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: March 31, 2008

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

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

27 Richmond Road, Pembroke HM 08, Bermuda
(Address of Principal Executive Offices and Zip Code)

(441) 278-5400
(Registrant’s Telephone Number, Including Area Code)

     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, 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 (Do not check if a smaller reporting company)		Smaller reporting company o

     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 May 5, 2008 was 48,847,487.

 

 

PART I
FINANCIAL INFORMATION

     Item 1. Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 2008 and December 31, 2007
(Expressed in thousands of United States dollars, except share and per share amounts)

		As of				As of
		March 31,				December 31,
		2008				2007
ASSETS:
Fixed maturity investments available for sale, at fair value (amortized cost: 2008: $5,071,730; 2007: $5,595,943)		$	5,218,726			$	5,707,143
Other invested assets available for sale, at fair value (cost: 2008: $82,380; 2007: $291,458)			77,099				322,144
Other invested assets, at fair value			191,195				—
Total investments			5,487,020				6,029,287
Cash and cash equivalents			774,337				202,582
Restricted cash			140,049				67,886
Securities lending collateral			337,567				147,241
Insurance balances receivable			376,788				304,499
Prepaid reinsurance			147,402				163,836
Reinsurance recoverable			758,723				682,765
Accrued investment income			42,389				55,763
Deferred acquisition costs			112,619				108,295
Intangible assets			14,714				3,920
Balances receivable on sale of investments			6,323				84,998
Net deferred tax assets			4,158				4,881
Other assets			42,341				43,155
Total assets		$	8,244,430			$	7,899,108
LIABILITIES:
Reserve for losses and loss expenses		$	4,048,187			$	3,919,772
Unearned premiums			848,149				811,083
Unearned ceding commissions			26,666				28,831
Reinsurance balances payable			60,437				67,175
Securities lending payable			337,567				147,241
Balances due on purchase of investments			—				141,462
Dividends payable			8,788				—
Senior notes			498,710				498,682
Accounts payable and accrued liabilities			21,306				45,020
Total liabilities		$	5,849,810			$	5,659,266
SHAREHOLDERS’ EQUITY:
Common shares, par value $0.03 per share, issued and outstanding 2008: 48,841,837 shares and 2007: 48,741,927 shares			1,465				1,462
Additional paid-in capital			1,288,776				1,281,832
Retained earnings			968,753				820,334
Accumulated other comprehensive income:
net unrealized gains on investments, net of tax			135,626				136,214
Total shareholders’ equity			2,394,620				2,239,842
Total liabilities and shareholders’ equity		$	8,244,430			$	7,899,108

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 months ended March 31, 2008 and 2007
(Expressed in thousands of United States dollars, except share and per share amounts)

		Three Months Ended
		March 31,
		2008				2007
REVENUES:
Gross premiums written		$	396,874			$	438,406
Premiums ceded			(70,302	)			(80,562	)
Net premiums written			326,572				357,844
Change in unearned premiums			(53,500	)			(71,278	)
Net premiums earned			273,072				286,566
Net investment income			76,931				72,648
Net realized investment gains (losses)			3,465				(6,484	)
			353,468				352,730
EXPENSES:
Net losses and loss expenses			143,497				165,995
Acquisition costs			26,840				29,196
General and administrative expenses			43,271				33,203
Interest expense			9,510				9,374
Foreign exchange loss			476				32
			223,594				237,800
Income before income taxes			129,874				114,930
Income tax (recovery) expense			(1,071	)			1,009
NET INCOME			130,945				113,921
Other comprehensive (loss) income Unrealized gains on investments arising during the period net of applicable deferred income tax expense 2008: ($251); 2007: ($817)			15,364				18,533
Reclassification adjustment for net realized (gains) losses included in net income			(15,952	)			6,484
Other comprehensive (loss) income			(588	)			25,017
COMPREHENSIVE INCOME		$	130,357			$	138,938
PER SHARE DATA
Basic earnings per share		$	2.68			$	1.89
Diluted earnings per share		$	2.55			$	1.83
Weighted average common shares outstanding			48,811,932				60,333,209
Weighted average common shares and common share equivalents outstanding			51,380,423				62,207,941
Dividends declared per share		$	0.18			$	0.15

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 three months ended March 31, 2008 and 2007
(Expressed in thousands of United States dollars)

										Accumulated
						Additional				Other
						Paid-in				Comprehensive				Retained
		Share Capital				Capital				Income				Earnings				Total
December 31, 2007		$	1,462			$	1,281,832			$	136,214			$	820,334			$	2,239,842
Cumulative effect adjustment upon adoption of FAS 159			—				—				(26,262	)			26,262				—
Net income			—				—				—				130,945				130,945
Dividends			—				—				—				(8,788	)			(8,788	)
Other comprehensive income			—				—				25,674				—				25,674
Stock compensation			3				6,944				—				—				6,947
March 31, 2008		$	1,465			$	1,288,776			$	135,626			$	968,753			$	2,394,620

										Accumulated
						Additional				Other
						Paid-in				Comprehensive				Retained
		Share Capital				Capital				Income				Earnings				Total
December 31, 2006		$	1,809			$	1,822,607			$	6,464			$	389,204			$	2,220,084
Net income			—				—				—				113,921				113,921
Dividends			—				—				—				(9,052	)			(9,052	)
Other comprehensive income			—				—				25,017				—				25,017
Stock compensation			3				6,005				—				—				6,008
March 31, 2007		$	1,812			$	1,828,612			$	31,481			$	494,073			$	2,355,978

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 three months ended March 31, 2008 and 2007
(Expressed in thousands of United States dollars)

		Three Months Ended
		March 31,
		2008				2007
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	130,945			$	113,921
Adjustments to reconcile net income to cash provided by operating activities:
Net realized gains on sales of investments			(27,322	)			(2,898	)
Impairment charges for other-than-temporary impairments on investments			11,370				9,382
Change in fair value of hedge fund investments			12,487				—
Amortization of premiums net of accrual of discounts on fixed maturities			(1,005	)			(88	)
Amortization and depreciation of fixed assets			2,206				2,075
Amortization of discount and expenses on senior notes			111				104
Stock compensation expense			6,154				6,316
Insurance balances receivable			(72,289	)			(95,970	)
Prepaid reinsurance			16,434				5,258
Reinsurance recoverable			(75,958	)			21,055
Accrued investment income			13,374				6,941
Deferred acquisition costs			(4,324	)			(7,139	)
Net deferred tax assets			472				79
Other assets			(1,450	)			(2,228	)
Reserve for losses and loss expenses			128,415				26,227
Unearned premiums			37,066				66,020
Unearned ceding commissions			(2,165	)			1,438
Reinsurance balances payable			(6,738	)			30,519
Accounts payable and accrued liabilities			(14,926	)			(23,214	)
Net cash provided by operating activities			152,857				157,798
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of fixed maturity investments			(586,715	)			(866,584	)
Purchases of other invested assets			(18,845	)			(3,873	)
Sales of fixed maturity investments			1,067,763				698,521
Sales of other invested assets			83,206				2,976
Net cash used for acquisition			(44,052	)			—
Purchase of intangible assets			(10,794	)			—
Changes in securities lending collateral received			(190,326	)			230,032
Purchase of fixed assets			(281	)			(4,929	)
Change in restricted cash			(72,163	)			(62,590	)
Net cash provided by (used in) investing activities			227,793				(6,447	)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from the exercise of stock options			550				—
Changes in securities lending collateral			190,326				(230,032	)
Net cash provided by (used in) financing activities			190,876				(230,032	)
Effect of exchange rate changes on foreign currency cash			229				148
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			571,755				(78,533	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			202,582				366,817
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	774,337			$	288,284
Supplemental disclosure of cash flow information:
— Cash paid for income taxes		$	5,354			$	1,600
— Cash paid for interest expense			18,750				19,271
— Change in balance receivable on sale of investments			78,675				(8,694	)
— Change in balance payable on purchase of investments			(141,462	)			46,517

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 and percentage 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 through operations in Bermuda, the United States, Ireland and the United Kingdom.

