e10vq
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2010
OR
     
o   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, LTD
(Exact Name of Registrant as Specified in Its Charter)
     
Bermuda   98-0481737
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
27 Richmond Road, Pembroke HM 08, Bermuda
(Address of Principal Executive Offices and Zip Code)
(441) 278-5400
(Registrant’s Telephone Number, Including Area Code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The number of outstanding common shares, par value $0.03 per share, of Allied World Assurance Company Holdings, Ltd as of August 2, 2010 was 48,873,660.
 
 

 


TABLE OF CONTENTS

PART I
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Other Information
Item 5. Exhibits
SIGNATURES
EXHIBIT INDEX
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

as of June 30, 2010 and December 31, 2009
(Expressed in thousands of United States dollars, except share and per share amounts)
                 
    As of     As of  
    June 30,     December 31,  
    2010     2009  
ASSETS
               
Fixed maturity investments available for sale, at fair value (amortized cost: 2010: $2,602,000; 2009: $4,260,844)
  $ 2,755,934     $ 4,427,072  
Fixed maturity investments trading, at fair value
    4,275,893       2,544,322  
Other invested assets trading, at fair value
    388,761       184,869  
 
           
Total investments
    7,420,588       7,156,263  
Cash and cash equivalents
    442,689       292,188  
Restricted cash
    101,206       87,563  
Insurance balances receivable
    552,330       395,621  
Prepaid reinsurance
    202,107       186,610  
Reinsurance recoverable
    932,435       919,991  
Accrued investment income
    46,105       53,046  
Net deferred acquisition costs
    103,286       87,821  
Goodwill
    268,376       268,376  
Intangible assets
    58,576       60,359  
Balances receivable on sale of investments
    24,318       55,854  
Net deferred tax assets
    14,170       21,895  
Other assets
    48,182       67,566  
 
           
Total assets
  $ 10,214,368     $ 9,653,153  
 
           
LIABILITIES
               
Reserve for losses and loss expenses
  $ 4,920,435     $ 4,761,772  
Unearned premiums
    1,069,956       928,619  
Reinsurance balances payable
    137,790       102,837  
Balances due on purchases of investments
    50,425       55,670  
Senior notes
    498,984       498,919  
Accounts payable and accrued liabilities
    68,235       92,041  
 
           
Total liabilities
  $ 6,745,825     $ 6,439,858  
 
           
SHAREHOLDERS’ EQUITY
               
Common shares, par value $0.03 per share (2010: 50,488,342; 2009: 49,734,487 shares issued and 2010: 49,407,301; 2009: 49,734,487 shares outstanding)
  $ 1,515     $ 1,492  
Additional paid-in capital
    1,378,262       1,359,934  
Treasury shares, at cost (2010: 1,081,041; 2009: nil)
    (49,089 )      
Accumulated other comprehensive income:
net unrealized gains on investments, net of tax
    138,245       149,849  
Retained earnings
    1,999,610       1,702,020  
 
           
Total shareholders’ equity
  $ 3,468,543     $ 3,213,295  
 
           
Total liabilities and shareholders’ equity
  $ 10,214,368     $ 9,653,153  
 
           
See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

for the three and six months ended June 30, 2010 and 2009
(Expressed in thousands of United States dollars, except share and per share amounts)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
REVENUES:
                               
Gross premiums written
  $ 493,847     $ 492,782     $ 998,010     $ 972,379  
Premiums ceded
    (124,052 )     (131,344 )     (194,923 )     (205,903 )
 
                       
Net premiums written
    369,795       361,438       803,087       766,476  
Change in unearned premiums
    (30,871 )     (27,770 )     (125,839 )     (108,836 )
 
                       
Net premiums earned
    338,924       333,668       677,248       657,640  
Net investment income
    65,594       76,537       134,496       154,391  
Net realized investment gains
    94,933       5,093       172,420       41,695  
Net impairment charges recognized in earnings:
                               
Total other-than-temporary impairment charges
          (16,225 )     (168 )     (58,188 )
Portion of loss recognized in other comprehensive income, before taxes
          10,751             10,751  
 
                       
Net impairment charges recognized in earnings
          (5,474 )     (168 )     (47,437 )
Other income
    616       369       913       835  
 
                       
 
    500,067       410,193       984,909       807,124  
 
                       
EXPENSES:
                               
Net losses and loss expenses
    188,722       177,719       420,876       326,216  
Acquisition costs
    37,938       36,963       78,722       74,091  
General and administrative expenses
    68,089       61,495       131,552       118,860  
Amortization and impairment of intangible assets
    891       1,065       1,783       2,130  
Interest expense
    9,531       9,522       19,059       19,969  
Foreign exchange loss (gain)
    559       (1,222 )     1,635       (387 )
 
                       
 
    305,730       285,542       653,627       540,879  
 
                       
Income before income taxes
    194,337       124,651       331,282       266,245  
Income tax expense
    10,378       10,981       13,583       21,167  
 
                       
NET INCOME
    183,959       113,670       317,699       245,078  
 
                       
Other comprehensive (loss) income:
                               
Unrealized gains on investments arising during the period net of applicable deferred income tax expense for the three months 2010: $(471); 2009: $(1,822); and six months 2010: $(690); 2009: $(441)
    63,852       140,209       101,322       76,149  
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of applicable deferred income tax for the three months and six months ended June 30, 2010 nil; 2009: nil
          (10,751 )           (10,751 )
Reclassification adjustment for net realized investment (gains) losses included in net income, net of applicable income tax
    (67,891 )     7,856       (112,926 )     14,487  
 
                       
Other comprehensive (loss) income
    (4,039 )     137,314       (11,604 )     79,885  
 
                       
COMPREHENSIVE INCOME
  $ 179,920     $ 250,984     $ 306,095     $ 324,963  
 
                       
PER SHARE DATA
                               
Basic earnings per share
  $ 3.66     $ 2.30     $ 6.34     $ 4.96  
Diluted earnings per share
  $ 3.47     $ 2.22     $ 5.98     $ 4.79  
Weighted average common shares outstanding
    50,222,974       49,523,459       50,123,945       49,386,549  
Weighted average common shares and common share equivalents outstanding
    52,974,410       51,257,887       53,086,708       51,215,808  
Dividends declared per share
  $ 0.20     $ 0.18     $ 0.40     $ 0.36  
See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

for the six months ended June 30, 2010 and 2009
(Expressed in thousands of United States dollars)
                                                 
                            Accumulated              
            Additional             Other              
            Paid-in     Treasury     Comprehensive     Retained        
    Share Capital     Capital     Shares     Income     Earnings     Total  
December 31, 2009
  $ 1,492     $ 1,359,934     $     $ 149,849     $ 1,702,020     $ 3,213,295  
Net income
                            317,699       317,699  
Dividends
                            (20,109 )     (20,109 )
Other comprehensive loss:
                                               
Net unrealized losses, net of deferred income tax
                      (11,604 )           (11,604 )
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
                                   
 
                                   
Total other comprehensive loss
                      (11,604 )           (11,604 )
Stock compensation
    23       18,328                         18,351  
Share repurchase
                (49,089 )                 (49,089 )
 
                                   
June 30, 2010
  $ 1,515     $ 1,378,262     $ (49,089 )   $ 138,245     $ 1,999,610     $ 3,468,543  
 
                                   
                                         
                    Accumulated              
            Additional     Other              
            Paid-in     Comprehensive     Retained        
    Share Capital     Capital     Income     Earnings     Total  
December 31, 2008
  $ 1,471     $ 1,314,785     $ 105,632     $ 994,974     $ 2,416,862  
Cumulative effect adjustment upon adoption of ASC 320-10-651, net of deferred taxes
                (136,848 )     136,848        
Net income
                      245,078       245,078  
Dividends
                      (17,828 )     (17,828 )
Other comprehensive income:
                                       
Unrealized gains
                90,636             90,636  
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
                (10,751 )           (10,751 )
 
                             
Total other comprehensive income
                79,885             79,885  
Stock compensation
    15       17,415                   17,430  
 
                             
June 30, 2009
  $ 1,486     $ 1,332,200     $ 48,669     $ 1,359,072     $ 2,741,427  
 
                             
 
1   Cumulative effect adjustment reflects adoption of ASC 320-10-65 as of April 1, 2009.
See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the six months ended June 30, 2010 and 2009
(Expressed in thousands of United States dollars)
                 
    Six Months Ended  
    June 30,  
    2010     2009  
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
               
Net income
  $ 317,699     $ 245,078  
Adjustments to reconcile net income to cash provided by operating activities:
               
Net realized gains on sales of investments
    (113,151 )     (34,311 )
Mark to market adjustments
    (59,269 )     (7,384 )
Net impairment charges recognized in earnings
    168       47,437  
Stock compensation expense
    17,454       16,560  
Insurance balances receivable
    (156,709 )     (73,832 )
Prepaid reinsurance
    (15,497 )     (27,531 )
Reinsurance recoverable
    (12,444 )     (21,402 )
Accrued investment income
    6,941       (5,980 )
Net deferred acquisition costs
    (15,465 )     (10,422 )
Net deferred tax assets
    8,415       (8,783 )
Other assets
    22,318       (1,353 )
Reserve for losses and loss expenses
    158,663       136,899  
Unearned premiums
    141,337       136,368  
Reinsurance balances payable
    34,953       37,819  
Accounts payable and accrued liabilities
    (23,806 )     (24,263 )
Other items, net
    (6,005 )     (2,518 )
 
           
Net cash provided by operating activities
    305,602       402,382  
 
           
CASH FLOWS USED IN INVESTING ACTIVITIES:
               
Purchases of fixed maturity investments — available for sale
    (113,118 )     (5,379,219 )
Purchases of fixed maturity investments — trading
    (6,927,637 )     (234,049 )
Purchases of other invested assets
    (203,011 )     (125,376 )
Sales of fixed maturity investments — available for sale
    1,827,800       5,297,600  
Sales of fixed maturity investments — trading
    5,344,007       357  
Sales of other invested assets
    3,155       134,386  
Changes in securities lending collateral received
          171,026  
Purchases of fixed assets
    (5,213 )     (3,072 )
Change in restricted cash
    (13,643 )     (8,636 )
 
           
Net cash used in investing activities
    (87,660 )     (146,983 )
 
           
CASH FLOWS USED IN FINANCING ACTIVITIES:
               
Dividends paid
    (20,109 )     (17,828 )
Proceeds from the exercise of stock options
    3,576       2,228  
Share repurchase
    (49,089 )      
Repayment of syndicated loan
          (243,750 )
Changes in securities lending collateral
          (177,010 )
 
           
Net cash used in financing activities
    (65,622 )     (436,360 )
 
           
Effect of exchange rate changes on foreign currency cash
    (1,819 )     801  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    150,501       (180,160 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    292,188       655,828  
 
           
CASH AND CASH EQUIVALENTS, END OF YEAR
  $ 442,689     $ 475,668  
 
           
Supplemental disclosure of cash flow information:
               
— Cash paid for income taxes
  $ 4,386     $ 37,878  
— Cash paid for interest expense
    18,750       20,365  
See accompanying notes to the consolidated financial statements.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
1. GENERAL
     Allied World Assurance Company Holdings, Ltd (“Holdings”) was incorporated in Bermuda on November 13, 2001. Holdings, through its wholly-owned subsidiaries (collectively, the “Company”), provides property and casualty insurance and reinsurance on a worldwide basis through operations in Bermuda, the United States, Europe, Hong Kong and Singapore.
2. BASIS OF PREPARATION AND CONSOLIDATION
     These unaudited condensed consolidated financial statements include the accounts of Holdings and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.
     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates reflected in the Company’s financial statements include, but are not limited to:
    The premium estimates for certain reinsurance agreements,
 
    Recoverability of deferred acquisition costs,
 
    The reserve for outstanding losses and loss expenses,
 
    Valuation of ceded reinsurance recoverables,
 
    Determination of impairment of goodwill and other intangible assets,
 
    Valuation of financial instruments, and
 
    Determination of other-than-temporary impairment of investments.
     Inter-company accounts and transactions have been eliminated on consolidation and all entities meeting consolidation requirements have been included in the consolidation. Certain immaterial reclassifications in the unaudited condensed consolidated statements of operations and comprehensive income (“consolidated income statements”) and consolidated statements of cash flows and notes to the unaudited condensed consolidated financial statements have been made to prior years’ amounts to conform to the current year’s presentation.
     These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
3. NEW ACCOUNTING PRONOUNCEMENTS
     In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-06 “Fair Value Measurements and Disclosures” (“ASU 2010-06”). ASU 2010-06 updated section ASC 820-10 to require a greater level of disaggregated information and more robust disclosure about valuation techniques and inputs to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measures which are effective for interim and annual reporting periods beginning after December 15, 2010. See Note 6 “Fair Value of Financial Instruments” for the Company’s disclosures about the fair value of financial instruments.
     In March 2010, the FASB issued ASU 2010-11 “Derivatives and Hedging: Scope Exception Related to Embedded Credit

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
Derivatives” (“ASU 2010-11”). ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements, specifically one that is related only to the subordination of one financial instrument to another. ASU 2010-11 is effective for interim and annual periods beginning after June 15, 2010. As permitted under the transitional provisions of ASU 2010-11, effective July 1, 2010 the Company has elected the fair value option for any investment in a beneficial interest in a securitized asset. As a result, the Company elected the fair value option for all of its mortgage-backed and asset-backed securities held as of June 30, 2010. On July 1, 2010, the Company reclassified net unrealized gains of $42,402 from “accumulated other comprehensive income” to “retained earnings”. As a result of the fair value election, any changes in fair value of the mortgage-backed and asset-backed securities will be recognized in “net realized investment gains (losses)” on the consolidated income statement. On July 1, 2010, these investments, which totaled $968,825 as of June 30, 2010, were classified as “fixed maturity investments trading, at fair value” on the consolidated balance sheet.
4. INVESTMENTS
a) Available for Sale Securities
     The amortized cost, gross unrealized gains, unrealized losses, other-than-temporary-impairment charges (“OTTI”) recorded through other comprehensive income (“OCI”) and fair value of the Company’s available for sale investments by category as of June 30, 2010 and December 31, 2009 are as follows:
                                         
            Gross                    
            Unrealized     Unrealized              
    Cost     Gains     Losses     OTTI OCI     Fair Value  
June 30, 2010
                                       
U.S. Government and Government agencies
  $ 197,602     $ 13,662     $ (8 )   $     $ 211,256  
Non-U.S. Government and Government agencies
    135,790       10,055       (5,239 )           140,606  
States, municipalities and political subdivisions
    145,495       14,550                   160,045  
Corporate debt:
                                       
Financial institutions
    337,266       15,609       (2,378 )           350,497  
Industrials
    691,159       49,728       (9 )           740,878  
Utilities
    168,265       15,562                   183,827  
Residential mortgage-backed:
                                       
Non-agency residential
    151,416       6,306       (6,759 )     (563 )     150,400  
Agency residential
    551,635       32,508       (68 )           584,075  
Commercial mortgage-backed
    157,464       8,715                   166,179  
Asset-backed
    65,908       2,345       (82 )           68,171  
 
                             
Total fixed maturity investments, available for sale
  $ 2,602,000     $ 169,040     $ (14,543 )   $ (563 )   $ 2,755,934  
 
                             
 
                                       
December 31, 2009
                                       
U.S. Government and Government agencies
  $ 689,858     $ 34,831     $ (1,389 )   $     $ 723,300  
Non-U.S. Government and Government agencies
    271,528       13,752       (1,590 )           283,690  
States, municipalities and political subdivisions
    210,315       17,429       (336 )           227,408  
Corporate debt:
                                       
Financial institutions
    684,386       27,695       (1,751 )           710,330  
Industrials
    879,905       46,489       (184 )           926,210  
Utilities
    143,773       10,479                   154,252  
Residential mortgage-backed:
                                       
Non-agency residential
    172,000       4,206       (11,517 )     (1,856 )     162,833  
Agency residential
    708,652       28,882       (1,095 )           736,439  
Commercial mortgage-backed
    406,236       6,482       (7,915 )           404,803  
Asset-backed
    94,191       3,762       (146 )           97,807  
 
                             
Total fixed maturity investments, available for sale
  $ 4,260,844     $ 194,007     $ (25,923 )   $ (1,856 )   $ 4,427,072  
 
                             

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
b) Trading Securities
     Securities accounted for at fair value with changes in fair value recognized in the consolidated income statements by category as of June 30, 2010 and December 31, 2009 are as follows:
                 
    June 30, 2010     December 31, 2009  
U.S. Government and Government agencies
  $ 1,558,731     $ 655,266  
Non-U.S. Government and Government agencies
    246,180       227,310  
States, municipalities and political subdivisions
    88,965       15,810  
Corporate debt
               
Financial institutions
    687,744       590,130  
Industrials
    359,285       191,729  
Utilities
    69,802       11,934  
Residential mortgage-backed
               
Non-agency residential
    256,130       259,055  
Agency residential
    377,748       139,858  
Commercial mortgage-backed
    29,545       18,266  
Asset-backed
    601,763       434,964  
 
           
Total fixed maturity investments, trading
    4,275,893       2,544,322  
Hedge funds
    319,592       184,725  
Equity securities
    69,169       144  
 
           
Total
  $ 4,664,654     $ 2,729,191  
 
           
c) Contractual Maturity Dates
     The contractual maturity dates of fixed maturity investments (available for sale and trading) as of June 30, 2010 are as follows:
                 
    Amortized Cost     Fair Value  
Due within one year
  $ 396,310     $ 399,476  
Due after one year through five years
    3,593,575       3,676,074  
Due after five years through ten years
    596,166       611,326  
Due after ten years
    100,233       110,940  
Mortgage-backed
    1,523,938       1,564,077  
Asset-backed
    667,671       669,934  
 
           
 
  $ 6,877,893     $ 7,031,827  
 
           
     Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
d) Other Invested Assets
     As of June 30, 2010, the Company held sixteen hedge fund investments with a total fair value of $319,592, which comprised 4.0% of the total fair value of its investments and cash and cash equivalents and are summarized as follows by type of investment strategy:

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                                                 
                    Long     Short              
Hedge Fund   Fair Value as of     Unfunded     Exposure(1)     Exposure(2)     Gross     Net  
Type   June 30, 2010     Commitments     (% of funded)     (% of funded)     Exposure(3)     Exposure(4)  
Secondary private equity funds
  $ 17,464     $ 43,319       100 %     0 %     100 %     100 %
Distressed
    68,310       42,660       68 %     13 %     81 %     55 %
Equity long/short
    76,205             61 %     36 %     97 %     25 %
Multi-strategy
    107,744             92 %     50 %     142 %     42 %
Event driven
    49,869             90 %     52 %     142 %     38 %
 
                                             
Total
  $ 319,592                                          
 
                                             
 
(1)   Long exposure represents the ratio of the fund’s long investments in securities to the fund’s equity capital (over 100% may denote explicit borrowing).
 
(2)   Short exposure represents the ratio of the securities sold short to the fund’s equity capital.
 
(3)   Gross exposure is the addition of the long and short exposures (over 100% may denote explicit borrowing).
 
(4)   Net exposure is the subtraction of the short exposure from the long exposure.
    Secondary private equity funds: These funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. The Company has invested in two secondary private equity funds to purchase those primary limited partnership interests. The fair values of the investments in this class have been estimated using the net asset value per share of the investments. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. The remaining restriction period for these funds ranges from seven to eight years.
 
    Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in five distressed funds, four of which (representing approximately 34% of the value of the funds in this class) are not currently eligible for redemption due to imposed lock-up periods with remaining periods ranging from eighteen months to seven years. Funds representing approximately 43% of the value of the funds in this class are currently eligible for quarterly redemption with a 65-day notification period, subject to redemption limitations. Funds representing approximately 23% of the value of the funds in this class are currently eligible for quarterly redemption with a 45-day notification period and redemption fee if redeemed prior to January 2012.
 
    Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and target net long position. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in three equity long/short funds, two of which (representing approximately 69% of the value of the funds in this class) are not currently eligible for redemption due to imposed lock-up periods with remaining periods ranging from two to six months, at which time the funds will be eligible for quarterly redemption with a 60-day notification period. The third fund, representing approximately 31% of the value of the funds in this class, is currently eligible for quarterly redemption with a 30-day notification period or monthly redemption with a 30-day notification period and redemption fee.
 
    Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in four multi-strategy funds. Funds representing approximately 24% of the value of the funds in this class currently are not eligible for

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
      redemption due to imposed lock-up periods with remaining periods of approximately eight months. Funds representing approximately 29% of the value of the funds in this class are currently eligible for quarterly redemption with a 60-day notification period. Funds representing approximately 23% of the value of the funds in this class are currently eligible for quarterly redemption with a 45-day notification period and redemption fee if redeemed prior to December 2010. Funds representing approximately 24% of the value of the funds in this class are not eligible for redemption due to a seven month lock-up period.
    Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one or more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include mergers and acquisitions (arbitrage), corporate restructurings and spin-offs and capital structure arbitrage. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in two event driven funds. Approximately 50% of the value of the funds is not currently eligible for redemption due to an imposed two year lock-up period. The remaining 50% of the value of the funds in this class is currently eligible for quarterly redemption, but is subject to redemption fees and limitations.
     Two of the Company’s hedge funds, a multi-strategy fund and an event driven fund, had long exposure greater than 100% of the funds’ net asset value (indicating explicit leverage of 122% and 120%, respectively as of June 30, 2010). None of the other funds in which the Company invests have used explicit leverage as of June 30, 2010.
     In addition, the Company has committed $50,000 and $25,000 for two new hedge funds, respectively.
e) Net Investment Income
                                 
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Fixed maturities and other investments
  $ 67,552     $ 76,703     $ 138,650     $ 155,581  
Other invested assets
    940       880       1,246       1,487  
Cash and cash equivalents
    111       561       163       1,187  
Expenses
    (3,009 )     (1,607 )     (5,563 )     (3,864 )
 
                       
Net investment income
  $ 65,594     $ 76,537     $ 134,496     $ 154,391  
 
                       
f) Components of Realized Gains and Losses
     Components of realized gains for the three and six months ended June 30, 2010 and 2009 are summarized in the following table:
                                 
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Gross realized gains on sale of securities
  $ 78,572     $ 46,618     $ 130,239     $ 94,272  
Gross realized losses on sale of securities
    (6,724 )     (49,001 )     (13,130 )     (59,961 )
Treasury yield hedge
    (3,958 )           (3,958 )      
Mark-to-market changes: debt securities trading
    32,746       (428 )     60,477       (428 )
Mark-to-market changes: hedge funds and equity securities
    (5,703 )     7,904     $ (1,208 )     7,812  
 
                       
Net realized investment gains
  $ 94,933     $ 5,093     $ 172,420     $ 41,695  
 
                       
Proceeds from sale of available for sale securities
  $ 539,449     $ 1,942,811     $ 1,846,074     $ 5,365,294  
Proceeds from sale of trading securities
  $ 4,081,800     $ 10,717     $ 5,297,353     $ 67,405  
     The Company recognized a realized loss of $3,958 related to a U.S. treasury yield hedge transaction that was purchased in May 2010 and terminated in June 2010.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
g) Pledged Assets
     As of June 30, 2010 and December 31, 2009, $391,355 and $323,681, respectively, of cash and cash equivalents and investments were on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with relevant insurance regulations. In addition, the Company has set up trust accounts to meet security requirements for inter-company reinsurance transactions. These trusts contained assets of $994,455 and $701,843 as of June 30, 2010 and December 31, 2009, respectively, and are included in fixed maturity investments.
     The Company also has facilities available for the issuance of letters of credit collateralized against the Company’s investment portfolio. The collateralized portion of these facilities is up to $1,300,000 as of June 30, 2010 and December 31, 2009. See Note 7 “Debt and Financing Arrangements” for details on the facilities.
     The following table shows the Company’s trust accounts on deposit, as well as outstanding and remaining letters of credit facilities, and the collateral committed to support the letters of credit facilities as of June 30, 2010 and December 31, 2009:
                 
    As of     As of  
    June 30,     December 31,  
    2010     2009  
Total trust accounts on deposit
  $ 1,385,810     $ 1,025,524  
Total letters of credit facilities:
               
Citibank Europe plc
    900,000       900,000  
Credit Facility
    800,000       800,000  
 
           
Total letters of credit facilities
    1,700,000       1,700,000  
 
           
Total letters of credit facilities outstanding:
               
Citibank Europe plc
    765,241       794,609  
Credit Facility
    206,452       376,658  
 
           
Total letters of credit facilities outstanding
    971,693       1,171,267  
 
           
Total letters of credit facilities remaining:
               
Citibank Europe plc
    134,759       105,391  
Credit Facility
    593,548       423,342  
 
           
Total letters of credit facilities remaining
    728,307       528,733  
 
           
Collateral committed to support the letter of credit facilities
  $ 1,223,194     $ 1,208,359  
 
           
     Total trust accounts on deposit includes available for sale securities, trading securities and cash and cash equivalents. The fair values of the combined total cash and cash equivalents and investments held under trust were $2,609,004 and $2,233,883 as of June 30, 2010 and December 31, 2009, respectively. Of the total letters of credit facilities outstanding as of June 30, 2010 and December 31, 2009, $8,025 and $263,297 was used to meet security requirements for inter-company transactions and the remaining letter of credit facilities outstanding of $963,668 and $907,970 was used for third-party ceding companies, respectively. Trust accounts were substituted for inter-company letters of credit during 2010.
h) Analysis of Unrealized Losses
     The Company’s primary investment objective is the preservation of capital. Although the Company has been successful in meeting this objective, shifts in interest rates and credit spreads affecting valuation can temporarily place some investments in an unrealized loss position.
     The following table summarizes the market value of those investments in an unrealized loss position for periods less than and greater than 12 months as of June 30, 2010 and December 31, 2009:

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                                                 
    June 30, 2010     December 31, 2009  
    Gross Fair     Unrealized             Gross Fair     Unrealized        
    Value     Loss     OTTI OCI     Value     Loss     OTTI OCI  
Less than 12 months
                                               
U.S. Government and Government agencies
  $ 6,769     $ (3 )   $     $ 112,349     $ (1,367 )   $  
Non-U.S. Government and Government agencies
    40,871       (4,519 )           40,450       (1,079 )      
States, municipalities and political subdivisions
                      7,637       (336 )      
Corporate debt
                                               
Financial institutions
    15,746       (1,298 )           45,697       (560 )      
Industrials
    1,067       (9 )           18,409       (184 )      
Residential mortgage-backed
                                               
Non-agency residential
    9,615       (568 )           82,544       (8,797 )     (1,527 )
Agency residential
    3,546       (15 )           70,525       (1,057 )      
Commercial mortgage-backed
    128                   56,396       (511 )      
Asset-backed
    14,301       (21 )           8,516       (120 )      
 
                                   
 
  $ 92,043     $ (6,433 )   $     $ 442,523     $ (14,011 )   $ (1,527 )
 
                                   
 
                                               
More than 12 months
                                               
U.S. Government and Government agencies
  $ 284     $ (5 )   $     $ 271     $ (22 )   $  
Non-U.S. Government and Government agencies
    2,685     $ (721 )   $       3,700       (511 )      
Corporate debt
                                               
Financial institutions
    42,685       (1,080 )           23,462       (1,191 )      
Residential mortgage-backed
                                               
Non-agency residential
    85,978       (6,191 )     (563 )     27,265       (2,720 )     (329 )
Agency residential
    959       (52 )           214       (38 )      
Commercial mortgage-backed
                      149,074       (7,404 )      
Asset-backed
    2,212       (61 )           419       (26 )      
 
                                   
 
  $ 134,803     $ (8,110 )   $ (563 )   $ 204,405     $ (11,912 )   $ (329 )
 
                                   
 
  $ 226,846     $ (14,543 )   $ (563 )   $ 646,928     $ (25,923 )   $ (1,856 )
 
                                   
     As of June 30, 2010 and December 31, 2009, there were approximately 64 and 159 securities, respectively, in an unrealized loss position. The gross unrealized loss of $14,543 as of June 30, 2010 was primarily the result of widening credit spreads related to increases in market risk premium and reduced market liquidity since the acquisition of these securities. The decrease in the gross unrealized loss from December 31, 2009 to June 30, 2010 is primarily due to selling available for sale debt securities and reinvesting proceeds in trading debt securities thereby reducing unrealized gains/losses recognized in accumulated other comprehensive income.
i) Other-than-temporary impairment charges
     Following the Company’s review of the securities in the investment portfolio during the three and six months ended June 30, 2010, nil and one mortgage-backed security, respectively, was considered to be other-than-temporarily impaired due to the present value of the expected cash flows being lower than the amortized cost. The $168 of OTTI during the six months ended June 30, 2010 was recognized through earnings due to credit related losses.
     For the mortgage-backed security for which OTTI was recognized due to credit loss during the six months ended June 30, 2010, the significant inputs utilized to determine a credit loss were the estimated frequency and severity of losses of the underlying mortgages that comprise the mortgage-backed security. The frequency of losses was measured as the credit default rate, which includes such factors such as loan-to-value ratios and credit scores of borrowers. The severity of losses includes such factors as trends in overall housing prices and house prices that are obtained at foreclosure. The frequency and severity inputs were used in projecting

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
the future cash flows of the mortgage backed security. For the security in which we recognized an OTTI due to credit loss the credit default rate was 10.3% and the severity rate was 49.0%.
     The following table summarizes the amounts related to credit losses on debt securities for which a portion of the OTTI was recognized in other comprehensive income in the consolidated income statements for the three and six months ended June 30, 2010, and the three months ended June 30, 2009:
                         
    For the Three Months     For the Six Months     For the Three Months  
    Ended June 30, 2010     Ended June 30, 2010     Ended June 30, 2009  
Beginning balance of credit losses
  $ 1,264     $ 1,096     $ 7,140  
Additions for credit loss for which OTTI was not previously recognized
          168       3,167  
Reductions for securities sold during the period (realized)
                 
Reductions for OTTI previously recognized due to intent to sell
                 
Additions resulting from the increase in credit losses
                2,307  
Reductions resulting from the improvement in expected cash flows
                 
 
                 
Ending balance of credit losses
  $ 1,264     $ 1,264     $ 12,614  
 
                 
     Following the Company’s review of the securities in the investment portfolio during the six months ended June 30, 2009, seven securities (six mortgage-backed securities and one corporate bond) were considered to be other-than-temporarily impaired due to the present value of the expected cash flows being lower than the amortized cost. Of the $58,188 recognized as OTTI, $5,474 was recognized through earnings due to credit related losses, $41,963 was recognized through earnings for those securities in an unrealized loss position where the Company’s investment managers had the discretion to sell and $10,751 was recognized in “accumulated other comprehensive income” in the unaudited condensed consolidated balance sheets.
5. DERIVATIVE INSTRUMENTS
     The Company uses currency forward contracts to manage currency exposure, which are the only derivative instruments used for risk management purposes. The U.S. dollar is the Company’s reporting currency and the functional currency of its operating subsidiaries. The Company enters into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, the Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar, primarily the Canadian dollar, Euro and British Sterling. For liabilities incurred in currencies other than U.S. dollars, U.S. dollars are converted to the currency of the loss at the time of claim payment. As a result, the Company has an exposure to foreign currency risk resulting from fluctuations in exchange rates. The Company has developed a hedging strategy using currency forward contracts to minimize the potential loss of value caused by currency fluctuations. These currency forward contracts are not designated as hedges and accordingly are carried at fair value on the consolidated balance sheets as a part of “other assets” or “accounts payable and accrued liabilities,” with the corresponding realized and unrealized gains and losses included in “foreign exchange loss” in the unaudited condensed consolidated statements of operations and comprehensive income. The fair value of our currency forward contracts as of June 30, 2010 and December 31, 2009 was a net payable of $2,216 and $1,650, respectively, and was included in “accounts payable and accrued expenses” in the unaudited condensed consolidated balance sheet.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
     In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:
    Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
    Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
      prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
 
    Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.
     The following table shows the fair value of the Company’s financial instruments and where in the fair value hierarchy the fair value measurements are included as of June 30, 2010.
                                         
                    Fair value measurement using:  
                    Quoted prices                
                    in active             Significant  
                    markets for     Significant other     unobservable  
    Carrying     Total fair     identical assets     observable inputs     inputs  
    amount     value     (Level 1)     (Level 2)     (Level 3)  
Available for sale securities:
                                       
U.S. Government and Government agencies
  $ 211,256     $ 211,256     $ 145,662     $ 65,594     $  
Non-U.S. Government and Government agencies
    140,606       140,606             140,606        
States, municipalities and political subdivisions
    160,045       160,045             160,045        
Corporate debt
    1,275,202       1,275,202             1,275,202        
Mortgage-backed
    900,654       900,654             771,490       129,164  
Asset-backed
    68,171       68,171             65,087       3,084  
 
                                   
Total available for sale fixed maturity investments
    2,755,934       2,755,934                          
 
                                   
Trading securities:
                                       
U.S. Government and Government agencies
  $ 1,558,731     $ 1,558,731     $ 1,431,132     $ 127,599     $  
Non-U.S. Government and Government agencies
    246,180       246,180             246,180        
States, municipalities and political subdivisions
    88,965       88,965             88,965        
Corporate debt
    1,116,831       1,116,831             1,116,831        
Mortgage-backed
    663,423       663,423             513,798       149,625  
Asset-backed
    601,763       601,763             501,292       100,471  
 
                                   
Total trading fixed maturity investments
    4,275,893       4,275,893                          
 
                                   
Total fixed maturity investments
    7,031,827       7,031,827                          
Hedge funds
    319,592       319,592                   319,592  
Equity securities
    69,169       69,169       69,169              
 
                                   
Total investments
    7,420,588       7,420,588                          
 
                                   
Senior notes
    498,984       547,500             547,500        
     The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of June 30, 2010.
     U.S. Government and U.S. Government agencies: Comprised primarily of bonds issued by the U.S. treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company’s U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.
     Non-U.S. Government and Government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.
     States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
     Corporate debt: Comprised of bonds issued by corporations that are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-term are priced using spread above the London Interbank Offered Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.
     Mortgage-backed: Primarily comprised of pools of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agency originators. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
     Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.
     Hedge funds: Comprised of hedge funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager, which is not considered an observable input, and as such, the fair values of those hedge funds are included in the Level 3 fair value hierarchy.
     Equity securities: The fair value of the equity securities are prices from market exchanges and therefore included in the Level 1 fair value hierarchy.
     Senior notes: The fair value of the senior notes is based on trades as reported in Bloomberg, which was 109.5% of their principal amount, providing an effective yield of 5.63% as of June 30, 2010. The fair value of the senior notes is included in the Level 2 fair value hierarchy.
     The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2010.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                         
    Fair value measurement using significant  
    unobservable inputs (Level 3):  
    Hedge funds     Mortgage-backed     Asset-backed  
Three Months Ended June 30, 2010
                       
Opening balance
  $ 242,135     $ 233,667     $ 36,532  
Total realized and unrealized gains included in net income
    1,742       9,703       79  
Total realized and unrealized losses included in net income
    (2,906 )     (6,987 )     (279 )
Change in unrealized gains included in OCI
          1,639       9  
Change in unrealized losses included in OCI
          (205 )      
Purchases
    78,621       96,089       28,868  
Sales
          (47,560 )     (2,058 )
Transfers into Level 3
          2,286       50,641  
Transfers out of Level 3
          (9,843 )     (10,237 )
 
                 
Ending balance
  $ 319,592     $ 278,789     $ 103,555  
 
                 
 
                       
Three Months Ended June 30, 2009
                       
Opening balance
  $ 120,708     $     $  
Total gains included in net income:
                       
Realized losses
    (824 )            
Change in fair value of investments
    5,395              
Purchases or sales
    7,281              
Transfers in and/or out of Level 3
                 
 
                 
Ending balance
  $ 132,560     $     $  
 
                 
 
                       
Six Months Ended June 30, 2010
                       
Opening balance
  $ 184,725     $ 253,979     $ 104,871  
Total realized and unrealized gains included in net income
    6,584       18,084       634  
Total realized and unrealized losses included in net income
    (3,386 )     (7,098 )     (209 )
Change in unrealized gains included in OCI
          5,084       51  
Change in unrealized losses included in OCI
          (447 )     (6 )
Purchases
    131,669       120,943       51,181  
Sales
          (119,228 )     (5,246 )
Transfers into Level 3
          48,731       50,739  
Transfers out of Level 3
          (41,259 )     (98,460 )
 
                 
Ending balance
  $ 319,592     $ 278,789     $ 103,555  
 
                 
 
                       
Six Months Ended June 30, 2009
                       
Opening balance
  $ 48,573     $     $  
Total gains included in net income:
                       
Realized losses
    (2,575 )            
Change in fair value of investments
    7,962              
Purchases or sales
    78,600              
Transfers in and/or out of Level 3
                 
 
                 
Ending balance
  $ 132,560     $     $  
 
                 
     The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs such securities have been transferred to Level 3 fair value hierarchy. The Company believes the prices obtained from the broker-dealers are the best estimate of fair value of the securities being priced as the broker-dealers are typically involved in the initial pricing of the security and the Company has compared the price per the broker-dealer to other pricing sources and noted no material differences.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
     During the three and six months ended June 30, 2010, the Company transferred $9,843 and $41,259 of mortgage-backed securities, respectively, and $10,237 and $98,460 of asset-backed securities, respectively, from Level 3 to Level 2 in the fair value hierarchy. The Company transferred those securities as they no longer utilized broker-dealer quotes and instead used other pricing sources that have significant observable inputs. The Company recognizes transfers between levels at the end of the reporting period.
7. DEBT AND FINANCING ARRANGEMENTS
     On July 21, 2006, the Company issued $500,000 aggregate principal amount of 7.50% Senior Notes due August 1, 2016 (“Senior Notes”), with interest on the notes payable on August 1 and February 1 of each year, commencing on February 1, 2007. The Senior Notes were offered by the underwriters at a price of 99.71% of their principal amount, providing an effective yield to investors of 7.54%.
     The Senior Notes can be redeemed by the Company prior to maturity subject to payment of a “make-whole” premium. The Company has no current expectations of calling the notes prior to maturity.
     The Company has a collateralized amended letter of credit facility (the “Credit Facility”) with Citibank Europe plc. that has been and will continue to be used to issue standby letters of credit. The Credit Facility was amended in December 2008 to provide the Company with greater flexibility in the types of securities that are eligible to be posted as collateral and to increase the maximum aggregate amount available under the Credit Facility from $750,000 to $900,000 on an uncommitted basis.
     In November 2007, the Company entered into an $800,000 five-year senior credit facility (the “Facility”) with a syndication of lenders. The Facility consists of a $400,000 secured letter of credit facility for the issuance of standby letters of credit (the “Secured Facility”) and a $400,000 unsecured facility for the making of revolving loans and for the issuance of standby letters of credit (the “Unsecured Facility”). Both the Secured Facility and the Unsecured Facility have options to increase the aggregate commitments by up to $200,000, subject to approval of the lenders. The Facility will be used for general corporate purposes and to issue standby letters of credit. The Facility contains representations, warranties and covenants customary for similar bank loan facilities, including a covenant to maintain a ratio of consolidated indebtedness to total capitalization as of the last day of each fiscal quarter or fiscal year of not greater than 0.35 to 1.0 and a covenant under the Unsecured Facility to maintain a certain consolidated net worth. In addition, each material insurance subsidiary must maintain a financial strength rating from A.M Best Company of at least A- under the Unsecured Facility and of at least B++ under the Secured Facility. Concurrent with this new Facility, the Company terminated the Letter of Credit Facility with Barclays Bank Plc and all outstanding letters of credit issued thereunder were transferred to the Secured Facility. The Company is in compliance with all covenants under the Facility as of June 30, 2010 and December 31, 2009.
     There are a total of 13 lenders that make up the Facility syndication and that have varying commitments ranging from $20,000 to $87,500. Of the 13 lenders, four have commitments of $87,500 each, four have commitments of $62,500 each, four have commitments of $45,000 each and one has a commitment of $20,000. The one lender in the Facility with a $20,000 commitment has declared bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. This lender did not meet its commitment under the Facility. In July 2010, the Company replaced this bankrupt lender with another lender for the full $20,000 commitment under the Facility.
     In November 2008, Holdings requested a $250,000 borrowing under its Unsecured Facility. The borrowing was requested to ensure the preservation of the Company’s financial flexibility in light of the uncertainty in the credit markets at that time. On November 21, 2008, the Company received $243,750 of loan proceeds from the borrowing, as $6,250 was not received from the lender in bankruptcy. On February 23, 2009, the Company repaid in full the $243,750 borrowing under its Unsecured Facility.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
8. GOODWILL AND INTANGIBLE ASSETS
     The following table shows an analysis of goodwill and intangible assets for the six months ended June 30, 2010 and the year ended December 31, 2009:
                                 
            Intangible              
            assets with     Intangible        
            indefinite     assets with        
    Goodwill     lives     finite lives     Total  
Net balance at December 31, 2008
  $ 268,532     $ 23,920     $ 47,490     $ 339,942  
Additions
                       
Amortization
                (4,185 )     (4,185 )
Impairments
    (156 )           (6,866 )     (7,022 )
 
                       
Net balance at December 31, 2009
    268,376       23,920       36,439       328,735  
Additions
                       
Amortization
                (1,783 )     (1,783 )
 
                       
Net balance at June 30, 2010
    268,376       23,920       34,656       326,952  
 
                       
 
                               
Gross balance
    268,532       23,920       48,200       340,652  
Accumulated amortization
                (6,678 )     (6,678 )
Impairments
    (156 )           (6,866 )     (7,022 )
 
                       
Net balance
  $ 268,376     $ 23,920     $ 34,656     $ 326,952  
 
                       
     The amortization of the intangible assets with definite lives for the remainder of 2010 and for the years ended December 31, 2011, 2012, 2013, 2014 and thereafter will be $1,700, $2,978, $2,533, $2,533, $2,533 and $22,378, respectively. The intangible assets will be amortized over a weighted average useful life of 13.0 years.
9. INCOME TAXES
     Under current Bermuda law, Holdings and its Bermuda subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. Holdings and Allied World Assurance Company, Ltd have received an assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that in the event of any such taxes being imposed, Holdings and Allied World Assurance Company, Ltd will be exempted from such taxes until March 28, 2016.
     Certain subsidiaries of Holdings file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the United Kingdom, Ireland, Switzerland and Hong Kong. The following tax years by jurisdiction are open to examination:
         
    Fiscal Years  
U.S. Internal Revenue Service (“IRS”) for the U.S. subsidiaries
    2006 – 2009  
Inland Revenue for the U.K. branches
    2008 – 2009  
Irish Revenue Commissioners for the Irish subsidiaries
    2005 – 2009  
Swiss Federal Tax Administration for the Swiss branch
    2008 – 2009  
Inland Revenue Department for the Hong Kong branch
                2009  
     To the best of the Company’s knowledge, there are no examinations pending by the Inland Revenue or the Irish Revenue Commissioners. The IRS is currently completing an examination of the 2006 tax returns of Darwin Professional Underwriters, Inc. (“Darwin”). The examination covers the tax return filed for the period subsequent to Darwin’s initial public offering on May 16, 2006 to December 31, 2006.
     Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company does not expect any material unrecognized tax benefits within 12 months of January 2010.

