10-K
Table of Contents


_________________________________________________________________________
_________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
Form 10-K
_______________________________ 
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-32938
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, AG
(Exact Name of Registrant as Specified in Its Charter)
Switzerland
 
98-0681223
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
Gubelstrasse 24, Park Tower, 15th Floor, 6300 Zug, Switzerland
(Address of Principal Executive Offices and Zip Code)
41-41-768-1080
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Shares, par value CHF 4.10 per share
 
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨        No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
  
Accelerated filer  ¨
  
Non-accelerated filer  ¨
  
Smaller reporting company  ¨
 
  
(Do not check if a smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨        No  þ
The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $3.9 billion based on the closing sale price of the registrant’s common shares on the New York Stock Exchange on that date.
As of February 15, 2016, 90,474,045 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A with respect to the annual general meeting of the shareholders of the registrant scheduled to be held on April 19, 2016 is incorporated in Part III of this Form 10-K.



TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
PART IV
ITEM 15.




PART I
References in this Annual Report on Form 10-K to the terms “we,” “us,” “our,” “the company” or other similar terms mean the consolidated operations of Allied World Assurance Company Holdings, AG, a Swiss holding company, and our consolidated subsidiaries, unless the context requires otherwise. References to the terms “Allied World Switzerland” or “Holdings” means only Allied World Assurance Company Holdings, AG. References to our “insurance subsidiaries” may include our reinsurance subsidiaries. References to “$” are to the lawful currency of the United States and to “CHF” are to the lawful currency of Switzerland. References to Holdings’ “common shares” means its registered voting shares. For your convenience, we have included a glossary of selected insurance and reinsurance terms beginning on page 32.

 
Item 1.
Business

Overview

We are a Swiss-based holding company headquartered in Switzerland, whose subsidiaries provide innovative property, casualty and specialty insurance and reinsurance solutions to clients worldwide. We were formed in Bermuda in 2001 and have continued to maintain significant insurance and reinsurance operations there following our redomestication to Switzerland in 2010.
  
As of December 31, 2015, we had $13.5 billion of total assets and $3.5 billion of shareholders’ equity. For the year ended December 31, 2015, our North American Insurance segment accounted for 58.7%, our Global Markets Insurance segment accounted for 15.4% and our Reinsurance segment accounted for 25.9% of our total gross premiums written of $3,093.0 million. As of December 31, 2015, we had a total of 1,433 full-time employees. We believe that our employee relations are good.

Available Information

We make available, free of charge through our website (www.awac.com), our financial information, including the information contained in our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the U.S. Securities and Exchange Commission (the “SEC”). We also make available, free of charge through our website, our Audit Committee Charter, Enterprise Risk Committee Charter, Nominating & Corporate Governance Committee Charter, Compensation Committee Charter, Investment Committee Charter, Corporate Governance Guidelines, Code of Business Conduct and Ethics and Code of Ethics for Chief Executive Officer and Senior Financial Officers. Except for documents specifically incorporated by reference into this Form 10-K, information contained on our website or that can be accessed through our website, is not incorporated by reference in this Form 10-K. Printed documents are also available for any shareholder who sends a request to Allied World Assurance Company Holdings, AG, Gubelstrasse 24, Park Tower, 15th Floor, 6300 Zug, Switzerland, attention: Theodore Neos, Corporate Secretary, or via e-mail to secretary@awac.com. Reports and other information we file with the SEC may also be viewed at the SEC’s website at www.sec.gov or viewed or obtained at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the SEC Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Our Strategy
 
Our business objective is to generate attractive returns on equity and book value per share growth for our shareholders. We seek to achieve this objective by executing the following strategies:

Capitalize on profitable underwriting opportunities.  Our management and underwriting teams are positioned to identify business with attractive risk/reward characteristics. We pursue a strategy that emphasizes profitability, not market share. Key elements of this strategy are prudent risk selection, appropriate pricing and adjusting our business mix to remain flexible and opportunistic. We seek ways to take advantage of underwriting opportunities that we believe will be profitable.

Exercise underwriting and risk management discipline.  We believe that we exercise underwriting and risk management discipline by: (i) maintaining a diverse spread of risk across product lines and geographic regions,

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(ii) managing our aggregate property catastrophe exposure through the application of sophisticated modeling tools, (iii) monitoring our exposures on non-property catastrophe coverages, (iv) adhering to underwriting guidelines across our business lines and (v) fostering a culture that focuses on enterprise risk management and strong internal controls.
 
Employ a diversified investment strategy.  We believe that we follow a diversified investment strategy designed to emphasize the preservation of capital, provide adequate liquidity for the prompt payment of claims and generate returns for our shareholders. Our investment portfolio consists primarily of investment-grade, fixed-maturity securities of short-to medium-term duration.

Competition

Competition in the insurance and reinsurance industry is substantial. Our competitors include other stock companies, mutual companies and other underwriting organizations, including major U.S. and non-U.S. companies, some of which have longer operating histories, more capital and/or more favorable ratings than we do, as well as greater marketing, management and business resources. In addition, risk-linked securities, derivatives, captive companies and other alternative risk transfer vehicles, many of which are offered by entities other than insurance and reinsurance companies, also compete with us. The availability of these non-traditional products could reduce the demand for both traditional insurance and reinsurance products.
 
Market participants compete on the basis of many factors, including premium rates, policy terms and conditions, quality of service, claims handling service and expertise, and reputation and experience in the risks underwritten.  Our ability to continue to compete is dependent on a number of variables, particularly our ability to maintain appropriate financial strength ratings assigned by independent ratings agencies. For more information concerning our financial strength ratings, see “— Financial Strength Ratings”.

Our Operating Segments

We have three business segments: North American Insurance, Global Markets Insurance and Reinsurance. These segments and their respective lines of business and products may, at times, be subject to different underwriting cycles. We modify our product strategy as market conditions change and new opportunities emerge by developing new products, targeting new industry classes or de-emphasizing existing lines. Our diverse underwriting skills and flexibility allow us to concentrate on the business lines where we expect to generate the greatest returns. Each of our segments utilizes significant gross limit capacity.

Financial data relating to our three segments is included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our consolidated financial statements included in this report.

The gross premiums written in each segment for the years ended December 31, 2015, 2014 and 2013 were as follows:
 
Year Ended 
 December 31, 2015
 
Year Ended 
 December 31, 2014
 
Year Ended 
 December 31, 2013
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
($ in millions)
North American Insurance
$
1,815.3

 
58.7
%
 
$
1,716.3

 
58.4
%
 
$
1,572.4

 
57.4
%
Global Markets Insurance
476.3

 
15.4
%
 
280.5

 
9.6
%
 
232.6

 
8.5
%
Reinsurance
801.4

 
25.9
%
 
938.6

 
32.0
%
 
933.8

 
34.1
%
Total
$
3,093.0

 
100.0
%
 
$
2,935.4

 
100.0
%
 
$
2,738.8

 
100.0
%

North American Insurance Segment

General

The North American Insurance segment is comprised of our direct insurance operations in the United States, Bermuda and Canada. This segment includes the direct insurance operations of:

Allied World Assurance Company, Ltd, a registered Class 4 Bermuda insurance and reinsurance company that writes business from its office in Bermuda; and

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Allied World Insurance Company, Allied World Assurance Company (U.S.) Inc., Allied World National Assurance Company, Allied World Specialty Insurance Company and Allied World Surplus Lines Insurance Company, which are authorized or eligible to write insurance on both a surplus lines and admitted basis throughout the United States.

Within this segment, we provide a diverse range of specialty liability products, with a particular emphasis on coverages for casualty and professional liability risks. Additionally, we offer a selection of direct general property and healthcare insurance products. Our Bermuda operations underwrite primarily larger, Fortune 1000 casualty and property risks for clients domiciled in North America, while our operations in the United States and Canada generally write small- and middle-market, non-Fortune 1000 accounts domiciled in North America, including public entities, private companies and non-profit organizations. Our underwriters are spread among our 12 offices in the United States, Bermuda and Canada because we believe it is important to be present in the markets where we compete for business. We believe that over the years we have become a significant writer of casualty, professional liability and other specialty liability coverages, and we intend to continue to seek attractive opportunities in the North American market.

The table below illustrates the breakdown of the company’s North American direct insurance gross premiums written by line of business for the year ended December 31, 2015.
 
Year Ended 
 December 31, 2015
 
Amount
 
% of Total
 
($ in millions)
Casualty
$
601.0

 
33.0
%
Professional liability
424.9

 
23.4
%
Property
286.3

 
15.8
%
Programs
191.6

 
10.6
%
Healthcare
171.7

 
9.5
%
Specialty and other(1)
139.8

 
7.7
%
 
$
1,815.3

 
100.0
%
________________________
(1) Includes our environmental, primary construction, surety, trade credit and product recall lines of business.

Products and Customer Base

Our operations focus on insuring specialty liability risks, such as professional liability, environmental liability, product liability, healthcare liability and commercial general liability risks. We regularly assess our product mix, and we evaluate new products and markets where we believe our underwriting and service will allow us to differentiate our offerings. We offer professional liability products, including policies covering directors and officers, employment practices, fiduciary liability insurance, and mergers and acquisitions. We also offer errors and omissions liability policies designed for a variety of service providers, including law firms, technology companies, insurance companies, insurance agents and brokers, and municipalities. In addition, we provide both primary and excess liability and other casualty coverages to the healthcare industry, including hospitals and hospital systems, managed care organizations, accountable care organizations and other medical service providers.
 

With respect to general casualty products, we provide both primary and excess capacity, and our focus is on complex liability risks in a variety of industries, including construction, real estate, public entities, retailers, manufacturing, transportation, and finance and insurance services. We also offer comprehensive insurance to contractors and their employees working outside of the United States on contracts for agencies of the U.S. government or foreign operations of U.S. companies.

Our property insurance operations focus on direct coverage of physical property and business interruption coverage for commercial property risks as well as inland marine business. We write solely commercial coverages and concentrate on primary risk layers of insurance (as opposed to excess layers). This means that we are typically part of the first group of insurers that cover a loss up to a specified limit. We offer general property products from our underwriting platforms in North America and cover risks for retail chains, real estate, manufacturers, hotels and casinos, and municipalities.

For more information concerning our gross premiums written by line of business in our North American Insurance segment, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Underwriting Results by Operating Segments — North American Insurance Segment — Comparison of Years Ended December 31, 2015 and 2014” and “— Comparison of Years Ended December 31, 2014 and 2013.”

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Global Markets Insurance Segment

General

The Global Markets Insurance segment includes all of our direct insurance operations outside of North America. This segment includes the direct insurance operations of:

Allied World Assurance Company, Ltd, operating from its branch offices in Asia and Australia;
Allied World Assurance Company (Europe) Limited, which is incorporated in Ireland and writes business primarily originating from Dublin, Ireland, the United Kingdom and Continental Europe;
Allied World Assurance Company, AG, which is incorporated in Switzerland and writes insurance from its office in Zug, Switzerland and is also approved to operate a branch office in Bermuda; and
Allied World Managing Agency Limited, which is incorporated in the United Kingdom and is the managing agent of our Lloyd’s Syndicate 2232.

We operate primarily in Europe and Asia Pacific and have an office in Miami that underwrites Latin American risks. While our European offices have historically focused on mid-sized to large European and multi-national companies domiciled outside of North America, we continue to expand our product offerings for small- and middle-market accounts and for specialty classes of business with global exposures. We underwrite a variety of professional liability, general casualty, healthcare liability, property, marine, onshore construction and personal lines products from our offices in Asia Pacific. In addition, Syndicate 2232 writes international property, general casualty and professional liability, marine, aviation and on-shore construction targeted either at key territories or where our customers have requested a Lloyd’s policy. Our staff in the Global Markets Insurance segment is spread among our offices in Dublin, Hong Kong, London, Miami, Singapore, Sydney and Zug because we believe it is important to be physically present in the markets where we compete for business.

The table below illustrates the breakdown of the company’s Global Markets insurance gross premiums written by line of business for the year ended December 31, 2015. 
 
Year Ended 
 December 31, 2015
 
Amount
 
% of Total
 
($ in millions)
Professional liability
$
141.4

 
29.7
%
Specialty and other(1)
140.9

 
29.6
%
Casualty
109.0

 
22.9
%
Property
85.0

 
17.8
%
 
$
476.3

 
100.0
%
________________________
(1) Includes our accident and health, trade credit, aviation, marine and onshore construction lines of business.

Products and Customer Base

Within our Global Markets Insurance segment, we provide general casualty products, including product liability, employers’ liability, motor, environmental liability, professional liability, errors and omissions and healthcare liability products. Our general casualty lines of business serve a wide variety of industries and are increasingly focused on small- and middle-market accounts. We offer professional liability products, including policies covering directors and officers, employment practices and fiduciary liability insurance. We also offer errors and omissions liability policies designed for a variety of service providers, including law firms, technology companies, financial institutions, insurance companies and brokers, and engineering and construction firms. Our healthcare underwriters provide products to a variety of healthcare providers such as hospitals, clinics, miscellaneous medical facilities, physicians and physician groups.

Our property products include physical damage and business interruption coverage for commercial risks as well as specialized products that cover specific building projects during the course of construction. We offer aviation products that encompass airline, aerospace and general aviation classes of business. Our marine products cover all types of goods in transit. We offer short- and medium-term trade credit insurance for clients that export primarily to emerging markets.


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For more information on our gross premiums written by line of business in our Global Markets Insurance segment, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Underwriting Results by Operating Segments — Global Markets Insurance Segment — Comparison of Years Ended December 31, 2015 and 2014” and “— Comparison of Years Ended December 31, 2014 and 2013.”

Reinsurance Segment

General

Our Reinsurance segment includes the reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages, including property catastrophe coverage written by other reinsurance companies. This segment includes the reinsurance operations of:

Allied World Assurance Company, Ltd, operating from its office in Bermuda and branch offices in Asia;
Allied World Assurance Company (Europe) Limited, which is incorporated in Ireland and writes business through its office in London;
Allied World Assurance Company, AG, which is incorporated in Switzerland and writes reinsurance business from its office in Zug, Switzerland;
Allied World Reinsurance Management Company, which is licensed to write as a managing general underwriter for our U.S. reinsurance business; and
Allied World Managing Agency Limited, which is incorporated in the United Kingdom and is the managing agent of our Lloyd’s Syndicate 2232.

In order to diversify our portfolio and complement our direct insurance business, we write reinsurance on both a treaty and a facultative basis and target several niche markets, including professional liability lines, specialty casualty, property for U.S. regional insurers, accident and health, marine, aerospace and crop risks. Overall, we strive to diversify our reinsurance portfolio through the appropriate combination of business lines, ceding source, geography and mix of product between quota share and excess-of-loss treaties. Our primary customer focus is on highly-rated carriers with proven underwriting skills and dependable operating models.