2.  BASIS OF PREPARATION AND CONSOLIDATION

     These unaudited 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 (“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 losses and loss expenses,
	•		Valuation of ceded reinsurance recoverables,
	•		Valuation of financial instruments, 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 immaterial reclassifications in the unaudited condensed consolidated statements of cash flows 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, 2007.

3.  NEW ACCOUNTING PRONOUNCEMENTS

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 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. The Company adopted FAS 159 as of January 1, 2008. See Note 7 “Fair Value of Financial Instruments” regarding the Company’s adoption of FAS 159.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

     In September 2006, the FASB issued 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 beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted FAS 157 as of January 1, 2008. See Note 7 “Fair Value of Financial Instruments” regarding the Company’s adoption of FAS 157.

     In December 2007, the FASB issued FAS No. 141(R) “Business Combinations” (“FAS 141(R)”). FAS 141(R) replaces FAS No. 141 “Business Combinations” (“FAS 141”), but retains the fundamental requirements in FAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. FAS 141(R) also requires acquisition-related costs to be recognized separately from the acquisition, requires assets acquired and liabilities assumed arising from contractual contingencies to be recognized at their acquisition-date fair values and requires goodwill to be recognized as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009 for calendar year-end companies). The Company is currently evaluating the provisions of FAS 141(R) and its potential impact on future financial statements.

     In December 2007, the FASB issued FAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“FAS 160”). FAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FAS 160 requires consolidated net income to be reported at the amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement also establishes a method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and for changes in a parent’s ownership interest in a subsidiary that does result in deconsolidation. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (January 1, 2009 for calendar year-end companies). The presentation and disclosure requirements of FAS 160 shall be applied retrospectively for all periods presented. The Company is currently evaluating the provisions of FAS 160 and its potential impact on future financial statements.

     In March 2008, the FASB issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires enhanced interim and annual disclosures about an entity’s derivative and hedging activities including how and why the entity uses derivative instruments, how the entity accounts for its derivatives under FAS No. 133 (“Accounting for Derivative Instruments and Hedging Activities), and how derivative instruments and related hedged items affect the entity’s financial position, financial performance and cash flows. FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009 for calendar year-end companies). The Company is currently evaluating the provisions of FAS 161 and its potential impact on future financial statements.

4.  ACQUISITION OF FINIAL INSURANCE COMPANY

     In November 2007, Allied World Assurance Holdings (U.S.) Inc. entered into an agreement to purchase all of the outstanding stock of Finial Insurance Company (formerly known as Converium Insurance (North America) Inc.) from Finial Reinsurance Company, an affiliate of Berkshire Hathaway Inc. Finial Insurance Company was renamed Allied World Reinsurance Company, is currently licensed to write insurance and reinsurance in 49 states and the District of Columbia and has been used to launch the Company’s new reinsurance operations in the United States. This transaction closed on February 29, 2008 for a purchase price of $12,000 plus the Finial Insurance Company’s policyholders’ surplus of $47,082 and an adjustment for the difference between the fair values of investments acquired under U.S. GAAP and statutory reporting of $300. The total purchase price of $59,382 was paid in cash from existing resources. As a part of the acquisition, the Company recorded $10,794 of intangible assets with indefinite lives for the value of the insurance and reinsurance licenses acquired. The remaining assets and liabilities acquired were principally comprised of bonds, at fair value, of $31,690, cash of $15,330, other assets of $1,568, and a reserve for losses and loss expenses of $104,914, of which 100% are recorded as “reinsurance recoverable” as the entire reserve for losses and loss expenses is ceded to National Indemnity Company, an affiliate of Berkshire Hathaway Inc.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

5.  INVESTMENTS

     The amortized cost, gross unrealized gains, gross unrealized losses and fair value of total investments by category as of March 31, 2008 and December 31, 2007 are as follows:

						Gross				Gross
						Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
March 31, 2008
U.S. government and government agencies		$	1,711,844			$	105,983			$	—			$	1,817,827
Non-U.S. government and government agencies			109,052				18,529				(20	)			127,561
Corporate			1,131,653				22,119				(11,325	)			1,142,447
Mortgage backed			1,977,417				21,692				(11,093	)			1,988,016
Asset backed			141,764				1,350				(239	)			142,875
Total fixed maturity investments, available for sale			5,071,730				169,673				(22,677	)			5,218,726
Hedge funds			191,195				—				—				191,195
Global high-yield bond fund			81,220				—				(5,281	)			75,939
Other invested assets			1,160				—				—				1,160
		$	5,345,305			$	169,673			$	(27,958	)		$	5,487,020
December 31, 2007
U.S. government and government agencies		$	1,987,577			$	65,653			$	(6	)		$	2,053,224
Non-U.S. government and government agencies			100,440				18,694				(291	)			118,843
Corporate			1,248,338				10,114				(5,835	)			1,252,617
Mortgage backed			2,095,561				22,880				(902	)			2,117,539
Asset backed			164,027				897				(4	)			164,920
Total fixed maturity investments, available for sale			5,595,943				118,238				(7,038	)			5,707,143
Hedge funds			215,173				27,250				(988	)			241,435
Global high-yield bond fund			75,125				4,424				—				79,549
Other invested assets			1,160				—				—				1,160
		$	5,887,401			$	149,912			$	(8,026	)		$	6,029,287

     Due to the adoption of FAS 159 as of January 1, 2008, the Company’s investment in hedge funds is included in “other invested assets, at fair value” on the unaudited condensed consolidated balance sheet. As of March 31, 2008, the Company’s investments in the global high-yield bond fund and other invested assets are included in “other invested assets available for sale, at fair value” on the unaudited condensed consolidated balance sheet. As of December 31, 2007, the Company’s investment in hedge funds, the global high-yield bond fund and other invested assets were included in “other invested assets available for sale, at fair value” on the unaudited condensed consolidated balance sheet.

     On a quarterly basis, the Company 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 consolidated statements of operations and comprehensive income in the period that it is determined.

     As of March 31, 2008, the Company’s investment portfolio had gross unrealized losses of $27,958 and were primarily the result of the widening of overall sector credit spreads for our fixed maturity investments. Following the Company’s review of the securities in its investment portfolio, 83 securities were considered to be other-than-temporarily impaired for the three months ended March 31, 2008. Consequently, the Company recorded an other-than-temporary impairment charge within “net realized investment gains (losses)” on the unaudited condensed consolidated statement of operations and comprehensive income of $11,370 for the three months ended March 31, 2008. The declines in market value of these securities were primarily due to the write-down of residential and commercial mortgage-backed securities due to the widening of credit spreads caused by the continued decline in the U.S. housing

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

market. All of the residential and commercial mortgage-backed securities written down were AAA rated securities. Given the current market environment for mortgage-backed securities, it is difficult to determine when recovery will occur and as such the Company recorded an other-than-temporary charge. During the three months ended March 31, 2007, 302 securities were considered to be other-than-temporarily impaired and as a result the Company recorded a charge of $9,382 within “net realized investment gains (losses)” on the unaudited condensed consolidated statement of operations and comprehensive income.

     During 2007, the Company submitted a redemption notice to sell its shares in the Goldman Sachs Global Equity Opportunities Fund, plc. The Company sold its shares on February 29, 2008 and recognized a loss on the sale of $278, which is included in “net realized investment gains (losses)” in the unaudited condensed consolidated statements of operations and comprehensive income.

