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: September 30, 2008

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

For the transition period from                      to                     

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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

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

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

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

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o		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 November 3, 2008 was 49,022,495.

 

 

PART I

Item 1. Financial Statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
as of September 30, 2008 and December 31, 2007
(Expressed in thousands of United States dollars, except share and per share amounts)

		As of				As of
		September 30,				December 31,
		2008				2007
ASSETS:
Fixed maturity investments available for sale, at fair value (amortized cost: 2008: $5,440,019; 2007: $5,595,943)		$	5,433,260			$	5,707,143
Other invested assets available for sale, at fair value (cost: 2008: $81,262; 2007: $291,458)			71,528				322,144
Other invested assets, at fair value			167,674				—
Total investments			5,672,462				6,029,287
Cash and cash equivalents			744,245				202,582
Restricted cash			47,689				67,886
Securities lending collateral			48,815				147,241
Insurance balances receivable			359,921				304,499
Prepaid reinsurance			166,161				163,836
Reinsurance recoverable			777,283				682,765
Accrued investment income			49,641				55,763
Deferred acquisition costs			117,348				108,295
Goodwill and other intangible assets			19,837				3,920
Balances receivable on sale of investments			36,264				84,998
Net deferred tax assets			10,198				4,881
Other assets			52,387				43,155
Total assets		$	8,102,251			$	7,899,108
LIABILITIES:
Reserve for losses and loss expenses		$	4,198,761			$	3,919,772
Unearned premiums			880,211				811,083
Unearned ceding commissions			28,172				28,831
Reinsurance balances payable			79,592				67,175
Securities lending payable			48,815				147,241
Balances due on purchase of investments			68,681				141,462
Senior notes			498,767				498,682
Accounts payable and accrued liabilities			26,424				45,020
Total liabilities		$	5,829,423			$	5,659,266
SHAREHOLDERS’ EQUITY:
Common shares, par value $0.03 per share, issued and outstanding 2008: 49,022,495 shares and 2007: 48,741,927 shares			1,471				1,462
Additional paid-in capital			1,307,185				1,281,832
Retained earnings			983,947				820,334
Accumulated other comprehensive income: net unrealized (losses) gains on investments, net of tax			(19,775	)			136,214
Total shareholders’ equity			2,272,828				2,239,842
Total liabilities and shareholders’ equity		$	8,102,251			$	7,899,108

See accompanying notes to the unaudited condensed consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the three and nine months ended September 30, 2008 and 2007
(Expressed in thousands of United States dollars, except share and per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
REVENUES:
Gross premiums written		$	290,981			$	276,253			$	1,134,638			$	1,245,208
Premiums ceded			(57,078	)			(56,956	)			(253,913	)			(281,480	)
Net premiums written			233,903				219,297				880,725				963,728
Change in unearned premiums			38,070				64,362				(66,804	)			(90,384	)
Net premiums earned			271,973				283,659				813,921				873,344
Net investment income			76,916				76,133				226,192				222,718
Net realized investment losses			(151,876	)			(4,196	)			(152,804	)			(12,161	)
			197,013				355,596				887,309				1,083,901
EXPENSES:
Net losses and loss expenses			176,010				173,246				497,591				515,466
Acquisition costs			28,615				29,198				81,720				90,266
General and administrative expenses			40,794				36,050				130,445				103,685
Interest expense			9,515				9,481				28,538				28,337
Foreign exchange gain			(2,728	)			(976	)			(2,651	)			(412	)
			252,206				246,999				735,643				737,342
(Loss) income before income taxes			(55,193	)			108,597				151,666				346,559
Income tax (recovery) expense			(8,826	)			(362	)			(12,117	)			392
NET (LOSS) INCOME			(46,367	)			108,959				163,783				346,167
Other comprehensive (loss) gain Unrealized (losses) gains on investments arising during the period net of applicable deferred income tax recovery (expense) for three months 2008: $2,359; 2007: ($2,637); and nine months 2008: $2,601; 2007: ($4,929)			(183,081	)			84,384				(243,047	)			44,292
Reclassification adjustment for net realized losses included in net (loss) income			124,258				4,196				113,320				12,161
Other comprehensive (loss) gain			(58,823	)			88,580				(129,727	)			56,453
COMPREHENSIVE (LOSS) INCOME		$	(105,190	)		$	197,539			$	34,056			$	402,620
PER SHARE DATA
Basic (loss) earnings per share		$	(0.95	)		$	1.80			$	3.37			$	5.73
Diluted (loss) earnings per share		$	(0.95	)		$	1.72			$	3.22			$	5.51
Weighted average common shares outstanding			49,007,389				60,413,019				48,547,839				60,381,867
Weighted average common shares and common share equivalents outstanding			49,007,389				63,250,024				50,869,098				62,808,186
Dividends declared per share		$	0.18			$	0.15			$	0.54			$	0.45