We determine appropriate pricing either by using pricing models built or approved by our actuarial staff or by relying on established pricing set by our pricing actuaries for a specific treaty. Pricing models are generally used for facultative reinsurance, property catastrophe reinsurance, property per risk reinsurance, workers compensation and personal accident catastrophe reinsurance. Other types of reinsurance rely on actuarially-established pricing. On a written basis, our business mix is more heavily weighted to reinsurance during the first three months of the year.

The table below illustrates the breakdown of the company’s reinsurance gross premiums written by line of business for the year ended December 31, 2015.
 
Year Ended 
 December 31, 2015
 
Amount
 
% of Total
 
($ in millions)
Property
$
421.6

 
52.6
%
Casualty
192.9

 
24.1
%
Specialty
186.9

 
23.3
%
 
$
801.4

 
100.0
%

Product Lines and Customer Base

The principal sources of revenue for this segment are property, casualty and specialty reinsurance. The insurers we reinsure range from single state to nationwide insurers located in the United States as well as specialty carriers or the specialty divisions of standard lines carriers. For our non-U.S. reinsurance business, our clients include multi-national insurers, single territory insurers, niche carriers and Lloyd’s syndicates. We focus on niche programs and coverages, frequently sourced from excess and surplus lines insurers. We target a portfolio of well-rated companies that are highly knowledgeable in their product lines, have the financial resources to execute their business plans and are committed to underwriting discipline throughout the underwriting cycle.
 


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Our property reinsurance contracts protect insurers who write residential, commercial and industrial accounts globally. We also write Euro-centric business and business for Continental European companies, including through the use of our Syndicate 2232. Our property reinsurance treaties are structured as either quota share or excess-of-loss.

Our casualty reinsurance business consists of general casualty and professional liability lines. We write mostly treaty business for global accounts, focused primarily in the United States. Our general casualty treaties cover working layer, intermediate layer and catastrophe exposures. We sell both quota share and excess-of-loss reinsurance. We principally underwrite general liability, auto liability and commercial excess and umbrella liability for both admitted and non-admitted companies. Our general casualty facultative business is principally comprised of lower-attachment, individual-risk reinsurance covering automobile liability, general liability and workers compensation risks for many of the largest U.S. property-casualty and surplus lines insurers. Our professional liability treaties cover several products, primarily directors’ and officers’ liability, but also attorneys’ malpractice, medical malpractice, miscellaneous professional classes and transactional risk liability. The complex exposures undertaken by this unit demand highly technical underwriting and pricing analysis.

For our specialty reinsurance business, we underwrite on a global basis crop, marine and aviation, and other specialty lines of business, including accident and health business, with an emphasis on catastrophe personal accident programs and workers compensation catastrophe business.

For more information on our gross premiums written by line of business in our Reinsurance segment, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Underwriting Results by Operating Segments — Reinsurance Segment — Comparison of Years Ended December 31, 2015 and 2014” and “— Comparison of Years Ended December 31, 2014 and 2013.”

Distribution

As a commercial insurer, we primarily offer products through independent insurance intermediaries, including retail brokerage firms and excess and surplus lines wholesalers. We typically pay a commission to agents and brokers for business that we accept from them.

Within our North American Insurance segment, Marsh & McLennan Companies, Inc. (“Marsh”) and Aon plc (“Aon”) accounted for 14.0% and 12.2%, respectively, of our gross premiums written in this segment during 2015.

Our Global Markets Insurance segment maintains significant relationships with Marsh, Aon and Willis Group Holdings (“Willis”), which accounted for 17.7%, 14.3% and 13.0%, respectively, of our gross premiums written in this segment during 2015.

Due to a number of factors, including transactional size and complexity, the distribution infrastructure of the reinsurance marketplace is characterized by relatively few intermediary firms. As a result, we have close business relationships with a small number of reinsurance intermediaries, and our business during 2015 was primarily with affiliates of Marsh, Aon and Willis, which accounted for 43.6%, 20.9% and 11.7%, respectively, of our gross premiums written in this segment during 2015.

In our opinion, no material part of our business is dependent upon a single insured or a single group of insureds; however, due to the substantial percentage of premiums produced in our Global Markets Insurance and Reinsurance segments by the top three intermediaries, the loss of business from any one of them could have a material adverse effect on our business. Likewise, the loss of business from Marsh or Aon could have a material adverse effect on our North American insurance business.

Certain of our products within our North American Insurance segment and Global Markets Insurance segment are also underwritten and distributed through third-party program administrators. To help align interests, we seek to establish incentive-based compensation as a component of the fees paid to program administrators, which encourages better long-term underwriting results. We contract with third-party agencies to underwrite a variety of programs. We generally have opted to outsource the claims-handling for these programs given the specialty nature of the business they underwrite. Before delegating underwriting authority, we consider the integrity, experience and reputation of each program administrator, as well as the potential profitability of the business and availability of reinsurance. Once a program is established, we conduct regular ongoing reviews and audits of the program administrator and the claims-handing if it has been outsourced. We do not believe that the loss of any one program or relationship with any one program administrator would have a material adverse effect on our business, and no single program accounts for 10% or more of our total revenues.

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Enterprise Risk Management

While the assumption of risk is inherent in our business, we believe that we have developed a strong enterprise risk management (“ERM”) framework that is integrated into the management of our business. Our ERM framework consists of numerous systems, processes and controls designed by our senior management, with oversight by our Board of Directors and its Enterprise Risk Committee, and implemented across our organization to identify, quantify, monitor and, where possible, mitigate internal and external risks that could materially impact our operations, financial condition and reputation.

One key element of our ERM framework is our economic capital model. Utilizing this modeling framework, we review the relative interaction between risks impacting us from various sources, including our underwriting practices and the investments we make. Our ERM supports our firm-wide, decision-making process by aiming to provide reliable and timely risk information. Our primary ERM objectives are to ensure the sustainability of the enterprise and to maximize our risk-adjusted returns on capital. Our ERM is a dynamic process, with periodic updates being made to reflect organizational processes and the recalibration of our models, as well as staying current with changes within our industry and the global economic environment.

We have identified the following as the main categories of risk within our business:

Insurance risk: Risk of fluctuations in benefits payable to policyholders and cedents, including premium or underwriting risk, catastrophe risk and reserve risk.

Investment risk:  Risk arising from fluctuations in the value of, or income from, invested assets, including fluctuations due to movements in interest rates, foreign exchange rates, credit spreads, credit defaults and/or equity volatility.
 
Reinsurance credit risk:  The ceding of policies we write to other reinsurers is a principal risk management activity, and it requires careful monitoring of the concentration of our reinsured exposures and the creditworthiness of the reinsurers to which we cede business.

Operational risk:  Encompasses a wide range of risks related to our operations, including corporate governance, claims settlement processes, regulatory compliance, employment practices, human resources and information technology (“IT”) exposures (including disaster recovery, cyber-security and business continuity planning).

Our risk governance structure includes committees comprised of senior underwriting, actuarial, finance, legal, investment and operations staff that identify, monitor and help manage each of these risks. Our management-based Risk Management Committee, chaired by our Chief Risk Officer, focuses primarily on identifying correlations among our primary categories of risk, developing metrics to assess our overall risk position, performing an annual risk assessment and continually reviewing factors that may impact our organizational risk. This risk governance structure is complemented by our internal audit department, which assesses the adequacy and effectiveness of our internal control systems and coordinates risk-based audits and compliance reviews and other specific initiatives to evaluate and address risk within targeted areas of our business as well as our risk-mitigation efforts.
 
Our management’s ERM efforts are overseen by our Board of Directors, primarily through its Enterprise Risk Committee. This committee, comprised of independent directors, is charged with reviewing and recommending to the Board of Directors our overall firm-wide risk appetite as well as overseeing management’s compliance therewith. Our Enterprise Risk Committee reviews our risk management methodologies, standards, tolerances and risk strategies, and reviews management’s processes for monitoring and aggregating risks across our organization. Our Audit Committee, Investment Committee and Compensation Committee also oversee aspects of our financial, investment and compensation risks, respectively. Internal controls and ERM can provide reasonable but not absolute assurance that our control objectives will be met. The possibility of material financial loss remains notwithstanding our ERM efforts.

Financial Strength Ratings

Ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. A.M. Best, Moody’s, Standard & Poor’s and Fitch Ratings have each developed a rating system to evaluate an insurer’s or reinsurer’s financial strength and ability to meet ongoing obligations to its policyholders. Each rating reflects the rating agency’s opinion of the capitalization, risk management, leadership and sponsorship of the entity to which it relates, and is neither an evaluation directed to investors in our common shares nor a recommendation to buy, sell or hold our common shares. Each rating agency maintains a letter scale rating system, including numerous incremental rating categories: A.M. Best’s rating system includes 15

7


separate categories, ranging from “A++” (Superior) to “F” (In Liquidation); Moody’s rating system includes 21 separate categories, ranging from “Aaa” (Exceptional) to “C” (Lowest-rated); Standard & Poor’s rating system includes 22 separate categories, ranging from “AAA” (Extremely Strong) to “R” (under regulatory supervision); Fitch Ratings’ rating system includes 19 separate categories, ranging from “AAA” (Exceptionally Strong) to “C” (Distressed). Our operating subsidiaries and their respective ratings from each rating agency are provided in the table below. Each rating is subject to periodic review by, and may be revised upward, downward or revoked at the sole discretion of, the rating agency. For further discussion of this risk, see Item 1A. “Risk Factors.”
 
 
 
 
 
 
 
 
 
 
 
 
 
Subsidiary
Rated “A”
(Excellent) from
A.M. Best(1)
 
Rated “A2”
(Good)  from
Moody’s(2)
 
Rated  “A”
(Strong) from
Standard & Poor’s(3)
 
Rated  “A+”
(Strong) from
Fitch Ratings(4)
Allied World Assurance Company, Ltd
 
X
  
 
X
  
 
X
  
 
X
Allied World Assurance Company (U.S.) Inc.
 
X
  
 
X
  
 
X
  
 
X
Allied World National Assurance Company
 
X
  
 
X
  
 
X
  
 
X
Allied World Insurance Company
 
X
  
 
X
  
 
X
  
 
X
Allied World Specialty Insurance Company
 
X
  
 
  
 
  
 
Allied World Surplus Lines Insurance Company
 
X
  
 
  
 
  
 
Allied World Assurance Company, AG
 
  
 
  
 
X
  
 
Allied World Assurance Company (Europe) Limited
 
X
  
 
  
 
X
  
 
(1)
Third highest of 15 available ratings from A.M. Best.
(2)
Sixth highest of 21 available ratings from Moody’s.
(3)
Sixth highest of 22 available ratings from Standard & Poor’s.
(4)
Fifth highest of 19 available ratings from Fitch Ratings.

In addition to the above-named subsidiaries, we underwrite through our Lloyd’s Syndicate 2232. All Lloyd’s syndicates benefit from Lloyd’s central resources, including Lloyd’s brand, its network of global licenses and the central fund. As all of Lloyd’s policies are ultimately backed by this common security, a single market rating can be applied. A.M. Best has assigned Lloyd’s a financial strength rating of “A” (Excellent), Standard & Poor’s has assigned Lloyd’s a financial strength rating of “A+” (Strong) and Fitch Ratings has assigned Lloyd’s a financial strength rating of “AA-” (Very Strong).
  
Reserve for Losses and Loss Expenses

We are required by applicable insurance laws and regulations in the countries in which we operate and accounting principles generally accepted in the United States (“U.S. GAAP”) to establish loss reserves to cover our estimated liability for the payment of all losses and loss expenses incurred with respect to premiums earned on the policies and treaties that we write. These reserves are balance sheet liabilities representing estimates of losses and loss expenses we are required to pay for insured or reinsured claims that have occurred as of or before the balance sheet date. It is our policy to establish these losses and loss expense reserves using prudent actuarial methods after reviewing all information known to us as of the date they are recorded. For more specific information concerning the statistical and actuarial methods we use to estimate ultimate expected losses and loss expenses, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Reserve for Losses and Loss Expenses.”

The following tables show the development of gross and net reserves for losses and loss expenses, respectively, over a ten-year period. The tables do not present accident or policy year development data. Each table begins by showing the original year-end reserves recorded at the balance sheet date for each of the years presented (“as originally estimated”). This represents the estimated amounts of losses and loss expenses arising in all prior years that are unpaid at the balance sheet date, including reserves for losses incurred but not reported (“IBNR”). The re-estimated liabilities reflect additional information regarding claims incurred prior to the end of the preceding financial year. A (redundancy) or deficiency arises when the re-estimation of reserves recorded at the end of each prior year is (less than) or greater than its estimation at the preceding year-end. The cumulative (redundancies) or deficiencies represent cumulative differences between the original reserves and the currently re-estimated liabilities over all prior years. Annual changes in the estimates are reflected in the consolidated statement of operations and comprehensive income for each year, as the liabilities are re-estimated.
 

The lower sections of the tables show the portions of the original reserves that were paid (claims paid) as of the end of subsequent years. This section of each table provides an indication of the portion of the re-estimated liability that is settled and

8


is unlikely to develop in the future. For our quota share treaty reinsurance business, we have estimated the allocation of claims paid to applicable years based on a review of large losses and earned premium percentages.

We do not consider it appropriate to extrapolate future (redundancies) or deficiencies based upon our tables, as conditions and trends that have affected development of the liability in the past may not necessarily recur in the future. We believe that our current estimates of liabilities appropriately reflect our current knowledge of the business and the prevailing market, social, legal and economic conditions while giving due consideration to historical trends and volatility evidenced in the markets over the longer term.