6. 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 99.71% of their principal amount, providing an effective yield to investors of 7.54%. The Company used a portion of the proceeds from the Senior Notes to repay the outstanding amount of its then existing credit agreement as well as to provide additional capital to its subsidiaries and for other general corporate purposes.

     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. The Company was in compliance with all covenants related to its Senior Notes as of March 31, 2008 and December 31, 2007.

     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 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.

     In March 2007, the Company entered into a collateralized $750,000 amended letter of credit facility (the “Credit Facility”) with Citibank Europe plc. The Credit Facility will be used to issue standby letters of credit.

     In November 2007, the Company entered into a $800,000 five-year senior credit facility (the “Facility”) with a syndication of lenders. The 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 Facility will be used for general corporate purposes and to issue standby letters of credit. The 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. The Company is in compliance with all covenants under the Facility as of March 31, 2008 and December 31, 2007.

     The Company currently has access to up to $1,550,000 in letters of credit under the two letter of credit facilities described above. These facilities are used to provide security to reinsureds and are collateralized by the Company, at least to the extent of letters of credit outstanding at any given time. As of March 31, 2008 and December 31, 2007, there were outstanding letters of credit totaling $872,033 and $922,206, respectively, under the two facilities. Collateral committed to support the letter of credit facilities was $1,341,765 as of March 31, 2008, compared to $1,170,731 as of December 31, 2007.

     At this time, the Company uses trust accounts primarily to meet security requirements for inter-company and certain related-party reinsurance transactions. The Company also has cash and cash equivalents and investments on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with relevant insurance regulations. As of March 31, 2008, total trust account deposits were $742,644 compared to $802,737 as of December 31, 2007.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company adopted FAS 159 as of January 1, 2008, and has elected the fair value option for its hedge fund investments, which are classified as “other invested assets, at fair value” in the unaudited condensed consolidated balance sheets. At the time of adoption, the fair value and carrying value of the hedge fund investments were $241,435 and the net unrealized gain was $26,262. These funds are comprised of liquid portfolios that have no fixed maturity with the objective of achieving current income and capital appreciation. The Company has elected the fair value option for its hedge fund investments as the Company believes that recognizing changes in the fair value of the hedge funds in the consolidated statements of operations and comprehensive income each period better reflects the results of the Company’s investment in the hedge funds rather than recognizing changes in fair value in accumulated other comprehensive income.

     Upon adoption of FAS 159, the Company reclassified the net unrealized gain related to the hedge funds of $26,262 from “accumulated other comprehensive income” and recorded a cumulative-effect adjustment in “retained earnings”. There was no net deferred tax liability associated with the net unrealized gain as the hedge fund investments are held by Holdings’ Bermuda insurance subsidiary, which pays no income tax. Any subsequent change in unrealized gain or loss of “other invested assets, at fair value” will be recognized in the consolidated statements of operations and comprehensive income and included in “net realized investment gains (losses)”. Prior to the adoption of FAS 159 any change in unrealized gain or loss was included in “accumulated other comprehensive income” in the unaudited condensed consolidated balance sheet. The net loss recognized for the change in fair value of the hedge fund investments in the unaudited condensed consolidated statements of operations and comprehensive income during the three months ended March 31, 2008 was $12,487.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

     The Company adopted FAS 157 as of January 1, 2008. This statement defines fair value and establishes a framework for measuring fair value under U.S. GAAP. FAS 157 defines fair value 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. FAS 157 also established a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

	•		Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•		Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
	•		Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

     The following table shows the fair value of the Company’s financial instruments and where in the FAS 157 fair value hierarchy the fair value measurements are included as of March 31, 2008.

										Fair value measurement using:
										Quoted prices
										in active
										markets for				Significant other				Significant
		Carrying				Total fair				identical assets				observable inputs				unobservable
		amount				value				(Level 1)				(Level 2)				inputs (Level 3)
U.S. government and government agencies		$	1,817,827			$	1,817,827			$	932,046			$	885,781
Non-U.S. government and government agencies			127,561				127,561								127,561
Corporate			1,142,447				1,142,447								1,142,447
Mortgage backed			1,988,016				1,988,016								1,988,016
Asset backed			142,875				142,875								142,875
Total fixed maturity investments, available for sale			5,218,726				5,218,726
Total other invested assets, available for sale			77,099				77,099								77,099
Total other invested assets, fair value			191,195				191,195												191,195
Total investments			5,487,020				5,487,020
Senior notes			498,710				491,640								491,640

     The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of March 31, 2008.

     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 U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe 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 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 broker-dealer quotes, and are included in the Level 2 fair value hierarchy.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

     Corporate: Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher provided that, in aggregate, corporate bonds with ratings of BBB-/Baa3 do not constitute more than 5% of the market value of the Company’s fixed income securities and 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 Offering 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 dealer quotes, trade prices and the new issue market. As the 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: Principally comprised of AAA-rated pools of residential and commercial mortgages originated by both agency (such as the Federal National Mortgage Association) and non-agency 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 dealer quotes, trade prices and the new issue market. As the 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.

     Asset-backed: Comprised of primarily AAA-rated bonds backed by pools of automobile loan receivables, home equity loans and credit card receivables 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. As the 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.

     Other invested assets available for sale: Principally comprised of an open-end global high-yield bond fund that invests in non-investment grade bonds issued by various issuers and industries. The fair value of the global high-yield bond fund is based on the net asset value as reported by the fund manager. The net asset value is an observable input as it is quoted on a market exchange on a daily basis. The fair value of the global high-yield bond fund is included in the Level 2 fair value hierarchy.

     Other invested assets, at fair value: Comprised of several hedge funds with objectives to seek attractive long-term returns with lower volatility by investing in a range of diversified investment strategies. The fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager less a liquidity discount where hedge fund investments contain lock-up provisions that prevent immediate dissolution. The Company considers these lock-up provisions to be obligations that market participants would assign a value to in determining the price of these hedge funds, and as such have considered these obligations in determining the fair value measurement of the related hedge funds. The liquidity discount was estimated by calculating the value of a protective put over the lock-up period. The protective put measures the risk of holding a restricted asset over a certain time period. The Company used the Black-Scholes option-pricing model to estimate the value of the protective put for each hedge fund. The aggregate liquidity discount recorded during the three months ended March 31, 2008 was $215. The net asset value and the liquidity discount are significant unobservable inputs, and as such the fair values of the Company’s hedge funds are included in the Level 3 fair value hierarchy.

     Senior notes: The fair value of the senior notes is based on the price as published by Bloomberg, which was 98.33% of their principal amount, providing an effective yield of 7.77% as of March 31, 2008. The fair value of the senior notes is included in the Level 2 fair value hierarchy.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

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

		Fair value
		measurement using
		significant
		unobservable
		inputs (Level 3):
		hedge funds
Balance classified as Level 3, January 1, 2008		$	241,435
Total gains or losses included in earnings:
Net realized gains			1,229
Change in fair value of hedge fund investments			(12,487	)
Purchases or sales			(38,982	)
Transfers in and/or out of Level 3			—
Ending balance, March 31, 2008		$	191,195

8.  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 U.K. and Ireland. The tax years open to examination by the U.S. Internal Revenue Service for the U.S. subsidiaries are the fiscal years from 2004 to the present. The tax years open to examination by the Inland Revenue for the U.K. branches are fiscal years from 2004 to the present. The tax years open to examination by Irish Revenue Commissioners for the Irish subsidiaries are the fiscal years from 2003 to the present. 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.

     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 has not recorded any interest or penalties during the three-month periods ended March 31, 2008 and 2007 and has not accrued any payment of interest and penalties as of March 31, 2008 and December 31, 2007.

     The Company does not expect any material unrecognized tax benefits within 12 months of January 1, 2008.

9.  SHAREHOLDERS’ EQUITY

a) Authorized shares

     The authorized share capital of Holdings as of March 31, 2008 and December 31, 2007 was $10,000.