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Table of Contents

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
10. SHAREHOLDERS’ EQUITY
a) Authorized shares
     The authorized share capital of Holdings as of June 30, 2010 and December 31, 2009 was $10,000. The issued share capital consists of the following:
                 
    June 30,     December 31,  
    2010     2009  
Common shares issued and fully paid, par value $0.03 per share
    50,488,342       49,734,487  
 
           
Share capital at end of period
  $ 1,515     $ 1,492  
 
           
         
    Six Months Ended
    June 30, 2010
Shares issued, balance at beginning of period
    49,734,487  
Shares issued
    753,855  
 
       
Total shares issued at end of period
    50,488,342  
 
       
 
       
Treasury shares issued, balance at beginning of period
     
Shares repurchased
    (1,081,041 )
 
       
Total treasury shares at end of period
    (1,081,041 )
 
       
 
       
Total shares outstanding
    49,407,301  
 
       
     As of June 30, 2010, there were outstanding 40,957,448 voting common shares and 8,449,853 non-voting common shares.
b) Share Warrants
     In conjunction with the private placement offering at the formation of the Company, the Company granted warrants to certain founding shareholders to acquire up to 5,500,000 common shares at an exercise price of $34.20 per share. These warrants are exercisable in certain limited conditions, including a public offering of common shares, and expire November 21, 2011. Any cash dividends paid to shareholders do not impact the exercise price of $34.20 per share for these founder warrants. There are various restrictions on the ability of warrant holders to dispose of their shares. As of June 30, 2010, none of these founder warrants have been exercised.
c) Dividends
     In February 2010, the Company declared a dividend of $0.20 per common share payable on April 1, 2010 to shareholders of record on March 16, 2010. The total dividend paid amounted to $10,092. In May 2010, the Company declared a quarterly dividend of $0.20 per common share, payable on June 10, 2010 to shareholders of record on May 25, 2010. The total dividend paid amounted to $10,017.
     In February 2009, the Company declared a quarterly dividend of $0.18 per common share on April 2, 2009 payable to shareholders of record on March 17, 2009. In May 2009, the Company declared a quarterly dividend of $0.18 per common share payable on June 11, 2009 to shareholders of record on May 26, 2009.
d) Share repurchase
     On May 6, 2010, the board of directors of Holdings authorized the Company to repurchase up to $500,000 of Holdings’ common shares through a share repurchase program. Repurchases under the authorization may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. This authorization is effective through May 3, 2012. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position, legal requirements and other factors. At any time, the repurchase program may be modified, extended or terminated by the board of directors. During the three months ended June 30, 2010, the Company repurchased, through open market purchases, 1,081,401 shares for total proceeds of $49,089, which represented an average repurchase price of $45.41 per share.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
11. EMPLOYEE BENEFIT PLANS
a) Employee option plan
     In 2001, the Company implemented the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2001 Employee Stock Option Plan (the “Plan”). Under the Plan, up to 4,000,000 common shares of Holdings may be issued. Holdings has filed a registration statement on Form S-8 under the Securities Act of 1933, as amended, to register common shares issued or reserved for issuance under the Plan. These options are exercisable in certain limited conditions, expire after 10 years, and generally vest pro-rata over four years from the date of grant. The exercise price of options issued are determined by the compensation committee of the board of directors but shall not be less than 100% of the fair market value of the common shares of Holdings on the date the option award is granted.
                 
    Six Months Ended June 30, 2010
            Weighted Average
    Options   Exercise Price
Outstanding at beginning of period
    1,314,907     $ 35.54  
Granted
    311,610       46.05  
Exercised
    (122,403 )     29.22  
Forfeited
    (19,546 )     42.76  
Expired
    (5,062 )     45.72  
 
               
Outstanding at end of period
    1,479,506     $ 38.15  
 
               
     Assumptions used in the option-pricing model for the options granted during the six months ended June 30, 2010 are as follows:
         
    Options Granted During  
    the Six Months Ended  
    June 30, 2010  
Expected term of option
    5.47 years
Weighted average risk-free interest rate
    2.65 %
Weighted average expected volatility
    42.35 %
Dividend yield
    1.25 %
Weighted average fair value on grant date
  $ 17.34  
 
     
     The Company has assumed a weighted average annual forfeiture rate of 6.37% in determining the compensation expense over the service period.
     Compensation expense of $758 and $1,550 relating to the options has been included in “general and administrative expenses” in the Company’s consolidated income statements for the three and six months ended June 30, 2010, respectively. Compensation expense of $682 and $1,307 relating to the options has been included in “general and administrative expenses” in the Company’s consolidated income statements for the three and six months ended June 30, 2009, respectively. As of June 30, 2010 and December 31, 2009, the Company has recorded in “additional paid-in capital” on the consolidated balance sheets an amount of $33,942 and $28,699, respectively, in connection with all options granted.
b) Stock incentive plan
     In 2004, the Company implemented the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2004 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for grants of restricted stock, restricted stock units (“RSUs”), dividend equivalent rights and other equity-based awards. A total of 2,000,000 common shares may be issued under the Stock Incentive Plan. To date, only RSUs have been granted. These RSUs generally vest in the fourth or fifth year from the original grant date, or pro-rata over four years from the date of the grant.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                 
    Six Months Ended June 30, 2010
            Weighted Average
            Grant Date Fair
    RSUs   Value
Outstanding RSUs at beginning of period
    915,432     $ 36.51  
RSUs granted
    41,197       46.05  
Performance-based RSUs granted
    279,900       46.05  
RSUs fully vested
    (143,183 )     40.97  
RSUs forfeited
    (8,802 )     38.75  
 
               
Outstanding RSUs at end of period
    1,084,544     $ 38.72  
 
               
     During 2010, the Company granted performance-based RSUs in lieu of utilizing the LTIP (as defined in Note 11(c)). The performance-based RSUs are structured in exactly the same form as shares issued under the LTIP in terms of vesting restrictions and achievement of established performance criteria. For the performance-based RSUs granted in 2010, the Company anticipates that the performance goals are likely to be achieved. Based on the performance goals, the performance-based RSUs granted in 2010 are expensed at 100% of the fair market value of Holding’s common share on the date of grant. The expense is recognized over the performance period.
     Compensation expense of $3,327 and $7,041 relating to the issuance of the RSUs, including the performance based RSUs, has been recognized in “general and administrative expenses” in the Company’s consolidated income statements for the three and six months ended June 30, 2010, respectively. Compensation expense of $2,273 and $4,624 relating to the issuance of the RSUs, including the performance-based RSUs, has been recognized in “general and administrative expenses” in the Company’s consolidated income statements for the three and six months ended June 30, 2009, respectively. The compensation expense for the RSUs is based on the fair market value of Holdings’ common shares at the time of grant. The Company has assumed a weighted average annual forfeiture rate of 4.98% in determining the compensation expense over the service period.
     As of June 30, 2010 and December 31, 2009, the Company has recorded $32,679 and $28,827, respectively, in “additional paid-in capital” on the consolidated balance sheets in connection with the RSUs awarded.
c) Long-term incentive plan
     In 2006, the Company implemented the Allied World Assurance Company Holdings, Ltd Second Amended and Restated Long-Term Incentive Plan (“LTIP”). The LTIP provides for performance based equity awards to key employees in order to promote the long-term growth and profitability of the Company. Each award represents the right to receive a number of common shares in the future, based upon the achievement of established performance criteria during the applicable three-year performance period. A total of 2,000,000 common shares may be issued under the LTIP.
                 
    Six Months Ended June 30, 2010
            Weighted Average
            Grant Date Fair
    LTIP   Value
Outstanding LTIP awards at beginning of period
    1,148,411     $ 42.28  
Additional LTIP awards granted due to the achievement of 2007 — 2009 performance criteria
    181,250       43.40  
LTIP awards vested
    (543,750 )     43.40  
 
               
Outstanding LTIP awards at end of period
    785,911     $ 41.76  
 
               
     Compensation expense of $3,842 and $8,863 relating to the LTIP has been recognized in “general and administrative expenses” in the Company’s consolidated income statements for the three and six months ended June 30, 2010, respectively. Compensation expense of $4,642 and $9,284 relating to the LTIP has been recognized in “general and administrative expenses” in the Company’s consolidated income statements for the three and six months ended June 30, 2009, respectively. The compensation expense for the LTIP is based on the fair market value of the Company’s common shares at the time of grant. The LTIP is deemed to be an equity plan and as such, $68,626 and $59,777 have been included in “additional paid-in capital” on the consolidated balance sheets as of June 30, 2010 and December 31, 2009, respectively.
     In calculating the compensation expense and in the determination of share equivalents for the purpose of calculating diluted earnings per share, it is estimated for the LTIP awards granted in 2008 that the maximum performance goals as set by the LTIP are

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
likely to be achieved over the performance period. Based on the performance goals, the LTIP awards granted in 2008 are expensed at 150% of the fair market value of Holdings’ common shares on the date of grant. For the LTIP awards granted in 2009, the Company anticipates that the performance goals as set by the LTIP are likely to be achieved above the target but below the maximum over the performance period. Based on the performance goals, the LTIP awards granted in 2009 are expensed at 132.5% of the fair market value of Holdings’ common shares on the date of grant. The expense is recognized over the performance period.
d) Cash-equivalent stock awards
     As part of the Company’s annual year-end compensation awards, the Company granted both stock-based awards and cash-equivalent stock awards. The cash-equivalent awards were granted to employees who received RSU and LTIP awards and were granted in lieu of granting the full award as a stock-based award. The cash-equivalent time vesting RSU awards vest pro-rata over four years from the date of grant. The cash-equivalent LTIP awards and performance based RSU awards vest after a three-year performance period. As the cash-equivalent awards are settled in cash, we establish a liability equal to the product of the fair market value of Holdings’ common shares as of the end of the reporting period and the total awards outstanding. The liability is included in “accounts payable and accrued expenses” in the balance sheets and changes in the liability are recorded in “general and administrative expenses” in the consolidated income statements. For the three and six months ended June 30, 2010, the expense recognized for the cash-equivalent stock awards was $3,012 and $5,321, respectively. For the three and six months ended June 30, 2009, the expense recognized for the cash-equivalent stock awards was $809 and $1,345, respectively.
     The following table shows the stock related compensation expense relating to the stock options, RSUs, LTIP and cash equivalent awards for the three and six months ended June 30, 2010 and 2009.
                                 
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Stock Options
  $ 758     $ 682     $ 1,550     $ 1,307  
RSUs
    3,327       2,273       7,041       4,624  
LTIP
    3,842       4,642       8,863       9,284  
Cash-equivalent stock awards
    3,012       809       5,321       1,345  
 
                       
Total
  $ 10,939     $ 8,406     $ 22,775     $ 16,560  
 
                       
12. EARNINGS PER SHARE
     The following table sets forth the comparison of basic and diluted earnings per share:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Basic earnings per share
                               
Net income
  $ 183,959     $ 113,670     $ 317,699     $ 245,078  
Weighted average common shares outstanding
    50,222,974       49,523,459       50,123,945       49,386,549  
 
                       
Basic earnings per share
  $ 3.66     $ 2.30     $ 6.34     $ 4.96  
 
                       

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Diluted earnings per share
                               
Net income
  $ 183,959     $ 113,670     $ 317,699     $ 245,078  
Weighted average common shares outstanding
    50,222,974       49,523,459       50,123,945       49,386,549  
Share equivalents:
                               
Warrants and options
    1,486,465       766,954       1,534,861       774,605  
Restricted stock units
    456,946       339,002       469,301       337,130  
LTIP awards
    808,025       628,471       958,601       717,524  
 
                       
Weighted average common shares and common share equivalents outstanding — diluted
    52,974,410       51,257,886       53,086,708       51,215,808  
 
                       
Diluted earnings per share
  $ 3.47     $ 2.22     $ 5.98     $ 4.79  
 
                       
     For the three months ended June 30, 2010, a weighted average of 686,938 employee stock options and 24,833 RSUs, were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share. For the six months ended June 30, 2010, a weighted average of 600,567 employee stock options and 15,988 RSUs were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share.
     For the three months ended June 30, 2009 a weighted average of 777,407 employee stock options and 257,485 RSUs, respectively, were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share. For the six months ended June 30, 2009, a weighted average of 695,234 employee stock options and 325,868 RSUs were considered anti-dilutive and were therefore excluded from the calculation of the diluted earnings per share.
13. SEGMENT INFORMATION
     The determination of reportable segments is based on how senior management monitors the Company’s underwriting operations. Management monitors the performance of its direct underwriting operations based on the geographic location of the Company’s offices, the markets and customers served and the type of accounts written. The Company is currently organized into three operating segments: U.S. insurance, international insurance and reinsurance. All product lines fall within these classifications.
     The U.S. insurance segment includes the Company’s direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance primarily to non-Fortune 1000 North American domiciled accounts. The international insurance segment includes the Company’s direct insurance operations in Bermuda, Europe and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts and mid-sized to large non-North American domiciled accounts. The reinsurance segment includes the reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. We presently write reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.
     Responsibility and accountability for the results of underwriting operations are assigned by major line of business within each segment. Because the Company does not manage its assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written.
     Management measures results for each segment on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio” and the “combined ratio.” The “loss and loss expense ratio” is derived by dividing net losses and loss expenses by net premiums earned. The “acquisition cost ratio” is derived by dividing acquisition costs by net premiums earned. The “general and administrative expense ratio” is derived by dividing general and administrative expenses by net premiums earned.
     The “combined ratio” is the sum of the “loss and loss expense ratio,” the “acquisition cost ratio” and the “general and administrative expense ratio.”
     The following table provides a summary of the segment results for the three and six months ended June 30, 2010 and 2009.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                                 
            International              
Three months ended June 30, 2010   U.S. Insurance     Insurance     Reinsurance     Total  
Gross premiums written
  $ 189,663     $ 167,601     $ 136,583     $ 493,847  
Net premiums written
    135,238       98,509       136,048       369,795  
Net premiums earned
    125,659       89,427       123,838       338,924  
Other income
    616                   616  
Net losses and loss expenses
    (69,198 )     (64,580 )     (54,944 )     (188,722 )
Acquisition costs
    (15,854 )     66       (22,150 )     (37,938 )
General and administrative expenses
    (30,683 )     (22,657 )     (14,749 )     (68,089 )
 
                       
Underwriting income
    10,540       2,256       31,995       44,791  
Net investment income
                            65,594  
Net realized investment gains
                            94,933  
Net impairment charges recognized in earnings
                             
Amortization and impairment of intangible assets
                            (891 )
Interest expense
                            (9,531 )
Foreign exchange loss
                            (559 )
 
                             
Income before income taxes
                          $ 194,337  
 
                             
 
                               
Loss and loss expense ratio
    55.1 %     72.2 %     44.4 %     55.7 %
Acquisition cost ratio
    12.6 %     (0.1 )%     17.9 %     11.2 %
General and administrative expense ratio
    24.4 %     25.3 %     11.9 %     20.1 %
 
                       
Combined ratio
    92.1 %     97.4 %     74.2 %     87.0 %
 
                       
                                 
            International              
Three months ended June 30, 2009   U.S. Insurance     Insurance     Reinsurance     Total  
Gross premiums written
  $ 182,712     $ 191,985     $ 118,085     $ 492,782  
Net premiums written
    127,469       116,170       117,799       361,438  
Net premiums earned
    111,025       111,807       110,836       333,668  
Other income
    369                   369  
Net losses and loss expenses
    (46,842 )     (74,101 )     (56,776 )     (177,719 )
Acquisition costs
    (13,543 )     (1,667 )     (21,753 )     (36,963 )
General and administrative expenses
    (29,996 )     (19,914 )     (11,585 )     (61,495 )
 
                       
Underwriting income
    21,013       16,125       20,722       57,860  
Net investment income
                            76,537  
Net realized investment gains
                            5,093  
Net impairment charges recognized in earnings
                            (5,474 )
Amortization and impairment of intangible assets
                            (1,065 )
Interest expense
                            (9,522 )
Foreign exchange gain
                            1,222  
 
                             
Income before income taxes
                          $ 124,651  
 
                             
 
                               
Loss and loss expense ratio
    42.2 %     66.3 %     51.2 %     53.3 %
Acquisition cost ratio
    12.2 %     1.5 %     19.6 %     11.1 %
General and administrative expense ratio
    27.0 %     17.8 %     10.5 %     18.4 %
 
                       
Combined ratio
    81.4 %     85.6 %     81.3 %     82.8 %
 
                       

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                                 
            International              
Six months ended June 30, 2010   U.S. Insurance     Insurance     Reinsurance     Total  
Gross premiums written
  $ 351,748     $ 289,023     $ 357,239     $ 998,010  
Net premiums written
    266,793       179,590       356,704       803,087  
Net premiums earned
    254,864       176,470       245,914       677,248  
Other income
    913                   913  
Net losses and loss expenses
    (167,623 )     (122,029 )     (131,224 )     (420,876 )
Acquisition costs
    (32,814 )           (45,908 )     (78,722 )
General and administrative expenses
    (57,797 )     (44,502 )     (29,253 )     (131,552 )
 
                       
Underwrting (loss) income
    (2,457 )     9,939       39,529       47,011  
Net investment income
                            134,496  
Net realized investment gains
                            172,420  
Net impairment charges recognized in earnings
                            (168 )
Amortization and impairment of intangible assets
                            (1,783 )
Interest expense
                            (19,059 )
Foreign exchange loss
                            (1,635 )
 
                             
Loss before income taxes
                          $ 331,282  
 
                             
 
                               
Loss and loss expense ratio
    65.8 %     69.1 %     53.4 %     62.1 %
Acquisition cost ratio
    12.9 %     0.0 %     18.7 %     11.6 %
General and administrative expense ratio
    22.7 %     25.2 %     11.9 %     19.4 %
 
                       
Combined ratio
    101.4 %     94.3 %     84.0 %     93.1 %
 
                       
                                 
            International              
Six months ended June 30, 2009   U.S. Insurance     Insurance     Reinsurance     Total  
Gross premiums written
  $ 336,081     $ 317,904     $ 318,394     $ 972,379  
Net premiums written
    243,313       205,127       318,036       766,476  
Net premiums earned
    216,292       223,001       218,347       657,640  
Other income
    835                   835  
Net losses and loss expenses
    (101,019 )     (113,294 )     (111,903 )     (326,216 )
Acquisition costs
    (27,954 )     (2,727 )     (43,410 )     (74,091 )
General and administrative expenses
    (57,395 )     (38,733 )     (22,732 )     (118,860 )
 
                       
Underwrting income
    30,759       68,247       40,302       139,308  
Net investment income
                            154,391  
Net realized investment gains
                            41,695  
Net impairment charges recognized in earnings
                            (47,437 )
Amortization and impairment of intangible assets
                            (2,130 )
Interest expense
                            (19,969 )
Foreign exchange gain
                            387  
 
                             
Income before income taxes
                          $ 266,245  
 
                             
 
                               
Loss and loss expense ratio
    46.7 %     50.8 %     51.3 %     49.6 %
Acquisition cost ratio
    12.9 %     1.2 %     19.9 %     11.3 %
General and administrative expense ratio
    26.5 %     17.4 %     10.4 %     18.1 %
 
                       
Combined ratio
    86.1 %     69.4 %     81.6 %     79.0 %
 
                       
     The following table shows an analysis of the Company’s net premiums written by geographic location of the Company’s subsidiaries for the three and six months ended June 30, 2010 and 2009. All inter-company premiums have been eliminated.