See accompanying notes to the unaudited condensed consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the nine months ended September 30, 2008 and 2007
(Expressed in thousands of United States dollars)

										Accumulated
						Additional				Other
						Paid-in				Comprehensive				Retained
		Share Capital				Capital				Income (Loss)				Earnings				Total
December 31, 2007		$	1,462			$	1,281,832			$	136,214			$	820,334			$	2,239,842
Cumulative effect adjustment upon adoption of FAS 159			—				—				(26,262	)			26,262				—
Net income			—				—				—				163,783				163,783
Dividends			—				—				—				(26,432	)			(26,432	)
Other comprehensive loss			—				—				(129,727	)			—				(129,727	)
Stock compensation			9				25,353				—				—				25,362
September 30, 2008		$	1,471			$	1,307,185			$	(19,775	)		$	983,947			$	2,272,828
										Accumulated
						Additional				Other
						Paid-in				Comprehensive				Retained
		Share Capital				Capital				Income				Earnings				Total
December 31, 2006		$	1,809			$	1,822,607			$	6,464			$	389,204			$	2,220,084
Net income			—				—				—				346,167				346,167
Dividends			—				—				—				(27,174	)			(27,174	)
Other comprehensive income			—				—				56,453				—				56,453
Stock compensation			3				17,242				—				—				17,245
September 30, 2007		$	1,812			$	1,839,849			$	62,917			$	708,197			$	2,612,775

See accompanying notes to the unaudited condensed consolidated financial statements.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2008 and 2007
(Expressed in thousands of United States dollars)

		Nine Months Ended
		September 30,
		2008				2007
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	163,783			$	346,167
Adjustments to reconcile net income to cash provided by operating activities:
Net realized losses (gains) on sales of investments			1,016				(25,544	)
Impairment charges for other-than-temporary impairments on investments			112,304				37,705
Change in fair value of hedge fund investments			39,484				—
Amortization of premiums net of accrual of discounts on fixed maturities			(9,917	)			(3,072	)
Amortization and depreciation of fixed assets			6,957				6,335
Amortization of discount and expenses on senior notes			341				316
Stock compensation expense			20,980				17,333
Insurance balances receivable			(55,422	)			(15,809	)
Prepaid reinsurance			(2,325	)			(19,232	)
Reinsurance recoverable			(94,518	)			14,707
Accrued investment income			6,122				6,889
Deferred acquisition costs			(9,053	)			(23,606	)
Net deferred tax assets			(2,716	)			1,433
Other assets			(8,442	)			(1,965	)
Reserve for losses and loss expenses			278,989				194,965
Unearned premiums			69,128				109,616
Unearned ceding commissions			(659	)			6,908
Reinsurance balances payable			12,417				(24,218	)
Accounts payable and accrued liabilities			(18,595	)			(10,117	)
Net cash provided by operating activities			509,874				618,811
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of fixed maturity investments			(3,544,183	)			(3,244,366	)
Purchases of other invested assets			(39,855	)			(124,828	)
Sales of fixed maturity investments			3,593,861				2,584,697
Sales of other invested assets			76,574				69,836
Net cash used for acquisition			(44,052	)			—
Changes in securities lending collateral received			98,426				(490,744	)
Purchase of fixed assets			(6,333	)			(7,066	)
Change in restricted cash			20,197				91,320
Net cash provided by (used in) investing activities			154,635				(1,120,611	)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Dividends paid			(26,432	)			(27,174	)
Proceeds from the exercise of stock options			3,765				580
Changes in securities lending collateral			(98,426	)			490,744
Net cash (used in) provided by financing activities			(121,093	)			464,150
Effect of exchange rate changes on foreign currency cash			(1,753	)			695
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			541,663				(36,955	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			202,582				366,817
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	744,245			$	329,862
Supplemental disclosure of cash flow information:
— Cash paid for income taxes		$	6,162			$	2,824
— Cash paid for interest expense			37,500				38,021
Supplemental disclosure of non-cash flow information:
— Change in balance receivable on sale of investments			48,734				8,594
— Change in balance payable on purchase of investments			(72,781	)			123,482

See accompanying notes to the unaudited condensed consolidated financial statements.

1. GENERAL

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

2. BASIS OF PREPARATION AND CONSOLIDATION

     These unaudited condensed consolidated financial statements include the accounts of Holdings and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are normal and recurring in nature and necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year.

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

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

     Intercompany accounts and transactions have been eliminated on consolidation, and all entities meeting consolidation requirements have been included in the consolidation. Certain immaterial reclassifications in the unaudited condensed consolidated statements of cash flows have been made to the prior period’s amounts to conform to the current period’s presentation.