     The issued share capital consists of the following:

		March 31, 2008				December 31, 2007
Common shares issued and fully paid, par value $0.03 per share			48,841,837				48,741,927
Share capital at end of period		$	1,465			$	1,462

     As of March 31, 2008, there were outstanding 34,925,119 voting common shares and 13,916,718 non-voting common shares.

b)  Dividends

     In February 2008, the Company declared a quarterly dividend of $0.18 per common share payable on April 3, 2008 to shareholders of record on March 18, 2008. The total dividend payable amounted to $8,788 and has been included in the unaudited condensed consolidated balance sheets.  

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

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

10.  EMPLOYEE BENEFIT PLANS

a) Employee option plan

     In 2001, the Company implemented the Allied World Assurance Company Holdings, Ltd Amended and Restated 2001 Employee Stock Option Plan (the “Plan”). Under the Plan, up to 2,000,000 common shares of Holdings may be issued. Holdings 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 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.

		Three months ended March 31, 2008
						Weighted Average
		Options				Exercise Price
Outstanding at beginning of period			1,223,875			$	31.03
Granted			257,300				43.27
Exercised			(18,733	)			29.35
Forfeited			(3,917	)			37.04
Outstanding at end of period			1,458,525			$	33.19

     Assumptions used in the option-pricing model for the options granted during the three months ended March 31, 2008:

		Options granted during
		the three months ended
		March 31, 2008
Expected term of option			6.25	years
Weighted average risk-free interest rate			2.50	%
Expected volatility			23.46	%
Dividend yield			1.66	%
Weighted average fair value on grant date			$9.78

     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 and 110. Likewise, as the Company became a public company in July 2006, there is limited historical data available on which to base the volatility of its common shares. As such, the Company used the average of five volatility statistics from comparable companies, as well as the Company’s volatility, in order to derive the volatility value above. The Company has assumed a forfeiture rate of 4.91% in determining the compensation expense over the service period.

     Compensation expense of $548 and $689 relating to the options has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2008 and 2007, respectively. As of March 31, 2008 and December 31, 2007, the Company recorded in “additional paid-in capital” on the unaudited condensed consolidated balance sheets an amount of $13,271 and $11,840, respectively, in connection with all options granted.

b)  Stock incentive plan

     In 2004, the Company implemented 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, 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 in the fourth or fifth year from the original grant date.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

		Three months ended March 31, 2008
						Weighted Average
						Grant Date Fair
		RSUs				Value
Outstanding RSUs at beginning of period			820,890			$	36.09
RSUs granted			239,479				43.27
RSUs fully vested			(75,097	)			34.00
RSUs forfeited			(26,834	)			35.13
Outstanding RSUs at end of period			958,438			$	38.07

     Compensation expense of $1,476 and $1,987 relating to the issuance of the RSUs has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2008 and 2007, respectively. The compensation expense for the RSUs is based on the fair market value of Holdings’ common shares at the time of grant. The Company has assumed a forfeiture rate of 4.30% in determining the compensation expense over the service period. As of March 31, 2008 and December 31, 2007, the Company has recorded $13,721 and $12,337, respectively, in “additional paid-in capital” on the unaudited condensed consolidated balance sheets in connection with the RSUs awarded.

c)  Long-term incentive plan

     In 2006, the Company implemented the Allied World Assurance Company Holdings, Ltd Amended and Restated 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 performance period. A total of 2,000,000 common shares may be issued under the LTIP. The awards granted in 2008 will generally vest after three years, or in the fourth or fifth year from the original grant date, subject to the achievement of the performance conditions and terms of the LTIP.

		Three months ended March 31, 2008
						Weighted Average
						Grant Date Fair
		LTIP				Value
Outstanding LTIP awards at beginning of period			590,834			$	40.09
LTIP awards granted			507,152				43.27
LTIP awards subjected to accelerated vesting			(11,667	)			34.00
LTIP awards forfeited			(20,000	)			43.40
Outstanding LTIP awards at end of period			1,066,319			$	41.61

     Compensation expense of $4,129 and $3,640 relating to the LTIP has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2008 and 2007, respectively. The compensation expense for the LTIP is based on the fair market value of Holdings’ common shares at the time of grant. As of March 31, 2008 and December 31, 2007, the Company has recorded $20,532 and $16,403, respectively, in “additional paid-in capital” on the unaudited condensed consolidated balance sheets in connection with the LTIP awards.

     In calculating the compensation expense, and in the determination of share equivalents for the purpose of calculating diluted earnings per share, it is estimated for the LTIP awards granted in 2006 and 2007 that the maximum performance goals as set by the LTIP are likely to be achieved over the performance period. For the LTIP awards granted in 2008 it is estimated that the target performance goals as set by the LTIP are likely to be achieved over the performance period. Based on the target performance goals the LTIP awards granted in 2008 are expensed at 100% of the fair market value of Holdings’ common shares on the date of grant. The expense is recognized over the performance period.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

     The total stock compensation expense of $6,154 and $6,316 relating to the stock options, RSUs and LTIP awards has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2008 and 2007, respectively.

11.  EARNINGS PER SHARE

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

		Three Months Ended
		March 31,
		2008				2007
Basic earnings per share
Net income		$	130,945			$	113,921
Weighted average common shares outstanding			48,811,932				60,333,209
Basic earnings per share		$	2.68			$	1.89

		Three Months Ended
		March 31,
		2008				2007
Diluted earnings per share
Net income		$	130,945			$	113,921
Weighted average common shares outstanding			48,811,932				60,333,209
Share equivalents:
Warrants and options			1,602,689				1,366,365
Restricted stock units			403,294				316,544
LTIP awards			562,508				191,823
Weighted average common shares and common share equivalents outstanding — diluted			51,380,423				62,207,941
Diluted earnings per share		$	2.55			$	1.83

     For the three-month period ended March 31, 2008, 23,000 employee stock options were considered antidilutive and were therefore excluded from the calculation of the diluted earnings per share. For the three-month period ended March 31, 2007, 215,650 employee stock options were considered antidilutive and were therefore excluded from the calculation of the diluted earnings per share.

12.  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 provides direct coverage 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 provides direct coverage 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.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

The “combined ratio” is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.

     The following table provides a summary of the segment results for the three months ended March 31, 2008 and 2007.

Three Months Ended March 31, 2008		Property				Casualty				Reinsurance				Total
Gross premiums written		$	86,060			$	121,063			$	189,751			$	396,874
Net premiums written			46,597				90,634				189,341				326,572
Net premiums earned			43,581				109,115				120,376				273,072
Net losses and loss expenses			(14,747	)			(73,115	)			(55,635	)			(143,497	)
Acquisition costs			(549	)			(3,270	)			(23,021	)			(26,840	)
General and administrative expenses			(10,494	)			(23,708	)			(9,069	)			(43,271	)
Underwriting income			17,791				9,022				32,651				59,464
Net investment income															76,931
Net realized investment gains															3,465
Interest expense															(9,510	)
Foreign exchange loss															(476	)
Income before income taxes														$	129,874
Loss and loss expense ratio			33.8	%			67.0	%			46.2	%			52.5	%
Acquisition cost ratio			1.3	%			3.0	%			19.1	%			9.8	%
General and administrative expense ratio			24.1	%			21.7	%			7.5	%			15.9	%
Combined ratio			59.2	%			91.7	%			72.8	%			78.2	%

Three Months Ended March 31, 2007		Property				Casualty				Reinsurance				Total
Gross premiums written		$	101,865			$	125,189			$	211,352			$	438,406
Net premiums written			46,132				100,645				211,067				357,844
Net premiums earned			44,491				124,409				117,666				286,566
Net losses and loss expenses			(6,865	)			(90,367	)			(68,763	)			(165,995	)
Acquisition costs			(332	)			(6,038	)			(22,826	)			(29,196	)
General and administrative expenses			(7,757	)			(15,307	)			(10,139	)			(33,203	)
Underwriting income			29,537				12,697				15,938				58,172
Net investment income															72,648
Net realized investment losses															(6,484	)
Interest expense															(9,374	)
Foreign exchange loss															(32	)
Income before income taxes														$	114,930
Loss and loss expense ratio			15.4	%			72.6	%			58.4	%			57.9	%
Acquisition cost ratio			0.8	%			4.9	%			19.4	%			10.2	%
General and administrative expense ratio			17.4	%			12.3	%			8.6	%			11.6	%
Combined ratio			33.6	%			89.8	%			86.4	%			79.7	%

     The following table shows an analysis of the Company’s net premiums written by geographic location of the Company’s subsidiaries for the three months ended March 31, 2008 and 2007. All inter-company premiums have been eliminated.