Development of Reserve for Losses and Loss Expenses Cumulative Deficiency (Redundancy)
Gross Losses
 
Year Ended December 31,
 
 
 
2005
 
2006
 
2007
 
2008(1)
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015(2)
 
($ in millions)
As Originally Estimated:
$
3,543.8

 
$
3,900.5

 
$
4,307.6

 
$
4,576.8

 
$
4,761.8

 
$
4,879.2

 
$
5,225.1

 
$
5,645.5

 
$
5,766.5

 
$
5,881.2

 
$
6,456.2

Liability Re-estimated as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One Year Later
3,403.3

 
3,622.7

 
3,484.9

 
4,290.3

 
4,329.3

 
4,557.8

 
4,991.2

 
5,375.6

 
5,491.1

 
5,751.2

 
 
Two Years Later
3,249.3

 
3,247.9

 
3,149.3

 
3,877.8

 
3,975.2

 
4,246.5

 
4,707.7

 
5,138.5

 
5,359.3

 
 
 
 
Three Years Later
2,894.5

 
2,911.3

 
2,791.1

 
3,576.8

 
3,670.3

 
3,953.8

 
4,449.1

 
4,984.7

 
 
 
 
 
 
Four Years Later
2,558.6

 
2,605.8

 
2,533.6

 
3,295.7

 
3,446.4

 
3,719.4

 
4,261.3

 
 
 
 
 
 
 
 
Five Years Later
2,315.9

 
2,432.6

 
2,300.1

 
3,101.7

 
3,285.2

 
3,603.6

 
 
 
 
 
 
 
 
 
 
Six Years Later
2,190.5

 
2,314.2

 
2,184.3

 
3,037.9

 
3,232.4

 
 
 
 
 
 
 
 
 
 
 
 
Seven Years Later
2,168.5

 
2,263.0

 
2,115.2

 
3,048.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
2,151.4

 
2,237.5

 
2,121.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
2,155.1

 
2,224.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
2,136.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative (Redundancy)
(1,407.3
)
 
(1,676.5
)
 
(2,186.0
)
 
(1,528.4
)
 
(1,529.4
)
 
(1,275.6
)
 
(963.8
)
 
(660.8
)
 
(407.2
)
 
(130.0
)
 
 
Cumulative Claims Paid as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One Year Later
718.3

 
560.2

 
583.4

 
574.8

 
634.5

 
656.6

 
852.1

 
1,112.6

 
1,165.6

 
1,413.6

 


Two Years Later
1,154.9

 
1,002.5

 
943.9

 
1,089.5

 
1,036.2

 
1,242.1

 
1,577.0

 
1,961.8

 
2,110.7

 
 
 
 
Three Years Later
1,521.6

 
1,252.9

 
1,311.4

 
1,391.3

 
1,408.0

 
1,671.5

 
2,185.2

 
2,606.8

 
 
 
 
 
 
Four Years Later
1,662.8

 
1,531.9

 
1,469.3

 
1,680.7

 
1,737.2

 
2,097.7

 
2,597.0

 
 
 
 
 
 
 
 
Five Years Later
1,829.0

 
1,622.5

 
1,634.5

 
1,904.4

 
2,071.9

 
2,356.0

 
 
 
 
 
 
 
 
 
 
Six Years Later
1,864.9

 
1,705.9

 
1,789.1

 
2,136.2

 
2,275.3

 
 
 
 
 
 
 
 
 
 
 
 
Seven Years Later
1,916.9

 
1,810.5

 
1,910.2

 
2,308.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
1,995.1

 
1,920.1

 
2,032.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
2,033.3

 
1,982.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
2,070.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Reserve for losses and loss expenses includes the reserves for losses and loss expenses of Allied World Insurance Company, which we acquired in February 2008, and AW Underwriters Inc., which we acquired in October 2008.
(2)
Reserve for losses and loss expenses includes the reserves for losses and loss expenses of the Hong Kong, Singapore and Labuan branches of RSA, which we acquired in April 2015.


9


Development of Reserve for Losses and Loss Expenses Cumulative Deficiency (Redundancy)
Gross Losses
 
 
Year Ended December 31,
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Liability Re-estimated as of:
One Year Later
96
 %
 
93
 %
 
81
 %
 
94
 %
 
91
 %
 
93
 %
 
96
 %
 
95
 %
 
95
 %
 
98
 %
Two Years Later
92
 %
 
83
 %
 
73
 %
 
85
 %
 
83
 %
 
87
 %
 
90
 %
 
91
 %
 
93
 %
 
 
Three Years Later
82
 %
 
75
 %
 
65
 %
 
78
 %
 
77
 %
 
81
 %
 
85
 %
 
88
 %
 
 
 
 
Four Years Later
72
 %
 
67
 %
 
59
 %
 
72
 %
 
72
 %
 
76
 %
 
82
 %
 
 
 
 
 
 
Five Years Later
65
 %
 
62
 %
 
53
 %
 
68
 %
 
69
 %
 
74
 %
 
 
 
 
 
 
 
 
Six Years Later
62
 %
 
59
 %
 
51
 %
 
66
 %
 
68
 %
 
 
 
 
 
 
 
 
 
 
Seven Years Later
61
 %
 
58
 %
 
49
 %
 
67
 %
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
61
 %
 
57
 %
 
49
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
61
 %
 
57
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
60
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative (Redundancy)
(40
)%
 
(43
)%
 
(51
)%
 
(33
)%
 
(32
)%
 
(26
)%
 
(18
)%
 
(12
)%
 
(7
)%
 
(2
)%
Gross Losses and Loss Expense Cumulative Paid as a Percentage of Originally Estimated Liability
Cumulative Claims Paid as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One Year Later
20
 %
 
14
 %
 
14
 %
 
13
 %
 
13
 %
 
13
 %
 
16
 %
 
20
 %
 
20
 %
 
24
 %
Two Years Later
33
 %
 
26
 %
 
22
 %
 
24
 %
 
22
 %
 
25
 %
 
30
 %
 
35
 %
 
37
 %
 
 
Three Years Later
43
 %
 
32
 %
 
30
 %
 
30
 %
 
30
 %
 
34
 %
 
42
 %
 
46
 %
 
 
 
 
Four Years Later
47
 %
 
39
 %
 
34
 %
 
37
 %
 
36
 %
 
43
 %
 
50
 %
 
 
 
 
 
 
Five Years Later
52
 %
 
42
 %
 
38
 %
 
42
 %
 
44
 %
 
48
 %
 
 
 
 
 
 
 
 
Six Years Later
53
 %
 
44
 %
 
42
 %
 
47
 %
 
48
 %
 
 
 
 
 
 
 
 
 
 
Seven Years Later
54
 %
 
46
 %
 
44
 %
 
50
 %
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
56
 %
 
49
 %
 
47
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
57
 %
 
51
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
58
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

10


Development of Reserve for Losses and Loss Expenses Cumulative Deficiency (Redundancy)
Losses Net of Reinsurance
 
 
Year Ended December 31,
 
2005
 
2006
 
2007
 
2008(1)
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015(2)
 
($ in millions)
As Originally Estimated:
$
2,826.9

 
$
3,211.4

 
$
3,624.9

 
$
3,688.5

 
$
3,841.8

 
$
3,951.6

 
$
4,222.2

 
$
4,504.4

 
$
4,532.0

 
$
4,540.9

 
$
4,976.2

Liability Re-estimated as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One Year Later
2,662.7

 
2,978.3

 
3,312.2

 
3,440.5

 
3,528.4

 
3,698.1

 
4,051.9

 
4,324.1

 
4,319.4

 
4,459.3

 
 
Two Years Later
2,551.9

 
2,699.6

 
3,032.1

 
3,128.3

 
3,256.0

 
3,474.3

 
3,855.7

 
4,157.0

 
4,255.9

 
 
 
 
Three Years Later
2,281.0

 
2,417.0

 
2,742.5

 
2,882.6

 
3,020.0

 
3,271.5

 
3,670.5

 
4,060.8

 
 
 
 
 
 
Four Years Later
1,986.8

 
2,152.2

 
2,518.5

 
2,655.7

 
2,854.8

 
3,092.9

 
3,542.6

 
 
 
 
 
 
 
 
Five Years Later
1,776.5

 
1,997.0

 
2,326.5

 
2,516.9

 
2,720.3

 
2,999.2

 
 
 
 
 
 
 
 
 
 
Six Years Later
1,663.6

 
1,896.0

 
2,240.0

 
2,451.8

 
2,682.2

 
 
 
 
 
 
 
 
 
 
 
 
Seven Years Later
1,644.2

 
1,857.4

 
2,185.0

 
2,464.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
1,630.6

 
1,841.5

 
2,193.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
1,639.9

 
1,828.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
1,624.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative (Redundancy)
(1,202.5
)
 
(1,382.5
)
 
(1,431.8
)
 
(1,224.3
)
 
(1,159.6
)
 
(952.4
)
 
(679.6
)
 
(443.6
)
 
(276.1
)
 
(81.6
)
 
 
Cumulative Claims Paid as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One Year Later
461.3

 
377.3

 
415.2

 
415.9

 
498.1

 
542.6

 
743.8

 
974.0

 
1,001.5

 
1,201.6

 
 
Two Years Later
759.3

 
699.0

 
681.3

 
811.7

 
843.7

 
1,050.8

 
1,365.8

 
1,688.5

 
1,792.8

 
 
 
 
Three Years Later
990.5

 
884.1

 
964.8

 
1,069.3

 
1,171.5

 
1,430.2

 
1,879.5

 
2,215.0

 
 
 
 
 
 
Four Years Later
1,090.7

 
1,094.0

 
1,100.0

 
1,318.8

 
1,458.2

 
1,787.3

 
2,218.4

 
 
 
 
 
 
 
 
Five Years Later
1,220.0

 
1,167.6

 
1,244.9

 
1,515.5

 
1,735.1

 
2,009.6

 
 
 
 
 
 
 
 
 
 
Six Years Later
1,248.3

 
1,241.5

 
1,379.9

 
1,712.4

 
1,911.3

 
 
 
 
 
 
 
 
 
 
 
 
Seven Years Later
1,293.1

 
1,335.9

 
1,496.3

 
1,863.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
1,362.9

 
1,441.8

 
1,607.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
1,398.0

 
1,498.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
1,433.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Reserve for losses and loss expenses net includes the reserves for losses and loss expenses of Allied World Insurance Company, which we acquired in February 2008, and AW Underwriters Inc., which we acquired in October 2008.
(2)
Reserve for losses and loss expenses net includes the reserves for losses and loss expenses of the Hong Kong, Singapore and Labuan branches of RSA, which we acquired in April 2015.

11



Development of Reserve for Losses and Loss Expenses Cumulative Deficiency (Redundancy)
Losses Net of Reinsurance
 
 
Year Ended December 31,
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Liability Re-estimated as of:
One Year Later
94
 %
 
93
 %
 
91
 %
 
93
 %
 
92
 %
 
94
 %
 
96
 %
 
96
 %
 
95
 %
 
98
 %
Two Years Later
90
 %
 
84
 %
 
84
 %
 
85
 %
 
85
 %
 
88
 %
 
91
 %
 
92
 %
 
94
 %
 
 
Three Years Later
81
 %
 
75
 %
 
76
 %
 
78
 %
 
79
 %
 
83
 %
 
87
 %
 
90
 %
 
 
 
 
Four Years Later
70
 %
 
67
 %
 
69
 %
 
72
 %
 
74
 %
 
78
 %
 
84
 %
 
 
 
 
 
 
Five Years Later
63
 %
 
62
 %
 
64
 %
 
68
 %
 
71
 %
 
76
 %
 
 
 
 
 
 
 
 
Six Years Later
59
 %
 
59
 %
 
62
 %
 
66
 %
 
70
 %
 
 
 
 
 
 
 
 
 
 
Seven Years Later
58
 %
 
58
 %
 
60
 %
 
67
 %
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
58
 %
 
57
 %
 
61
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
58
 %
 
57
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
57
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative (Redundancy)
(43
)%
 
(43
)%
 
(39
)%
 
(33
)%
 
(30
)%
 
(24
)%
 
(16
)%
 
(10
)%
 
(6
)%
 
(2
)%
Net Losses and Loss Expense Cumulative Paid as a Percentage of Originally Estimated Liability
Cumulative Claims Paid as of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One Year Later
16
 %
 
12
 %
 
11
 %
 
11
 %
 
13
 %
 
14
 %
 
18
 %
 
22
 %
 
22
 %
 
26
 %
Two Years Later
27
 %
 
22
 %
 
19
 %
 
22
 %
 
22
 %
 
27
 %
 
32
 %
 
37
 %
 
40
 %
 
 
Three Years Later
35
 %
 
28
 %
 
27
 %
 
29
 %
 
30
 %
 
36
 %
 
45
 %
 
49
 %
 
 
 
 
Four Years Later
39
 %
 
34
 %
 
30
 %
 
36
 %
 
38
 %
 
45
 %
 
53
 %
 
 
 
 
 
 
Five Years Later
43
 %
 
36
 %
 
34
 %
 
41
 %
 
45
 %
 
51
 %
 
 
 
 
 
 
 
 
Six Years Later
44
 %
 
39
 %
 
38
 %
 
46
 %
 
50
 %
 
 
 
 
 
 
 
 
 
 
Seven Years Later
46
 %
 
42
 %
 
41
 %
 
51
 %
 
 
 
 
 
 
 
 
 
 
 
 
Eight Years Later
48
 %
 
45
 %
 
44
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Years Later
49
 %
 
47
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ten Years Later
51
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

12


Losses Net of Reinsurance
The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses for the years ended December 31, 2015, 2014 and 2013. Losses incurred and paid are reflected net of reinsurance recoveries. 
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
($ in millions)
Net reserves for losses and loss expenses, January 1
$
4,540.9

 
$
4,532.0

 
$
4,504.4

Acquisition of net reserves for losses and loss expenses (1)
259.3

 

 

Incurred related to:
 
 
 
 
 
Current year non-catastrophe
1,607.4

 
1,346.8

 
1,290.0

Current year property catastrophe
60.5

 
65.0

 
13.5

Prior year
(81.6
)
 
(212.6
)
 
(180.3
)
Total incurred
1,586.3

 
1,199.2

 
1,123.2

Paid related to:
 
 
 
 
 
Current year non-catastrophe
171.5

 
153.1

 
115.6

Current year property catastrophe
14.5

 
18.7

 

Prior year
1,201.6

 
1,001.5

 
974.0

Total paid
1,387.6

 
1,173.3

 
1,089.6

Foreign exchange revaluation
(22.7
)
 
(17.0
)
 
(6.0
)
Net reserve for losses and loss expenses, December 31
4,976.2

 
4,540.9

 
4,532.0

Losses and loss expenses recoverable
1,480.0

 
1,340.3

 
1,234.5

Reserve for losses and loss expenses, December 31
$
6,456.2

 
$
5,881.2

 
$
5,766.5

(1)
The acquisition of net reserves for losses and loss expenses relates to the acquired Asian operations.

Investments

We believe that we follow a diversified investment strategy designed to emphasize the preservation of our invested assets, provide adequate liquidity for the prompt payment of claims and produce attractive returns for our shareholders. The Investment Committee of our Board of Directors has approved an Investment Policy Statement that contains investment guidelines and supervises our investment strategy, investment activity and investment risk. The Investment Committee regularly monitors our overall investment results and compliance with investment objectives and guidelines set forth in the Investment Policy Statement, and ultimately reports our overall investment results to the Board of Directors.