     These unaudited condensed consolidated financial statements, including these notes, should be read in conjunction with the Company’s audited consolidated financials statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

3. NEW ACCOUNTING PRONOUNCEMENTS

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The fair value option permits all entities to choose to measure eligible items at fair value at specified election dates. An entity shall record unrealized gains and losses on items for which the fair value option has been elected through net income in the statement of operations at each subsequent reporting date. The Company adopted FAS 159 as of January 1, 2008. See Note 7 “Fair Value of Financial Instruments” regarding the Company’s adoption of FAS 159.

     In September 2006, the FASB issued FAS No. 157 “Fair Value Measurements” (“FAS 157”). This statement defines fair value,

establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In October 2008, the FASB issued FASB Staff Position 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of FAS 157 in a market that is not active. The determination of whether a market is not active requires significant judgment including whether individual transactions are forced liquidations or distressed sales, whether observable inputs require significant adjustment based on unobservable data and whether broker or pricing service quotes are determinative of fair value. FSP 157-3 was effective upon issuance and is applicable to the unaudited condensed consolidated balance sheet as of September 30, 2008. The Company adopted FAS 157 as of January 1, 2008. See Note 7 “Fair Value of Financial Instruments” regarding the Company’s adoption of FAS 157.

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

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

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

     In May 2008, the FASB issued FAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of entities that are presented in conformity with U.S. GAAP. The current U.S. GAAP hierarchy is found in auditing literature and is focused on the auditor rather than the entity. FAS 162 shall be effective 60 days after the SEC’s approval of the Public Accounting Oversight Board amendments to AU Section 411 “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company does not anticipate any impact on future financial statements due to the adoption of FAS 162.

     In May 2008, the FASB issued FAS No. 163 “Accounting for Financial Guarantee Insurance Contracts — an Interpretation of FASB Statement No. 60” (“FAS 163”). FAS 163 clarifies how FAS 60 “Accounting and Reporting by Insurance Enterprises” applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. FAS 163 also requires expanded disclosures about financial guarantee insurance contracts. FAS 163 is effective for fiscal years beginning after December 15, 2008 (January 1, 2009 for calendar year-end companies), and interim periods within those fiscal years. The Company currently does not provide financial guarantee insurance, and as such does not anticipate any impact on future financial statements due to the adoption of FAS 163.

4. ACQUISITIONS

     In November 2007, Allied World Assurance Holdings (U.S.) Inc. entered into an agreement to purchase all of the outstanding stock of Finial Insurance Company (formerly known as Converium Insurance (North America) Inc.) from Finial Reinsurance Company, an affiliate of Berkshire Hathaway Inc. Finial Insurance Company was renamed Allied World Reinsurance Company, is currently licensed to write insurance and reinsurance in 50 states and the District of Columbia and has been used to launch the Company’s reinsurance operations in the United States. This transaction closed on February 29, 2008 for a purchase price of $12,000, the Finial Insurance Company’s policyholders’ surplus of $47,082, an adjustment for the difference between the fair values of investments acquired under U.S. GAAP and statutory reporting of $300 and direct expenses of $387. The total purchase price of $59,769 was paid in cash with available capital. As a part of the acquisition, the Company recorded $12,000 of intangible assets with indefinite lives for the value of the insurance and reinsurance licenses acquired. The remaining assets and liabilities acquired were principally comprised of bonds, at fair value, of $31,690, cash of $15,330, other assets of $1,176, deferred tax liabilities of $4,344 and a reserve for losses and loss expenses of $104,914, of which 100% were recorded as “reinsurance recoverable” as the entire reserve for losses and loss expenses is ceded to National Indemnity Company, an affiliate of Berkshire Hathaway Inc. The Company also recognized goodwill of $3,917 related to this acquisition, which is included in “goodwill and other intangible assets” in the unaudited condensed consolidated balance sheets.

     For additional acquisition information, please refer to Note 13 regarding the acquisition of Darwin Professional Underwriters, Inc.

5. INVESTMENTS

     The amortized cost, gross unrealized gains, gross unrealized losses and fair value of total investments by category as of September 30, 2008 and December 31, 2007 are as follows:

						Gross				Gross
						Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
September 30, 2008
U.S. government and government agencies		$	1,778,853			$	44,029			$	(366	)		$	1,822,516
Non-U.S. government and government agencies			121,001				7,389				(9	)			128,381
Corporate			1,260,158				4,712				(16,146	)			1,248,724
States, municipalities and political subdivisions			56,903				61				—				56,964
Mortgage backed			2,115,265				12,601				(58,793	)			2,069,073
Asset backed			107,839				18				(255	)			107,602
Total fixed maturity investments, available for sale			5,440,019				68,810				(75,569	)			5,433,260
Hedge funds			167,674				—				—				167,674
Global high-yield bond fund			81,262				—				(9,734	)			71,528
		$	5,688,955			$	68,810			$	(85,303	)		$	5,672,462
December 31, 2007
U.S. government and government agencies		$	1,987,577			$	65,653			$	(6	)		$	2,053,224
Non-U.S. government and government agencies			100,440				18,694				(291	)			118,843
Corporate			1,248,338				10,114				(5,835	)			1,252,617
Mortgage backed			2,095,561				22,880				(902	)			2,117,539
Asset backed			164,027				897				(4	)			164,920
Total fixed maturity investments, available for sale			5,595,943				118,238				(7,038	)			5,707,143
Hedge funds			215,173				27,250				(988	)			241,435
Global high-yield bond fund			75,125				4,424				—				79,549
Other invested asset			1,160				—				—				1,160
		$	5,887,401			$	149,912			$	(8,026	)		$	6,029,287