		Three Months Ended
		March 31,
		2008				2007
Bermuda		$	263,541			$	290,602
United States			23,120				22,910
Europe			39,911				44,332
Total net premiums written		$	326,572			$	357,844

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

13.  SUBSEQUENT EVENTS

     On May 8, 2008, the Company declared a quarterly dividend of $0.18 per common share, payable on June 12, 2008 to shareholders of record on May 27, 2008. At the 2008 Annual General Meeting held on May 8, 2008, shareholders of Holdings approved the Second Amended and Restated 2001 Employee Stock Option Plan to increase by 2,000,000 common shares (from 2,000,000 to 4,000,000) the total number of Holdings’ common shares that may be issued thereunder, and extend the termination date from June 9, 2016 to May 8, 2018, after which date no awards may be granted.

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,” “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 2007 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 29, 2008. 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 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 March 31, 2008, we had $8.2 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 year ended December 31, 2007, we experienced rate declines from increased competition across all of our operating segments. This trend of increased competition and decreasing rates has continued during the three months ended March 31, 2008, and we expect this trend to continue during the remainder of 2008. Given this trend, we continue to be selective in the policies and reinsurance contracts we underwrite. Our consolidated gross premiums written decreased $41.5 million, or 9.5%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. Our net income for the three months ended March 31, 2008 increased $17.0 million, or 15.0%, to $130.9 million compared to $113.9 million for the three months ended March 31, 2007. Net income for the three months ended March 31, 2008 included net investment income of $76.9 million compared to $72.6 million for the three months ended March 31, 2007.

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. 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 realized gains or losses include (1) net realized investment gains or losses from the sale of investments, (2) write-downs related to declines in the market value of securities on our available for sale portfolio that were considered to be other than temporary and (3) the change in the fair value of investments that we mark-to-market in the condensed consolidated statements of operations and comprehensive income.

Expenses

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

	•		losses paid, which are actual cash payments to insureds or losses payable 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
	•		reserves for losses incurred but not reported, or “IBNR”, which are reserves established by us for claims that are not yet reported but can reasonably be expected to have occurred based on industry information, management’s experience and/or actuarial evaluation. The portion recoverable from reinsurers is deducted from the gross estimated loss.

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

     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 U.S. offices and additional amortization expense for building-related and infrastructure expenditures. We believe this trend will continue during the remainder of 2008 as we continue to hire additional staff and build our infrastructure.

Ratios

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

Critical Accounting Policies

     It is important to understand our accounting policies in order to understand our financial position and results of operations. Our unaudited condensed consolidated financial statements reflect determinations that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If events or other factors cause actual results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to reserves for losses and loss expenses, reinsurance recoverables, premiums and acquisition costs, valuation of financial instruments and 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, 2007 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 the valuation of financial instruments.

Fair Value of Financial Instruments

     Under existing accounting principles generally accepted in the United States (“U.S. GAAP”), we are required to recognize certain assets at their fair value in our condensed consolidated balance sheets. This includes our fixed maturity investments, global high-yield bond fund, hedge funds and other invested assets. Fair value, as defined in Financial Accounting Standard No. 157 “Fair Value Measurements” (“FAS 157”), is 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. FAS 157 also established a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

	•		Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•		Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
	•		Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

     At each measurement date, we estimate the fair value of the financial instruments using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating the fair value of our financial instruments. When quoted market prices or observable market inputs are not available, we utilize valuation techniques that rely on unobservable inputs to estimate the fair value of financial instruments. The following describes the valuation techniques used by us to determine the fair value of financial instruments held as of March 31, 2008 and what level within the FAS 157 fair value hierarchy the valuation technique resides.

     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 U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe 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 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 broker-dealer quotes, and are included in the Level 2 fair value hierarchy.

     Corporate: Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher provided that, in aggregate, corporate bonds with ratings of BBB-/Baa3 do not constitute more than 5% of the market value of our fixed income securities and 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 Offering 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 dealer quotes, trade prices and the new issue market. As the 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: Principally comprised of AAA-rated pools of residential and commercial mortgages originated by both agency (such as the Federal National Mortgage Association) and non-agency 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 dealer quotes, trade prices and the new issue market. As the 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.

     Asset-backed: Comprised of primarily AAA-rated bonds backed by pools of automobile loan receivables, home equity loans and credit card receivables 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. As the 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.

     Other invested assets available for sale: Principally comprised of an open-end global high-yield bond fund that invests in non-investment grade bonds issued by various issuers and industries. The fair value of the global high-yield bond fund is based on the net asset value as reported by the fund manager. The net asset value is an observable input as it is quoted on a market exchange on a daily basis. The fair value of the global high-yield bond fund is included in the Level 2 fair value hierarchy.

     Other invested assets, at fair value: Comprised of several hedge funds with objectives to seek attractive long-term returns with lower volatility by investing in a range of diversified investment strategies. The fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager less a liquidity discount where hedge fund investments contain lock-up provisions that prevent immediate dissolution. We consider these lock-up provisions to be obligations that market participants would assign a value to in determining the price of these hedge funds, and as such have considered these obligations in determining the fair value measurement of the related hedge funds. The liquidity discount was estimated by calculating the value of a protective put over the lock-up period. The protective put measures the risk of holding a restricted asset over a certain time period. We used the Black-Scholes option-pricing model to estimate the value of the protective put for each hedge fund. The aggregate liquidity discount recorded during the three months ended March 31, 2008 was $0.2 million. The net asset value and the liquidity discount are significant unobservable inputs, and as such the fair values of the our hedge funds are included in the Level 3 fair value hierarchy. Our hedge funds are the only assets that use Level 3 inputs in determining fair value. The hedge funds represent 3.5% of our total investments.

     There have been no material changes to any of our valuation techniques from what was used as of December 31, 2007. Since fair valuing a financial instrument is an estimate of what a willing buyer would pay for our asset if we sold it, we will not know the ultimate value of our financial instruments until they are sold. We believe the valuation techniques utilized provide us with the best estimate of the price that would be received to sell our assets in an orderly transaction between participants at the measurement date.

Results of Operations

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

		Three Months
		Ended March 31,
		2008				2007
		($ in millions)
Gross premiums written		$	396.9			$	438.4
Net premiums written			326.6				357.8
Net premiums earned			273.1				286.6
Net investment income			76.9				72.6
Net realized investment gains (losses)			3.5				(6.5	)
		$	353.5			$	352.7
Net losses and loss expenses		$	143.5			$	166.0
Acquisition costs			26.8				29.2
General and administrative expenses			43.3				33.2
Interest expense			9.5				9.4
Foreign exchange loss			0.5				—
		$	223.6			$	237.8
Income before income taxes		$	129.9			$	114.9
Income tax (recovery) expense			(1.0	)			1.0
Net income		$	130.9			$	113.9
Ratios
Loss and loss expense ratio			52.5	%			57.9	%
Acquisition cost ratio			9.8				10.2
General and administrative expense ratio			15.9				11.6
Expense ratio			25.7				21.8
Combined ratio			78.2				79.7

Comparison of Three Months Ended March 31, 2008 and 2007

Premiums

     Gross premiums written decreased by $41.5 million, or 9.5%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The decrease was primarily the result of the non-renewal of business that did not meet our underwriting requirements (which included pricing and/or policy and contract terms and conditions), increased competition and

decreasing rates for new and renewal business in each of our operating segments. Also causing lower gross premiums written for our reinsurance segment was the fact that some cedents increased their retentions and purchased less reinsurance.