To help ensure adequate liquidity for the payment of claims, we take into account the maturity and duration of our investment portfolio and our general liability profile. In making investment decisions, we consider the impact of various catastrophic events to which we may be exposed. The majority of our assets are invested in fixed income markets. Our Investment Policy Statement contains restrictions on the maximum amount of our investment portfolio that may be invested in alternative investments (such as hedge funds and private equity vehicles) as well as the minimum amount that must be maintained in investment grade fixed income securities and cash. Our Investment Policy Statement also includes restrictions on the portfolio’s composition, including limits on issuer type, industry sector, credit quality, portfolio duration, the amount of investments in approved countries and permissible security types.

For several asset classes, we have entered into investment management agreements with outside investment managers to provide us with certain discretionary investment management services. Engaging investment managers benefits us in a variety of ways, including by providing operational and cost efficiencies, a diversity of investment styles and approaches and introducing us to innovations in research and risk management. In addition, to maintain control over investment managers, we have developed investment guidelines that include restrictions on the permissible security types that our investment managers may include in the portfolios they manage. Our investment management agreements may generally be terminated by either party upon 30 days’ prior written notice.

As of December 31, 2015, we had total investments and cash and cash equivalents of $9.2 billion, including restricted cash, fixed-maturity securities, equity securities, hedge fund, private equity investments and other securities. The average credit quality of our investments is rated A+ by Standard & Poor’s and A1 by Moody’s. Our current Investment Policy Statement requires that short-term instruments must be rated a minimum of A-1, F-1 or P-1 by Standard & Poor’s, Moody’s or

13


Fitch. The target duration range is 1.00 to 4.25 years. The portfolio has a total return rather than income orientation. The average duration of our investment portfolio was 2.6 years as of December 31, 2015.

For more information on the securities in our investment portfolio, including breakdowns of asset classes, credit quality and duration, please see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations  — Critical Accounting Policies — Fair Value of Financial Instruments;” Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Notes 4, 5 and 6 of the notes to the consolidated financial statements in this Form 10-K.

Regulatory Matters

General

Our insurance and reinsurance subsidiaries must comply with many laws and regulations in the countries and local jurisdictions where we operate and sell our products. Compliance obligations are increasing in most jurisdictions as the focus on insurance regulatory controls has escalated in recent years, with particular emphasis on regulation of solvency, risk management and internal controls.

Group Supervision

The Bermuda Monetary Authority (“BMA”) acts as the group supervisor for Allied World Assurance Company, Ltd, our lead insurance and reinsurance subsidiary, which has been named the “designated insurer” for group supervisory purposes. In accordance with the Group Supervisory and Insurance Group Solvency Rules that became effective in January 2012, Allied World Assurance Company, Ltd is required to prepare and submit to the BMA annual group U.S. GAAP financial statements, annual group statutory financial statements, annual group statutory financial and capital returns, and unaudited quarterly returns.
  
Bermuda

Allied World Assurance Company, Ltd is subject to the Bermuda Insurance Act 1978 (the “Insurance Act”). The Insurance Act imposes solvency and liquidity standards as well as auditing and reporting requirements on Bermuda insurers and reinsurers, and it empowers the BMA to supervise, investigate and intervene in the affairs of these companies. There are a number of remedial actions the BMA can take to protect the public interest if it determines that a Bermuda insurer or reinsurer may become insolvent or that a breach of the Insurance Act or of a registration condition has or is about to occur.

In addition to maintaining a principal office in Bermuda and appointing specified officers, the following are some significant aspects of the Bermuda regulatory framework with which Allied World Assurance Company, Ltd must comply:

Solvency and Capital Standards.  It must maintain a minimum solvency margin and hold available statutory economic capital and surplus equal to or in excess of its enhanced capital requirement and target capital level as determined by the BMA under the Bermuda Solvency Capital Requirement model (the “BSCR model”). The BSCR model is a risk-based capital model that establishes an enhanced capital requirement and total capital level by taking into account risk characteristics specific to an insurer’s business. Allied World Assurance Company, Ltd is required to maintain a minimum solvency margin that is equal to the greatest of (1) $100,000,000, (2) 50% of net premiums written, (3) 15% of net losses and loss expense reserves and (4) 25% of its enhanced group capital requirement.

Eligible Capital and Liquidity.  It must disclose the makeup of its capital under a “three-tiered capital system,” under which capital instruments are classified as either basic or ancillary capital, and then classified into one of three tiers based on “loss absorbency” characteristics. The minimum and maximum thresholds of tier 1, 2 and 3 capital that may be used to support a company’s minimum solvency margin, enhanced capital requirement and target capital level are determined in accordance with BMA rules. In addition, minimum liquidity must be maintained at a ratio at least equal to the value of relevant assets at not less than 75% of the amount of relevant liabilities.

Dividends.  It is prohibited from declaring or paying a dividend during any financial year if it is, or would be after such dividend, in breach of its minimum solvency margin, minimum liquidity ratio or enhanced capital requirements. It must also receive BMA approval prior to declaring or paying within any financial year dividends of more than 25% of its total statutory capital and surplus or reducing its total statutory capital by 15% or more. Additionally, under the Companies Act 1981 of Bermuda, no Bermuda company may pay a dividend if such company has reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would thereby be less than its liabilities.

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Code of Conduct.  It must comply with the BMA’s Insurance Code of Conduct, which prescribes the duties, standards, procedures and sound business principles with which all companies registered under the Insurance Act must comply.

Change of Control.  The BMA also requires written notification from any person who, directly or indirectly, becomes a holder of at least 10% of the voting shares of Allied World Assurance Company, Ltd or its parent companies within a stipulated period after becoming such a holder. The BMA may object to such a person if such person is determined to be not fit and proper to be such a holder or it may require the shareholder to reduce its holdings or voting rights.

Switzerland

Allied World Assurance Company, AG is licensed by the Swiss Financial Market Supervisory Authority (“FINMA”) to carry on insurance and reinsurance business in specific non-life lines in Switzerland. It must comply with Swiss insurance supervisory laws under regulations and guidance issued by FINMA, and it is required to satisfy capital and solvency requirements, based on a Swiss Solvency Test (which is similar in nature to the methodology applied under the European Union’s Solvency II regime).

In addition to quantitative risk measures, FINMA requires full qualitative governance and control of risk in the firm, including fitness, propriety and competence of the directors and senior management; observance of ethical standards; objective and appropriate remuneration procedures; management of conflicts of interests; the institution of a compliance function; and independence and adequate resourcing of control functions (including the responsible actuary, the risk management function and the internal audit function). Insurance companies are required to implement documented procedures for risk management and internal controls.

United States

Our U.S. insurance and reinsurance subsidiaries are admitted or surplus lines eligible in all 50 states and the District of Columbia. Allied World Insurance Company is domiciled in New Hampshire and is the lead U.S. subsidiary for regulatory purposes.

The regulation of U.S. insurance and reinsurance companies varies by state. Generally, states regulate insurance holding companies to assure the fairness of inter-affiliate transactions, the propriety of dividends paid to corporate parents and the benefits of any proposed change of control transaction. States also regulate insurer solvency, accounting matters and risk management, as well as a range of operational matters, including authorized lines of business, permitted investments, policy forms and premium rates, maximum single policy risks, adequacy of reserves for losses and unearned premiums and maintenance of in-state deposits for the benefit of policyholders. To monitor compliance, state insurance departments perform periodic market conduct examinations and financial fitness examinations, and require the filing of annual and other reports relating to the financial condition of companies and other matters.

Several of our U.S. companies serve primarily the excess and surplus lines markets and, as such, are subject to somewhat reduced regulation and reporting requirements in the jurisdictions in which they operate. These companies are generally exempt from form and rate pre-approval requirements and from state guaranty fund laws and involuntary pool participation.

Guaranty Fund Assessments and Involuntary Pools.  Virtually all states require admitted insurers to participate in various forms of guaranty associations in order to bear a portion of the losses to insureds caused by the insolvency of other insurers. Assessments are generally between 1% and 2% of the annual premiums written. Many states also require participation in assigned risk pools involving workers compensation and automobile insurance.

Risk-Based Capital.  U.S. insurers are subject to risk-based capital (“RBC”) guidelines that provide a method to measure the total adjusted capital (statutory capital and surplus plus other adjustments) taking into account the specific risk characteristics of the insurer’s investments and products. The RBC guidelines establish capital requirements for four categories: asset risk, insurance risk, interest rate risk and business risk. As of December 31, 2015, we believe all of our U.S. subsidiaries had RBC in excess of amounts requiring company or regulatory action.

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Other

Our operating subsidiaries and their respective branch offices do business in or are licensed in the following jurisdictions: Australia, Bermuda, Canada, Hong Kong, Ireland, Labuan, Singapore, Switzerland, the United Kingdom, the United States and several jurisdictions in Latin America. As of December 31, 2015, we believe all of our operating subsidiaries and their respective branch offices were in good standing in the jurisdictions in which they operate.



Item 1A.
Risk Factors.

Factors that could cause our actual results to differ materially from those in the forward-looking statements contained in this Form 10-K and other documents we file with the SEC include the following:

Risks Related to Our Company

Downgrades or the revocation of the financial strength ratings of our operating subsidiaries may affect our standing among brokers and customers and may cause our premiums and earnings to decrease significantly. Downgrades in our debt ratings could raise our borrowing costs and impact our ability to access capital markets.

Financial strength ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. The objective of these rating systems is to provide an opinion of an insurer’s or reinsurer’s financial strength and ability to meet ongoing obligations to its policyholders or cedents. Our operating subsidiaries are rated by third-party rating agencies. Each rating is subject to periodic review by, and may be revised downward or revoked at the sole discretion of, the rating agency. Our ratings are neither an evaluation directed to our investors nor a recommendation to buy, sell or hold our securities. For the financial strength ratings of our operating subsidiaries, please see Item 1. “Business — Financial Strength Ratings”.

A ratings downgrade or revocation could adversely affect our competitive position in the insurance and reinsurance industry and may make it more difficult for us to market our products, possibly resulting in substantial loss of business as customers and brokers that place this business move to competitors with higher financial strength ratings. Additionally, if any of our debt ratings were downgraded we could also incur higher borrowing costs and may have more limited means to access capital.

Additionally, it is common for our reinsurance contracts to contain terms that would allow the ceding companies to cancel the contract for the portion of our obligations if our insurance subsidiaries are downgraded below an A- by either A.M. Best or Standard & Poor’s. Whether a ceding company would exercise the cancellation right (and, in the case of our U.S. reinsurance business, as described in the paragraph below, the right to require the posting of security) would depend, among other factors, on the reason for such downgrade, the extent of the downgrade, the prevailing market conditions and the pricing and availability of replacement reinsurance coverage. Therefore, we cannot predict in advance the extent to which these rights would be exercised, if at all, or what effect any such cancellations or security postings would have on our financial condition or future operations, but such effect could be material.

For example, if ceding companies for which we have in force business were to exercise their cancellation rights or require the posting of security, the impact could result in the return of premium, the commutation of loss reserves, the posting of collateral or a combination thereof.

We do not typically post security for the reinsurance contracts we write. In addition to the cancellation right discussed above, should the applicable subsidiary’s A.M. Best rating or Standard & Poor’s rating be downgraded below A-, some ceding companies would have the right to require us to post security for our portion of the obligations under such contracts. If this were to occur, we may not have the liquidity to post security as stipulated in such reinsurance contracts.

We cannot provide any assurance regarding whether or to what extent third-party rating agencies may downgrade or revoke our financial strength or debt ratings in the future.





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

Our success depends on our ability to accurately assess the potential losses associated with the risks that we insure and reinsure. We establish reserves for losses and related expenses that represent our estimates of what we expect the ultimate resolution and administration of claims will cost. The process of establishing loss reserves can be highly complex and is subject to considerable variability and uncertainty as it requires the use of informed estimates and judgments.

Establishing an appropriate level of loss reserves is an inherently uncertain process and it is possible that our loss reserves at any given time will prove to be inadequate. For further discussion of the risk and uncertainties related to the estimation of our loss reserves please see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Reserve for Losses and Loss Expenses”.

If our loss reserves are determined to be inadequate, we will be required to increase our reserves to reflect our changed expectations at the time of such determination. This could cause a material increase in our liabilities and a material reduction in our profitability.

We may experience significant losses and volatility in our financial results from natural and man-made disasters.

As a property and casualty insurer and reinsurer, we may experience significant losses from claims arising out of natural and man-made disasters. These events can be caused by various unpredictable natural disasters including earthquakes, volcanic eruptions, hurricanes, windstorms, hailstorms, drought, severe winter weather, floods, fires, tornadoes, pandemic diseases and man-made disasters, including terrorism, cyber-attacks, explosions, war, nuclear accidents, oil spills and environmental contamination. In recent years, changing weather patterns and climatic conditions, referred to as global warming, may have added to the unpredictability and frequency of natural catastrophes in certain parts of the world and created additional uncertainty with regard to legal, regulatory and social responses thereto, as well as to future trends and exposures. A substantial portion of our revenues are derived from the underwriting of property insurance and reinsurance around the world and any large scale climate change or other systemic weather-related change could increase the frequency and severity of our loss costs due to weather-related catastrophes. In addition, increases in the values and concentrations of insured property and the effects of inflation have resulted in increased severity of losses to the industry, and we expect this trend to continue.

We also have exposure to losses resulting from acts of terrorism and political instability. Although we generally exclude acts of terrorism from our property insurance policies and property reinsurance treaties, we provide coverage in circumstances where we believe we are adequately compensated for assuming those risks. Managing risks associated with terrorism is particularly challenging given the unpredictable nature, frequency and severity of terrorist events, and the limited availability of terrorism reinsurance. In addition, our trade credit and political risk insurance lines of business protect insureds against risks arising from adverse action by foreign governments. We attempt to manage our exposure to political risk event losses, by among other things, setting credit limits by country, region, industry and individual counterparty and regularly reviewing our aggregate exposures. The occurrence of one or more large losses in our credit and political risk insurance portfolio could have a material adverse effect on our financial condition or results of operations.

The loss limitation methods we employ, such as establishing restrictive underwriting guidelines and purchasing reinsurance, may not be sufficient protection against losses from natural or man-made disasters. These types of events are inherently unpredictable and there is a possibility that loss reserves for such disasters will be inadequate. The occurrence of claims from catastrophic events could result in substantial volatility in our financial condition or results of operations for any fiscal quarter or year. The historical incidence for events such as earthquakes, pandemics and cyber-attacks is infrequent and may not be representative of contemporary exposures and risks. In addition, because U.S. GAAP does not permit insurers and reinsurers to reserve for weather-related catastrophes until they occur, claims from these events could cause substantial volatility in our financial results and could have a material adverse effect on our financial condition, results of operations, or ratings.