     Due to the adoption of FAS 159 as of January 1, 2008, the Company’s investment in hedge funds is included in “other invested assets, at fair value” on the unaudited condensed consolidated balance sheet. As of September 30, 2008, the Company’s investment in the global high-yield bond fund is included in “other invested assets available for sale, at fair value” on the unaudited condensed consolidated balance sheet. As of December 31, 2007, the Company’s investment in hedge funds, the global high-yield bond fund and other invested assets were included in “other invested assets available for sale, at fair value” on the unaudited condensed consolidated balance sheet.

     On a quarterly basis, the Company reviews the carrying value of its investments to determine if a decline in value is considered to be other than temporary. This review involves consideration of several factors including: (i) the significance of the decline in value and the resulting unrealized loss position; (ii) the time period for which there has been a significant decline in value; (iii) an analysis of the issuer of the investment, including its liquidity, business prospects and overall financial position; and (iv) the Company’s intent and ability to hold the investment for a sufficient period of time for the value to recover. For certain investments, the Company’s investment advisers have the discretion to sell those investments at any time. As such, the Company recognizes an other-than-temporary charge for those securities in an unrealized loss position each quarter as the Company cannot assert it has the intent to hold those investments until anticipated recovery. The identification of potentially impaired investments involves significant management judgment that includes the determination of their fair value and the assessment of whether any decline in value is other than temporary. If the decline in value is determined to be other than temporary, then the Company records a realized loss in the consolidated statements of operations and comprehensive income in the period that it is determined.

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

		September 30, 2008								December 31, 2007
		Gross				Unrealized				Gross				Unrealized
		Fair Value				Losses				Fair Value				Losses
Less than 12 months
U.S. Government and Government agencies		$	7,071			$	(366	)		$	—			$	—
Non U.S. Government and Government agencies			—				—				—				—
Corporate			354,019				(14,724	)			359,880				(5,734	)
States, municipalities and political subdivisions			—				—				—				—
Mortgage backed			658,245				(58,567	)			172,673				(835	)
Asset backed			15,955				(254	)			11,536				(4	)
Hedge funds			—				—				51,512				(988	)
Global high-yield bond fund			71,528				(9,734	)			—				—
		$	1,106,818			$	(83,645	)		$	595,601			$	(7,561	)
More than 12 months
U.S. Government and Government agencies		$	—			$	—			$	71,404			$	(6	)
Non U.S. Government and Government agencies			2,752				(9	)			33,227				(291	)
Corporate			9,100				(1,423	)			22,544				(101	)
States, municipalities and political subdivisions			—				—				—				—
Mortgage backed			2,429				(226	)			13,805				(67	)
Asset backed			—				—				—				—
		$	14,281			$	(1,658	)		$	140,980			$	(465	)
		$	1,121,099			$	(85,303	)		$	736,581			$	(8,026	)

     As of September 30, 2008, the Company’s investment portfolio had gross unrealized losses of $85,303, that were primarily the result of increases in market interest rates during 2008 that caused the market price of our fixed maturity investments to decrease, as well as widening credit spreads related to increases in market risk premium and reduced market liquidity. Following the Company’s review of the securities in its investment portfolio, 181 and 388 securities were considered to be other-than-temporarily impaired for the three and nine months ended September 30, 2008, respectively. Consequently, the Company recorded an other-than-temporary-impairment charge of $75,028 and $112,304 within “net realized investment losses” on the unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2008, respectively. An other-than-temporary charge was recognized for those securities in an unrealized loss position that the Company’s investment advisers had the discretion to sell. The following shows the other-than-temporary charges for fixed maturity investments by category for the three and nine months ended September 30, 2008:

		Other-than-temporary-
		impairment charges
		For the three				For the nine
		months ended				months ended
		September 30,				September 30,
		2008				2008
U.S. government and government agencies		$	10,293			$	15,493
Non-U.S. government and government agencies			233				684
Corporate			44,293				51,761
States, municipalities and political subdivisions			260				813
Mortgage backed			18,213				39,818
Asset backed			1,736				3,735
Total other-than-temporary charges		$	75,028			$	112,304