     The table below illustrates our gross premiums written by geographic location for the three months ended March 31, 2008 and 2007.

		Three Months
		Ended March 31,								Dollar				Percentage
		2008				2007				Change				Change
		($ in millions)
Bermuda		$	297.2			$	334.2			$	(37.0	)			(11.1	)%
Europe			63.9				71.6				(7.7	)			(10.8	)
United States			35.8				32.6				3.2				9.8
		$	396.9			$	438.4			$	(41.5	)			(9.5	)%

     Net premiums written decreased by $31.2 million, or 8.7%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007, a lower percentage decrease 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 17.7% of gross premiums written for the three months ended March 31, 2008 compared to 18.4% for the same period in 2007. The decrease in the cession percentage was due to lower reinsurance utilization in our property segment, partially offset by increased reinsurance utilization in our casualty segment.

     Net premiums earned decreased by $13.5 million, or 4.7%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 as a result of lower net premiums written. The percentage decrease in net premiums earned was lower than that of net premiums written due to the continued earning of higher net premiums that were written prior to the three months ended March 31, 2008.

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

		Gross								Net
		Premiums								Premiums
		Written								Earned
		Three Months Ended March 31,
		2008				2007				2008				2007
Property			21.7	%			23.2	%			16.0	%			15.5	%
Casualty			30.5				28.6				40.0				43.4
Reinsurance			47.8				48.2				44.0				41.1

     The increase in the percentage of casualty gross premiums written reflects the continued growth of our U.S. operations, where casualty gross premiums written increased by $5.6 million, or 24.7%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007.

  Net Investment Income and Realized Investment Gains (Losses)

     Net investment income increased by $4.3 million, or 5.9%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The increase was primarily the result of a $4.0 million increase in the dividend received from our global high-yield bond fund, as well as an approximate 4.5% increase in the market value of the average aggregate invested assets from March 31, 2007 to March 31, 2008. The dividend from the global high-yield bond fund increased from $2.1 million for the three months ended March 31, 2007 to $6.1 million for the three months ended March 31, 2008. Our aggregate invested assets grew due to positive operating cash flows partially offset by funds used to acquire our common shares from American International Group, Inc. in December 2007. For both the three months ended March 31, 2008 and 2007, we incurred investment management fees of $1.4 million.

     For the three months ended March 31, 2008 and 2007, the annualized period book yield of the investment portfolio was 4.7%. As of March 31, 2008, approximately 99% of our fixed income investments (which included individually held securities and securities held in a global 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 Aa1 as rated by Moody’s Investors Service, with an average duration of approximately 3.0 years as of March 31, 2008.

     Net realized investment gains (losses) increased by $10.0 million from a net loss of $6.5 million to a net gain of $3.5 million. Net realized investment gains for the three months ended March 31, 2008 included net realized gains of $27.4 million from the sale of securities. We sold a number of securities during the three months ended March 31, 2008 to capitalize the initial operations of our U.S. reinsurance platform, which will be reinvested. Also included in the net realized investment gains for the three months ended March 31, 2008 was a loss of $12.5 million related to the mark-to-market of our hedge fund investments. On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“FAS 159”) and elected to fair value our hedge fund investments. As a result, any change in the fair value of our hedge fund investments is recognized as realized investment gains or losses in the condensed consolidated statements of operations and comprehensive income at each reporting period. As we adopted FAS 159 in 2008, there were no realized investment gains or losses recognized from our hedge fund investments in the unaudited condensed consolidated statement of operations and comprehensive income during the three months ended March 31, 2007 as the change in fair value was included in “accumulated other comprehensive income” in the unaudited condensed consolidated balance sheet. During the three months ended March 31, 2008, net realized investment gains included a write-down of approximately $11.4 million related to declines in the market value of securities in our available for sale portfolio that were considered to be other than temporary. The declines in market value of these securities were primarily due to the write-down of residential and commercial mortgage-backed securities due to the widening of credit spreads caused by the continued decline in the U.S. housing market. All of the residential and commercial mortgage-backed securities written down were AAA rated securities. Given the current market environment for mortgage-backed securities, it is difficult to determine when recovery will occur and as such we recorded an other-than-temporary charge. During the three months ended March 31, 2007, the net loss on fixed income investments included a write-down of approximately $9.4 million related to declines in the market value of securities in our available for sale portfolio that were considered to be other than temporary.

   Net Losses and Loss Expenses

     Net losses and loss expenses decreased by $22.5 million, or 13.6%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The primary reasons for the reduction in these expenses were favorable prior year loss development and lower earned premiums during the three months ended March 31, 2008 compared to the three months ended March 31, 2007. 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 March 31, 2008 and 2007.

     We recorded net favorable reserve development related to prior years of approximately $53.1 million and $26.2 million during the three months ended March 31, 2008 and 2007, respectively. The following is a breakdown of the major factors contributing to the net favorable reserve development for the three months ended March 31, 2008:

	•		We recognized net favorable reserve development of $33.2 million related to the 2005 windstorms, of which $10.5 million was recognized by our property segment and $22.7 million was recognized by our reinsurance segment. We recognized the net favorable reserve development for the 2005 windstorms due to less than anticipated reported loss activity over the past twelve months. Accordingly, as of March 31, 2008, we estimated our net losses related to Hurricanes Katrina, Rita and Wilma to be $387.7 million, which was a reduction from our original estimate of $456.0 million.
	•		Net favorable reserve development of $10.6 million, excluding the 2005 windstorms, was recognized by our property segment primarily as a result of general property business actual loss emergence being lower than the initial expected loss emergence for the 2002, 2003, 2006 and 2007 loss years.
	•		Net favorable reserve development of $9.3 million was recognized by our casualty segment primarily as a result of general casualty and healthcare lines of business actual loss emergence being lower than the initial expected loss emergence for the 2002 through 2005 loss years.

     The following is a breakdown of the major factors contributing to the net favorable reserve development for the three months ended March 31, 2007:

	•		Net favorable reserve development of $13.3 million, excluding catastrophes, for our property segment was primarily the result of general property business actual loss emergence being lower than the initial expected loss emergence for the 2006 loss year.
	•		Net favorable reserve development of $12.6 million related to the 2005 windstorms.
	•		Net favorable reserve development of $1.0 million primarily due to additional recoveries under our property catastrophe reinsurance protection related to Hurricane Frances.
	•		Net unfavorable reserve development of $0.7 million for our casualty segment, which included net unfavorable reserve development of $27.8 million for loss years 2002 and 2005 due to a higher incidence of reported losses in our 2002 professional liability business and our 2005 general casualty business. This was offset by net favorable reserve development of $27.1 million in our general casualty, professional liability and healthcare business due to actual loss emergence being lower than the initial expected loss emergence for the 2003 and 2004 loss years.