We may be adversely impacted by inflation.

Our operations, like those of other property and casualty insurers and reinsurers, are susceptible to the effects of inflation because premiums are established before the ultimate amounts of loss and loss adjustment expense are known. Although we consider the potential effects of inflation when setting premium rates, our premiums may not fully offset the effects of inflation and essentially result in our under pricing the risks we insure and reinsure. Our reserve for losses and loss adjustment expenses includes assumptions about future payments for settlement of claims and claims-handling expenses, such as the value of replacing property and associated labor costs for the property business we write, the value of medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, we will be required to

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increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified, which may have a material adverse effect on our financial condition or results of operations.

The analytical models we use to assist our decision making in quantifying disaster exposures and other key areas may prove to be inadequate.

We use widely accepted and industry-recognized risk modeling programs, techniques and data analytics to help us quantify and analyze our aggregate exposure to individual disaster events, loss trends and other risks associated with our business. We use modeled outputs and analyses to assist us in our business decision-making, including underwriting and pricing. These models rely on various methodologies and assumptions, which are subject to uncertainty, model errors and the inherent limitations of statistical analysis. As with any model of physical systems, particularly those with low frequencies of occurrence and potentially high severity of outcomes, the accuracy of the model’s predictions is largely dependent on the accuracy and quality of the data provided, the assumptions made and the judgments of our employees and other industry professionals. Accordingly, actual results may differ materially from our modeled results in various ways. If, based upon these models or otherwise, we misprice our products or underestimate the frequency or severity of loss events, or overestimate the risks we are exposed to, this could have a material adverse effect on our reserves or results of operations.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or results of operations.

We seek to limit our loss exposure by implementing a number of strategies intended to mitigate our risk exposure, such as adhering to maximum limitations on policies written in defined geographical zones, limiting program size for each client, adjusting retention levels and establishing per-risk and per-occurrence limitations for each event and prudent underwriting guidelines for each insurance program written. Many of our direct liability insurance policies also include maximum aggregate limitations. We cannot assure you that any of these loss limitation methods will be effective. In particular, geographic zone limitations involve significant underwriting judgments, including the determination of the areas of the zones and whether a policy falls within a particular zone limit. Legal disputes relating to loss limitation provisions in our policies may also arise. As a result, various provisions of our policies that are designed to limit risks, such as choice of forum and exclusions from coverage, may not be enforceable in the manner we intend and some or all of our other loss limitation methods may prove to be ineffective. It is also possible that losses could manifest themselves in ways that we do not anticipate and that our risk mitigation strategies are not designed to address. There are inherent limitations in all of the loss limitation methods we use and an event or series of events may result in loss levels that exceed our expectations. The failure of any of our loss limitation methods may result in claims and expenses that could have a material adverse effect on our financial condition or results of operations.

Economic events could harm our business, liquidity and financial condition, and our share price.

Economic events may adversely affect various aspects of our business, including the demand for and claims made under our products, our counterparty credit risk, and the ability of our customers, counterparties and others to establish or maintain their relationships with us. Volatility in the U.S. and other securities markets may also adversely affect our share price, investment performance and ability to access and efficiently use internal and external capital resources.

The risk associated with underwriting reinsurance business could adversely affect us.

Like other reinsurers, our reinsurance group does not separately evaluate each of the individual risks assumed under reinsurance contracts. Therefore, we are largely dependent on the original underwriting decisions made by the ceding companies. We are subject to the risk that the ceding companies may not have adequately evaluated the risks to be reinsured and that the premiums ceded may not adequately compensate us for the risks we assume.

The availability and cost of security arrangements for reinsurance transactions may materially impact our ability to provide reinsurance from Bermuda to insurers domiciled in the United States.

Allied World Assurance Company, Ltd, our Bermuda insurance and reinsurance company, is not licensed or admitted as an insurer in any jurisdiction in the United States, nor is it accredited as a reinsurer in any jurisdiction in the United States although Allied World Assurance Company, Ltd has been approved as a “certified reinsurer” in certain U.S. states that allow reduced collateral for reinsurance ceded to such reinsurers. Insurance regulations in the United States do not permit U.S. cedents to take financial statement credit for reinsurance obtained from unlicensed or non-admitted reinsurers unless security is posted. Allied World Assurance Company, Ltd’s assumed reinsurance contracts generally require it to post a letter of credit or provide other security, even in U.S. states where it has been approved for reduced collateral. As a result, Allied World

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Assurance Company, Ltd is required to post collateral security with respect to most reinsurance liabilities it assumes from ceding insurers domiciled in the United States. Under applicable statutory provisions, the security arrangements may be in the form of letters of credit, reinsurance trusts maintained by trustees or funds-withheld arrangements where assets are held by the ceding company. If we are unable to post security in the form of letters of credit or trust funds when required, Allied World Assurance Company, Ltd’s ability to provide reinsurance to U.S.-domiciled insurers may be severely limited and adversely affected.

In addition, security arrangements with ceding insurers may subject our assets to security interests or may require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from our assets while held in trust typically accrues to our benefit, the investment of these assets is governed by the terms of the letter of credit facilities and the investment regulations of the state of domicile of the ceding insurer, which generally regulate the amount and quality of investments permitted and which may be more restrictive than the investment regulations applicable to us under Bermuda law. These restrictions may result in lower investment yields on these assets, which could adversely affect our profitability.

We depend on a small number of brokers for a large portion of our revenues. The loss of business provided by any one of them could adversely affect us.

We market our insurance and reinsurance products worldwide through insurance and reinsurance brokers. Our top three brokers, Marsh, Aon and Willis, represented approximately 51.6% of our total gross premiums written for 2015, with each representing 24%, 16% and 11%, of total gross premiums written, respectively. Loss of all or a substantial portion of the business produced by any one of those brokers could have a material adverse effect on our financial condition or results of operations.

Our exposure to counterparties in various industries and reliance on brokers subjects us to credit risk.

We have exposure to counterparties through our insurance and reinsurance business and in various industries, including banks, hedge funds and other investment vehicles, and derivative transactions that expose us to credit risk in the event our counterparty fails to perform its obligations. We also have exposure to financial institutions in the form of secured and unsecured debt instruments and equity securities.

In accordance with industry practice, we frequently pay amounts owed on claims under our insurance and reinsurance contracts to brokers, and these brokers, in turn, pay these amounts to the customers that have purchased insurance or reinsurance from us. If a broker fails to make such a payment, it is likely that we will be liable to the client for the deficiency due to local law or contractual obligations. Likewise, when a customer pays premiums for policies written by us to a broker for further payment to us, these premiums are considered to have been paid and the customer will no longer be liable to us for those amounts, whether or not we actually receive the premiums from the broker. Consequently, we assume a degree of credit risk associated with the brokers we use.

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

We purchase reinsurance to mitigate the effects of large or multiple losses on our financial condition. From time to time, market conditions beyond our control have limited, and in some cases prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance they consider adequate for their business needs. For example, reinsurance may be more difficult or costly to obtain following a period with a large number of major catastrophic events. We cannot assure that reinsurance will remain continuously available to us in amounts that we consider sufficient and at rates that we consider acceptable or that we will be able to obtain coverage from entities with satisfactory financial resources.

Furthermore, a reinsurer’s insolvency, or inability or refusal to make payments under a reinsurance or retrocessional reinsurance agreement with us, could have a material adverse effect on our financial condition or results of operations because the ceding of risk to reinsurers does not relieve us of our liability to the entities we insure or reinsure.

Our investment performance may adversely affect our financial performance and ability to conduct business.

We generally derive a significant portion of our income from our invested assets. As a result, our operating results depend in part on the performance of our investment portfolio. Our investment portfolio is overseen by our Chief Investment Officer and managed by professional investment management firms in accordance with the Investment Policy Statement approved by the Investment Committee of our Board of Directors. Our investment performance is subject to a variety of risks, including

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risk related to general economic conditions, market volatility and interest rate fluctuations, liquidity risk and credit default risk. The volatility of the markets may cause us to incur capital losses. Realized and unrealized losses in our investment portfolio would generally reduce our book value, and if significant, can affect our ability to conduct our business.

Because of the unpredictable nature of losses that may arise under insurance or reinsurance policies written by us, our liquidity needs could be substantial and may arise at any time. To the extent we are unsuccessful in managing our investment portfolio within the context of our expected liabilities, we may be forced to liquidate our investments at times and prices that are not optimal or we may have difficulty in liquidating some of our alternative investments due to restrictions on sales, transfers and redemptions. This could have a material adverse effect on the performance of our investment portfolio. If our liquidity needs or general liability profile unexpectedly change, we may not be successful in continuing to structure our investment portfolio in its current manner. In addition, investment losses could significantly decrease our book value, thereby affecting our ability to conduct business.

Volatility in interest rates and changes in credit spreads could impact the performance of our investment portfolio, which could have an adverse effect on our investment income and operating results. Although we take measures to manage the risks of investing in a changing interest rate environment, we may not be able to effectively mitigate interest rate sensitivity. Our mitigation efforts include maintaining a high-quality portfolio of primarily fixed income investments with a relatively short duration to reduce the effect of interest rate changes on book value. A significant increase in interest rates would generally have an adverse effect on our book value. Additionally, changes in the credit spread (the difference in the percentage yield) between U.S. Treasury securities and non-U.S. Treasury securities may negatively impact our investment portfolio as we may not be able to effectively mitigate credit spread sensitivity.

While our investment portfolio consists primarily of investment grade, fixed-maturity securities, there are no assurances that their high ratings will be maintained. The assignment of a high credit rating does not preclude the potential for the risk of default on any investment instrument. In addition, a smaller portion of our portfolio is invested in below investment-grade securities. These securities, which pay higher rates of interest, also have a higher degree of credit or default risk and may also be less liquid and/or may experience default in times of economic weakness or market disruptions (such as a recession), which could have a material adverse effect on our financial condition or results of operations.

Our investment portfolio includes securities that may be more volatile than fixed maturity instruments and certain of these instruments may be illiquid.

Our investment portfolio includes equity securities, hedge funds and private equity funds that may experience significant volatility in their investment returns and valuations. Moreover, our hedge fund and private equity limited partnership interests are subject to transfer restrictions and may be illiquid. Additionally, we have observed that market liquidity (the ability to buy or sell securities at or near the recent indicative price) has declined in most capital markets over the last year. If the investment returns or value of these investments declines, or if we are unable to dispose of these investments at their carrying value, it could have a material adverse effect on our financial condition or results of operations.

We may be adversely affected by fluctuations in currency exchange rates.

Our reporting currency is U.S. dollars. However, we write business on a worldwide basis, and our results of operations may be affected by fluctuations in the value of currencies other than U.S. dollars. We enter into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than U.S. dollars. In addition, we maintain a portion of our investments and liabilities in currencies other than U.S. dollars. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates in effect on the balance sheet date. We may incur foreign currency exchange gains or losses as we ultimately receive premiums and settle claims required to be paid in foreign currencies.
 
We have currency hedges in place that seek to alleviate our potential exposure to volatility in foreign exchange rates and intend to consider the use of additional hedges when we are advised of known or probable significant losses that will be paid in currencies other than the U.S. dollar. To the extent that we do not seek to hedge our foreign currency risk or our hedges prove ineffective, the impact of a movement in foreign currency exchange rates could adversely affect our financial condition or results of operations.

We may require additional capital in the future that may not be available to us on commercially favorable terms.

Our future capital requirements depend on many factors, including regulatory requirements and our ability to write new business and to establish premium rates and loss reserves at levels sufficient to cover losses. To the extent that the funds

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generated by insurance and reinsurance premiums received and sale proceeds and income from our investment portfolio are insufficient to fund future operating requirements and cover losses and loss expenses, we may need to raise additional funds through financings or reduce our assets. We may also seek to refinance existing debt or credit arrangements as amounts become due or our existing commitments expire. Any future financing or refinancing, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and the securities issued may have rights, preferences and privileges that are senior or otherwise superior to those of our common shares.

Our business could be adversely affected if we lose any member of our management team or are unable to attract and retain our personnel.

Our success depends in substantial part on our ability to attract and retain our employees who generate and service our business. We rely substantially on the services of our executive management team. If we lose the services of any member of our executive management team, our business could be adversely affected. If we are unable to attract and retain other talented personnel, the further implementation of our business strategy could be impeded. This, in turn, could have a material adverse effect on our business. We do not maintain key man life insurance policies for any of our employees.

Employee error and misconduct may be difficult to detect and prevent and could adversely affect our business, results of operations and financial condition.

We may experience losses from fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, misuse of customer or proprietary information, or the failure to comply with regulatory or legal requirements or our internal policies. It is not always possible to deter or prevent employee misconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. Losses related to employee error or misconduct could have a material adverse affect on our financial condition or results of operations.

If a program administrator were to exceed its underwriting authority or otherwise breach obligations owed to us, we could be adversely affected.

We write a portion of our insurance business through relationships with program administrators, under contracts pursuant to which we authorize such program administrators to underwrite and bind business on our behalf, within guidelines we prescribe. In this structure, we rely on controls incorporated in the provisions of the program administration agreement, as well as on the administrator’s internal controls, to limit the risks insured to those which are within the prescribed parameters. Although we monitor program administrators on an ongoing basis, our monitoring efforts may not be adequate or our program administrators could exceed their underwriting authorities or otherwise breach obligations owed to us. We are liable to policyholders under the terms of policies underwritten by program administrators, and to the extent such administrators exceed their authorities or otherwise breach their obligations to us, our financial condition or results of operations could be material adversely affected.

If we experience difficulties with outsourcing and similar third-party relationships, our ability to conduct our business might be negatively impacted.

We outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. We may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, reputational damage and a loss of business that may have a material adverse effect on our financial condition or results of operations. By utilizing third parties to perform certain business and administrative functions, we may be exposed to greater risk of cyber-attacks and data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have a material adverse effect on our financial condition or results of operations.
 
If we experience difficulties with our information technology infrastructure and telecommunications systems and/or data security, our ability to conduct our business might be adversely affected.