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States dollars, except share, per share, percentage and ratio information)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
United States
  $ 192,980     $ 168,220     $ 438,260     $ 412,793  
Bermuda
    131,119       151,299       258,901       270,312  
Europe
    38,550       41,462       90,710       82,914  
Hong Kong
    1,234       457       5,613       457  
Singapore
    5,912             9,603        
 
                       
Total net premiums written
  $ 369,795     $ 361,438     $ 803,087     $ 766,476  
 
                       
14. SUBSEQUENT EVENTS
     On August 5, 2010, the Company declared a quarterly dividend of $0.20 per common share, payable on September 9, 2010 to shareholders of record on August 24, 2010.
     On July 2, 2010, the Company sold its program administrator and wholesale brokerage operations for $2,395 and recognized a gain on the sale of $2,071.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     The following discussion and analysis of our financial condition and result of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q. References in this Form 10-Q to the terms “we,” “us,” “our,” “the company” or other similar terms mean the consolidated operations of Allied World Assurance Company Holdings, Ltd and its subsidiaries, unless the context requires otherwise. References in this Form 10-Q to the term “Holdings” means Allied World Assurance Company Holdings, Ltd only.
Note on Forward-Looking Statement
     This Form 10-Q and other publicly available documents may include, and our officers and representatives may from time to time make, projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. These projections and statements are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 and are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections and statements may address, among other things, our strategy for growth, product development, financial results and reserves. Actual results and financial condition may differ, possibly materially, from these projections and statements and therefore you should not place undue reliance on them. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections and statements are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in “Risk Factors” in Item 1A of Part I of our 2009 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2010. We are under no obligation (and expressly disclaim any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
Our Business
     We write a diversified portfolio of property and casualty insurance and reinsurance internationally through our subsidiaries and branches based in Bermuda, Europe, Hong Kong, Singapore and the United States. We manage our business through three operating segments: U.S. insurance, international insurance and reinsurance. As of June 30, 2010, we had approximately $10.2 billion of total assets, $3.5 billion of total shareholders’ equity and $4.0 billion of total capital, which includes shareholders’ equity and senior notes.
     During the three and six month periods that ended June 30, 2010, we experienced premium rate declines across all of our operating segments, in particular for the professional liability and healthcare lines of business. We believe the premium rate decreases are due to increased competition, increased capacity and an absence of large severity casualty losses. We expect this trend to continue during the remainder of 2010 and we are anticipating this trend to continue into 2011. Despite the challenging pricing environment, we do believe that there are opportunities where certain products have adequate returns and that the expanded breadth of our operations allows us to target those classes of business. We have seen premium rate increases for certain general casualty business with decreases in exposures given the recent economic environment. Given these trends, we continue to be selective in the policies and reinsurance contracts we underwrite. Our consolidated gross premiums written increased slightly by $1.0 million, or 0.2%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and our net income increased $70.2 million, or 61.7%, for the same three-month period. Our consolidated gross premiums written increased by $25.6 million, or 2.6%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009, and our net income increased $72.6 million, or 29.6%, for the same six-month period. The increase in net income for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009 was primarily due to higher net realized investment gains and lower other-than-temporary-impairment charges (“OTTI”), partially offset by higher net losses and loss expenses due to increased property losses.
Recent Developments
     In March 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-11 “Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”). On June 30, 2010, in accordance with ASU 2010-11, we elected the fair value option for all of our mortgage-backed and asset-backed securities. As a result of the fair value election, starting with the three months ended September 30, 2010, any changes in the fair value of the mortgage-backed and asset-backed securities will be recognized through earnings in “net realized investment gains (losses)” on the

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unaudited condensed consolidated statements of operations and comprehensive income (“consolidated income statements”). On July 1, 2010, we reclassified $968.8 million of mortgage-backed and asset-backed securities, combined, from “fixed maturity investments available for sale, at fair value” to “fixed maturity investments trading, at fair value” on the unaudited condensed consolidated balance sheets (“consolidated balance sheets”). Also on July 1, 2010, we reclassified $42.4 million of net unrealized gains from “accumulated other comprehensive income” to “retained earnings” on the consolidated balance sheets.
     In April 2010, the Deepwater Horizon oil rig in the Gulf of Mexico exploded triggering an underwater oil leak. The Deepwater Horizon well has yet to be fully contained and it is too early to determine the liability potential for this event. To date, we have received only a few notices of loss from our insureds and cedents. As the allocation of liability is yet to be determined, we will continue to monitor this situation. At this time, we believe that we have sufficient reserves for this event.
     In May 2010, the board of directors of Holdings authorized the company to repurchase up to $500 million of Holdings’ common shares through a share repurchase program. Repurchases under the authorization may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. This authorization is effective through May 3, 2012. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the company’s capital position, legal requirements and other factors. At any time, the repurchase program may be modified, extended or terminated by the board of directors. As part of the share repurchase program, we entered into a 10b5-1 repurchase plan that enables us to complete share repurchases during trading blackout periods. During the three months ended June 30, 2010, we repurchased, through open-market purchases, 1,081,041 shares at a total cost of $49.1 million, for an average price of $45.41 per share. We have classified these repurchased shares as “Treasury shares, at cost” on the consolidated balance sheets.
     In June 2010, we received approval from Lloyd’s of London to establish Syndicate 2232 (pseudonym AWH) that became fully operational and began writing business in June 2010. The syndicate offers select product lines including international property, general casualty, professional liability and international treaty reinsurance, targeted at key territories such as countries in Latin America and the Asia Pacific region. Syndicate 2232’s primary purpose is to enhance our international insurance and reinsurance platforms and capabilities. In June 2010, we had gross premiums written of $3.4 million, primarily consisting of new business, through Syndicate 2232.
Financial Highlights
                                 
    Three Months Ended June 30,   Six Months Ended June 30,
    2010   2009   2010   2009
    ($ in millions except share and per share data)
Gross premiums written
  $ 493.8     $ 492.8     $ 998.0     $ 972.4  
Net income
    184.0       113.7       317.7       245.1  
Operating income
    95.7       112.9       157.0       250.4  
Basic earnings per share:
                               
Net income
  $ 3.66     $ 2.30     $ 6.34     $ 4.96  
Operating income
  $ 1.90     $ 2.28     $ 3.13     $ 5.07  
Diluted earnings per share:
                               
Net income
  $ 3.47     $ 2.22     $ 5.98     $ 4.79  
Operating income
  $ 1.80     $ 2.20     $ 2.96     $ 4.89  
Weighted average common shares outstanding:
                               
Basic
    50,222,974       49,523,459       50,123,945       49,386,549  
Diluted
    52,974,410       51,257,887       53,086,708       51,215,808  
Basic book value per common share
  $ 70.20     $ 55.35     $ 70.20     $ 55.35  
Diluted book value per common share
  $ 65.18     $ 51.78     $ 65.18     $ 51.78  
Annualized return on average equity (ROAE), net income
    22.5 %     17.7 %     19.9 %     19.6 %
Annualized ROAE, operating income
    11.7 %     17.6 %     9.8 %     20.0 %
Non-GAAP Financial Measures
     In presenting the company’s results, management has included and discussed certain non-GAAP financial measures, as such term is defined in Item 10(e) of Regulation S-K promulgated by the SEC. Management believes that these non-GAAP measures, which

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may be defined differently by other companies, better explain the company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the company’s business. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
Operating income & operating income per share
     Operating income is an internal performance measure used in the management of our operations and represents after-tax operational results excluding, as applicable, net realized investment gains or losses, net impairment charges recognized in earnings, impairment of intangible assets and foreign exchange gain or loss. We exclude net realized investment gains or losses, net impairment charges recognized in earnings and net foreign exchange gain or loss from our calculation of operating income because the amount of these gains or losses is heavily influenced by and fluctuates in part according to the availability of market opportunities and other factors. We exclude impairment of intangible assets as these are non-recurring charges. We believe these amounts are largely independent of our business and underwriting process and including them distorts the analysis of trends in our operations. In addition to presenting net income determined in accordance with U.S. GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations in a manner similar to how management analyzes our underlying business performance. Operating income should not be viewed as a substitute for U.S. GAAP net income. The following is a reconciliation of operating income to its most closely related U.S. GAAP measure, net income.
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  
    ($ in millions except per share data)  
Net income
  $ 184.0     $ 113.7     $ 317.7     $ 245.1  
Add after tax affect of:
                               
Net realized investment gains
    (88.9 )     (5.1 )     (162.4 )     (41.7 )
Net impairment charges recognized in earnings
          5.5       0.1       47.4  
Foreign exchange loss (gain)
    0.6       (1.2 )     1.6       (0.4 )
 
                       
Operating income
  $ 95.7     $ 112.9     $ 157.0     $ 250.4  
 
                       
Basic per share data:
                               
Net income
  $ 3.66     $ 2.30     $ 6.34     $ 4.96  
Add after tax affect of:
                               
Net realized investment gains
    (1.77 )     (0.10 )     (3.24 )     (0.84 )
Net impairment charges recognized in earnings
          0.11             0.96  
Foreign exchange loss (gain)
    0.01       (0.03 )     0.03       (0.01 )
 
                       
Operating income
  $ 1.90     $ 2.28     $ 3.13     $ 5.07  
 
                       
Diluted per share data:
                               
Net income
  $ 3.47     $ 2.22     $ 5.98     $ 4.79  
Add after tax affect of:
                               
Net realized investment gains
    (1.68 )     (0.10 )     (3.05 )     (0.81 )
Net impairment charges recognized in earnings
          0.11             0.92  
Foreign exchange loss (gain)
    0.01       (0.03 )     0.03       (0.01 )
 
                       
Operating income
  $ 1.80     $ 2.20     $ 2.96     $ 4.89  
 
                       
Annualized return on equity
     Annualized return on average shareholders’ equity (“ROAE”) is calculated using average equity, excluding the average after tax unrealized gains or losses on investments. Unrealized gains or losses on investments are primarily the result of interest rate and risk premium movements and the resultant impact on fixed income securities. Such gains or losses are not related to management actions or operational performance, nor are they likely to be realized. Therefore, we believe that excluding these unrealized gains or losses provides a more consistent and useful measurement of operating performance, which supplements U.S. GAAP information. We present ROAE as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of our financial information.

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     Annualized operating return on average shareholders’ equity is calculated using operating income and average shareholders’ equity, excluding the average after tax unrealized gains or losses on investments. Unrealized gains or losses are excluded from equity for the reasons outlined above.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
    ($ in millions)  
Opening shareholders’ equity
  $ 3,338.8     $ 2,491.9     $ 3,213.3     $ 2,416.9  
Deduct: accumulated other comprehensive income
    (142.3 )     (48.2 )     (149.8 )     (105.6 )
 
                       
Adjusted opening shareholders’ equity
  $ 3,196.5     $ 2,443.7     $ 3,063.5     $ 2,311.3  
 
Closing shareholders’ equity
  $ 3,468.5     $ 2,741.4     $ 3,468.5     $ 2,741.4  
Deduct: accumulated other comprehensive income
    (138.3 )     (48.7 )     (138.3 )     (48.7 )
 
                       
Adjusted closing shareholders’ equity
  $ 3,330.2     $ 2,692.7     $ 3,330.2     $ 2,692.7  
 
                               
Average shareholders’ equity
  $ 3,263.4     $ 2,568.2     $ 3,196.9     $ 2,502.0  
 
                               
Net income available to shareholders
  $ 184.0     $ 113.7     $ 317.7     $ 245.1  
Annualized return on average shareholders’ equity — net income available to shareholders
    22.5 %     17.7 %     19.9 %     19.6 %
 
                       
 
Operating income available to shareholders
  $ 95.7     $ 112.9     $ 157.0     $ 250.4  
Annualized return on average shareholders’ equity — operating income available to shareholders
    11.7 %     17.6 %     9.8 %     20.0 %
 
                       
 
                               
Diluted book value per share
     We have included diluted book value per share because it takes into account the effect of dilutive securities; therefore, we believe it is an important measure of calculating shareholder returns.
                 
    Six Months Ended June 30,  
    2010     2009  
    ($ in millions except share  
    and per share data)  
Price per share at period end
  $ 45.38     $ 40.83  
 
               
Total shareholders’ equity
  $ 3,468.5     $ 2,741.4  
 
               
Basic common shares outstanding
    49,407,301       49,524,492  
Add:
               
Unvested restricted share units
    804,644       947,180  
Performance based equity awards
    1,409,984       1,329,661  
Dilutive options/warrants outstanding
    6,667,941       6,569,616  
Weighted average exercise price per share
  $ 34.52     $ 33.70  
Deduct:
               
Options bought back via treasury method
    (5,072,455 )     (5,423,031 )
 
           
Common shares and common share equivalents outstanding
    53,217,415       52,947,918  
 
               
Basic book value per common share
  $ 70.20     $ 55.35  
Diluted book value per common share
  $ 65.18     $ 51.78  

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Relevant Factors
Revenues
     We derive our revenues primarily from premiums on our insurance policies and reinsurance contracts, net of any reinsurance or retrocessional coverage purchased. Insurance and reinsurance premiums are a function of the amounts and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, are known. In addition, our revenues include income generated from our investment portfolio, consisting of net investment income and net realized investment gains or losses. Investment income is principally derived from interest and dividends earned on investments, partially offset by investment management expenses and fees paid to our custodian bank. Net realized investment gains or losses include gains or losses from the sale of investments, as well as the change in the fair value of investments that we mark-to-market through net income.
     Due to changes in the recognition and presentation of OTTI of our available for sale fixed maturity investments based on guidance issued by the FASB in April 2009, OTTI, which was previously included in “net realized investment gains or losses”, is presented separately in the consolidated income statements as “net impairment charges recognized in earnings”.
Expenses
     Our expenses consist largely of net losses and loss expenses, acquisition costs, and general and administrative expenses. Net losses and loss expenses incurred are comprised of three main components:
    losses paid, which are actual cash payments to insureds and reinsureds, net of recoveries from reinsurers;
    outstanding loss or case reserves, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and
    reserves for losses incurred but not reported, or “IBNR”, which are reserves (in addition to case reserves) established by us that we believe are needed for the future settlement of claims. The portion recoverable from reinsurers is deducted from the gross estimated loss.
     Acquisition costs are comprised of commissions, brokerage fees and insurance taxes. Commissions and brokerage fees are usually calculated as a percentage of premiums and depend on the market and line of business. Acquisition costs are reported after (1) deducting commissions received on ceded reinsurance, (2) deducting the part of acquisition costs relating to unearned premiums and (3) including the amortization of previously deferred acquisition costs.
     General and administrative expenses include personnel expenses including stock-based compensation charges, rent expense, professional fees, information technology costs and other general operating expenses.
Ratios
     Management measures results for each segment on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio,” “expense ratio” and the “combined ratio.” Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written. The “loss and loss expense ratio” is derived by dividing net losses and loss expenses by net premiums earned. The “acquisition cost ratio” is derived by dividing acquisition costs by net premiums earned. The “general and administrative expense ratio” is derived by dividing general and administrative expenses by net premiums earned. The “expense ratio” is the sum of the acquisition cost ratio and the general and administrative expense ratio. The “combined ratio” is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.
Critical Accounting Policies
     It is important to understand our accounting policies in order to understand our financial position and results of operations. Our unaudited condensed consolidated financial statements reflect determinations that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If events or other factors cause actual results to

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differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. We believe that some of the more critical judgments in the areas of accounting estimates and assumptions that affect our financial condition and results of operations are related to reserves for losses and loss expenses, reinsurance recoverables, premiums and acquisition costs, valuation of financial instruments, other than temporary impairment of investments and goodwill and other intangible asset impairment valuation. For a detailed discussion of our critical accounting policies please refer to our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC. There were no material changes in the application of our critical accounting estimates subsequent to that report.
Results of Operations
     The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
    ($ in millions)  
Gross premiums written
  $ 493.8     $ 492.8     $ 998.0     $ 972.4  
 
                       
Net premiums written
  $ 369.8     $ 361.4     $ 803.1     $ 766.4  
 
                       
Net premiums earned
    338.9       333.7       677.2       657.6  
Net investment income
    65.6       76.5       134.5       154.4  
Net realized investment gains
    94.9       5.1       172.4       41.7  
Net impairment charges recognized in earnings
          (5.5 )     (0.2 )     (47.4 )
Other income
    0.6       0.4       0.9       0.8  
 
                       
 
  $ 500.0     $ 410.2     $ 984.8     $ 807.1  
 
                       
Net losses and loss expenses
  $ 188.7     $ 177.7     $ 420.9     $ 326.2  
Acquisition costs
    37.9       37.0       78.7       74.1  
General and administrative expenses
    68.1       61.5       131.5       118.9  
Amortization and impairment of intangible assets
    0.9       1.1       1.8       2.1  
Interest expense
    9.4       9.5       19.0       20.0  
Foreign exchange loss (gain)
    0.6       (1.2 )     1.6       (0.4 )
 
                       
 
  $ 305.6     $ 285.6     $ 653.5     $ 540.9  
 
                       
Income before income taxes
  $ 194.4     $ 124.6     $ 331.3     $ 266.2  
Income tax expense
    10.4       10.9       13.6       21.1  
 
                       
Net income
  $ 184.0     $ 113.7     $ 317.7     $ 245.1  
 
                       
 
                               
Ratios
                               
Loss and loss expense ratio
    55.7 %     53.3 %     62.1 %     49.6 %
Acquisition cost ratio
    11.2 %     11.1 %     11.6 %     11.3 %
General and administrative expense ratio
    20.1 %     18.4 %     19.4 %     18.1 %
Expense ratio
    31.3 %     29.5 %     31.0 %     29.4 %
Combined ratio
    87.0 %     82.8 %     93.1 %     79.0 %
Comparison of Three Months Ended June 30, 2010 and 2009
Premiums
     Gross premiums written increased by $1.0 million, or 0.2%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The overall increase in gross premiums written was primarily the result of the following:
    Gross premiums written in our U.S. insurance segment increased by $7.0 million, or 3.8%. The increase in gross premiums written was primarily due to increased new business, including from new products, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. This increase was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition.

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    Gross premiums written in our international insurance segment decreased by $24.4 million, or 12.7%, due to the continued trend of the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition.
    Gross premiums written in our reinsurance segment increased by $18.5 million, or 15.7%. The increase in gross premiums written was primarily due to one of our professional liability reinsurance treaties that was previously written in the third quarter of 2009 for $16.5 million and was renewed in the second quarter of 2010 for $10.9 million thereby increasing gross premiums written during the three months ended June 30, 2010 compared to the three months ended June 30, 2009. This increase was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions), increased competition and increased cedent retention.
     The table below illustrates our gross premiums written by geographic location for the three months ended June 30, 2010 and 2009.
                                 
    Three Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
    ($ in millions)  
United States
  $ 247.4     $ 223.5     $ 23.9       10.7 %
Bermuda
    182.3       207.9       (25.6 )     (12.3 )
Europe
    57.0       60.9       (3.9 )     (6.4 )
Singapore
    5.9             5.9       n/a *
Hong Kong
    1.2       0.5       0.7       104.0  
 
                         
 
  $ 493.8     $ 492.8     $ 1.0       0.2 %
 
                         
 
*   n/a: not applicable
     Net premiums written increased by $8.4 million, or 2.3%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in net premiums written was primarily due to a reduction in premiums ceded. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 25.1% of gross premiums written for the three months ended June 30, 2010 compared to 26.7% for the same period in 2009. The reduction in premiums ceded was due to lower cessions on our property catastrophe reinsurance coverage. We renewed our property catastrophe reinsurance treaty from May 1, 2010 to April 30, 2011, which resulted in premiums ceded of $21.8 million. The cost of the property catastrophe reinsurance treaty was lower than the expiring treaty by $6.9 million primarily due to reduced property exposure. The decreased cost of the property catastrophe reinsurance treaty was partially offset by lower return premium on our expiring property catastrophe reinsurance treaties of $2.8 million.
     Net premiums earned increased by $5.2 million, or 1.6%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 as a result of higher net premiums earned for the U.S. insurance and reinsurance segments. This is driven by increased net premiums written in the current and prior periods.
     We evaluate our business by segment, distinguishing between U.S. insurance, international insurance and reinsurance. The following chart illustrates the mix of our business on both a gross premiums written and net premiums earned basis.
                                 