     The Company recorded other-than-temporary-impairment charges, within “net realized investment losses” on the unaudited condensed consolidated statements of operations and comprehensive income, of $25,382 and $37,705 for the three and nine months ended September 30, 2007, respectively. Included in the other-than-temporary-impairment charges for the three and nine months ended September 30, 2007 was a charge of $23,915 for the Company’s investment in the Goldman Sachs Global Alpha Hedge Fund PLC. As of September 30, 2007, the Company’s basis in the fund was $57,495 and the fair value was $33,580, resulting in a loss of $23,915. The Company reviewed its carrying value of this investment in light of the significant changes in economic conditions that occurred during the third quarter of 2007, which included subprime mortgage exposure, tightening of credit spreads and overall market volatility. These economic conditions caused the fair value of this investment to decline. On December 31, 2007, the Company sold its investment in this fund. The remaining other-than-temporary-impairment charges were solely due to changes in interest rates.

     During 2007, the Company submitted a redemption notice to sell its shares in the Goldman Sachs Global Equity Opportunities Fund, plc. The Company sold its shares on February 29, 2008 and recognized a loss on the sale of $278, which is included in “net realized investment losses” in the unaudited condensed consolidated statements of operations and comprehensive income for the nine months ended September 30, 2008.

     On June 30, 2007, the Company sold its shares in the Goldman Sachs Liquid Trading Opportunities Fund Offshore, Ltd. The gain on the sale amounted to $484, which has been included in “net realized investment losses” in the unaudited condensed consolidated statements of operations and comprehensive income for the nine months ended September 30, 2007.

6. DEBT AND FINANCING ARRANGEMENTS

     On July 21, 2006, the Company issued $500,000 aggregate principal amount of 7.50% Senior Notes due August 1, 2016 (“Senior Notes”), with interest on the Senior Notes payable on August 1 and February 1 of each year, commencing on February 1, 2007. The Senior Notes were offered by the underwriters at a price of 99.71% of their principal amount, providing an effective yield to investors of 7.54%. The Company used a portion of the proceeds from the Senior Notes to repay the outstanding amount of its then existing credit agreement as well as to provide additional capital to its subsidiaries and for other general corporate purposes.

     The Senior Notes can be redeemed by the Company prior to maturity subject to payment of a “make-whole” premium. The Company has no current expectations of calling the Senior Notes prior to maturity. The Senior Notes contain certain covenants that include: (i) limitations on liens on stock of designated subsidiaries; (ii) limitation as to the disposition of stock of designated subsidiaries; and (iii) limitations on mergers, amalgamations, consolidations or sale of assets. The Company was in compliance with all covenants related to its Senior Notes as of September 30, 2008 and December 31, 2007.

     Events of default include: (i) the default in the payment of any interest or principal on any outstanding notes, and the continuance of such default for a period of 30 days; (ii) the default in the performance, or breach, of any of the covenants in the indenture (other than a covenant added solely for the benefit of another series of debt securities) and continuance of such default or breach for a period of 60 days after the Company has received written notice specifying such default or breach; and (iii) certain events of bankruptcy, insolvency or reorganization. Where an event of default occurs and is continuing, either the trustee of the Senior Notes or the holders of not less than 25% in principal amount of the Senior Notes may have the right to declare that all unpaid principal amounts and accrued interest then outstanding be due and payable immediately.

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

     In November 2007, the Company entered into a $800,000 five-year senior credit facility (the “Facility”) with a syndication of lenders. The Facility consists of a $400,000 secured letter of credit facility for the issuance of standby letters of credit (the “Secured Facility”) and a $400,000 unsecured facility for the making of revolving loans and for the issuance of standby letters of credit (the “Unsecured Facility”). Both the Secured Facility and the Unsecured Facility have options to increase the aggregate commitments by up to $200,000, subject to approval of the lenders. The Facility will be used for general corporate purposes and to issue standby letters of credit. The Facility contains representations, warranties and covenants customary for similar bank loan facilities, including a covenant to maintain a ratio of consolidated indebtedness to total capitalization as of the last day of each fiscal quarter or fiscal year of not greater than 0.35 to 1.0 and a covenant under the Unsecured Facility to maintain a certain consolidated net worth. In addition, each material insurance subsidiary must maintain a financial strength rating from A.M. Best Company of at least A- under the Unsecured Facility and of at least B++ under the Secured Facility. The Company is in compliance with all covenants under the Facility as of September 30, 2008 and December 31, 2007.

     There are a total of 13 lenders who make up the Facility syndication and 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. One of the lenders in the Facility with a $20,000 commitment has declared bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The Company does not expect this lender to be able to meet its commitment under the Facility.

     The Company currently has access to up to $1,550,000 in letters of credit under the two letter of credit facilities described above. These facilities are used to provide security to reinsureds and are collateralized by the Company, at least to the extent of letters of credit outstanding at any given time. As of September 30, 2008 and December 31, 2007, there were outstanding letters of credit totaling $908,033 and $922,206, respectively, under the two facilities. Collateral committed to support the letter of credit facilities was $1,090,982 as of September 30, 2008, compared to $1,170,731 as of December 31, 2007.