We rely heavily on the successful, secure and uninterrupted functioning of our IT infrastructure, technology and telecommunications systems. Our business depends on effective information security and systems and the integrity and timeliness of the data our information systems use to run our business. Our ability to adequately price products and services, to establish reserves, to provide effective, efficient and secure service to our customers, to value our investments and to timely and accurately report our financial results also depends significantly on the integrity and availability of the data we maintain, including that within our information systems, as well as data held through third-party service providers and systems. In order to ensure the integrity of such data, we continuously test, and improve or upgrade, our security measures and systems. A failure

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of our IT infrastructure, technology and telecommunication systems or the termination of third-party software licenses we rely on in order to maintain such systems could materially impact our ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary actuarial, legal, financial and other business functions. Although we have implemented administrative and technical controls, taken protective actions to reduce the risk of cyber incidents and protect our IT systems and data, and undertaken to modify such procedures as circumstances warrant and negotiate agreements with third-party providers to protect our assets, such measures may be insufficient to prevent unauthorized access, computer viruses, malware or other malicious code or cyber-attack, catastrophic events, system failures and disruptions, employee errors or malfeasance, third-party (including our service providers) errors or malfeasance, and other events that could have security consequences that may result in liability to us, cause our data to be corrupted and cause us to commit resources, management time and money to prevent or correct security breaches.

The regulatory environment surrounding information security and privacy is increasingly demanding. We are subject to numerous European Union, U.S. federal and state, and other foreign laws and regulations governing the protection of personal and confidential information of our clients or employees. These laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. If any person, including any of our employees or those with whom we share such information, negligently disregards or intentionally breaches our established controls with respect to our client data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, fines and/or regulatory enforcement actions in one or more jurisdictions.

Some of our key business partners rely on our systems for critical underwriting and administration functions and interruption and/or failure of these systems could cause significant liability to them. If we do not maintain adequate IT infrastructure, technology and telecommunications systems, we could experience adverse consequences, including inadequate information on which to base critical decisions, the loss of existing customers, difficulty in attracting new customers, damage to our reputation, litigation exposures and increased administrative expenses. As a result, our ability to conduct our business might be adversely affected.

The integration of acquired companies, the growth of our operations through new lines of insurance or reinsurance business, the expansion into new geographic regions and/or the entering into joint ventures or partnerships may expose us to operational risks.

Acquisitions involve numerous operational, strategic, legal and financial risks; potential liabilities associated with the acquired business; and uncertainties related to the design, operation and integration of acquired businesses’ internal controls over financial reporting. We may experience difficulties in integrating an acquired company, which could adversely affect the acquired company’s performance or prevent us from realizing anticipated synergies, cost savings and operational efficiencies. Our existing businesses could also be negatively impacted by acquisitions.

Expanding our lines of business, expanding our geographic reach and entering into joint ventures or partnerships also involve operational, strategic, legal and financial risks, including retaining qualified management and implementing satisfactory budgetary, financial and operational controls. Our failure to manage these risks could have a material adverse affect on our financial condition or results of operations, or we may not realize any of the intended benefits.

Shareholder voting requirements under Swiss law may limit our flexibility with respect to certain aspects of capital management.

Swiss law allows our shareholders to authorize share capital which can be issued by the Board of Directors without shareholder approval, and this authorization must be renewed by the shareholders every two years. Swiss law does not provide as much flexibility in the various terms that can attach to different classes of stock as permitted in other jurisdictions. Swiss law also reserves for approval by shareholders many corporate actions over which our Board of Directors previously had authority when we were domiciled in Bermuda. For example, dividends must be approved by shareholders. While we do not believe that Swiss law requirements relating to our capital management will have an adverse effect on us, we cannot assure that situations will not arise where such flexibility would have provided substantial benefits to our shareholders.

Risks Related to the Insurance and Reinsurance Business

The insurance and reinsurance business is historically cyclical and we expect to experience periods with excess
underwriting capacity and unfavorable premium rates and policy terms and conditions.

Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of underwriting capacity, general economic conditions and

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other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. The occurrence, or non-occurrence, of catastrophic events, the frequency and severity of which are unpredictable, affects both industry results and consequently prevailing market prices for certain of our products. As a result of these factors, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense competition on price and policy terms due to excessive underwriting capacity as well as periods when shortages of capacity permit favorable premium rates and policy terms and conditions. Increases in the supply of insurance and reinsurance may have adverse consequences for us, including fewer policies and contracts written, lower premium rates, increased expenses for customer acquisition and retention and less favorable policy terms and conditions.

Competition in the insurance and reinsurance markets could reduce our margins.

Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products. Increased competition could result in fewer submissions and contracts written, lower premium rates, and less favorable policy terms and conditions, which could have a material adverse effect on our growth, financial condition or results of operations.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legislative, regulatory, judicial, social, financial, technological and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the frequency and severity of claims. In some instances, these changes may not become apparent until after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.
 

Risks Related to Laws and Regulations Applicable to Us

Compliance by our insurance subsidiaries with the legal and regulatory requirements to which they are subject is expensive. Any failure to comply could have a material adverse effect on our business.

Our insurance and reinsurance subsidiaries conduct business globally. Our businesses are subject to varying degrees of regulation and supervision both in the jurisdictions in which they are organized and in the jurisdictions in which they operate. The purpose of insurance laws and regulations generally is to protect policyholders and ceding insurance companies, not our shareholders. The laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries are domiciled require, among other things, maintenance of minimum levels of statutory capital, surplus, and liquidity; various solvency standards; and periodic examinations of our subsidiaries’ financial condition. In some jurisdictions, laws and regulations also restrict payments of dividends and reductions of capital. Applicable statutes, regulations, and policies may also restrict the ability of these subsidiaries to write insurance and reinsurance policies, to make certain investments, and to distribute funds.

The insurance and regulatory environment, in particular for offshore insurance and reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including those in which we conduct our operations. The laws and regulations that are applicable to our operations are complex and may increase the costs of regulatory compliance or subject our business to the possibility of regulatory actions or proceedings. In addition, we may be subject to laws and regulations not specifically related to the insurance industry, including country-specific trade sanctions and anti-money laundering, anti-bribery and anti-corruption laws. It is not possible to predict the future impact of changes in laws and regulations on our operations. The cost of complying with any new legal requirements affecting our subsidiaries could have a material adverse effect on our business.

In addition, our subsidiaries may not always be able to obtain or maintain necessary licenses, permits, authorizations or accreditations. They also may not be able to fully comply with, or obtain appropriate exemptions from, the laws and regulations applicable to them. Any failure to comply with applicable law or to obtain appropriate exemptions could result in restrictions on either the ability of the company in question, as well as potentially its affiliates, to do business in one or more of the jurisdictions in which they operate or on brokers on which we rely to produce business for us. Any such failure to comply with applicable laws or to obtain appropriate exemptions could result in the imposition of fines or other sanctions. Any of these

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sanctions could have a material adverse effect on our business. For more information, please see Item 1. “Business —Regulatory Matters”.

Our Bermuda operating company could become subject to regulation in the United States.

Allied World Assurance Company, Ltd, our Bermuda operating company, is not admitted as an insurer, nor accredited as a reinsurer, in any jurisdiction in the United States. For the year ended December 31, 2015, more than 76% of the gross premiums written by Allied World Assurance Company, Ltd, however, are derived from insurance or reinsurance contracts entered into with entities domiciled in the United States. The insurance laws of each state in the United States regulate the sale of insurance and reinsurance within the state’s jurisdiction by foreign insurers. Allied World Assurance Company, Ltd conducts its business through its Bermuda office and does not maintain an office, and its personnel do not solicit insurance business, resolve claims or conduct other insurance business, in the United States. While Allied World Assurance Company, Ltd does not believe it is in violation of insurance laws of any jurisdiction in the United States, we cannot be certain that inquiries or challenges to our insurance and reinsurance activities will not be raised in the future. It is possible that, if Allied World Assurance Company, Ltd were to become subject to any laws of this type at any time in the future, we would not be in compliance with the requirements of those laws.

Our holding company structure and regulatory and other constraints affect our ability to pay dividends and make other payments.

Allied World Assurance Company Holdings, AG is a holding company, and as such has no substantial operations of its own. It does not have any significant assets other than its ownership of the shares of its direct and indirect subsidiaries. Dividends and other permitted distributions from our subsidiaries are expected to be our sole source of funds for Allied World Assurance Company Holdings, AG to meet any ongoing cash requirements and to pay any dividends to shareholders. Some of our insurance and reinsurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. The inability of our subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have an adverse effect on our operations and our ability to pay dividends to our shareholders, meet our debt service obligations and repurchase shares of our common stock.

Legislative, regulatory and industry initiatives could adversely affect our business.

The insurance and reinsurance industry is affected by political, judicial, and legal developments that may create new and expanded regulations and theories of liability. Governmental authorities in the United States and worldwide seem increasingly interested in the potential risks posed by the insurance and reinsurance industry as a whole, and to commercial and financial systems in general. While we do not believe these inquiries have identified meaningful new risks posed by the insurance and reinsurance industry, and while we cannot predict the exact nature, timing or scope of possible governmental initiatives, there may be increased regulatory intervention in our industry in the future. For example, the U.S. federal government has increased its scrutiny of the insurance regulatory framework in recent years, and some state legislators have considered or enacted laws that will alter and likely increase state regulation of insurance and reinsurance companies and holding companies. Further, the National Association of Insurance Commissioners, which is an association of the insurance commissioners of all 50 states and the District of Columbia and state insurance regulators, regularly reexamine existing laws and regulations.

We derive substantial revenues from healthcare liability underwriting in the United States through providing insurance to individuals and institutions that participate in the U.S. healthcare delivery infrastructure. The Affordable Care Act has and will continue to effect far-reaching changes in the healthcare delivery system and the healthcare cost reimbursement structure in the United States and could negatively impact our healthcare liability business. Additionally, future healthcare proposals could include tort reform provisions under which plaintiffs would be restricted in their ability to bring suit against healthcare providers, which could negatively impact the demand for our healthcare liability products. While the impact of this healthcare legislation or future healthcare proposals on our business is difficult to predict, any material changes in how healthcare providers insure their malpractice liability risks could have a material adverse effect on our results of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) effected changes to financial services regulation in the United States. The Dodd-Frank Act establishes the Financial Services Oversight Council (“FSOC”) and the Federal Insurance Office (“FIO”) and in limited instances authorizes the federal preemption of certain state insurance laws. The FSOC and FIO are authorized to study, monitor and report to Congress on the U.S. insurance and reinsurance industry and the significance of global reinsurance to the U.S. insurance market. The FIO also can recommend to the FSOC that it designate an insurer as a systemically important financial institution posing risks to U.S. financial stability in the event of the insurer’s material financial distress or failure. An insurer so designated by FSOC could be subject to Federal Reserve supervision and heightened prudential standards. Our business could be affected by changes to the U.S. system of insurance and

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reinsurance regulation or the designation of insurers or reinsurers with which we do business as systemically significant non-bank financial companies.

With respect to international measures, an E.U. directive concerning the capital adequacy, risk management and regulatory reporting for insurers and reinsurers (“Solvency II”) which was adopted by the European Parliament in April 2009, may affect our insurance businesses. Implementation of Solvency II by E.U. member states became effective January 1, 2016. Implementing those measures necessary for compliance with the requirements of Solvency II may require us to utilize a significant amount of resources. In addition, the capital and solvency margin requirements of Solvency II may lead to either an increase or decrease of the capital required by our E.U. domiciled insurers in order that they comply with Solvency II. Solvency II provides for the supervision of insurers and reinsurers on both a solo (entity level) and group basis. In respect of our non-E.U. subsidiaries engaging in E.U. insurance or reinsurance business, should the regulatory regime in which they are operating not be deemed equivalent to that established within the E.U. pursuant to Solvency II, additional capital requirements may be imposed in order that such companies may continue to insure or reinsure E.U. domiciled risk/cedents.

We are unable to predict the future impact on our operations of changes in the laws and regulations to which we are or may become subject. Moreover, our exposure to potential regulatory initiatives could be heightened by the fact that our principal insurance subsidiary is domiciled in, and operates exclusively from, Bermuda. For example, Bermuda, a small jurisdiction, may be disadvantaged in participating in global or cross-border regulatory matters as compared with larger jurisdictions such as the United States or the leading E.U. countries. In addition, Bermuda, which is currently an overseas territory of the United Kingdom, may consider changes to its relationship with the United Kingdom in the future. These changes could adversely affect Bermuda’s position with respect to its regulatory initiatives, which could adversely impact us commercially. We may not be able to comply fully with, or obtain appropriate exemptions from, applicable statutes and regulations and any changes thereto resulting from legislative, regulatory and industry initiatives. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business and could subject us to fines and other sanctions, which could have an adverse effect on our business.

We are subject to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 and similar worldwide anti-bribery laws, which impose restrictions and may carry substantial penalties.

The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our corporate policies mandate compliance with these anti-bribery laws, which often carry substantial penalties. We cannot assure you that our internal control policies and procedures will protect us from reckless or other inappropriate acts committed by our directors, officers, employees, affiliates or agents. Violations of these laws, or allegations of such violations, could have a material adverse effect on our business, reputation, financial position and results of operations and could cause the market value of our common shares to decline.

Risks Related to Ownership of Our Common Shares

Our Articles of Association contain restrictions on voting, ownership and transfers of our common shares, which could impede an attempt to replace or remove our directors or effect a change in control and which could diminish the value of our common shares.

Our Articles of Association generally provide that shareholders have one vote for each common share held by them and are entitled to vote at all meetings of shareholders. However, the voting rights exercisable by a shareholder may be limited so that certain persons or groups, even if they hold 10% or more of our common shares, are not deemed to hold 10% or more of the voting power conferred by our common shares. Moreover, these provisions could have the effect of reducing the voting power of some shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership. Our Board of Directors may refuse to register holders of shares as shareholders with voting rights based on certain grounds, including if the holder would, directly or indirectly, formally, constructively or beneficially own or otherwise control (as described in Articles 8 and 14 of our Articles of Association) voting rights with respect to 10% or more of our registered share capital recorded in the Swiss Commercial Register. In addition, our Board of Directors shall reject entry of holders of shares as shareholders with voting rights in the share register or shall decide on their deregistration when the acquirer or shareholder, upon request, does not expressly state that it has acquired or holds the shares for its own account and benefit. Furthermore, our Board of Directors may cancel, with retroactive application, the registration of a shareholder with voting rights if the initial registration was on the basis of false information in the shareholder’s application. Shareholders registered without voting rights may not participate in or vote at our shareholders meetings, but will be entitled to dividends, preemptive rights and liquidation

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proceeds. Only shareholders that are registered as shareholders with voting rights on the relevant record date are permitted to participate in and vote at a shareholders meeting.

These restrictions on the voting and ownership of our shares may make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that shareholders might consider favorable.

There are regulatory limitations on the ownership and transfer of our common shares.