    Gross     Net  
    Premiums     Premiums  
    Written     Earned  
    Three Months Ended June 30,  
    2010     2009     2010     2009  
U.S. insurance
    38.4 %     37.0 %     37.1 %     33.3 %
International insurance
    33.9 %     39.0 %     26.4 %     33.5 %
Reinsurance
    27.7 %     24.0 %     36.5 %     33.2 %
 
                       
Total
    100.0 %     100.0 %     100.0 %     100.0 %
 
                       
Net Investment Income
     Net investment income decreased by $10.9 million, or 14.2%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease was due to lower yields on our fixed maturity investments despite the increase in book value of our fixed maturity investments from June 30, 2009 to June 30, 2010. The annualized period book yield of the investment

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portfolio for the three months ended June 30, 2010 and 2009 was 3.5% and 4.4%, respectively. The decrease in book yield was primarily caused by the overall market interest rate environment, which is at historically low levels, and by selling corporate bonds and mortgage-backed securities and reinvesting in lower yielding U.S. treasury securities in order to reduce spread risk and duration in our investment portfolio. A lower duration implies that we are investing in securities with shorter average lives, which results in lower book yield and should result in less price sensitivity. Investment management expenses of $3.0 million and $1.6 million were incurred during the three months ended June 30, 2010 and 2009, respectively. The increase in investment management expenses was due to the increase in the size of our investment portfolio as well as additional fees paid to investment advisors for higher cost investment strategies.
     As of June 30, 2010, approximately 96% of our fixed income investments consisted of investment grade securities. As of June 30, 2010, the average credit rating of our fixed income portfolio was AA- as rated by Standard & Poor’s and Aa3 as rated by Moody’s. As of December 31, 2009, average credit rating of our fixed income portfolio was AA as rated by Standard & Poor’s and Aa2 as rated by Moody’s. The average duration as of June 30, 2010 was approximately 2.6 years. The average duration of the investment portfolio was 3.0 years as of June 30, 2009.
Realized Investment Gains/Losses and Net Impairment Charges Recognized in Earnings
     During the three months ended June 30, 2010, we recognized $94.9 million in net realized investment gains compared to net realized investment gains of $5.1 million during the three months ended June 30, 2009. During the three months ended June 30, 2010, we did not recognize any net impairment charges compared to $5.5 million during the three months ended June 30, 2009. Net realized investment gains of $94.9 million for the three months ended June 30, 2010 were comprised of the following:
    Net realized investment gains of $71.8 million from the sale of fixed maturity securities due to the rebalancing of our portfolio from U.S. treasury and agency securities into other assets, as well as shortening the overall duration of our investment portfolio.
    Net realized investment gains of $27.1 million primarily related to the mark-to-market adjustments for our hedge fund investments, equity securities and fixed maturity investments that are accounted for as trading securities.
         
    Mark-to-Market Adjustments  
    for the Three Months Ended  
    June 30, 2010  
    ($ in millions)  
Fixed maturity investments accounted for as trading securities
  $ 32.8  
Hedge funds and equity securities
    (5.7 )
 
     
Total
  $ 27.1  
 
     
    Net realized investment loss of $4.0 million related to a U.S. treasury yield hedge transaction we purchased in May 2010 and terminated in June 2010.
     Net realized investment gains of $5.1 million for the three months ended June 30, 2009 were comprised of the following:
    Net realized investment gains of $7.5 million primarily related to the mark-to-market adjustments for our hedge fund investments and fixed maturity investments that are accounted for as trading securities.
    Net realized investment losses of $2.4 million from the sale of securities. The net realized investment losses primarily consisted of a realized loss of $21.9 million related to the sale of our global high-yield bond fund partially offset by realized gains of $19.1 million from the sale of fixed maturity investments and hedge funds and $0.4 million from the sale of equity securities.
     During the three months ended June 30, 2009, we had $5.5 million of net impairment charges recognized in earnings due to credit related losses where the anticipated discounted cash flows of various fixed maturity investments were lower than the amortized cost. The $5.5 million of net impairment charges recognized in earnings consisted of $4.5 million related to mortgage-backed securities and $1.0 million related to a corporate bond.
Other Income
     The other income of $0.6 million and $0.4 million for the three months ended June 30, 2010 and 2009, respectively, represents fee income from our program administrator and wholesale brokerage operations.

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Net Losses and Loss Expenses
     Net losses and loss expenses increased by $11.0 million, or 6.2%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in net losses and loss expenses was due to higher attritional loss activity of $30.0 million in the current year, with no comparable events having occurred during the three months ended June 30, 2009. The increase due to higher loss activity was offset by higher net favorable prior year reserve development.
     We recorded net favorable reserve development related to prior years of $64.1 million and $36.7 million during the three months ended June 30, 2010 and 2009, respectively. The following table shows the net favorable reserve development of $64.1 million by loss year for each of our segments for the three months ended June 30, 2010. In the table, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
U.S. insurance
  $ (0.1 )   $ (0.8 )   $ (6.8 )   $ (10.0 )   $ (2.6 )   $ 0.1     $ (0.8 )   $ 0.1     $ (20.9 )
International insurance
    2.6       (4.7 )     5.1       (15.0 )     (1.3 )     (3.0 )     (10.7 )     3.8       (23.2 )
Reinsurance
    0.3       (1.3 )     (6.9 )     (4.1 )     (0.7 )     (1.4 )     0.2       (6.1 )     (20.2 )
 
                                                     
Total
  $ 2.8     $ (6.8 )   $ (8.6 )   $ (29.1 )   $ (4.6 )   $ (4.3 )   $ (11.3 )   $ (2.2 )   $ (64.1 )
 
                                                     
     The following table shows the favorable reserve development of $36.7 million by loss year for each of our segments for the three months ended June 30, 2009. In the table, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                 
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
U.S. insurance
  $ (2.8 )   $ (7.9 )   $ (6.6 )   $ (3.3 )   $ 0.3     $ (0.4 )   $ 0.1     $ (20.6 )
International insurance
    (0.4 )     (3.1 )     (14.7 )     (20.6 )     23.6       4.7       3.7       (6.8 )
Reinsurance
    (0.4 )     (5.3 )     (1.3 )     (0.6 )     (0.2 )     (1.5 )           (9.3 )
 
                                               
Total
  $ (3.6 )   $ (16.3 )   $ (22.6 )   $ (24.5 )   $ 23.7     $ 2.8     $ 3.8     $ (36.7 )
 
                                               
     The loss and loss expense ratio for the three months ended June 30, 2010 was 55.7% compared to 53.3% for the three months ended June 30, 2009. Net favorable reserve development recognized during the three months ended June 30, 2010 reduced the loss and loss expense ratio by 18.9 percentage points. Thus, the loss and loss expense ratio related to the current loss year was 74.6%. Net favorable reserve development recognized in the three months ended June 30, 2009 reduced the loss and loss expense ratio by 11.0 percentage points. Thus, the loss and loss expense ratio related to that loss year was 64.3%. The increase in the loss and loss expense ratio for the current loss year was primarily due to increased incidences of large individual losses compared to those incurred during the three months ended June 30, 2009. The $30.0 million of current period losses noted above contributed 8.9 percentage points to the loss and loss expense ratio for the three months ended June 30, 2010.

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     The following table shows the components of the increase in net losses and loss expenses of $11.0 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.
                         
    Three Months Ended        
    June 30,     Dollar  
    2010     2009     Change  
    ($ in millions)  
Net losses paid
  $ 129.4     $ 104.0     $ 25.4  
Net change in reported case reserves
    72.1       55.9       16.2  
Net change in IBNR
    (12.8 )     17.8       (30.6 )
 
                 
Net losses and loss expenses
  $ 188.7     $ 177.7     $ 11.0  
 
                 
     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.
                 
    Three Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, April 1
  $ 3,933.0     $ 3,722.7  
Incurred related to:
               
Current period non-catastrophe
    252.8       214.4  
Current period property catastrophe
           
Prior period non-catastrophe
    (60.3 )     (38.5 )
Prior period property catastrophe
    (3.8 )     1.8  
 
           
Total incurred
  $ 188.7     $ 177.7  
Paid related to:
               
Current period non-catastrophe
    7.8       3.8  
Current period property catastrophe
    18.9        
Prior period non-catastrophe
    93.4       83.3  
Prior period property catastrophe
    9.3       16.9  
 
           
Total paid
  $ 129.4     $ 104.0  
Foreign exchange revaluation
    (4.3 )     7.6  
 
           
Net reserve for losses and loss expenses, June 30
    3,988.0       3,804.0  
Losses and loss expenses recoverable
    932.4       909.7  
 
           
Reserve for losses and loss expenses, June 30
  $ 4,920.4     $ 4,713.7  
 
           
Acquisition Costs
     Acquisition costs increased by $0.9 million, or 2.4%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in acquisition costs was primarily due to the increase in net premiums earned in our U.S. insurance and reinsurance segments, which typically have higher acquisition costs than our international insurance segment and represent a higher proportion of net premiums earned during the three months ended June 30, 2010 compared to the same period in 2009. Acquisition costs as a percentage of net premiums earned were 11.2% for the three months ended June 30, 2010 compared to 11.1% for the same period in 2009.
General and Administrative Expenses
     General and administrative expenses increased by $6.6 million, or 10.7%, for the three months ended June 30, 2010 compared to the same period in 2009. The increase in general and administrative expenses was primarily due to an increase in global headcount from 614 at June 30, 2009 to 684 at June 30, 2010 resulting in an overall increase in salary and related costs, including stock-based compensation of $3.3 million. Professional fees also increased by $3.9 million, which was primarily related to the establishment of our Lloyd’s syndicate and the evaluation of potential strategic opportunities.
     Our general and administrative expense ratio was 20.1% for the three months ended June 30, 2010, which was higher than the 18.4% for the three months ended June 30, 2009. The increase was primarily due to the factors discussed above.

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     Our expense ratio was 31.3% for the three months ended June 30, 2010 compared to 29.5% for the three months ended June 30, 2009 primarily due to an increase in the general and administrative expense ratio.
Amortization and Impairment of Intangible Assets
     The amortization and impairment of intangible assets decreased $0.2 million, or 18.2%, for the three months ended June 30, 2010 compared the three months ended June 30, 2009. The decrease was primarily the result of no longer amortizing the trademark intangible asset that was fully impaired during the fourth quarter of 2009. No impairment of intangible assets was recognized during the three months ended June 30, 2010 and June 30, 2009, respectively.
Interest Expense
     Interest expense of $9.5 million was incurred for both the three months ended June 30, 2010 and 2009, and represented the quarterly interest expense on the senior notes.
Net Income
     Net income for the three months ended June 30, 2010 was $184.0 million compared to $113.7 million for the three months ended June 30, 2009. The increase was primarily the result of higher net realized investment gains partially offset by higher net losses and loss expenses and general and administrative expenses. Net income for the three months ended June 30, 2010 included a net foreign exchange loss of $0.6 million and an income tax expense of $10.4 million. Net income for the three months ended June 30, 2009 included a net foreign exchange gain of $1.2 million and an income tax expense of $10.9 million.
Comparison of Six Months Ended June 30, 2010 and 2009
Premiums
     Gross premiums written increased by $25.6 million, or 2.6%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The overall increase in gross premiums written was primarily the result of the following:
    Gross premiums written in our U.S. insurance segment increased by $15.6 million, or 4.6%. The increase in gross premiums written was primarily due to increased new business, including from new products, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This increase was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition.
    Gross premiums written in our international insurance segment decreased by $28.9 million, or 9.1%, due to the continued trend of the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition.
    Gross premiums written in our reinsurance segment increased by $38.8 million, or 12.2%. The increase in gross premiums written was primarily due to the timing of renewals for two treaties, a quota share reinsurance treaty for $23.6 million in our property reinsurance line of business and a quota share reinsurance treaty for $10.9 million in our professional liability reinsurance line of business. The property reinsurance treaty was originally bound in the third quarter of 2009 for $9.0 million and expired on November 30, 2009. The renewed treaty is effective from January 1, 2010 to December 31, 2010. The professional liability reinsurance treaty was previously written in the third quarter of 2009 for $16.5 million and was renewed in the second quarter of 2010 for $10.9 million. These increases were partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions), increased competition and increased cedent retention.

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     The table below illustrates our gross premiums written by geographic location for the six months ended June 30, 2010 and 2009.
                                 
    Six Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
    ($ in millions)  
United States
  $ 523.2     $ 505.5     $ 17.7       3.5 %
Bermuda
    336.4       352.8       (16.4 )     (4.6 )
Europe
    123.2       113.6       9.6       8.4  
Singapore
    9.6             9.6       n/a *
Hong Kong
    5.6       0.5       5.1       n/m **
 
                         
 
  $ 998.0     $ 972.4     $ 25.6       2.6 %
 
                         
 
*   n/a: not applicable
 
**   n/m: not meaningful
     Net premiums written increased by $36.7 million, or 4.8%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in net premiums written was primarily due to higher gross premiums written as well as a reduction in premiums ceded. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 19.5% of gross premiums written for the six months ended June 30, 2010 compared to 21.2% for the same period in 2009. The reduction in premiums ceded was due to lower premiums ceded under our property catastrophe reinsurance coverage, as well as the commutation of certain variable-rated reinsurance contracts that have swing-rated provisions of $9.3 million partially offset by premiums ceded of $11.8 million for variable-rated reinsurance contracts that were not commuted. A “swing-rated” reinsurance contract links the ultimate amount of ceded premium to the ultimate loss ratio on the reinsured business. It enables the cedent to retain a greater portion of premium if the ultimate loss ratio develops at a level below the initial loss threshold set by the reinsurers, but requires a higher amount of ceded premium if the ultimate loss ratio develops above the initial threshold. Swing-rated reinsurance often, but not always, contains a provision limiting the maximum decrease or increase in ceded premium. In commuting a number of swing-rated reinsurance contracts, we reduced certain premiums previously ceded and also reduced ceded losses by $8.9 million in accordance with the terms of the contracts. The impact of the commutation was a net gain of $0.4 million.
     Net premiums earned increased by $19.6 million, or 3.0%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 as a result of higher net premiums earned for the U.S. insurance and reinsurance segments. This is driven by increased net premiums written in the current and prior periods, as well as the impact of the commutation of the swing-rated reinsurance contracts which are fully earned.
     We evaluate our business by segment, distinguishing between U.S. insurance, international insurance and reinsurance. The following chart illustrates the mix of our business on both a gross premiums written and net premiums earned basis.
                                 
    Gross     Net  
    Premiums     Premiums  
    Written     Earned  
    Six Months Ended June 30,  
    2010     2009     2010     2009  
U.S. insurance
    35.2 %     34.6 %     37.6 %     32.9 %
International insurance
    29.0 %     32.7 %     26.1 %     33.9 %
Reinsurance
    35.8 %     32.7 %     36.3 %     33.2 %
 
                         
Total
    100.0 %     100.0 %     100.0 %     100.0 %
 
                         
Net Investment Income
     Net investment income decreased by $19.9 million, or 12.9%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was due to a combination of lower accretion of book value to par value for our fixed maturity investments, lower yields on our fixed maturity investments and an increased allocation to hedge funds, which contribute to our total return but carry no current yield. We increased our hedge fund investments by over $180 million between June 30, 2009 and June 30, 2010. In response to new OTTI guidance issued by the FASB in April 2009, we increased the book value of our fixed maturity investments for any non-credit OTTI previously recognized, which resulted in higher book values and lower future accretions. The annualized period book yield of the investment portfolio for the six months ended June 30, 2010 and 2009 was 3.6% and 4.4%,

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respectively. The decrease in book yield was primarily caused by selling corporate bonds and mortgage-backed securities and reinvesting in lower yielding U.S. treasury securities in order to reduce spread risk and duration in our investment portfolio. Investment management expenses of $5.6 million and $3.9 million were incurred during the six months ended June 30, 2010 and 2009, respectively. The increase in investment management expenses was due to the increase in the size of our investment portfolio as well as additional fees paid to investment advisors for higher cost investment strategies.
Realized Investment Gains/Losses and Net Impairment Charges Recognized in Earnings
     During the six months ended June 30, 2010, we recognized $172.4 million in net realized investment gains compared to net realized investment gains of $41.7 million during the six months ended June 30, 2009. During the six months ended June 30, 2010, we recognized $0.2 million in net impairment charges recognized in earnings compared to $47.4 million during the six months ended June 30, 2009. Net realized investment gains of $172.4 million for the six months ended June 30, 2010 were comprised of the following:
    Net realized investment gains of $117.1 million primarily from the sale of fixed maturity securities due to the rebalancing of our portfolio from U.S. treasury and agency securities into other asset classes, as well as shortening the overall duration of our investment portfolio.
 
    Net realized investment gains of $59.3 million primarily related to the mark-to-market adjustments for our hedge fund investments, equity securities and fixed maturity investments that are accounted for as trading securities. We expect the mark-to-market adjustments on our fixed maturity investments that are accounted for as trading securities to increase as we continue to increase the balance of these securities. From December 31, 2009 to June 30, 2010, we have increased the balance of fixed maturity investments accounted for as trading by $1.8 billion, or 68%, from $2.5 billion as of December 31, 2009 to $4.3 billion as of June 30, 2010.
         
    Mark-to-Market Adjustments  
    for the Six Months Ended  
    June 30, 2010  
    ($ in millions)  
Fixed maturity investments accounted for as trading securities
  $ 60.5  
Hedge funds and equity securities
    (1.2 )
 
     
Total
  $ 59.3  
 
     
    Net realized investment loss of $4.0 million related to a U.S. treasury yield hedge transaction we purchased in May 2010 and terminated in June 2010.
     Net realized investment gains of $41.7 million for the six months ended June 30, 2009 were comprised of the following:
    Net realized investment gains of $7.4 million primarily related to the mark-to-market adjustments for our hedge fund investments and fixed maturity investments that are accounted for as trading securities.
 
    Net realized investment gains of $34.3 million from the sale of securities. The net realized investment gains primarily consisted of realized gains of $56.6 million from the sale of fixed maturity investments and hedge funds partially offset by a realized loss of $21.9 million related to the sale of our global high-yield bond fund. In addition, we sold approximately $18 million of equity securities that we acquired as part of the acquisition of Darwin Professional Underwriters, Inc. (“Darwin”). We recognized a realized loss of $0.4 million from that sale.
     During the six months ended June 30, 2009, we had $47.4 million of net impairment charges recognized in earnings, $5.5 million due to credit related losses where the anticipated discounted cash flows of the various fixed maturity investments were lower than the amortized cost, and $41.9 million of net impairment charges for those securities in an unrealized loss position where our investment managers had the discretion to sell.
Other Income
     The other income of $0.9 million and $0.8 million for the six months ended June 30, 2010 and 2009, respectively, represents fee income from our program administrator and wholesale brokerage operations.