     At this time, the Company uses trust accounts primarily to meet security requirements for inter-company and certain related-party reinsurance transactions. The Company also has cash and cash equivalents and investments on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with relevant insurance regulations. As of September 30, 2008, total trust account deposits were $698,354 compared to $802,737 as of December 31, 2007.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company adopted FAS 159 as of January 1, 2008, and has elected the fair value option for its hedge fund investments, which are classified as “other invested assets, at fair value” in the unaudited condensed consolidated balance sheets. At the time of adoption, the fair value and carrying value of the hedge fund investments were $241,435 and the net unrealized gain was $26,262. The Company has elected the fair value option for its hedge fund investments as the Company believes that recognizing changes in the fair value of the hedge funds in the consolidated statements of operations and comprehensive income each period better reflects the results of the Company’s investment in the hedge funds rather than recognizing changes in fair value in accumulated other comprehensive income.

     Upon adoption of FAS 159, the Company reclassified the net unrealized gain related to the hedge funds of $26,262 from “accumulated other comprehensive income” and recorded a cumulative-effect adjustment in “retained earnings”. There was no net deferred tax liability associated with the net unrealized gain as the hedge fund investments are held by a Bermuda insurance subsidiary that pays no income tax. Any subsequent change in unrealized gain or loss of “other invested assets, at fair value” will be recognized in the consolidated statements of operations and comprehensive income and included in net realized investment gains or losses. Prior to the adoption of FAS 159 any change in unrealized gain or loss was included in “accumulated other comprehensive income” in the unaudited condensed consolidated balance sheet. The net loss recognized for the change in fair value of the hedge fund investments in the unaudited condensed consolidated statements of operations and comprehensive income during the three and nine months ended September 30, 2008 was $27,617 and $39,484, respectively.

     The Company adopted FAS 157 as of January 1, 2008. This statement defines fair value and establishes a framework for measuring fair value under U.S. GAAP. FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also established a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the

valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

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

     The following table shows the fair value of the Company’s financial instruments and where in the FAS 157 fair value hierarchy the fair value measurements are included as of September 30, 2008.

										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)
U.S. government and government agencies		$	1,822,516			$	1,822,516			$	922,117			$	900,399			$
Non-U.S. government and government agencies			128,381				128,381								128,381
Corporate			1,248,724				1,248,724								1,248,724
States, municipalities and political subdivisions			56,964				56,964								56,964
Mortgage backed			2,069,073				2,069,073								2,069,073
Asset backed			107,602				107,602								107,602
Total fixed maturity investments, available for sale			5,433,260				5,433,260
Total other invested assets, fair value			167,674				167,674												167,674
Total other invested assets, available for sale			71,528				71,528								71,528
Total investments			5,672,462				5,672,462
Senior notes			498,767				442,300								442,300

     The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of September 30, 2008.

     U.S. government and U.S. government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of 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 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 broker/dealers and international indices, and are included in the Level 2 fair value hierarchy.

     Corporate: Comprised of bonds issued by corporations that on acquisition are rated BBB-/Baa3 or higher provided that, in aggregate, corporate bonds with ratings of BBB-/Baa3 do not constitute more than 5% of the market value of the Company’s fixed income securities and are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-

term are priced using spread above the London Interbank Offering Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from 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.

     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 broker/dealers and the new issue market, and are included in the Level 2 fair value hierarchy.

     Mortgage-backed: Principally comprised of AAA-rated pools of residential and commercial mortgages originated by both agency (such as the Federal National Mortgage Association) and non-agency originators. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from 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.

     Asset-backed: Comprised of primarily AAA-rated bonds backed by pools of automobile loan receivables, home equity loans and credit card receivables originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market. As the 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.

     Other invested assets, at fair value: Comprised of four hedge funds invested in a range of diversified strategies. The fair values of the hedge funds are based on the net asset value of the funds as reported by the fund manager less a liquidity discount where hedge fund investments contain lock-up provisions that prevent immediate dissolution. The Company considers these lock-up provisions to be obligations that market participants would assign a value to in determining the price of these hedge funds, and as such have considered these obligations in determining the fair value measurement of the related hedge funds. The liquidity discount was estimated by calculating the value of a protective put over the lock-up period. The protective put measures the risk of holding a restricted asset over a certain time period. The Company used the Black-Scholes option-pricing model to estimate the value of the protective put for each hedge fund. The aggregate liquidity discount recognized during the three and nine months ended September 30, 2008 was $(33) and $237, respectively. The net asset value and the liquidity discount are significant unobservable inputs, and as such the fair values of the Company’s hedge funds are included in the Level 3 fair value hierarchy.