     The loss and loss expense ratio for the three months ended March 31, 2008 was 52.5%, compared to 57.9% for the three months ended March 31, 2007. Net favorable reserve development recognized in the three months ended March 31, 2008 reduced the loss and loss expense ratio by 19.4 percentage points. Thus, the loss and loss expense ratio related to the current period’s business was 71.9%. Net favorable reserve development recognized in the three months ended March 31, 2007 reduced the loss and loss expense ratio by 9.1 percentage points. Thus, the loss and loss expense ratio related to that period’s business was 67.0%. The increase in the loss and loss expense ratio for the current period’s business was due to higher than expected reported loss activity in our property segment, as well as a decline in net premiums earned due to lower rates on new and renewal business for each of our operating segments. During the three months ended March 31, 2008, there were a number of large individual property losses throughout the world to which we had exposure, including losses from tornadoes in the United States, fires in the United States, Asia and Africa and flooding in Africa. These losses were not considered to be individually material to our results of operations, but in the aggregate resulted in net reported losses and loss expenses of approximately $15.0 million.

     We continue to review the impact of the subprime mortgage market and credit related downturn on professional liability insurance policies and reinsurance contracts we write. We have high attachment points for our professional liability policies and reinsurance contracts, which makes estimating whether losses will exceed our attachment point more difficult. Based on claims information received to date and our analysis, the average attachment point for our professional liability policies with potential subprime and credit related exposure is approximately $126 million with average limits of $12 million (gross of reinsurance). Our direct insurance policies with subprime and credit related loss notices may have the benefit of facultative reinsurance, treaty reinsurance or a combination of both. For our professional liability reinsurance contracts with potential subprime and credit related exposure, the average attachment point is approximately $89 million with average limits of $1.5 million. At this time we believe, based on the claims information received to date, our current IBNR is adequate to meet any potential subprime and credit related losses. As of March 31, 2008, we have recorded case reserves of $3.8 million in our reinsurance operating segment for subprime and credit related losses. We will continue to monitor our reserve for losses and loss expenses for any new claims information and adjust our reserve for losses and loss expenses accordingly.

     The following table shows the components of the decrease in net losses and loss expenses of $22.5 million for the three months ended March 31, 2008 from the three months ended March 31, 2007.

		Three Months
		Ended
		March 31,								Dollar
		2008				2007				Change
		($ in millions)
Net losses paid		$	92.6			$	119.2			$	(26.6	)
Net change in reported case reserves			1.4				(21.0	)			22.4
Net change in IBNR			49.5				67.8				(18.3	)
Net losses and loss expenses		$	143.5			$	166.0			$	(22.5	)

     Net losses paid have decreased $26.6 million for the three months ended March 31, 2008 primarily due to lower claim payments relating to the 2004 and 2005 windstorms than the amount paid during the three months ended March 31, 2007. During the three months ended March 31, 2008, $13.7 million of net losses were paid in relation to the 2004 and 2005 windstorms compared to $35.4 million during the three months ended March 31, 2007. During the three months ended March 31, 2008, we recovered $4.5 million on our property catastrophe reinsurance protection in relation to losses paid as a result of Hurricanes Katrina and Rita

compared to $9.4 million for the three months ended March 31, 2007. The increase in reported case reserves is due to increased case reserves for our casualty segment. The decrease in IBNR for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was primarily due to net favorable loss reserve development and a reduction in business written, partially offset by increased loss reserves for our current period’s business.

     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended March 31, 2008 and 2007. Losses incurred and paid are reflected net of reinsurance recoverables.

		Three Months
		Ended March 31,
		2008				2007
		($ in millions)
Net reserve for losses and loss expenses, January 1		$	3,237.0			$	2,947.9
Incurred related to:
Current period non-catastrophe			196.6				192.2
Current period property catastrophe			—				—
Prior period non-catastrophe			(19.9	)			(12.6	)
Prior period property catastrophe			(33.2	)			(13.6	)
Total incurred		$	143.5			$	166.0
Paid related to:
Current period non-catastrophe			2.8				0.8
Current period property catastrophe			—				—
Prior period non-catastrophe			76.1				83.0
Prior period property catastrophe			13.7				35.4
Total paid		$	92.6			$	119.2
Foreign exchange revaluation			1.6				0.4
Net reserve for losses and loss expenses, March 31			3,289.5				2,995.1
Losses and loss expenses recoverable			758.7				668.1
Reserve for losses and loss expenses, March 31		$	4,048.2			$	3,663.2

Acquisition Costs

     Acquisition costs decreased by $2.4 million, or 8.2%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. Acquisition costs as a percentage of net premiums earned were 9.8% for the three months ended March 31, 2008 compared to 10.2% for the same period in 2007. The decrease in this rate was primarily due to increased commissions received on ceded reinsurance in our casualty segment.

General and Administrative Expenses

     General and administrative expenses increased by $10.1 million, or 30.4%, for the three months ended March 31, 2008 compared to the same period in 2007. The following is a breakdown of the major factors contributing to the increase:

	•		Salary and employee welfare costs increased by $5.6 million due to increased headcount, as well as a one-time expense of $3.3 million for the reimbursement of stock compensation and signing bonuses for new executives hired as a result of the continued expansion of our U.S. operations. We increased our average staff count by approximately 9.9%.
	•		Information technology costs increased by approximately $2.3 million due to the amortization of hardware and software as well as consulting costs required as part of the development of our technological infrastructure.
	•		Rent increased by approximately $0.4 million due to additional office space in New York. There was a gain of $0.6 million on the sale of fixed assets from our previous office space in Bermuda during the three months ended March 31, 2007. No such gain on fixed assets occurred during the three months ended March 31, 2008.

     Our general and administrative expense ratio was 15.9% for the three months ended March 31, 2008, which was higher than the 11.6% for the three months ended March 31, 2007. The increase was primarily due to the factors discussed above, while net premiums earned declined.

     Our expense ratio was 25.7% for the three months ended March 31, 2008 compared to 21.8% for the three months ended March 31, 2007. The increase resulted from increased general and administrative expenses.

Interest Expense

     Interest expense increased by $0.1 million, or 1.1%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. Interest expense incurred during the three months ended March 31, 2008 and 2007 represented one quarter of the annual interest expense on the senior notes, which bear interest at an annual rate of 7.50%.

Net Income

     Net income for the three months ended March 31, 2008 was $130.9 million compared to net income of $113.9 million for the three months ended March 31, 2007. The increase was primarily the result of favorable prior year loss development, increased net investment income and net realized investment gains that more than offset the reduction in net premiums earned. Net income for the three months ended March 31, 2008 included a net foreign exchange loss of $0.5 million and income tax recovery of $1.0 million. Net income for the three months ended March 31, 2007 included a small net foreign exchange loss and an income tax expense of $1.0 million.

Underwriting Results by Operating Segments

     Our company is organized into three operating segments:

     Property Segment.  Our property segment provides direct coverage of physical property and business interruption coverage for commercial property and energy-related risks. We write solely commercial coverages and focus on the insurance of primary risk layers. This means that we are typically part of the first group of insurers that cover a loss up to a specified limit.

     Casualty Segment.   Our casualty segment provides direct coverage for general and product liability, professional liability and healthcare liability risks. We focus primarily on insurance of excess layers, where we insure the second and/or subsequent layers of a policy above the primary layer. Our direct casualty underwriters provide a variety of specialty insurance casualty products to large and complex organizations around the world.

     Reinsurance Segment.  Our reinsurance segment includes the reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by other insurance companies. We presently write reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets including professional liability lines, specialty casualty, property for U.S. regional insurers, accident and health and to a lesser extent marine and aviation lines.

Property Segment

     The following table summarizes the underwriting results and associated ratios for the property segment for the three months ended March 31, 2008 and 2007.