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Net Losses and Loss Expenses
     Net losses and loss expenses increased by $94.7 million, or 29.0%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in net losses and loss expenses was due to a number of individual losses totaling $116.5 million in the current year, with no comparable events having occurred during the six months ended June 30, 2009. The increase due to higher loss activity was offset by higher net favorable prior year reserve development.
     We recorded net favorable reserve development related to prior years of $138.1 million and $96.8 million during the six months ended June 30, 2010 and 2009, respectively. The $138.1 million of net favorable reserve development excludes the impact of the commutation of the swing-rated reinsurance contracts of $8.9 million. The following table shows the net favorable reserve development of $138.1 million by loss year for each of our segments for the six months ended June 30, 2010. In the table, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
U.S. insurance
  $ (0.5 )   $ (1.8 )   $ (14.4 )   $ (12.5 )   $ (2.3 )   $ 2.2     $ 3.9     $ 0.8     $ (24.6 )
International insurance
    2.5       (6.8 )     (14.9 )     (43.9 )     (11.3 )     (7.5 )     (3.3 )     4.3       (80.9 )
Reinsurance
    (0.4 )     (1.1 )     (9.9 )     (8.0 )     (1.1 )     (2.3 )     (2.2 )     (7.6 )     (32.6 )
 
                                                     
Total
  $ (1.6 )   $ (9.7 )   $ (39.2 )   $ (64.4 )   $ (14.7 )   $ (7.6 )   $ (1.6 )   $ (2.5 )     (138.1 )
 
                                                     
     The following table shows the favorable reserve development of $96.8 million by loss year for each of our segments for the six months ended June 30, 2009. In the table, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                 
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
U.S. insurance
  $ (4.0 )   $ (13.6 )   $ (17.5 )   $ (8.5 )   $ 7.4     $ 4.2     $ 3.9     $ (28.1 )
International insurance
    (5.5 )     (19.1 )     (38.3 )     (21.8 )     21.8       (5.1 )     20.6       (47.4 )
Reinsurance
    (0.4 )     (9.1 )     (6.1 )     1.4       (0.3 )     (4.6 )     (2.2 )     (21.3 )
 
                                               
Total
  $ (9.9 )   $ (41.8 )   $ (61.9 )   $ (28.9 )   $ 28.9     $ (5.5 )   $ 22.3     $ (96.8 )
 
                                               
     The loss and loss expense ratio for the six months ended June 30, 2010 was 62.1% compared to 49.6% for the six months ended June 30, 2009. Net favorable reserve development recognized and the impact of the commutation adjustment during the six months ended June 30, 2010 reduced the loss and loss expense ratio by 20.2 percentage points. Thus, the loss and loss expense ratio related to the current loss year was 82.3%. Net favorable reserve development recognized in the six months ended June 30, 2009 reduced the loss and loss expense ratio by 14.7 percentage points. Thus, the loss and loss expense ratio related to that loss year was 64.3%. The increase in the loss and loss expense ratio for the current loss year was primarily due to $116.5 million of losses from the Chilean, Haitian and Baja earthquakes, the Connecticut power plant explosion, European Windstorm Xynthia, a mine collapse and hail storms in Australia during the six months ended June 30, 2010, which contributed 17.2 points to the current loss year’s loss and loss expense ratio.

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     The following table shows the components of the increase in net losses and loss expenses of $94.7 million for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.
                         
    Six Months Ended        
    June 30,     Dollar  
    2010     2009     Change  
    ($ in millions)          
Net losses paid
  $ 265.4     $ 215.1     $ 50.3  
Net change in reported case reserves
    78.4       45.0       33.4  
Net change in IBNR
    77.1       66.1       11.0  
 
                 
Net losses and loss expenses
  $ 420.9     $ 326.2     $ 94.7  
 
                 
     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the six months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.
                 
    Six Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, January 1
  $ 3,841.8     $ 3,688.5  
Incurred related to:
               
Commutation of variable-rated reinsurance contracts
    8.9        
Current period non-catastrophe
    485.1       423.0  
Current period property catastrophe
    65.0        
Prior period non-catastrophe
    (133.4 )     (98.5 )
Prior period property catastrophe
    (4.7 )     1.7  
 
           
Total incurred
  $ 420.9     $ 326.2  
Paid related to:
               
Current period non-catastrophe
    14.1       4.9  
Current period property catastrophe
    19.3        
Prior period non-catastrophe
    216.8       172.8  
Prior period property catastrophe
    15.2       37.4  
 
           
Total paid
  $ 265.4     $ 215.1  
Foreign exchange revaluation
    (9.3 )     4.4  
 
           
Net reserve for losses and loss expenses, June 30
    3,988.0       3,804.0  
Losses and loss expenses recoverable
    932.4       909.7  
 
           
Reserve for losses and loss expenses, June 30
  $ 4,920.4     $ 4,713.7  
 
           
Acquisition Costs
     Acquisition costs increased by $4.6 million, or 6.2%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in acquisition costs was primarily due to the increase in net premiums earned in our U.S. insurance segment and reinsurance segment, which typically have higher acquisition costs than our international insurance segment and represent a higher proportion of net premiums earned during the six months ended June 30, 2010 compared to the same period in 2009. Acquisition costs as a percentage of net premiums earned were 11.6% for the six months ended June 30, 2010 compared to 11.3% for the same period in 2009 for the reasons explained above.
General and Administrative Expenses
     General and administrative expenses increased by $12.6 million, or 10.6%, for the six months ended June 30, 2010 compared to the same period in 2009. The increase in general and administrative expenses was primarily due to the following:
    An overall increase in global headcount from 614 at June 30, 2009 to 684 at June 30, 2010 resulting in an overall increase in salary and related costs of $10.7 million.

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    Increased stock-related compensation of $6.2 million, including an increase of $2.2 million for performance-based awards granted under the Company’s equity plans in 2009 to recognize expected performance above the target level. For all performance-based awards, we initially recognize the stock compensation expense at 100% of the fair market value of Holdings’ common shares on the date of grant and reassess, at least annually, the projected growth in book value to determine whether an adjustment to the initial estimate of the expense should be made. During the six months ended June 30, 2010, we have accrued 132.5% of the fair market value of Holdings’ common shares awarded on the date of grant, as we believe it is probable that we will achieve the performance criteria above target but below the maximum award when these performance-based awards vest at the end of 2011. For additional information on our performance-based awards, see Note 11 in our notes to the unaudited condensed consolidated financial statements.
 
    Decrease of $6.8 million related to the Darwin Long-Term Incentive Plan (the “Darwin LTIP”). We recognized a reduction in the Darwin LTIP of $1.3 million during the six months ended June 30, 2010 compared to an increase of $5.5 million during the six months ended June 30, 2009. The amount incurred for the Darwin LTIP is a result of pre-acquisition underwriting profitability, including any subsequent loss reserve development. The reduction in the Darwin LTIP during the six months ended June 30, 2010 was due to unfavorable reserve development.
     Our general and administrative expense ratio was 19.4% for the six months ended June 30, 2010, which was higher than the 18.1% for the six months ended June 30, 2009. The increase was primarily due to the factors discussed above.
     Our expense ratio was 31.0% for the six months ended June 30, 2010 compared to 29.4% for the six months ended June 30, 2009 due to an increase in both acquisition cost ratio and general and administrative expense ratio.
Amortization and Impairment of Intangible Assets
     The amortization and impairment of intangible assets decreased $0.3 million, or 14.3%, for the six months ended June 30, 2010 compared the six months ended June 30, 2009. The decrease is primarily the result of no longer amortizing the trademark intangible asset that was fully impaired during the fourth quarter of 2009. No impairments were recognized during the six months ended June 30, 2010 and 2009, respectively.
Interest Expense
     Interest expense decreased $1.0 million, or 5.0%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Interest expense of $1.0 million was incurred during the three months ended March 31, 2009 on our borrowing of $243.8 million from our $400 million unsecured revolving credit facility, which was paid in full in February 2009.
Net Income
     Net income for the six months ended June 30, 2010 was $317.7 million compared to $245.1 million for the six months ended June 30, 2009. The increase was primarily the result of higher net realized investment gains, lower OTTI and higher net premiums earned partially offset by higher net losses and loss expenses and general and administrative expenses. Net income for the six months ended June 30, 2010 included a net foreign exchange loss of $1.6 million and an income tax expense of $13.6 million. Net income for the six months ended June 30, 2009 included a net foreign exchange gain of $0.4 million and an income tax expense of $21.1 million. The decrease in the income tax expense was primarily due to lower taxable income in our U.S. operations during the six months ended June 30, 2010 compared to same period in 2009.
Underwriting Results by Operating Segments
     Our company is organized into three operating segments:
     U.S. Insurance Segment. The U.S. insurance segment includes our direct specialty insurance operations in the United States. This segment provides both direct property and specialty casualty insurance to non-Fortune 1000 North American domiciled accounts.
     International Insurance Segment. The international insurance segment includes our direct insurance operations in Bermuda, Europe and Hong Kong. This segment provides both direct property and casualty insurance primarily to Fortune 1000 North American domiciled accounts and mid-sized to large non-North American domiciled accounts.

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     Reinsurance Segment. Our reinsurance segment has operations in Bermuda, Europe, Singapore and the United States. This segment includes the reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. We presently write reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.
U.S. Insurance Segment
     The following table summarizes the underwriting results and associated ratios for the U.S. insurance segment for the three and six months ended June 30, 2010 and 2009.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
    ($ in millions)
Revenues
                               
Gross premiums written
  $ 189.7     $ 182.7     $ 351.7     $ 336.1  
Net premiums written
    135.2       127.5       266.8       243.3  
Net premiums earned
    125.7       111.0       254.9       216.3  
Other income
    0.6       0.4       0.9       0.8  
Expenses
                               
Net losses and loss expenses
  $ 69.2     $ 46.8     $ 167.6     $ 101.0  
Acquisition costs
    15.9       13.5       32.8       28.0  
General and administrative expenses
    30.7       30.0       57.8       57.4  
Underwriting income (loss)
    10.5       21.1       (2.4 )     30.7  
Ratios
                               
Loss and loss expense ratio
    55.1 %     42.2 %     65.8 %     46.7 %
Acquisition cost ratio
    12.6 %     12.2 %     12.9 %     12.9 %
General and administrative expense ratio
    24.4 %     27.0 %     22.7 %     26.5 %
Expense ratio
    37.0 %     39.2 %     35.6 %     39.4 %
Combined ratio
    92.1 %     81.4 %     101.4 %     86.1 %
Comparison of Three Months Ended June 30, 2010 and 2009
     Premiums. Gross premiums written increased by $7.0 million, or 3.8%, for the three months ended June 30, 2010 compared to the same period in 2009. The increase in gross premiums written was primarily due to higher volume from new products and increased underwriting staff, particularly in our general casualty and healthcare lines of business where we believe profitable underwriting opportunities exist. The increase was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition, particularly for public directors and officers liability products in our professional liability line of business.
     The table below illustrates our gross premiums written by line of business for the three months ended June 30, 2010 and 2009.
                                 
    Three Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
            ($ in millions)  
Professional liability
  $ 44.8     $ 46.9     $ (2.1 )     (4.5 )%
Healthcare
    41.1       36.5       4.6       12.6  
General casualty
    38.4       33.4       5.0       15.0  
General property
    30.0       35.0       (5.0 )     (14.3 )
Programs
    26.2       26.5       (0.3 )     (1.1 )
Other
    9.2       4.4       4.8       109.1  
 
                         
 
  $ 189.7     $ 182.7     $ 7.0       3.8 %
 
                         
     Net premiums written increased by $7.7 million, or 6.0%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in net premiums written was primarily due to higher gross premiums written, as well as a reduction of premiums ceded.

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     Net premiums earned increased $14.7 million, or 13.2%, primarily due to the growth of our U.S. insurance operations during 2009 and during the first half of 2010.
     Net losses and loss expenses. Net losses and loss expenses increased by $22.4 million, or 47.9%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in net losses and loss expenses was primarily due to the growth of the U.S. insurance operations and higher loss activity in the current year, which included net losses and loss expenses incurred of $3.0 million from the Tennessee floods.
     Overall, our U.S. insurance segment recorded net favorable reserve development of $20.9 million during the three months ended June 30, 2010 compared to net favorable reserve development of $20.6 million for the three months ended June 30, 2009, as shown in the tables below. In the tables, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
Professional liability
  $     $     $ (0.2 )   $ (5.6 )   $ (1.0 )   $ (1.2 )   $ (0.8 )   $ 0.8     $ (8.0 )
Healthcare
    (0.4 )     (0.3 )     0.1       (1.9 )     (1.4 )     0.5       0.7       (1.3 )     (4.0 )
General casualty
    0.3       (0.4 )     (7.6 )     (1.5 )                             (9.2 )
General property
          (0.1 )     0.9       (1.0 )     (0.2 )     (0.3 )     (0.5 )           (1.2 )
Programs
                            0.1       1.2       (0.3 )     (0.2 )     0.8  
Other
                                  (0.2 )           0.9       0.7  
 
                                                     
 
  $ (0.1 )   $ (0.8 )   $ (6.8 )   $ (10.0 )   $ (2.5 )   $     $ (0.9 )   $ 0.2     $ (20.9 )
 
                                                     
                                                                 
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
Professional liability
  $     $     $ (0.7 )   $ (0.5 )   $ (1.1 )   $ 0.7     $     $ (1.6 )
Healthcare
    (0.4 )     (0.4 )     (3.1 )     (2.1 )     (0.8 )     (1.2 )     (2.8 )     (10.8 )
General casualty
    (1.6 )     (7.5 )     (1.9 )           2.6             3.6       (4.8 )
General property
    (0.8 )           (0.9 )     (0.6 )                 (0.1 )     (2.4 )
Programs
                      (0.1 )     (0.4 )     0.1       (0.6 )     (1.0 )
Other
                                  (0.1 )     0.1        
 
                                               
 
  $ (2.8 )   $ (7.9 )   $ (6.6 )   $ (3.3 )   $ 0.3     $ (0.5 )   $ 0.2     $ (20.6 )
 
                                               
     The loss and loss expense ratio for the three months ended June 30, 2010 was 55.1% compared to 42.2% for the three months ended June, 2009. Net favorable reserve development recognized during the three months ended June 30, 2010 decreased the loss and loss expense ratio by 16.6 percentage points. Thus, the loss and loss expense ratio for the current loss year was 71.7%. In comparison, net favorable reserve development recognized in the three months ended June 30, 2009 decreased the loss and loss expense ratio by 18.6 percentage points. In addition, during the three months ended June 30, 2009, the $4.0 million reduction in premiums ceded for the variable-rated reinsurance contracts of Darwin that have swing-rated provisions reduced the loss and loss expense ratio by 2.2 percentage points. Thus, the loss and loss expense ratio for that loss year was 63.0%. The increase in the loss and loss expense ratio for the current loss year was primarily due to higher loss activity, including incurred losses of $3.0 from the Tennessee floods, which contributed 2.4 percentage points to the loss and loss expense ratio for the three months ended June 30, 2010.
     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.

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    Three Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, April 1
  $ 972.0     $ 847.1  
Incurred related to:
               
Current period non-catastrophe
    90.1       67.4  
Current period property catastrophe
           
Prior period non-catastrophe
    (22.1 )     (20.8 )
Prior period property catastrophe
    1.2       0.2  
 
           
Total incurred
  $ 69.2     $ 46.8  
Paid related to:
               
Current period non-catastrophe
    2.3       1.5  
Current period property catastrophe
           
Prior period non-catastrophe
    29.3       21.2  
Prior period property catastrophe
    3.9       1.9  
 
           
Total paid
  $ 35.5     $ 24.6  
Net reserve for losses and loss expenses, June 30
    1,005.7       869.3  
Losses and loss expenses recoverable
    378.0       324.9  
 
           
Reserve for losses and loss expenses, June 30
  $ 1,383.7     $ 1,194.2  
 
           
     Acquisition costs. Acquisition costs increased by $2.4 million, or 17.8%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase was primarily caused by increased net premiums earned. The acquisition cost ratio increased to 12.6% for the three months ended June 30, 2010 from 12.2% for the same period in 2009.
     General and administrative expenses. General and administrative expenses increased by $0.7 million, or 2.3%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in general and administrative expenses was primarily due to increased salary and related costs partially offset by $2.0 million of lower expenses related to the Darwin LTIP. The decrease in the general and administrative expense ratio from 27.0% for the three months ended June 30, 2009 to 24.4% for the same period in 2010 was the result of the increase in net premiums earned.
Comparison of Six Months Ended June 30, 2010 and 2009
     Premiums. Gross premiums written increased by $15.6 million, or 4.6%, for the six months ended June 30, 2010 compared to the same period in 2009. The increase in gross premiums written was primarily due to higher volumes from new products and increased underwriting staff, particularly in our general casualty and healthcare lines of business where we believe underwriting opportunities were present. While healthcare premium rates are down, we still believe there are attractive opportunities in this line of business. The increase was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition, particularly for public directors and officers liability products in our professional liability line of business.
     The table below illustrates our gross premiums written by line of business for the six months ended June 30, 2010 and 2009.
                                 
    Six Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
            ($ in millions)  
Healthcare
  $ 88.6     $ 86.2     $ 2.4       2.8 %
Professional liability
    83.7       88.9       (5.2 )     (5.8 )
General casualty
    66.4       57.0       9.4       16.5  
Programs
    51.0       50.5       0.5       1.0  
General property
    46.5       45.1       1.4       3.1  
Other
    15.5       8.4       7.1       84.5  
 
                         
 
  $ 351.7     $ 336.1     $ 15.6       4.6 %
 
                         

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     Net premiums written increased by $23.5 million, or 9.7%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in net premiums written was primarily due to higher gross premiums written, as well as a reduction of premiums ceded. The reduction in premiums ceded was primarily due to lower cessions in our general casualty and general property lines of business and the commutation of certain variable-rated reinsurance contracts that have swing-rated provisions of $9.3 million partially offset by premiums ceded of $11.8 million for variable-rated reinsurance contracts that were not commuted. In commuting these swing-rated reinsurance contracts, we reduced certain premiums previously ceded and also reduced ceded losses by $8.9 million in accordance with the terms of the contracts. The net impact of the commutation during the six months ended June 30, 2010 was a net gain of $0.4 million. Overall, we ceded 24.2% of gross premiums written for the six months ended June 30, 2010 compared to 27.6% for the six months ended June 30, 2009. The decrease in the cession percentage was primarily due to the reduction of premiums ceded of $9.3 million related to the commutation of the swing-rated reinsurance contracts. Excluding the impact of the commutation, we ceded 26.8% of gross premiums written during the six months ended June 30, 2010.
     Net premiums earned increased $38.6 million, or 17.8%, primarily due to the growth of our U.S. insurance operations during 2009 and during the first half of 2010 and $9.3 million from the commutation, which was fully earned.
     Net losses and loss expenses. Net losses and loss expenses increased by $66.6 million, or 65.9%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in net losses and loss expenses was primarily due to a $12.0 million net loss from a Connecticut power plant explosion in our program line of business, the reduction of ceded IBNR for the commutation of the swing-rated reinsurance contracts of $8.9 million, $3.0 million from the Tennessee floods and lower net favorable reserve development recognized.
     Overall, our U.S. insurance segment recorded net favorable reserve development of $24.6 million during the six months ended June 30, 2010 compared to net favorable reserve development of $28.1 million for the six months ended June 30, 2009, as shown in the tables below. The $24.6 million of net favorable reserve development excludes the impact of the commutation of the swing-rated reinsurance contracts of $8.9 million discussed above. In the tables, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
Professional liability
  $     $     $ (0.7 )   $ (5.8 )   $ (1.2 )   $ (0.8 )   $ 0.1     $ 0.8     $ (7.6 )
Healthcare
    (0.8 )     (0.7 )     (0.6 )     (3.6 )     (1.0 )     0.5       1.7       (1.3 )     (5.8 )
General casualty
    0.3       (1.0 )     (14.0 )     (1.5 )           (1.0 )     3.6             (13.6 )
General property
          (0.1 )     0.9       (1.6 )     (0.2 )     1.5       (1.5 )           (1.0 )
Programs
                                  2.1             0.5       2.6  
Other
                                  (0.1 )           0.9       0.8  
 
                                                     
 
  $ (0.5 )   $ (1.8 )   $ (14.4 )   $ (12.5 )   $ (2.4 )   $ 2.2     $ 3.9     $ 0.9     $ (24.6 )
 
                                                     
                                                                 
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
Professional liability
  $     $     $ (1.2 )   $ (1.3 )   $ 9.0     $ 7.4     $ 2.9     $ 16.8  
Healthcare
    (0.8 )     (0.4 )     (6.1 )     (6.2 )     (2.9 )     (1.7 )     (5.3 )     (23.4 )
General casualty
    (2.5 )     (13.2 )     (7.1 )           2.8       0.1       3.6       (16.3 )
General property
    (0.8 )           (3.1 )     (0.6 )     (0.1 )     (0.8 )     3.9       (1.5 )
Programs
                      (0.4 )     (1.5 )     (0.4 )     (3.9 )     (6.2 )
Other
                            0.1       (0.4 )     2.8       2.5  
 
                                               
 
  $ (4.1 )   $ (13.6 )   $ (17.5 )   $ (8.5 )   $ 7.4     $ 4.2     $ 4.0     $ (28.1 )
 
                                               
     The loss and loss expense ratio for the six months ended June 30, 2010 was 65.8% compared to 46.7% for the six months ended June, 2009. Net favorable reserve development recognized and the impact of the commutation adjustment to ceded IBNR during the six months ended June 30, 2010 decreased the loss and loss expense ratio by 8.8 percentage points. Thus, the loss and loss expense ratio for the current loss year was 74.6%. In comparison, net favorable reserve development recognized in the six months ended June

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30, 2009 decreased the loss and loss expense ratio by 13.0 percentage points. In addition, during the six months ended June 30, 2009, the $10.1 million reduction in premiums ceded for the variable-rated reinsurance contracts of Darwin that have swing-rated provisions reduced the loss and loss expense ratio by 2.9 percentage points. Thus, the loss and loss expense ratio for that loss year was 62.6%. The increase in the loss and loss expense ratio for the current loss year was primarily due to the $12.0 million net loss on the Connecticut power plant explosion and $3.0 million from the Tennessee floods. These losses contributed 6.1 percentage points to the current loss year’s loss and loss expense ratio, after adjusting for the $9.3 million impact to ceded earned premium of the commuted swing-rated reinsurance contracts previously discussed.
     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the six months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.
                 