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

     Senior notes: The fair value of the senior notes is based on the price as published by Bloomberg, which was 88.46% of their principal amount, providing an effective yield of 9.63% as of September 30, 2008. 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 nine months ended September 30, 2008.

		Fair value measurement using significant
		unobservable inputs (Level 3):
		hedge funds
		Three months ended				Nine months ended
		September 30, 2008				September 30, 2008
Opening balance		$	192,661			$	241,435
Total gains or losses included in earnings:
Realized gains			2,449				8,562
Change in fair value of hedge fund investments			(27,617	)			(39,484	)
Purchases or sales			181				(42,839	)
Transfers in and/or out of Level 3			—				—
Ending balance, September 30, 2008		$	167,674			$	167,674

8. INCOME TAXES

     Certain subsidiaries of Holdings file U.S. federal income tax returns and various U.S. state income tax returns, as well as income tax returns in the U.K. and Ireland. The tax years open to examination by the U.S. Internal Revenue Service for the U.S. subsidiaries are the fiscal years from 2004 to the present. The tax years open to examination by the Inland Revenue for the U.K. branches are fiscal years from 2004 to the present. The tax years open to examination by Irish Revenue Commissioners for the Irish subsidiaries are the fiscal years from 2003 to the present. To the best of the Company’s knowledge, there are no examinations pending by the U.S. Internal Revenue Service, the Inland Revenue or the Irish Revenue Commissioners.

     Management has deemed all material tax positions to have a greater than 50% likelihood of being sustained based on technical merits if challenged. The Company has not recorded any interest or penalties during the three and nine months ended September 30, 2008 and 2007 and has not accrued any payment of interest or penalties as of September 30, 2008 and December 31, 2007.

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

9. SHAREHOLDERS’ EQUITY

a) Authorized shares

     The authorized share capital of Holdings as of September 30, 2008 and December 31, 2007 was $10,000.

     The issued share capital consists of the following:

		September 30, 2008				December 31, 2007
Common shares issued and fully paid, par value $0.03 per share			49,022,495				48,741,927
Share capital at end of period		$	1,471			$	1,462

     As of September 30, 2008, there were outstanding 35,412,797 voting common shares and 13,609,698 non-voting common shares.

b) Dividends

     In 2008, the Company has paid quarterly dividends of $0.18 per common share on April 3, 2008, June 12, 2008 and September 11, 2008, payable to shareholders of record on March 18, 2008, May 27, 2008 and August 26, 2008, respectively. The total dividends paid amounted to $26,432.

     For the nine months ended September 30, 2007, the Company paid quarterly dividends of $0.15 per common share on April 5, 2007, June 14, 2007 and September 13, 2007, payable to shareholders of record on March 20, 2007, May 29, 2007 and August 28, 2007, respectively. The total dividends paid amounted to $27,174.

10. 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.

		Nine months ended September 30, 2008
						Weighted Average
		Options				Exercise Price
Outstanding at beginning of period			1,223,875			$	31.03
Granted			294,300				42.75
Exercised			(138,615	)			27.31
Forfeited			(14,209	)			37.26
Outstanding at end of period			1,365,351			$	33.87

     Assumptions used in the option-pricing model for the options granted during the nine months ended September 30, 2008:

		Options granted during
		the nine months ended
		September 30, 2008
Expected term of option		6.25 years
Weighted average risk-free interest rate		2.58%
Expected volatility		23.57%
Dividend yield		1.66%
Weighted average fair value on grant date		$9.77

     There is limited historical data available for the Company to base the expected term of the options. As these options are considered to have standard characteristics, the Company has used the simplified method to determine the expected life as set forth in the SEC’s Staff Accounting Bulletins 107 and 110. Likewise, as the Company became a public company in July 2006, there is limited historical data available on which to base the volatility of its common shares. As such, the Company used the average of five volatility statistics from comparable companies, as well as the Company’s volatility, in order to derive the volatility value above. The Company has assumed a forfeiture rate of 4.91% in determining the compensation expense over the service period.

     Compensation expense of $614 and $620 relating to the options has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2008 and 2007, respectively. Compensation expense of $1,794 and $1,936 relating to the options has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008 and December 31, 2007, the Company recorded in “additional paid-in capital” on the unaudited condensed consolidated balance sheets amounts of $17,438 and $11,840, respectively, in connection with all options granted.

b) Stock incentive plan

     In 2004, the Company implemented the Allied World Assurance Company Holdings, Ltd 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 pro-rata over four years from the date of grant or in the fourth or fifth year from the original grant date.