		Three Months
		Ended
		March 31,
		2008				2007
		($ in millions)
Revenues
Gross premiums written		$	86.1			$	101.9
Net premiums written			46.6				46.1
Net premiums earned			43.6				44.5
Expenses
Net losses and loss expenses		$	14.7			$	6.8
Acquisition costs			0.6				0.3
General and administrative expenses			10.5				7.8
Underwriting income			17.8				29.6
Ratios
Loss and loss expense ratio			33.8	%			15.4	%
Acquisition cost ratio			1.3				0.8
General and administrative expense ratio			24.1				17.4
Expense ratio			25.4				18.2
Combined ratio			59.2				33.6

     Comparison of Three Months Ended March 31, 2008 and 2007

     Premiums.   Gross premiums written decreased $15.8 million, or 15.5%, for the three months ended March 31, 2008 compared to the same period in 2007. This decrease was primarily due to the non-renewal of business that did not meet our underwriting requirements (which included pricing and/or policy terms and conditions) and rate decreases from increased competition for new and renewal business.

     The table below illustrates our gross premiums written by line of business for the three months ended March 31, 2008 and 2007.

		Three Months Ended
		March 31,								Dollar				Percentage
		2008				2007				Change				Change
		($ in millions)
General property		$	69.1			$	79.9			$	(10.8	)			(13.5	)%
Energy			16.9				21.7				(4.8	)			(22.1	)
Other			0.1				0.3				(0.2	)			(66.7	)
		$	86.1			$	101.9			$	(15.8	)			(15.5	)%

     Net premiums written increased by $0.5 million, or 1.1%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. This was primarily the result of the non-renewal of our energy treaty which expired on June 1, 2007, partially offset by the amendment of our general property treaty to cede a portion of certain energy classes. This amendment expired February 28, 2008 and was not renewed. Overall, we ceded 45.9% of gross premiums written for the three months ended March 31, 2008 compared to 54.7% for the three months ended March 31, 2007. Net premiums earned decreased $0.9 million, or 2.0%, primarily due to lower net premiums written in the general property line of business.

     Net losses and loss expenses.  Net losses and loss expenses increased by $7.9 million, or 116.2%, for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The increase in net losses and loss expenses was primarily the result of higher than expected loss activity for the current period’s business and lower net favorable reserve development recognized during the three months ended March 31, 2008 compared to the three months ended March 31, 2007.

     Overall, our property segment recorded net favorable reserve development of $21.1 million during the three months ended March 31, 2008 compared to net favorable reserve development of $25.7 million for the three months ended March 31, 2007.

     The $21.1 million of net favorable reserve development during the three months ended March 31, 2008 included the following:

	•		Net favorable reserve development of $10.5 million related to the 2005 windstorms due to less than anticipated reported loss activity over the past twelve months.
	•		Net favorable reserve development of $10.6 million, excluding the 2005 windstorms, primarily the result of general property business actual loss emergence being lower than the initial expected loss emergence for the 2002, 2003, 2006 and 2007 loss years.

     The $25.7 million of net favorable reserve development during the three months ended March 31, 2007 included the following:

	•		Net favorable reserve development of $13.3 million, primarily as a result of actual loss emergence for the general property business written in our Bermuda and U.S. offices being lower than the initial expected loss emergence for the 2006 loss year.
	•		Net favorable reserve development of $8.7 million for Hurricanes Katrina, Rita and Wilma.
	•		Net favorable reserve development of $3.7 million related to the 2004 windstorms.

     The loss and loss expense ratio for the three months ended March 31, 2008 was 33.8% compared to 15.4% for the three months ended March 31, 2007. Net favorable reserve development recognized in the three months ended March 31, 2008 reduced the loss and loss expense ratio by 48.4 percentage points. Thus, the loss and loss expense ratio related to the current period’s business was 82.2%. In comparison, net favorable reserve development recognized in the three months ended March 31, 2007 reduced the loss and loss expense ratio by 57.7 percentage points. Thus, the loss and loss expense ratio for that period’s business was 73.1%. The increase in the loss and loss expense ratio for the current period’s business was due to higher than expected reported loss activity in the current period as well as lower rates on new and renewal business. During the three months ended March 31, 2008, there were a number of large individual property losses throughout the world to which we had exposure, including losses from tornadoes in the United States, fires in the United States, Asia and Africa and flooding in Africa. These losses were not considered to be individually material to our results of operations, but in the aggregate resulted in net reported losses and loss expenses of approximately $15.0 million.

     Net paid losses for the three months ended March 31, 2008 and 2007 were $51.1 million and $49.7 million, respectively. The increase in paid losses was due to higher net paid losses for recent loss years during the three months ended March 31, 2008 compared to the three months ended March 31, 2007, partially offset by lower net paid losses related to the 2004 and 2005 windstorms. During the three months ended March 31, 2008, approximately $9.2 million of net losses were paid in relation to the 2004 and 2005 windstorms compared to approximately $23.5 million during the three months ended March 31, 2007.

     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended March 31, 2008 and 2007. Losses incurred and paid are reflected net of reinsurance recoverables.

		Three Months
		Ended March 31,
		2008				2007
		($ in millions)
Net reserve for losses and loss expenses, January 1		$	360.6			$	423.9
Incurred related to:
Current period non-catastrophe			35.8				32.5
Current period property catastrophe			—				—
Prior period non-catastrophe			(10.6	)			(13.3	)
Prior period property catastrophe			(10.5	)			(12.4	)
Total incurred		$	14.7			$	6.8
Paid related to:
Current period non-catastrophe			1.3				0.8
Current period property catastrophe			—				—
Prior period non-catastrophe			40.6				25.4
Prior period property catastrophe			9.2				23.5
Total paid		$	51.1			$	49.7
Foreign exchange revaluation			1.6				0.4
Net reserve for losses and loss expenses, March 31			325.8				381.4
Losses and loss expenses recoverable			357.2				433.4
Reserve for losses and loss expenses, March 31		$	683.0			$	814.8

     Acquisition costs.  Acquisition costs increased by $0.3 million, or 100.0%, for the three months ended March 31, 2008 compared to March 31, 2007. The increase is due to less reinsurance utilization for our energy line of business, which reduced ceding commission income. The acquisition cost ratio increased to 1.3% for the three months ended March 31, 2008 from 0.8% for the same period in 2007 primarily as a result of lower ceding commissions earned on reinsurance we purchased, as we have ceded less premiums during the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The factors that will determine the amount of acquisition costs going forward are the amount of brokerage fees and commissions incurred on policies we write less ceding commissions earned on reinsurance we purchase. We normally negotiate our reinsurance treaties on an annual basis, so the ceding commission rates and amounts ceded will vary from renewal period to renewal period.

     General and administrative expenses.  General and administrative expenses increased by $2.7 million, or 34.6%, for the three months ended March 31, 2008 compared to three months ended March 31, 2007. The increase in general and administrative expenses was attributable to increased salary and employee welfare costs including a one-time expense of $0.5 million for the reimbursement of stock compensation and signing bonuses for new executives hired as a result of the continued expansion of our U.S. operations, increased building-related costs and higher costs associated with information technology. The increase in the general and administrative expense ratio from 17.4% for the three months ended March 31, 2007 to 24.1% for the same period in 2008 was the result of the factors discussed above, while net premiums earned declined.

Casualty Segment

     The following table summarizes the underwriting results and associated ratios for the casualty segment for the three months ended March 31, 2008 and 2007.

		Three Months
		Ended March 31,
		2008				2007
		($ in millions)
Revenues
Gross premiums written		$	121.1			$	125.2
Net premiums written			90.6				100.6
Net premiums earned			109.1				124.4
Expenses
Net losses and loss expenses		$	73.1			$	90.4
Acquisition cost			3.3				6.0
General and administrative expenses			23.7				15.3
Underwriting income			9.0				12.7
Ratios
Loss and loss expense ratio			67.0	%			72.6	%
Acquisition cost ratio			3.0				4.9
General and administrative expense ratio			21.7				12.3
Expense ratio			24.7				17.2
Combined ratio			91.7				89.8