    Six Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, January 1
  $ 901.9     $ 819.4  
Incurred related to:
               
Commutation of variable-rated reinsurance contracts
    8.9        
Current period non-catastrophe
    183.3       129.1  
Current period property catastrophe
           
Prior period non-catastrophe
    (25.6 )     (32.0 )
Prior period property catastrophe
    1.0       3.9  
 
           
Total incurred
  $ 167.6     $ 101.0  
Paid related to:
               
Current period non-catastrophe
    2.9       2.5  
Current period property catastrophe
           
Prior period non-catastrophe
    57.3       40.5  
Prior period property catastrophe
    3.6       8.1  
 
           
Total paid
  $ 63.8     $ 51.1  
Net reserve for losses and loss expenses, June 30
    1,005.7       869.3  
Losses and loss expenses recoverable
    378.0       324.9  
 
           
Reserve for losses and loss expenses, June 30
  $ 1,383.7     $ 1,194.2  
 
           
     Acquisition costs. Acquisition costs increased by $4.8 million, or 17.1%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase was primarily caused by increased net premiums earned. The acquisition cost ratio was 12.9% for both the six months ended June 30, 2010 and 2009.
     General and administrative expenses. General and administrative expenses increased by $0.4 million, or 0.7%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in general and administrative expenses was due to higher salary and related costs from increased headcount offset by the reduction in the Darwin LTIP of $6.8 million. The decrease in the general and administrative expense ratio from 26.5% for the six months ended June 30, 2009 to 22.7% for the same period in 2010 was the result of the increase in net premiums earned.

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International Insurance Segment
     The following table summarizes the underwriting results and associated ratios for the international insurance segment for the three and six months ended June 30, 2010 and 2009.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
    ($ in millions)
Revenues
                               
Gross premiums written
  $ 167.6     $ 192.0     $ 289.0     $ 317.9  
Net premiums written
    98.5       116.2       179.6       205.1  
Net premiums earned
    89.4       111.8       176.4       223.0  
Expenses
                               
Net losses and loss expenses
  $ 64.6     $ 74.1     $ 122.0     $ 113.3  
Acquisition costs
    (0.1 )     1.7             2.7  
General and administrative expenses
    22.6       20.0       44.5       38.7  
Underwriting income
    2.3       16.0       9.9       68.3  
Ratios
                               
Loss and loss expense ratio
    72.2 %     66.3 %     69.1 %     50.8 %
Acquisition cost ratio
    (0.1 )%     1.5 %     0.0 %     1.2 %
General and administrative expense ratio
    25.3 %     17.8 %     25.2 %     17.4 %
Expense ratio
    25.2 %     19.3 %     25.2 %     18.6 %
Combined ratio
    97.4 %     85.6 %     94.3 %     69.4 %
Comparison of Three Months Ended June 30, 2010 and 2009
     Premiums. Gross premiums written decreased by $24.4 million, or 12.7%, for the three months ended June 30, 2010 compared to the same period in 2009. The decrease in gross premiums written was due to the continued trend of the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition in our international insurance segment.
     The table below illustrates our gross premiums written by line of business for the three months ended June 30, 2010 and 2009.
                                 
    Three Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
                    ($ in millions)          
General property*
  $ 59.7     $ 73.1     $ (13.4 )     (18.3 )%
Professional liability
    50.5       55.7       (5.2 )     (9.3 )
General casualty
    45.1       50.6       (5.5 )     (10.9 )
Healthcare
    12.3       12.6       (0.3 )     (2.4 )
 
                         
 
  $ 167.6     $ 192.0     $ (24.4 )     (12.7 )%
 
                         
 
*   Includes our energy line of business.
     Net premiums written decreased $17.7 million, or 15.2%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease in net premiums written was primarily due to the decrease in gross premiums written, partially offset by lower premiums ceded on our property catastrophe reinsurance coverage. We ceded to reinsurers 41.2% of gross premiums written for the three months ended June 30, 2010 compared to 39.5% for the three months ended June 30, 2009. The increase in the ceded premium percentage is due to increased cessions on our professional liability and general casualty reinsurance treaties. Net premiums earned decreased $22.4 million, or 20.0%, primarily due to lower net premiums written during 2009 and for the first half of 2010.
     Net losses and loss expenses. Net losses and loss expenses decreased by $9.5 million, or 12.8%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease in net losses and loss expenses was primarily due to higher net favorable reserve development recognized partially offset by higher attritional loss activity in the current period. During the three

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months ended June 30, 2010, we incurred net losses and loss expenses of $24.0 million from a mine collapse, the Baja, Mexico earthquake and the Tennessee floods. No comparable events occurred during the three months ended June 30, 2009. The loss from the mine collapse was incurred in our general casualty line of business, while the rest of the losses noted above were incurred in our general property line of business. Overall, our international insurance segment recorded net favorable reserve development of $23.2 million during the three months ended June 30, 2010 compared to net favorable reserve development of $6.8 million for the three months ended June 30, 2009, as shown in the tables below. In the tables, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
General property
  $     $ (0.1 )   $     $ (1.6 )   $ (0.4 )   $ (1.5 )   $ (10.7 )   $ 3.7     $ (10.6 )
Professional liability
          (3.6 )     3.9       (2.8 )     7.9                         5.4  
General casualty
    2.7       (0.6 )     1.6       (10.1 )     (1.5 )     (1.5 )                 (9.4 )
Healthcare
    (0.1 )     (0.3 )     (0.4 )     (0.5 )     (7.3 )                       (8.6 )
 
                                                     
 
  $ 2.6     $ (4.6 )   $ 5.1     $ (15.0 )   $ (1.3 )   $ (3.0 )   $ (10.7 )   $ 3.7     $ (23.2 )
 
                                                     
                                                                 
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
General property
  $ (0.3 )   $ (1.0 )   $ (1.6 )   $     $ (0.1 )   $ 4.6     $ 3.4     $ 5.0  
Professional liability
                (2.4 )     (12.9 )                 0.2       (15.1 )
General casualty
          (2.2 )     (10.3 )     (0.6 )     23.7       0.1       0.1       10.8  
Healthcare
    (0.1 )           (0.3 )     (7.1 )                       (7.5 )
 
                                               
 
  $ (0.4 )   $ (3.2 )   $ (14.6 )   $ (20.6 )   $ 23.6     $ 4.7     $ 3.7     $ (6.8 )
 
                                               
     The loss and loss expense ratio for the three months ended June 30, 2010 was 72.2%, compared to 66.3% for the three months ended June 30, 2009. The net favorable reserve development recognized during the three months ended June 30, 2010 decreased the loss and loss expense ratio by 26.0 percentage points. Thus, the loss and loss expense ratio related to the current loss year was 98.2%. Comparatively, the net favorable reserve development recognized during the three months ended June 30, 2009 decreased the loss and loss expense ratio by 6.1 percentage points. Thus, the loss and loss expense ratio related to that period’s business was 72.4%. The increase in the loss and loss expense ratio for the current loss year was primarily due to net incurred losses of $24.0 million noted above, which occurred during the three months ended June 30, 2010 and contributed 26.8 percentage points to the current year’s losses and loss expense ratio.
     Net paid losses for the three months ended June 30, 2010 and 2009 were $53.5 million and $38.0 million, respectively. The increase in net paid losses was primarily due to net paid losses on current year catastrophe losses.
     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.

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    Three Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, April 1
  $ 1,776.0     $ 1,787.1  
Incurred related to:
               
Current period non-catastrophe
    87.8       80.9  
Current period property catastrophe
           
Prior period non-catastrophe
    (18.3 )     (7.1 )
Prior period property catastrophe
    (4.9 )     0.3  
 
           
Total incurred
  $ 64.6     $ 74.1  
Paid related to:
               
Current period non-catastrophe
    2.9       1.5  
Current period property catastrophe
    18.9        
Prior period non-catastrophe
    27.5       26.9  
Prior period property catastrophe
    4.2       9.6  
 
           
Total paid
  $ 53.5     $ 38.0  
Foreign exchange revaluation
    (4.3 )     7.6  
 
           
Net reserve for losses and loss expenses, June 30
    1,782.8       1,830.8  
Losses and loss expenses recoverable
    554.7       581.9  
 
           
Reserve for losses and loss expenses, June 30
  $ 2,337.5     $ 2,412.7  
 
           
     Acquisition costs. Acquisition costs decreased to negative $0.1 million for the three months ended June 30, 2010 from positive $1.7 million for the three months ended June 30, 2009. The negative cost represents ceding commissions received on ceded premiums in excess of the brokerage fees and commissions paid on gross premiums written. The acquisition cost ratio decreased from 1.5% for the three months ended June 30, 2009 to negative 0.1% for the three months ended June 30, 2010. The decrease in the acquisition cost ratio is due to higher premiums ceded, which has increased ceding commission income.
     General and administrative expenses. General and administrative expenses increased $2.6 million, or 13.0%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in general and administrative expenses was primarily due to an increase in salary and related costs, including stock-based compensation. The general and administrative expense ratios for the three months ended June 30, 2010 and 2009 were 25.3% and 17.8%, respectively. The increase was due to higher general and administrative expense relative to lower net premiums earned.
Comparison of Six Months Ended June 30, 2010 and 2009
     Premiums. Gross premiums written decreased by $28.9 million, or 9.1%, for the six months ended June 30, 2010 compared to the same period in 2009. The decrease in gross premiums written was due to the continued trend of the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and increased competition in our international insurance segment.
     The table below illustrates our gross premiums written by line of business for the six months ended June 30, 2010 and 2009.
                                 
    Six Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
                    ($ in millions)          
General property*
  $ 99.4     $ 116.7     $ (17.3 )     (14.8 )%
Professional liability
    77.7       88.2       (10.5 )     (11.9 )
General casualty
    76.8       81.4       (4.6 )     (5.7 )
Healthcare
    35.1       31.6       3.5       11.1  
 
                         
 
  $ 289.0     $ 317.9     $ (28.9 )     (9.1 )%
 
                         
 
*   Includes our energy line of business.

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     Net premiums written decreased $25.5 million, or 12.4%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease in net premiums written was primarily due to the decrease in gross premiums written partially offset by lower premiums ceded on our property catastrophe reinsurance coverage. We ceded to reinsurers 37.9% of gross premiums written for the six months ended June 30, 2010 compared to 35.5% for the six months ended June 30, 2009. The increase is primarily due to increased cessions on our general casualty and professional liability lines of business. Net premiums earned decreased $46.6 million, or 20.9%, primarily due to lower net premiums written during 2009 and for the first half of 2010.
     Net losses and loss expenses. Net losses and loss expenses increased by $8.7 million, or 7.7%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in net losses and loss expenses was primarily due to higher loss activity in the current period partially offset by higher net favorable reserve development recognized. During the six months ended June 30, 2010, we experienced net losses and loss expenses of $81.5 million from the earthquakes in Haiti, Chile, and Baja, Mexico, a mine collapse, and the Tennessee floods. Overall, our international insurance segment recorded net favorable reserve development of $80.8 million during the six months ended June 30, 2010 compared to net favorable reserve development of $47.4 million for the six months ended June 30, 2009, as shown in the tables below. In the tables, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
General property
  $     $ (0.2 )   $ (0.3 )   $ (2.2 )   $ (5.7 )   $ (6.1 )   $ (14.6 )   $ 4.3     $ (24.8 )
Professional liability
          (3.8 )     0.6       (20.7 )     7.9                         (16.0 )
General casualty
    2.7       (2.2 )     (14.3 )     (12.5 )     (6.2 )     (1.5 )     11.3             (22.7 )
Healthcare
    (0.2 )     (0.6 )     (0.8 )     (8.4 )     (7.3 )                       (17.3 )
 
                                                     
 
  $ 2.5     $ (6.8 )   $ (14.8 )   $ (43.8 )   $ (11.3 )   $ (7.6 )   $ (3.3 )   $ 4.3     $ (80.8 )
 
                                                     
                                                                 
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
General property
  $ (0.3 )   $ (0.9 )   $ (1.8 )   $ (2.7 )   $ (1.8 )   $ (5.2 )   $ 20.3     $ 7.6  
Professional liability
          (0.3 )     (15.0 )     (12.9 )                 0.2       (28.0 )
General casualty
    (4.9 )     (16.6 )     (15.9 )     0.8       23.7       0.1       0.1       (12.7 )
Healthcare
    (0.3 )     (1.3 )     (5.6 )     (7.1 )                       (14.3 )
 
                                               
 
  $ (5.5 )   $ (19.1 )   $ (38.3 )   $ (21.9 )   $ 21.9     $ (5.1 )   $ 20.6     $ (47.4 )
 
                                               
     The loss and loss expense ratio for the six months ended June 30, 2010 was 69.1%, compared to 50.8% for the six months ended June 30, 2009. The net favorable reserve development recognized during the six months ended June 30, 2010 decreased the loss and loss expense ratio by 45.8 percentage points. Thus, the loss and loss expense ratio related to the current loss year was 114.9%. Comparatively, the net favorable reserve development recognized during the six months ended June 30, 2009 decreased the loss and loss expense ratio by 21.3 percentage points. Thus, the loss and loss expense ratio related to that period’s business was 72.1%. The increase in the loss and loss expense ratio for the current loss year was primarily due to net incurred losses of $81.5 million noted above, which occurred during the six months ended June 30, 2010 and contributed 46.2 percentage points to the current year’s losses and loss expense ratio.
     Net paid losses for the six months ended June 30, 2010 and 2009 were $120.0 million and $83.9 million, respectively. The increase in net paid losses was primarily due to two large loss payments totaling approximately $17 million in our general casualty line of business and net paid losses for current year catastrophe losses.
     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the six months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.

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    Six Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, January 1
  $ 1,790.1     $ 1,797.0  
Incurred related to:
               
Current period non-catastrophe
    152.8       160.7  
Current period property catastrophe
    50.0        
Prior period non-catastrophe
    (76.5 )     (45.6 )
Prior period property catastrophe
    (4.3 )     (1.8 )
 
           
Total incurred
  $ 122.0     $ 113.3  
Paid related to:
               
Current period non-catastrophe
    8.6       1.6  
Current period property catastrophe
    18.9        
Prior period non-catastrophe
    83.5       64.9  
Prior period property catastrophe
    9.0       17.4  
 
           
Total paid
  $ 120.0     $ 83.9  
Foreign exchange revaluation
    (9.3 )     4.4  
 
           
Net reserve for losses and loss expenses, June 30
    1,782.8       1,830.8  
Losses and loss expenses recoverable
    554.7       581.9  
 
           
Reserve for losses and loss expenses, June 30
  $ 2,337.5     $ 2,412.7  
 
           
     Acquisition costs. Acquisition costs decreased $2.7 million for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The acquisition cost ratio decreased from 1.2% for the six months ended June 30, 2009 to 0.0% for the six months ended June 30, 2010. The decrease in the acquisition cost ratio is due to higher premiums ceded, which has increased ceding commission income.
     General and administrative expenses. General and administrative expenses increased $5.8 million, or 15.0%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in general and administrative expenses was primarily due to an increase in salary and related costs, including stock-based compensation. The general and administrative expense ratios for the six months ended June 30, 2010 and 2009 were 25.2% and 17.4%, respectively, due to higher general and administrative expense relative to lower net premiums earned.
Reinsurance Segment
     The following table summarizes the underwriting results and associated ratios for the reinsurance segment for the three and six months ended June 30, 2010 and 2009.

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    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
            ($ in millions)        
Revenues
                               
Gross premiums written
  $ 136.6     $ 118.1     $ 357.2     $ 318.4  
Net premiums written
    136.0       117.8       356.7       318.0  
Net premiums earned
    123.8       110.8       245.9       218.3  
Expenses
                               
Net losses and loss expenses
  $ 54.9     $ 56.8     $ 131.2     $ 111.9  
Acquisition costs
    22.1       21.8       45.9       43.4  
General and administrative expenses
    14.8       11.5       29.3       22.7  
Underwriting income
    32.0       20.7       39.5       40.3  
Ratios
                               
Loss and loss expense ratio
    44.4 %     51.2 %     53.4 %     51.3 %
Acquisition cost ratio
    17.9 %     19.6 %     18.7 %     19.9 %
General and administrative expense ratio
    11.9 %     10.5 %     11.9 %     10.4 %
Expense ratio
    29.8 %     30.1 %     30.6 %     30.3 %
Combined ratio
    74.2 %     81.3 %     84.0 %     81.6 %
Comparison of Three Months Ended June 30, 2010 and 2009
     Premiums. Gross premiums written increased by $18.5 million, or 15.7%, for the three months ended June 30, 2010 compared to the same period in 2009. The increase in gross premiums written was primarily due to one of our professional liability reinsurance treaties that was previously written in the third quarter of 2009 for $16.5 million and was renewed in the second quarter of 2010 for $10.9 million causing higher gross premiums written during the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase was partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions), increased competition and increased cedent retention.
     During the three months ended June 30, 2010, our Bermuda, U.S., Singapore and European reinsurance operations had gross premiums written of $69.4 million, $57.7 million, $5.8 million and $3.7 million, respectively. During the three months ended June 30, 2009, our Bermuda, U.S., Singapore and European reinsurance operations had gross premiums written of $72.6 million, $40.7 million, nil, and $4.8 million, respectively.
     The table below illustrates our gross premiums written by line of business for the three months ended June 30, 2010 and 2009.
                                 
    Three Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
                    ($ in millions)          
Property reinsurance
  $ 53.1     $ 42.5     $ 10.6       24.9 %
International reinsurance
    27.1       37.5       (10.4 )     (27.7 )
General casualty reinsurance
    24.5       11.3       13.2       116.8  
Professional liability reinsurance
    23.7       19.1       4.6       24.1  
Specialty reinsurance
    4.3       3.8       0.5       13.2  
Facultative reinsurance
    3.9       3.9              
 
                       
 
  $ 136.6     $ 118.1     $ 18.5       15.7 %
 
                         
     Net premiums written increased by $18.2 million, or 15.4%, which is consistent with the increase in gross premiums written. Net premiums earned increased $13.0 million, or 11.7%, due to the increase in net premiums written. Premiums related to our reinsurance business earn at a slower rate than those related to our direct insurance business. Direct insurance premiums typically earn ratably over the term of a policy. Reinsurance premiums under a quota share reinsurance contract are typically earned over the same period as the underlying policies, or risks, covered by the contract. As a result, the earning pattern of a quota share reinsurance contract may extend up to 24 months, reflecting the inception dates of the underlying policies. Property catastrophe premiums and premiums for other treaties written on a losses occurring basis earn ratably over the term of the reinsurance contract.
     Net losses and loss expenses. Net losses and loss expenses decreased by $1.9 million, or 3.3%, for the three months ended June 30,

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2010 compared to the three months ended June 30, 2009. The decrease in net losses and loss expenses is primarily due to higher net favorable reserve development recognized during the three months ended June 30, 2010 compared to the same period in 2009 partially offset by the growth of the reinsurance operations and $3.0 million of losses incurred from the hail storms in Australia. Overall, our reinsurance segment recorded net favorable reserve development of $20.0 million and $9.3 million during the three months ended June 30, 2010 and 2009, respectively, as shown in the tables below. In the tables, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
Property reinsurance
  $     $     $     $ (0.1 )   $     $     $     $ (6.0 )   $ (6.1 )
International reinsurance
          (0.1 )                       (1.5 )           (0.1 )     (1.7 )
General casualty reinsurance
          (0.1 )     (4.1 )     (0.8 )     (0.3 )     (0.1 )                 (5.4 )
Professional liability reinsurance
    0.4       (1.3 )     (4.1 )     (2.7 )     (0.5 )     (0.2 )                 (8.4 )
Specialty reinsurance
                (0.1 )     (0.1 )           0.4       0.2             0.4  
Facultative reinsurance
          0.2       1.4       (0.4 )                             1.2  
 
                                                     
 
  $ 0.4     $ (1.3 )   $ (6.9 )   $ (4.1 )   $ (0.8 )   $ (1.4 )   $ 0.2     $ (6.1 )   $ (20.0 )
 
                                                     
                                                                 
    Loss Reserve Development by Loss Year  
    For the Three Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
Property reinsurance
  $     $     $ 0.1     $ (0.1 )   $     $ (1.5 )   $ (0.1 )   $ (1.6 )
International reinsurance
                1.2       0.1                   0.1       1.4  
General casualty reinsurance
    (0.2 )     (2.4 )     (2.7 )     (0.9 )     (0.1 )                 (6.3 )
Professional liability reinsurance
    (0.2 )     (1.3 )     (1.3 )     (0.3 )     (0.1 )                 (3.2 )
Specialty reinsurance
                (0.5 )     0.6                         0.1  
Facultative reinsurance
          (1.6 )     1.9                               0.3  
 
                                               
 
  $ (0.4 )   $ (5.3 )   $ (1.3 )   $ (0.6 )   $ (0.2 )   $ (1.5 )   $     $ (9.3 )
 
                                               
     The loss and loss expense ratio for the three months ended June 30, 2010 was 44.4%, compared to 51.2% for the three months ended June 30, 2009. Net favorable reserve development recognized during the three months ended June 30, 2010 reduced the loss and loss expense ratio by 16.2 percentage points. Thus, the loss and loss expense ratio related to the current loss year was 60.6%. In comparison, net favorable reserve development recognized in the three months ended June 30, 2009 reduced the loss and loss expense ratio by 8.4 percentage points. Thus, the loss and loss expense ratio related to that loss year was 59.6%.
     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.

