2010 in conjunction with the Redomestication, Allied World Switzerland had total share capital of CHF of 597,020 comprised of 39,801,302 voting shares, with a par value of CHF 15.00 ($15.00) per share. In addition as of December 31, 2010, Allied World Switzerland had participation capital of CHF 3,035 comprised of 202,340 non-voting participation certificates, with a par value of CHF 15.00 ($15.00) per certificate. To affect the Redomestication on December 1, 2010, Allied World Switzerland and Allied World Bermuda entered into a contribution-in-kind agreement. Under the terms of the contribution-in-kind agreement all issued and outstanding voting and non-voting shares of Allied World Bermuda were cancelled and issued to Allied World Switzerland as a contribution-in-kind in exchange for which the holders of such voting and non-voting shares immediately prior to the completion of the Redomestication received the same number of voting and non-voting shares of Allied World Switzerland. As a result of the contribution-in-kind and the resulting par value changing from $0.03 to CHF 15.00, the share capital balance was increased to CHF 600,055 with an equal reduction in additional paid-in capital. At the time of contribution-in-kind, the exchange rate between the U.S. Dollar and Swiss Franc was one-for-one.

     As required under Swiss law, the Company cannot hold more than 10% of its registered capital in treasury shares, unless it receives shareholder approval to do so. As a result, immediately prior to the Redomestication, the Company cancelled 10,879,106 shares held in treasury with a related reduction to additional paid in capital of $561,851.

c) Share Warrants

     In conjunction with the private placement offering at the formation of the Allied World Bermuda, Allied World Bermuda granted warrant agreements to certain founding shareholders to acquire up to 5,500,000 common shares at an exercise price of $34.20 per share. These warrants are exercisable in certain limited conditions, including a public offering of common shares, and expire November 21, 2011. Any cash dividends paid to shareholders do not impact the exercise price of $34.20 per share for these founder warrants. There are various restrictions on the ability of warrant holders to dispose of their shares.

     In August 2010, Allied World Bermuda repurchased a warrant owned by The Chubb Corporation (“Chubb”) in a privately negotiated transaction. The warrant entitled Chubb to purchase 2,000,000 of Allied World Bermuda’s common shares for $34.20 per share. Allied World Bermuda repurchased the warrant for an aggregate purchase price of $32,819. After this repurchase, Chubb has no warrants remaining and no other disclosed equity interest in the Company. In November 2010, Allied World Bermuda repurchased a warrant owned by GS Capital Partners and other investment funds, which are affiliates of The Goldman Sachs Group, Inc (“Goldman Sachs”) and founding shareholders in a privately negotiated transaction. The warrant entitled Goldman Sachs to purchase 1,500,000 of Allied World Bermuda’s common shares for $34.20 per share. Allied World Bermuda repurchased the warrant for an aggregate purchase price of $37,197. The repurchase of the warrants was recognized as a reduction in “additional paid-in capital” in the consolidated balance sheets. The repurchase was executed separately from the share repurchase program discussed in Note 11(e) below.

     In February 2011, the Company repurchased a warrant owned by American International Group, Inc. (“AIG”) in a privately negotiated transaction. The warrant entitled AIG to purchase 2,000,000 of the Company’s common shares for $34.20 per share. The Company repurchased the warrant for an aggregate purchase price of $53,620. The repurchase of the warrant was recognized as a reduction in “additional paid-in capital” on the consolidated balance sheets. The repurchase was executed separately from the share repurchase program discussed in Note 11(e) below. After this repurchase, AIG has no warrants remaining and no other disclosed equity interest in the Company.

d) Dividends

     The Company paid a special dividend of $0.25 per common share related to the Redomestication on November 26, 2010 to shareholders of record on November 15, 2010. Under Swiss law, the Company can only pay a dividend with prior shareholder approval. The next distribution was approved during the annual shareholders’ meeting. This special dividend provided a dividend to shareholders for the interim period. Under Swiss law, distributions to shareholders may be paid out only if the Company has sufficient distributable profits from previous fiscal years, or if the Company has freely distributable reserves, each as presented on the audited stand-alone statutory balance sheet. Distributions to shareholders out of the share and participation capital may be made by way of a capital reduction in the form of a reduction to par value to achieve a similar result as the payment of a dividend.

     In February 2010, the Company declared a dividend of $0.20 per common share payable on April 1, 2010 to shareholders of record on March 16, 2010. The total dividend payable amounted to $10,092.

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

e) Share repurchase

     In May 2010, the Company established a share repurchase program in order to repurchase its common shares. Repurchases may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position, legal requirements and other factors. As part of the share repurchase program, the Company entered into a rule 10b5-1 repurchase plan that enables the Company to complete share repurchases during trading blackout periods. During the three months ended March 31, 2011, the Company repurchased through open market purchases 969,163 shares at a total cost of $60,000 for an average price of $61.91 per share. These repurchased shares have been classified as “Treasury shares, at cost” on the consolidated balance sheets. The Company will issue shares out of treasury principally related to the Company’s employee benefit plans.

     In August 2010, the Company repurchased 5,000,000 of its common shares for $250,000, or $50.00 per share, in a privately negotiated transaction from Goldman Sachs. The shares repurchased were classified as “Treasury shares, at cost” on the consolidated balance sheets. In November 2010, the Company repurchased the remaining 3,159,793 common shares from Goldman Sachs for $185,448, or $58.69 per share. The repurchase price per common share is based on and reflects 0.5% discount from the volume-weighted average trading price of the Company’s common shares on November 5, 2010. These repurchases were executed separately from the Company’s share repurchase program discussed above. After these repurchases, including the warrant repurchased, Goldman Sachs has no other disclosed equity interest in the Company.