Regulatory constraints in various jurisdictions make it difficult for persons or groups to acquire large blocks of our common shares. For example, before any person acquires direct or indirect control of a U.S. insurance company, including any of our U.S. insurance subsidiaries, that person must file an acquisition statement with, and obtain prior approval from, the domiciliary insurance commissioner of the respective company. Generally, state law provides that control over a domestic insurance company is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of our U.S. insurance subsidiaries, the insurance change of control laws of various U.S. jurisdictions would likely apply to such a transaction. Similar provisions apply to our Lloyd’s corporate member and our Bermuda exempted companies. These laws may discourage potential acquisition proposals and may delay, deter, or prevent a change of control of our company, including transactions that some or all of our shareholders might consider to be desirable.

As a shareholder of our company, you may have greater difficulties in protecting your interests than as a shareholder of a U.S. corporation.

Swiss law differs in material respects from laws generally applicable to U.S. corporations and their shareholders. Taken together with the provisions of our Articles of Association, some of these differences may result in our shareholders having greater difficulty in protecting their interests as shareholders than would shareholders of a U.S. corporation. Among other things, such differences impact the circumstances under which transactions involving an interested director are voidable, whether an interested director can be held accountable for any benefit realized in a transaction with our company, what approvals are required for business combinations by our company with a large shareholder or a wholly-owned subsidiary, what rights you may have as a shareholder to enforce specified provisions of Swiss corporate law or our Articles of Association, the rights of shareholders to bring class action and derivative lawsuits and the circumstances under which we may indemnify our directors and officers.

It may be difficult to effect service of process or enforce judgments against us or our officers and directors.

Holdings is incorporated pursuant to the laws of Switzerland. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons or to recover against us or them on the judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws.

We have been advised by Swiss counsel that there is doubt as to whether Swiss courts would enforce (i) judgments of U.S. courts obtained in actions against us or our directors and officers predicated upon the civil liability provisions of the U.S. federal securities laws or (ii) original actions brought in Switzerland against us or our directors and officers predicated solely upon U.S. federal securities laws. Further, we have been advised by Swiss counsel that there is no treaty in effect between the United States and Switzerland providing for the enforcement of judgments of U.S. courts and there are grounds upon which Swiss courts may not enforce such judgments. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Swiss courts as contrary to Swiss public policy.

Risks Related to Taxation

U.S. taxation of our non-U.S. companies could materially adversely affect our financial condition and results of operations.

We believe that our non-U.S. companies, including our Swiss, Bermuda and Irish companies, have operated and will operate their respective businesses in a manner that will not cause them to be subject to U.S. tax (other than U.S. federal excise tax on insurance and reinsurance premiums and withholding tax on specified investment income from U.S. sources) on the

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basis that none of them are engaged in a U.S. trade or business. However, there are no definitive standards under current law as to those activities that constitute a U.S. trade or business and the determination of whether a non-U.S. company is engaged in a U.S. trade or business is inherently factual. Therefore, we cannot assure you that the U.S. Internal Revenue Service (the “IRS”) will not contend that a non-U.S. company is engaged in a U.S. trade or business. If any of the non-U.S. companies are engaged in a U.S. trade or business and does not qualify for benefits under the applicable income tax treaty, such company may be subject to U.S. federal income taxation at regular corporate rates on its premium income from U.S. sources and investment income that is effectively connected with its U.S. trade or business. In addition, a U.S. federal branch profits tax at the rate of 30% may be imposed on the earnings and profits attributable to such income. All of the premium income from U.S. sources and a significant portion of investment income of such company (as computed under Section 842 of the U.S. Internal Revenue Code of 1986, as amended, which requires that a foreign company carrying on a U.S. insurance or reinsurance business have a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of U.S. risks insured or reinsured by such company) may be subject to U.S. federal income and branch profits taxes.

If Allied World Assurance Company, Ltd, our Bermuda insurance subsidiary, or any Bermuda insurance subsidiary we form or acquire in the future is engaged in a U.S. trade or business and qualifies for benefits under the United States-Bermuda tax treaty, U.S. federal income taxation of such subsidiary will depend on whether (i) it maintains a U.S. permanent establishment and (ii) the relief from taxation under the treaty generally applies to non-premium income. We believe that our Bermuda insurance subsidiary has operated and will continue to operate its business in a manner that will not cause it to maintain a U.S. permanent establishment. However, the determination of whether an insurance company maintains a U.S. permanent establishment is inherently factual. Therefore, we cannot assure you that the IRS will not successfully assert that our Bermuda insurance subsidiary maintains a U.S. permanent establishment. In such case, our Bermuda insurance subsidiary will be subject to U.S. federal income tax at regular corporate rates and branch profit tax at the rate of 30% with respect to its income attributable to the permanent establishment. Furthermore, although the provisions of the treaty clearly apply to premium income, it is uncertain whether they generally apply to other income of a Bermuda insurance company. Therefore, if a Bermuda insurance subsidiary of our company qualifies for benefits under the treaty and does not maintain a U.S. permanent establishment but is engaged in a U.S. trade or business, and the treaty is interpreted not to apply to income other than premium income, such subsidiary will be subject to U.S. federal income and branch profits taxes on its investment and other non-premium income as described in the preceding paragraph. In addition, a Bermuda subsidiary will qualify for benefits under the treaty only if more than 50% of its shares are beneficially owned, directly or indirectly, by individuals who are Bermuda residents or U.S. citizens or residents. Our Bermuda subsidiaries may not be able to continually satisfy such beneficial ownership test or be able to establish it to the satisfaction of the IRS.

If any of our Swiss or Irish companies are engaged in a U.S. trade or business and qualify for benefits under the relevant income tax treaty with the United States, U.S. federal income taxation of such company will depend on whether it maintains a U.S. permanent establishment. We believe that each such company has operated and will continue to operate its business in a manner that will not cause it to maintain a U.S. permanent establishment. However, the determination of whether a non-U.S. company maintains a U.S. permanent establishment is inherently factual. Therefore, we cannot assure you that the IRS will not successfully assert that any of such companies maintains a U.S. permanent establishment. In such case, the company will be subject to U.S. federal income tax at regular corporate rates and branch profits tax at the rate of 5% with respect to its income attributable to the permanent establishment.

U.S. federal income tax, if imposed, will be based on effectively connected or attributable income of a non-U.S. company computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that all deductions and credits claimed by a non-U.S. company in a taxable year can be disallowed if the company does not file a U.S. federal income tax return for such year. Penalties may be assessed for failure to file such return. None of our non-U.S. companies filed U.S. federal income tax returns for the 2002 and 2001 taxable years. However, we have filed protective U.S. federal income tax returns on a timely basis for each non-U.S. company for subsequent years in order to preserve our right to claim tax deductions and credits in such years if any of such companies is determined to be subject to U.S. federal income tax.

If any of our non-U.S. companies is subject to such U.S. federal taxation, this could have a material adverse effect on our financial condition or results of operations.

Our U.S. subsidiaries may be subject to additional U.S. taxes in connection with our interaffiliate arrangements.

Our U.S. subsidiaries reinsure a significant portion of their insurance policies with Allied World Assurance Company, Ltd. While we believe that the terms of these reinsurance arrangements are arm’s length, we cannot assure you that the IRS will not successfully assert that the payments made by the U.S. subsidiaries with respect to such arrangements exceed arm’s length amounts. In such case, our U.S. subsidiaries will be treated as realizing additional income that may be subject to additional U.S.

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income tax, possibly with interest and penalties. Such excess amount may also be deemed to have been distributed as dividends to the indirect parent of the U.S. subsidiaries, Allied World Assurance Holdings (Ireland) Ltd, in which case this deemed dividend will also be subject to a U.S. federal withholding tax of 5%, assuming that the parent is eligible for benefits under the United States-Ireland income tax treaty (or a withholding tax of 30% if the parent is not so eligible). If any of these U.S. taxes are imposed, this could have a material adverse effect on our financial condition or results of operations. In addition, if legislation is enacted in the U.S. that limits or eliminates our ability to enter into interaffiliate arrangements, this could have a material adverse effect on our financial condition or results of operations.

We may not be able to make distributions or repurchase shares without subjecting you to Swiss withholding tax.
If we are not successful in our efforts to make distributions, if any, through a reduction of par value or pay dividends out of reserves from capital contributions, then any dividends paid by us will generally be subject to a Swiss federal withholding tax at a rate of 35%. The withholding tax must be withheld from the gross distribution and paid to the Swiss Federal Tax Administration. A U.S. holder that qualifies for benefits under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income may apply for a refund of the tax withheld in excess of the 15% treaty rate (or in excess of the 5% reduced treaty rate for qualifying corporate shareholders with at least 10% participation in our voting shares, or for a full refund in case of qualified pension funds). Payment of a capital distribution in the form of a par value reduction or out of reserves from capital contributions is not subject to Swiss withholding tax. However, there can be no assurance that our shareholders will approve such dividends, that we will be able to meet the other applicable legal requirements, or that Swiss withholding rules will not be changed in the future. In addition, over the long term, the amount of par value available for us to use for par value reductions or available funds out of reserves from capital contributions will be limited. If we are unable to make a distribution through a reduction in par value or pay a dividend out of reserves from capital contributions, we may not be able to make distributions without subjecting you to Swiss withholding taxes.
The repurchase of our shares to be held in treasury will generally not be subject to Swiss withholding tax. However, under Swiss law, we are generally prohibited from holding in treasury an aggregate amount of voting shares and non-voting shares in excess of 10% of our aggregate share capital, which could limit our ability to repurchase our shares in the future.

You may be subject to U.S. income taxation with respect to income of our non-U.S. companies and ordinary income characterization of gains on disposition of our shares under the controlled foreign corporation (“CFC”) rules.

Generally, each “United States shareholder” of a CFC will be subject to (i) U.S. federal income taxation on its ratable share of the CFC’s subpart F income, even if the earnings attributable to such income are not distributed, provided that such “United States shareholder” holds directly or through non-U.S. entities shares of the CFC; and (ii) potential ordinary income characterization of gains from the sale or exchange of the directly owned shares of the non-U.S. corporation. For these purposes, any U.S. person who owns directly, through non-U.S. entities, or under applicable constructive ownership rules, 10% or more of the total combined voting power of all classes of stock of any non-U.S. company will be considered to be a “United States shareholder.” An insurance company is classified as a CFC only if its “United States shareholders” own 25% or more of the vote or value of its stock. Although our non-U.S. companies may be or become CFCs, for the following reasons we believe it is unlikely that any U.S. person holding our shares directly, or through non-U.S. entities, would be subject to tax as a “United States shareholder.”

First, although certain of our principal U.S. shareholders previously owned 10% or more of our common shares, no such shareholder currently owns more than 10%. We will be classified as a CFC only if United States shareholders own 25% or more of our stock; one United States shareholder alone will not be subject to tax on subpart F income unless that shareholder owns 25% or more of our stock or there is at least one other United States shareholder that in combination with the first United States shareholder owns 25% or more of our common stock. Second, our Articles of Association provide that no individual or legal entity may, directly or through Constructive Ownership (as defined in Article 14 of our Articles of Association) or otherwise control voting rights with respect to 10% or more of our registered share capital recorded in the Swiss Commercial Register and authorize our Board of Directors to refuse to register holders of shares as shareholders with voting rights under certain circumstances. We cannot assure you, however, that the provisions of the Articles of Association referenced in this paragraph will operate as intended or that we will be otherwise successful in preventing a U.S. person from exceeding, or being deemed to exceed, these voting limitations. Accordingly, U.S. persons who hold our shares directly or through non-U.S. entities should consider the possible application of the CFC rules.

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You may be subject to U.S. income taxation under the related person insurance income (“RPII”) rules.

Our non-U.S. insurance and reinsurance subsidiaries may currently insure and reinsure and may continue to insure and reinsure directly or indirectly certain of our U.S. shareholders and persons related to such shareholders. We believe that U.S. persons that hold our shares directly or through non-U.S. entities will not be subject to U.S. federal income taxation with respect to the income realized in connection with such insurance and reinsurance prior to distribution of earnings attributable to such income either on the basis (i) that RPII, determined on a gross basis, realized by each non-U.S. insurance and reinsurance subsidiary will be less than 20% of its gross insurance income in each taxable year; or (ii) that at all times during the year U.S. insureds hold less than 20% of the combined voting power of all classes of our shares entitled to vote and hold less than 20% of the total value of our shares. However, the identity of all of our shareholders, as well as some of the factors that determine the extent of RPII in any period, may be beyond our knowledge or control. For example, we may be considered to insure indirectly the risk of our shareholder if an unrelated company that insured such risk in the first instance reinsures such risk with us. Therefore, we cannot assure you that we will be successful in keeping the RPII realized by the non-U.S. insurance and reinsurance subsidiaries or the ownership of us by U.S. insureds below the 20% limit in each taxable year. Furthermore, even if we are successful in keeping the RPII or the ownership of us by U.S. insureds below the 20% limit, we cannot assure you that we will be able to establish that fact to the satisfaction of the U.S. tax authorities. If we are unable to establish that the RPII of any non-U.S. insurance or reinsurance subsidiary is less than 20% of that subsidiary’s gross insurance income in any taxable year, and no other exception from the RPII rules applies, each U.S. person who owns our shares, directly or through non-U.S. entities, on the last day of the taxable year will be generally required to include in its income for U.S. federal income tax purposes that person’s ratable share of that subsidiary’s RPII for the taxable year, determined as if that RPII were distributed proportionately to U.S. holders at that date, regardless of whether that income was actually distributed.

The RPII rules provide that if a holder who is a U.S. person disposes of shares in a foreign insurance corporation that has RPII (even if the amount of RPII is less than 20% of the corporation’s gross insurance income and the ownership of us by U.S. insureds is below 20%) and in which U.S. persons own 25% or more of the shares, any gain from the disposition will generally be treated as a dividend to the extent of the holder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the holder owned the shares (whether or not those earnings and profits are attributable to RPII). In addition, such a shareholder will be required to comply with specified reporting requirements, regardless of the amount of shares owned. These rules should not apply to dispositions of our shares because Allied World Assurance Company Holdings, AG is not itself directly engaged in the insurance business and these rules appear to apply only in the case of shares of corporations that are directly engaged in the insurance business. We cannot assure you, however, that the IRS will interpret these rules in this manner or that the proposed regulations addressing the RPII rules will not be promulgated in final form in a manner that would cause these rules to apply to dispositions of our shares.

U.S. tax-exempt entities may recognize unrelated business taxable income (“UBTI”).

A U.S. tax-exempt entity holding our shares generally will not be subject to U.S. federal income tax with respect to dividends and gains on our shares, provided that such entity does not purchase our shares with borrowed funds. However, if a U.S. tax-exempt entity realizes income with respect to our shares under the CFC or RPII rules, as discussed above, such entity will be generally subject to U.S. federal income tax with respect to such income as UBTI. Accordingly, U.S. tax-exempt entities that are potential investors in our shares should consider the possible application of the CFC and RPII rules.