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    Three Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, April 1
  $ 1,185.0     $ 1,088.5  
Incurred related to:
               
Current period non-catastrophe
    74.9       66.1  
Current period property catastrophe
           
Prior period non-catastrophe
    (19.9 )     (10.7 )
Prior period property catastrophe
    (0.1 )     1.4  
 
           
Total incurred
  $ 54.9     $ 56.8  
Paid related to:
               
Current period non-catastrophe
    2.6       0.8  
Current period property catastrophe
           
Prior period non-catastrophe
    36.6       35.2  
Prior period property catastrophe
    1.2       5.4  
 
           
Total paid
  $ 40.4     $ 41.4  
Net reserve for losses and loss expenses, June 30
    1,199.5       1,103.9  
Losses and loss expenses recoverable
    (0.3 )     2.9  
 
           
Reserve for losses and loss expenses, June 30
  $ 1,199.2     $ 1,106.8  
 
           
     Acquisition costs. Acquisition costs increased by $0.3 million, or 1.4%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 primarily as a result of higher net premiums earned. The acquisition cost ratio was 17.9% for the three months ended June 30, 2010, compared to 19.6% for the three months ended June 30, 2009. The decrease in the acquisition cost ratio is due to more business written on an excess-of-loss basis, which typically carries a lower acquisition cost ratio than quota share business.
     General and administrative expenses. General and administrative expenses increased $3.3 million, or 28.7%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in general and administrative expenses was primarily due to an increase in salary and related costs included stock-based compensation. The 1.4 percentage point increase in the general and administrative expense ratio from 10.5% for the three months ended June 30, 2009 to 11.9% for the three months ended June 30, 2010 was due to higher general and administrative expenses partially offset by higher net premiums earned.
Comparison of Six Months Ended June 30, 2010 and 2009
     Premiums. Gross premiums written increased by $38.8 million, or 12.2%, for the six months ended June 30, 2010 compared to the same period in 2009. The increase in gross premiums written was primarily due to increased writings in our property reinsurance line of business and the timing of renewals of two treaties, a quota share reinsurance treaty for $23.6 million in our property reinsurance line of business and a quota share reinsurance treaty for $10.9 million in our professional liability reinsurance line of business. The property reinsurance treaty was originally bound during in the third quarter of 2009 for $9.0 million and expired on November 30, 2009. The renewed treaty is effective from January 1, 2010 to December 31, 2010. The professional liability reinsurance treaty was previously written in the third quarter of 2009 for $16.5 million and was renewed in the second quarter of 2010 for $10.9 million. These increases were partially offset by the non-renewal of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions), increased competition, increased cedent retention and a reduction in adjustments on estimated premiums of $4.4 million. We recognized net downward adjustments of $2.0 million during the six months ended June 30, 2010 compared to net upward adjustments of $2.4 million during the six months ended June 30, 2009. We also had a reduction of renewed premiums in our U.S. general casualty line of business of $27.5 million primarily due to lowering our participation on several treaties.
     During the six months ended June 30, 2010, our Bermuda, U.S., Singapore and European reinsurance operations had gross premiums written of $149.6 million, $171.5 million, $9.5 million, and $26.6 million, respectively. During the six months ended June 30, 2009, our Bermuda, U.S., Singapore and European reinsurance operations had gross premiums written of $133.8 million, $169.5 million, nil and $15.1 million, respectively.

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The table below illustrates our gross premiums written by line of business for the six months ended June 30, 2010 and 2009.
                                 
    Six Months Ended              
    June 30,     Dollar     Percentage  
    2010     2009     Change     Change  
                    ($ in millions)          
Property reinsurance
  $ 113.8     $ 71.4     $ 42.4       59.4 %
General casualty reinsurance
    89.3       103.3       (14.0 )     (13.6 )
International reinsurance
    68.1       61.7       6.4       10.4  
Professional liability reinsurance
    60.0       56.7       3.3       5.8  
Specialty reinsurance
    19.9       19.1       0.8       4.2  
Facultative reinsurance
    6.1       6.2       (0.1 )     (1.6 )
 
                         
 
  $ 357.2     $ 318.4     $ 38.8       12.2 %
 
                         
     Net premiums written increased by $38.7 million, or 12.2%, which is consistent with the increase in gross premiums written. Net premiums earned increased $27.6 million, or 12.6%, due to the increase in net premiums written.
     Net losses and loss expenses. Net losses and loss expenses increased by $19.3 million, or 17.2%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in net losses and loss expenses was primarily due to higher loss activity of $20.0 million from the earthquake in Chile, the European Windstorm Xynthia, and the hail storms in Australia, partially offset by higher net favorable reserve development. Overall, our reinsurance segment recorded net favorable reserve development of $32.7 million and $21.3 million during the six months ended June 30, 2010 and 2009, respectively, as shown in the tables below. In the tables, a negative number represents net favorable reserve development and a positive number represents net unfavorable reserve development.
                                                                         
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2010  
    2002     2003     2004     2005     2006     2007     2008     2009     Total  
    ($ in millions)  
Property reinsurance
  $     $     $ (0.1 )   $ (1.4 )   $     $     $ 0.7     $ (7.5 )   $ (8.3 )
International reinsurance
    (0.1 )     (0.2 )     (0.1 )     (0.2 )           (1.5 )           (0.1 )     (2.2 )
General casualty reinsurance
          0.1       (5.1 )     (3.7 )     (0.6 )     (0.1 )                 (9.4 )
Professional liability reinsurance
    (0.3 )     (1.8 )     (6.8 )     (2.8 )     (0.5 )     (0.2 )                 (12.4 )
Specialty reinsurance
                (0.1 )     0.4             (0.5 )     (2.9 )           (3.1 )
Facultative reinsurance
          0.8       2.3       (0.4 )                             2.7  
 
                                                     
 
  $ (0.4 )   $ (1.1 )   $ (9.9 )   $ (8.1 )   $ (1.1 )   $ (2.3 )   $ (2.2 )   $ (7.6 )   $ (32.7 )
 
                                                     
                                                                 
    Loss Reserve Development by Loss Year  
    For the Six Months Ended June 30, 2009  
    2002     2003     2004     2005     2006     2007     2008     Total  
    ($ in millions)  
Property reinsurance
  $     $ 0.3     $ (0.8 )   $ 2.7     $     $ (5.3 )   $ (1.4 )   $ (4.5 )
International reinsurance
                1.2                   0.7       (0.8 )     1.1  
General casualty reinsurance
    (0.1 )     (2.9 )     (3.4 )     (1.1 )     (0.2 )                 (7.7 )
Professional liability reinsurance
    (0.3 )     (2.8 )     (3.5 )     (0.8 )     (0.1 )                 (7.5 )
Specialty reinsurance
                (0.5 )     0.6                         0.1  
Facultative reinsurance
          (3.7 )     0.9                               (2.8 )
 
                                               
 
  $ (0.4 )   $ (9.1 )   $ (6.1 )   $ 1.4     $ (0.3 )   $ (4.6 )   $ (2.2 )   $ (21.3 )
 
                                               
     The loss and loss expense ratio for the six months ended June 30, 2010 was 53.4%, compared to 51.3% for the six months ended June 30, 2009. Net favorable reserve development recognized during the six months ended June 30, 2010 reduced the loss and loss expense ratio by 13.3 percentage points. Thus, the loss and loss expense ratio related to the current loss year was 66.7%. In comparison, net favorable reserve development recognized in the six months ended June 30, 2009 reduced the loss and loss expense ratio by 9.8 percentage points. Thus, the loss and loss expense ratio related to that loss year was 61.1%. The increase in the loss and loss expense ratio for the current loss year was primarily due to net incurred losses of $20.0 million noted above, which contributed 8.1 percentage points to the current loss year’s loss and loss expense ratio.

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     The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the six months ended June 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance recoverables.
                 
    Six Months Ended  
    June 30,  
    2010     2009  
    ($ in millions)  
Net reserves for losses and loss expenses, January 1
  $ 1,149.8     $ 1,072.1  
Incurred related to:
               
Current period non-catastrophe
    148.9       133.2  
Current period property catastrophe
    15.0        
Prior period non-catastrophe
    (31.3 )     (20.9 )
Prior period property catastrophe
    (1.4 )     (0.4 )
 
           
Total incurred
  $ 131.2     $ 111.9  
Paid related to:
               
Current period non-catastrophe
    2.5       0.8  
Current period property catastrophe
    0.4        
Prior period non-catastrophe
    76.0       67.4  
Prior period property catastrophe
    2.6       11.9  
 
           
Total paid
  $ 81.5     $ 80.1  
Net reserve for losses and loss expenses, June 30
    1,199.5       1,103.9  
Losses and loss expenses recoverable
    (0.3 )     2.9  
 
           
Reserve for losses and loss expenses, June 30
  $ 1,199.2     $ 1,106.8  
 
           
     Acquisition costs. Acquisition costs increased by $2.5 million, or 5.8%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 primarily as a result of higher net premiums earned. The acquisition cost ratio was 18.7% for the six months ended June 30, 2010, compared to 19.9% for the six months ended June 30, 2009. The decrease in the acquisition cost ratio is due to more business written on an excess-of-loss basis, which typically carries a lower acquisition cost ratio than quota share business.
     General and administrative expenses. General and administrative expenses increased $6.6 million, or 29.1%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in general and administrative expenses was primarily due to an increase in salary and related costs included stock-based compensation. The 1.5 percentage point increase in the general and administrative expense ratio from 10.4% for the six months ended June 30, 2009 to 11.9% for the six months ended June 30, 2010 was due to higher general and administrative expenses partially offset by higher net premiums earned.
Reserves for Losses and Loss Expenses
     Reserves for losses and loss expenses by segment as of June 30, 2010 and December 31, 2009 were comprised of the following:
                                                                 
    U.S. Insurance     International Insurance     Reinsurance     Total  
    June 30,     Dec. 31,     June 30,     Dec. 31,     June 30,     Dec. 31,     June 30,     Dec. 31,  
    2010     2009     2010     2009     2010     2009     2010     2009  
    ($ in millions)  
Case reserves
  $ 317.0     $ 268.1     $ 561.4     $ 570.4     $ 323.8     $ 313.5     $ 1,202.2     $ 1,152.0  
IBNR
    1,066.7       985.6       1,776.1       1,786.0       875.4       838.2       3,718.2       3,609.8  
 
                                               
Reserve for losses and loss expenses
    1,383.7       1,253.7       2,337.5       2,356.4       1,199.2       1,151.7       4,920.4       4,761.8  
Reinsurance recoverables
    (378.0 )     (351.8 )     (554.7 )     (566.3 )     0.3       (1.9 )     (932.4 )     (920.0 )
 
                                               
Net reserve for losses and loss expenses
  $ 1,005.7     $ 901.9     $ 1,782.8     $ 1,790.1     $ 1,199.5     $ 1,149.8     $ 3,998.0     $ 3,841.8  
 
                                               
     We participate in certain lines of business where claims may not be reported for many years. Accordingly, management does not solely rely upon reported claims on these lines for estimating ultimate liabilities. We also use statistical and actuarial methods to estimate expected ultimate losses and loss expenses. Loss reserves do not represent an exact calculation of liability. Rather, loss reserves are estimates of what we expect the ultimate resolution and administration of claims will cost. These estimates are based on various factors including underwriters’ expectations about loss experience, actuarial analysis, comparisons with the results of industry benchmarks and loss experience to date. Loss reserve estimates are refined as experience develops and as claims are reported and

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resolved. Establishing an appropriate level of loss reserves is an inherently uncertain process. Ultimate losses and loss expenses may differ from our reserves, possibly by material amounts.
     The following tables provide our ranges of loss and loss expense reserve estimates by business segment as of June 30, 2010:
                         
    Reserve for Losses and Loss Expenses
    Gross of Reinsurance Recoverable(1)
    Carried   Low   High
    Reserves   Estimate   Estimate
            ($ in millions)        
U.S. insurance
  $ 1,383.7     $ 1,151.2     $ 1,492.8  
International insurance
    2,337.5       1,759.5       2,683.1  
Reinsurance
    1,199.2       905.5       1,447.1  
                         
    Reserve for Losses and Loss Expenses
    Net of Reinsurance Recoverable(2)
    Carried   Low   High
    Reserves   Estimate   Estimate
            ($ in millions)        
U.S. insurance
  $ 1,005.7     $ 809.6     $ 1,070.6  
International insurance
    1,782.8       1,334.8       2,049.5  
Reinsurance
    1,199.5       904.9       1,445.3  
 
(1)   For statistical reasons, it is not appropriate to add together the ranges of each business segment in an effort to determine the low and high range around the consolidated loss reserves. On a gross basis, the consolidated low estimate is $4,080.8 million and the consolidated high estimate is $5,358.4 million.
 
(2)   For statistical reasons, it is not appropriate to add together the ranges of each business segment in an effort to determine the low and high range around the consolidated loss reserves. On a net basis, the consolidated low estimate is $3,271.3 million and the consolidated high estimate is $4,343.3 million.
     Our range for each business segment was determined by utilizing multiple actuarial loss reserving methods along with various assumptions of reporting patterns and expected loss ratios by loss year. The various outcomes of these techniques were combined to determine a reasonable range of required loss and loss expense reserves. While we believe our approach to determine the range of loss and loss expense is reasonable, there are no assurances that actual loss experience will be with the ranges of loss and loss expense noted above.
     Our selection of the actual carried reserves has typically been above the midpoint of the range. We believe that we should be prudent in our reserving practices due to the lengthy reporting patterns and relatively large limits of net liability for any one risk of our direct excess casualty business and of our casualty reinsurance business. Thus, due to this uncertainty regarding estimates for reserve for losses and loss expenses, we have carried our consolidated reserve for losses and loss expenses, net of reinsurance recoverable, above the midpoint of the low and high estimates for the consolidated net losses and loss expenses. We believe that relying on the more prudent actuarial indications is appropriate for these lines of business.
Reinsurance Recoverable
     The following table illustrates our reinsurance recoverable as of June 30, 2010 and December 31, 2009:
                 
    Reinsurance Recoverable  
    As of     As of  
    June 30,     December 31 ,  
    2010     2009  
    ($ in millions)  
Ceded case reserves
  $ 247.6     $ 266.5  
Ceded IBNR reserves
    684.8       653.5  
 
           
Reinsurance recoverable
  $ 932.4     $ 920.0  
 
           
     We remain obligated for amounts ceded in the event our reinsurers do not meet their obligations. Accordingly, we have evaluated the reinsurers that are providing reinsurance protection to us and will continue to monitor their credit ratings and financial stability. We generally have the right to terminate our treaty reinsurance contracts at any time, upon prior written notice to the reinsurer, under

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specified circumstances, including the assignment to the reinsurer by A.M. Best of a financial strength rating of less than “A-.” Approximately 96% of ceded reserves as of June 30, 2010 were recoverable from reinsurers who had an A.M. Best rating of “A-” or higher.
Liquidity and Capital Resources
General
     As of June 30, 2010, our shareholders’ equity was $3.5 billion, a 7.9% increase compared to $3.2 billion as of December 31, 2009. The increase was primarily the result of net income for the six months ended June 30, 2010 of $317.7 million driven primarily by strong investment returns.
     Holdings is a holding company and transacts no business of its own. Cash flows to Holdings may comprise dividends, advances and loans from its subsidiary companies. Holdings is therefore reliant on receiving dividends and other permitted distributions from its subsidiaries to make principal, interest and/or dividend payments on its senior notes and common shares.
     In May 2010, the board of directors of Holdings authorized the company to repurchase up to $500 million of Holdings’ common shares through a share repurchase program. Repurchases under the authorization may be effected from time to time through open market purchases, privately negotiated transactions, tender offers or otherwise. This authorization is effective through May 3, 2012. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the company’s capital position, legal requirements and other factors. At any time, the repurchase program may be modified, extended or terminated by the board of directors. As part of the share repurchase program, we entered into a 10b5-1 repurchase plan that enables us to complete share repurchases during trading blackout periods. During the three months ended June 30, 2010, we repurchased, through open-market purchases, 1,081,041 shares at a total cost of $49.1 million, for an average price of $45.41 per share. We have classified these repurchased shares as “Treasury shares, at cost” on the consolidated balance sheets.
     We believe our company’s capital position continues to remain well within the range needed for our business requirements and we have sufficient liquidity to fund our ongoing operations.
Restrictions and Specific Requirements
     The jurisdictions in which our operating subsidiaries are licensed to write business impose regulations requiring companies to maintain or meet various defined statutory ratios, including solvency and liquidity requirements. Some jurisdictions also place restrictions on the declaration and payment of dividends and other distributions.
     The payment of dividends from Holdings’ Bermuda domiciled operating subsidiary is, under certain circumstances, limited under Bermuda law, which requires our Bermuda operating subsidiary to maintain certain measures of solvency and liquidity. Holdings’ U.S. domiciled operating subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. In particular, payments of dividends by Allied World Assurance Company (U.S.) Inc., Allied World National Assurance Company, Allied World Reinsurance Company, Darwin National Assurance Company, Darwin Select Insurance Company and Vantapro Specialty Insurance Company are subject to restrictions on statutory surplus pursuant to the respective states in which these insurance companies are domiciled. Each state requires prior regulatory approval of any payment of extraordinary dividends. In addition, Allied World Assurance Company (Europe) Limited and Allied World Assurance Company (Reinsurance) Limited are subject to significant regulatory restrictions limiting their ability to declare and pay any dividends without the consent of the Irish Financial Services Regulatory Authority. We also have insurance subsidiaries that are the parent company for other insurance subsidiaries, which means that dividends and other distributions will be subject to multiple layers of regulations in order to dividend funds to Holdings. The inability of the subsidiaries of Holdings to pay dividends and other permitted distributions could have a material adverse effect on Holdings’ cash requirements and ability to make principal, interest and dividend payments on its senior notes and common shares.
     Holdings’ insurance and reinsurance subsidiary in Bermuda, Allied World Assurance Company, Ltd, is neither licensed nor admitted as an insurer, nor is it accredited as a reinsurer, in any jurisdiction in the United States. As a result, it is generally required to post collateral security with respect to any reinsurance liabilities it assumes from ceding insurers domiciled in the United States in order for U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to insurance liabilities ceded to them. 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.

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     Allied World Assurance Company, Ltd uses trust accounts primarily to meet security requirements for inter-company and certain reinsurance transactions. We also have cash and cash equivalents and investments on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with relevant insurance regulations. In addition, Allied World Assurance Company, Ltd currently has access to up to $1.7 billion in letters of credit under two letter of credit facilities, one with Citibank Europe plc and one with a syndication of lenders described below. The credit facility with Citibank Europe plc was amended in December 2008 to provide us with greater flexibility in the types of securities that are eligible to be posted as collateral and to increase the maximum aggregate amount available under the credit facility from $750 million to $900 million on an uncommitted basis. These facilities are used to provide security to reinsureds and are collateralized by us, at least to the extent of letters of credit outstanding at any given time. The letters of credit issued under the credit facility with Citibank Europe plc are deemed to be automatically extended without amendment for twelve months from the expiry date, or any future expiration date unless at least 30 days prior to any expiration date Citibank Europe plc notifies us that they elect not to consider the letters of credit renewed for any such additional period. If Citibank Europe plc no longer provides capacity under the credit facility it may limit our ability to meet our security requirements and would require us to obtain other sources of security at terms that may not be favorable to us.
     In November 2007, we entered into an $800 million five-year senior credit facility (the “Facility”) with a syndication of lenders. The Facility consists of a $400 million secured letter of credit facility for the issuance of standby letters of credit (the “Secured Facility”) and a $400 million unsecured facility for the making of revolving loans and for the issuance of standby letters of credit (the “Unsecured Facility”). Both the Se