12. EMPLOYEE BENEFIT PLANS

a) Employee option plan

     In 2001, the Company implemented the Allied World Assurance Holdings, Ltd 2001 Employee Warrant Plan, which was subsequently amended, restated and renamed the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2001 Employee Stock Option Plan (the “ESOP”). Under the ESOP, up to 4,000,000 common shares may be issued.

     As part of the Redomestication, Allied World Switzerland adopted and assumed the ESOP from Allied World Bermuda which was subsequently amended, restated and renamed the Allied World Assurance Company Holdings, AG Third Amended and Restated 2001 Employee Stock Option Plan (the “Plan”). Allied World Switzerland has filed a registration statement on Form S-8 under the Securities Act of 1933, as amended, to register common shares issued or reserved for issuance under the Plan. 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. The exercise price of options issued are recommended by the Compensation Committee to the Board of Directors for approval but shall not be less than 100% of the fair market value of the common shares of Allied World Switzerland on the date the option award is granted.

		Three Months Ended March 31, 2011
						Weighted Average
		Options				Exercise Price
Outstanding at beginning of period			1,272,739			$	38.77
Granted			494,885				61.51
Exercised			(84,305	)			38.49
Forfeited			(8,326	)			44.37
Expired			—				—
Outstanding at end of period			1,674,993			$	45.47

     Assumptions used in the option-pricing model for the options granted during the three months ended March 31, 2011 are as follows:

		Options Granted During
		the Three Months Ended
		March 31, 2011
Expected term of option			5.48	years
Weighted average risk-free interest rate			2.33	%
Weighted average expected volatility			31.51	%
Dividend yield			1.00	%
Weighted average fair value on grant date		$	18.27

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

     The Company has assumed a weighted average annual forfeiture rate of 6.72% in determining the compensation expense over the service period.

     Compensation expense of $1,179 and $792 relating to the options has been included in “general and administrative expenses” in the Company’s consolidated income statements for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010, the Company has recorded in “additional paid-in capital” on the consolidated balance sheets an amount of $40,934 and $41,505, respectively, in connection with all options granted.

b) Stock incentive plan

     In 2004, the Company implemented the Allied World Assurance Holdings, Ltd 2004 Stock Incentive Plan. As part of the Redomestication, Allied World Switzerland adopted and assumed this plan from Allied World Bermuda, which was subsequently amended, restated and renamed the Allied World Assurance Company Holdings, AG Third Amended and Restated 2004 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for grants of restricted stock, restricted stock units (“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 pro-rata over four years from the date of grant or vest in the fourth or fifth year from the date of grant.

		Three Months Ended March 31, 2011
						Weighted Average
						Grant Date Fair
		RSUs				Value
Outstanding RSUs at beginning of period			851,078			$	39.88
RSUs granted			45,239				61.51
Performance-based RSUs granted			139,210				61.51
RSUs fully vested			(129,377	)			42.61
RSUs forfeited			(11,361	)			37.01
Outstanding RSUs at end of period			894,789			$	43.98

     The Company granted performance-based RSUs in lieu of utilizing the LTIP (as defined in Note 12(c)). The performance-based RSUs are structured in exactly the same form as shares issued under the LTIP in terms of vesting restrictions and achievement of established performance criteria. For the performance-based RSUs granted in 2010 and 2011, the Company anticipates that the performance goals are likely to be achieved. Based on the performance goals, the performance-based RSUs granted in 2010 and 2011 are expensed at 100% of the fair market value of Allied World Switzerland’s common shares on the date of grant. The expense is recognized over the performance period.

     Compensation expense of $3,822 and $3,714 relating to the issuance of the RSUs, including the performance-based RSUs, has been recognized in “general and administrative expenses” in the Company’s consolidated income statements for the three months ended March 31, 2011 and 2010, respectively. The compensation expense for the RSUs is based on the fair market value of Allied World Switzerland’s common shares at the time of grant. The Company believes it is unlikely that performance-based RSUs will be forfeited as these awards are issued to senior management. Thus, no forfeiture rate is applied to the performance-based RSUs. The Company has assumed a weighted average annual forfeiture rate of 2.80%, excluding performance-based RSUs, in determining the compensation expense over the service period.

     As of March 31, 2011 and December 31, 2010, the Company has recorded $30,784 and $37,991, respectively, in “additional paid-in capital” on the consolidated balance sheets in connection with the RSUs awarded.

c) Long-term incentive plan

     In May 2006, the Company implemented the Long-Term Incentive Plan (“LTIP”), which it amended and restated in November 2007. The LTIP provides for performance-based equity awards to key employees in order to promote the long-term growth and profitability of the Company. As part of the Redomestication, Allied World Switzerland adopted and assumed the LTIP from Allied World Bermuda. 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. The awards granted in 2009 will vest after the fiscal year ending December 31, 2011, subject to the achievement of the performance conditions and terms of the LTIP. The awards granted in 2008 generally vested after the fiscal year ended December 31, 2010, however, a portion of this award will vest after the fourth or fifth year from the original grant date, subject to the achievement of the performance conditions and terms of the LTIP.

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

		Three Months Ended March 31, 2011
						Weighted Average
						Grant Date Fair
		LTIP				Value
Outstanding LTIP awards at beginning of period			773,411			$	41.74
Additional LTIP awards granted due to the achievement of 2008 — 2010 performance criteria			212,938				43.27
LTIP forfeited			(13,500	)			42.48
LTIP awards vested			(638,813	)			43.27
Outstanding LTIP awards at end of period			334,036			$	39.76