You may be subject to additional U.S. federal income taxation with respect to distributions on and gains on dispositions of our shares under the passive foreign investment company (“PFIC”) rules.

We believe that U.S. persons holding our shares should not be subject to additional U.S. federal income taxation with respect to distributions on and gains on dispositions of shares under the PFIC rules. We expect that our insurance subsidiaries will be predominantly engaged in, and derive their income from the active conduct of, an insurance business and will not hold reserves in excess of reasonable needs of their business, and therefore qualify for the insurance exception from the PFIC rules. However, the determination of the nature of such business and the reasonableness of such reserves is inherently factual. Furthermore, we cannot assure you, as to what positions the IRS or a court might take in the future regarding the application of the PFIC rules to us. Therefore, we cannot assure you that we will not be considered to be a PFIC. If we are considered to be a PFIC, U.S. persons holding our shares could be subject to additional U.S. federal income taxation on distributions on and gains on dispositions of shares. Accordingly, each U.S. person who is considering an investment in our shares should consult his or her tax advisor as to the effects of the PFIC rules.

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The Organization for Economic Cooperation and Development (“OECD”) is considering measures that might encourage countries to increase our taxes.

In 2015, the OECD released its final package of measures to address base erosion and profit shifting (“BEPS”). It is possible that jurisdictions in which we do business could react to the BEPS initiative or their own concerns by enacting tax legislation that could affect us or our shareholders.

Our non-U.K. companies may be subject to U.K. tax, which may have a material adverse effect on our results of operations.

Two of our subsidiaries, Allied World Capital (Europe) Limited and Allied World Managing Agency Limited, are incorporated in the United Kingdom and are therefore subject to tax in the United Kingdom. None of our other companies are incorporated in the United Kingdom. Accordingly, none of our other companies should be treated as being resident in the United Kingdom for corporation tax purposes unless the central management and control of any such company is exercised in the United Kingdom. The concept of central management and control is indicative of the highest level of control of a company, which is wholly a question of fact. Each of our companies currently intend to manage our affairs so that none of our other companies are resident in the United Kingdom for tax purposes.

The rules governing the taxation of foreign companies operating in the United Kingdom through a branch or agency were amended by the Finance Act 2003. The current rules apply to the accounting periods of non-U.K. resident companies which start on or after January 1, 2003. Accordingly, a non-U.K. resident company will only be subject to U.K. corporation tax if it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom. In that case, the company is, in broad terms, taxable on the profits and gains attributable to the permanent establishment in the United Kingdom. Broadly, a company will have a permanent establishment if it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on or if an agent acting on behalf of the company has and habitually exercises authority in the United Kingdom to do business on behalf of the company. Each of our companies, other than Allied World Assurance Company (Europe) Limited (which has established a branch in the United Kingdom), currently intends to operate in such a manner so that none of our companies, other than Allied World Assurance Company (Europe) Limited, carry on a trade through a permanent establishment in the United Kingdom.

If any of our U.S. subsidiaries were trading in the United Kingdom through a branch or agency and the U.S. subsidiaries were to qualify for benefits under the applicable income tax treaty between the United Kingdom and the United States, only those profits which were attributable to a permanent establishment in the United Kingdom would be subject to U.K. corporation tax.

If Allied World Assurance Holdings (Ireland) Ltd was trading in the United Kingdom through a branch or agency and it was entitled to the benefits of the tax treaty between Ireland and the United Kingdom, it would only be subject to U.K. taxation on its profits which were attributable to a permanent establishment in the United Kingdom. The branch established in the United Kingdom by Allied World Assurance Company (Europe) Limited constitutes a permanent establishment of that company and the profits attributable to that permanent establishment is subject to U.K. corporation tax.

The United Kingdom has no income tax treaty with Bermuda.

There are circumstances in which companies that are neither resident in the United Kingdom nor entitled to the protection afforded by a double tax treaty between the United Kingdom and the jurisdiction in which they are resident may be exposed to income tax in the United Kingdom (other than by deduction or withholding) on income arising in the United Kingdom (including the profits of a trade carried on there even if that trade is not carried on through a branch agency or permanent establishment), but each of our companies currently operates in such a manner that none of our companies will fall within the charge to income tax in the United Kingdom (other than by deduction or withholding) in this respect.

If any of our non-U.K. companies were treated as being resident in the United Kingdom for U.K. corporation tax purposes, or if any of our companies, other than Allied World Assurance Company (Europe) Limited, were to be treated as carrying on a trade in the United Kingdom through a branch agency or as having a permanent establishment in the United Kingdom, our results of operations and your investment could be materially adversely affected.


 


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

Companies resident in Ireland are generally subject to Irish corporation tax on their worldwide income and capital gains. None of our companies, other than our Irish companies and Allied World Assurance Holdings (Ireland) Ltd, which resides in Ireland, should be treated as being resident in Ireland unless the central management and control of any such company is exercised in Ireland. The concept of central management and control is indicative of the highest level of control of a company, and is wholly a question of fact. Each of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, currently intends to operate in such a manner so that the central management and control of each of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, is exercised outside of Ireland. Nevertheless, because central management and control is a question of fact to be determined based on a number of different factors, the Irish Revenue Commissioners might contend successfully that the central management and control of any of our companies, other than Allied World Assurance Holdings (Ireland) Ltd or our Irish companies, is exercised in Ireland. Should this occur, such company will be subject to Irish corporation tax on their worldwide income and capital gains.

The trading income of a company not resident in Ireland for Irish tax purposes can also be subject to Irish corporation tax if it carries on a trade through a branch or agency in Ireland. Each of our companies currently intends to operate in such a manner so that none of our companies carry on a trade through a branch or agency in Ireland. Nevertheless, because neither case law nor Irish legislation definitively defines the activities that constitute trading in Ireland through a branch or agency, the Irish Revenue Commissioners might contend successfully that any of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, is trading through a branch or agency in Ireland. Should this occur, such companies will be subject to Irish corporation tax on profits attributable to that branch or agency.

If any of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, were treated as resident in Ireland for Irish corporation tax purposes, or as carrying on a trade in Ireland through a branch or agency, our results of operations and your investment could be materially adversely affected.

If investments held by our Irish companies are determined not to be integral to the insurance and reinsurance businesses carried on by those companies, additional Irish tax could be imposed and our business and financial results could be adversely affected.

Based on administrative practice, taxable income derived from investments made by our Irish companies is generally taxed in Ireland at the rate of 12.5% on the grounds that such investments either form part of the permanent capital required by regulatory authorities, or are otherwise integral to the insurance and reinsurance businesses carried on by those companies. Our Irish companies intend to operate in such a manner so that the level of investments held by such companies does not exceed the amount that is integral to the insurance and reinsurance businesses carried on by our Irish companies. If, however, investment income earned by our Irish companies exceeds these thresholds, or if the administrative practice of the Irish Revenue Commissioners changes, Irish corporation tax could apply to such investment income at a higher rate (currently 25%) instead of the general 12.5% rate, and our results of operations could be materially adversely affected.

We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on our results of operations and your investment.  

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, has given our Bermuda subsidiaries an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to such entities or their operations, shares, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 31, 2035.

Item 1B.
Unresolved Staff Comments.

None.


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GLOSSARY OF SELECTED INSURANCE AND OTHER TERMS
Admitted insurer
An insurer that is licensed or authorized to write insurance in a particular state; to be distinguished from an insurer eligible to write excess and surplus lines insurance on risks located within a jurisdiction.
Acquisition costs
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.
Acquisition cost ratio
Calculated by dividing “acquisition costs” by “net premiums earned”.
Assumed reinsurance
That portion of a risk that a reinsurer accepts from an insurer in return for a stated premium.
Attachment point
The loss point at which an insurance or reinsurance policy becomes operative and below which any losses are retained by either the insured or other insurers or reinsurers, as the case may be.
Capacity
The maximum percentage of surplus, or the dollar amount of exposure, that an insurer or reinsurer is willing or able to place at risk. Capacity may apply to a single risk, a program, a line of business or an entire portfolio of business. Capacity may be constrained by legal restrictions, corporate restrictions or indirect restrictions.
Case reserves
Loss reserves, established with respect to specific, individual reported claims.
Casualty lines
Insurance that is primarily concerned with losses due to injuries to persons and liability imposed on the insured for such injury or for damage to the property of others.
Catastrophe exposure or event
A severe loss, typically involving multiple claimants. Common perils include earthquakes, hurricanes, tsunamis, hailstorms, severe winter weather, floods, fires, tornadoes, explosions and other natural or man-made disasters. Catastrophe losses may also arise from acts of war, acts of terrorism and political instability.
Catastrophe reinsurance
A form of excess-of-loss reinsurance that, subject to a specified limit, indemnifies the ceding company for the amount of loss in excess of a specified retention with respect to an accumulation of losses resulting from a catastrophic event. The actual reinsurance document is called a “catastrophe cover.” These reinsurance contracts are typically designed to cover property insurance losses but can be written to cover other types of insurance losses such as workers’ compensation policies.
Cede, cedent, ceding company
When an insurer transfers some or all of its risk to a reinsurer, it “cedes” business and is referred to as the “ceding company” or “cedent.”
Combined ratio
Calculated as the sum of the “loss and loss expense ratio”, the “acquisition cost ratio” and the “general and administrative expense ratio”.
Commercial coverage
Insurance products that are sold to entities and individuals in their business or professional capacity, and which are intended for other than the insured’s personal or household use.

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Coverholder
A Lloyd’s approved service company that is authorized to enter into policies or contracts of insurance and reinsurance to be underwritten by the Lloyd’s syndicate in accordance with the terms of a binding authority or service company agreement.
 
 
Deductible
The amount of exposure an insured retains on any one risk or group of risks. The term may apply to an insurance policy, where the insured is an individual or business, or a reinsurance contract, where the insured is an insurance company. See “Retention.”
Direct insurance
Insurance sold by an insurer that contracts directly with the insured, as distinguished from reinsurance.
Directors and officers liability
Insurance that covers liability for corporate directors and officers for wrongful acts, subject to applicable exclusions, terms and conditions of the policy.
Duration
Duration is a complex calculation involving present value, yield, coupon, final maturity and call features.  It measures the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates, and is expressed as a number of years.  The bigger the duration number, the greater the interest rate risk.

 
 
Earned premiums or Premiums earned
That portion of premiums written that applies to the expired portion of the policy term. Earned premiums are recognized as revenues under both statutory accounting practice and U.S. GAAP.
Employment practices liability insurance
Insurance that primarily provides liability coverage to organizations and their employees for losses arising from acts of discrimination, harassment and retaliation against current and prospective employees of the organization.
Errors and omissions insurance
Insurance that provides liability coverage for claims arising from professional negligence or malpractice, subject to applicable exclusions, terms and conditions of the policy.
Excess and surplus lines
A risk or a part of a risk for which there is no insurance market available among admitted insurers; or insurance written by non-admitted insurance companies to cover such risks.
Excess layer
Insurance to cover losses in one or more layers above a certain amount with losses below that amount usually covered by the insured’s primary policy and its self-insured retention.
Excess-of-loss reinsurance
Reinsurance that indemnifies the insured against all or a specified portion of losses over a specified amount or “retention.”
Exclusions
Provisions in an insurance or reinsurance policy excluding certain risks or otherwise limiting the scope of coverage.
Expense ratio
Calculated as the sum of the “acquisition cost ratio” and the “general and administrative cost ratio”.
Exposure
The possibility of loss. A unit of measure of the amount of risk a company assumes.
Facultative reinsurance
The reinsurance of all or a portion of the insurance provided by a single policy. Each policy reinsured is separately negotiated.

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Fiduciary liability insurance
Insurance that primarily provides liability coverage to fiduciaries of employee benefit and welfare plans for losses arising from the breach of any fiduciary duty owed to plan beneficiaries.
Frequency
The number of claims occurring during a specified period of time.
General and administrative expense ratio
Calculated by dividing “general and administrative expenses” by “net premiums earned”.
General casualty
Insurance that is primarily concerned with losses due to injuries to persons and liability imposed on the insured for such injury or for damage to the property of others.
Gross premiums written
Total premiums for insurance and reinsurance written during a given period.
Healthcare liability or Healthcare lines
Insurance coverage, often referred to as medical malpractice insurance, which addresses liability risks of doctors, surgeons, nurses, other healthcare professionals and the institutions (e.g., hospitals and clinics) in which they practice.
Incurred but not reported (“IBNR”) reserves
Reserves established by an insurer for claims that have occurred but have not yet been reported to the insurer as well as for changes in the values of claims that have been reported to the insurer but are not yet settled.
In-force
Policies that have not expired or been terminated and for which the insurer remains on risk as of a given date.
Intermediate layer
Insurance that absorbs the losses immediately above the insured’s working or primary layer. An intermediate layer insurer will pay up to a certain dollar amount of losses over the working or primary layer, at which point a higher layer excess insurer will be liable for additional losses.

Limits
The maximum amount that an insurer or reinsurer will insure or reinsure for a specified risk, a portfolio of risks or on a single insured entity. The term also refers to the maximum amount of benefit payable for a given claim or occurrence.
Loss and loss expense ratio
Calculated by dividing net “losses and loss expenses” by “net premiums earned”.
Loss development
The difference between the original loss as initially reserved by an insurer or reinsurer and its subsequent evaluation at a later date or at the time of its closure. Loss development occurs because of inflation and time lags between the occurrence of claims and the time they are actually reported to an insurer or reinsurer. To account for these increases, a “loss development factor” or multiplier is usually applied to a claim or group of claims in an effort to more accurately project the ultimate amount that will be paid.
Loss reserves
Liabilities established by insurers and reinsurers to reflect the estimated cost of claims incurred that the insurer or reinsurer will ultimately be required to pay. Reserves are established for losses and for loss expenses, and consist of case reserves and IBNR reserves. As the term is used in this Form 10-K, “loss reserves” is meant to include reserves for both losses and for loss expenses.
Loss year
The year to which a claim is attributed based upon the terms in the underlying policy or contract. All years referred to are years ending December 31.

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Losses and loss expenses
“Losses” are an occurrence that is the basis for submission or payment of a claim. Losses may be covered, limited or excluded from coverage, depending on the terms of the insurance policy or other insurance or reinsurance contracts. “Loss expenses” are the expenses incurred by an insurance or reinsurance company in settling a loss.
Losses incurred
The total losses and loss adjustment expenses paid, plus the change in loss and loss adjustment expense reserves, including IBNR, sustained by an insurance or reinsurance company under its insurance policies or other insurance or reinsurance contracts.
Net premiums earned