		Nine months ended September 30, 2008
						Weighted Average
						Grant Date Fair
		RSUs				Value
Outstanding RSUs at beginning of period			820,890			$	36.09
RSUs granted			262,061				42.87
RSUs fully vested			(140,620	)			37.25
RSUs forfeited			(36,710	)			36.29
Outstanding RSUs at end of period			905,621			$	37.86

     Compensation expense of $2,178 and $1,990 relating to the issuance of the RSUs has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2008 and 2007, respectively. Compensation expense of $5,930 and $5,836 relating to the issuance of the RSUs has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the nine months ended September 30, 2008 and 2007, respectively. The compensation expense for the RSUs is based on the fair market value of Holdings’ common shares at the time of grant. The Company has assumed a forfeiture rate of 4.30% in determining the compensation expense over the service period. As of September 30, 2008 and December 31, 2007, the Company has recorded $18,189 and $12,337, respectively, in “additional paid-in capital” on the unaudited condensed consolidated balance sheets in connection with the RSUs awarded.

c) Long-term incentive plan

     In 2006, the Company implemented the Allied World Assurance Company Holdings, Ltd Long-Term Incentive Plan (“LTIP”), which provides for performance based equity awards to key employees in order to promote the long-term growth and profitability of the Company. Each award represents the right to receive a number of common shares in the future, based upon the achievement of established performance criteria during the applicable performance period. A total of 2,000,000 common shares may be issued under the LTIP. The awards granted in 2008 will generally vest after the fiscal year ending December 31, 2010, or in the fourth or fifth year from the original grant date, subject to the achievement of the performance conditions and terms of the LTIP.

		Nine months ended September 30, 2008
						Weighted Average
						Grant Date Fair
		LTIP				Value
Outstanding LTIP awards at beginning of period			590,834			$	40.09
LTIP awards granted			507,152				43.27
LTIP awards subjected to accelerated vesting			(11,667	)			34.00
LTIP awards forfeited			(20,000	)			43.40
Outstanding LTIP awards at end of period			1,066,319			$	41.61

     Compensation expense of $4,563 and $2,960 relating to the LTIP has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended September 30, 2008 and 2007, respectively. Compensation expense of $13,256 and $9,561 relating to the LTIP has been recognized in “general and administrative expenses” in the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the nine months ended September 30, 2008 and 2007, respectively. The compensation expense for the LTIP is based on the fair market value of Holdings’ common shares at the time of grant. As of September 30, 2008 and December 31,

2007, the Company has recorded $29,643 and $16,403, respectively, in “additional paid-in capital” on the unaudited condensed consolidated balance sheets in connection with the LTIP awards.

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

     The following table shows the stock compensation expense relating to the stock options, RSUs and LTIP awards for the three and nine months ended September 30, 2008 and 2007.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Stock options		$	614			$	620			$	1,794			$	1,936
RSUs			2,178				1,990				5,930				5,836
LTIP			4,563				2,960				13,256				9,561
Total stock compensation expense		$	7,355			$	5,570			$	20,980			$	17,333

11. EARNINGS PER SHARE

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Basic earnings per share
Net (loss) income		$	(46,367	)		$	108,959			$	163,783			$	346,167
Weighted average common shares outstanding			49,007,389				60,413,019				48,547,839				60,381,867
Basic (loss) earnings per share		$	(0.95	)		$	1.80			$	3.37			$	5.73

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Diluted earnings per share
Net (loss) income		$	(46,367	)		$	108,959			$	163,783			$	346,167
Weighted average common shares outstanding			49,007,389				60,413,019				48,547,839				60,381,867
Share equivalents:
Warrants and options			—				2,053,905				1,233,430				1,776,360
Restricted stock units			—				391,907				405,064				370,878
LTIP awards			—				391,193				682,765				279,081
Weighted average common shares and common share equivalents outstanding — diluted			49,007,389				63,250,024				50,869,098				62,808,186
Diluted (loss) earnings per share		$	(0.95	)		$	1.72			$	3.22			$	5.51

     For the three-month period ended September 30, 2008, no common share equivalents were included in calculating diluted earnings per share as there was a net loss, and any additional shares would be antidilutive. As a result, a total of 5,500,000 warrants, 1,365,351 employee stock options, 905,621 RSUs and 1,066,319 LTIP awards have been excluded from this calculation. For the nine-month period ended September 30, 2008, a weighted average of 419,439 employee stock options were antidilutive and were therefore excluded from the calculation of the diluted earnings per share.

     For the three-month period ended September 30, 2007, all common share equivalents were considered dilutive and have been included in the calculation of the diluted earnings per share. For the nine-month period ended September 30, 2007, a weighted average of 7,778 employee stock options were antidilutive and were therefore excluded from the calculation of the diluted earnings per share.

12. SEGMENT INFORMATION

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

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

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

     Management measures results for each segment on the basis of the “loss and loss expense ratio”, “acquisition cost ratio”, “general and administrative expense ratio” and the “combined ratio”. The “loss and loss expense ratio” is derived by dividing net losses and loss expenses by net premiums earned. The “acquisition cost ratio” is derived by dividing acquisition costs by net premiums earned. The “general and administrative expense ratio” is derived by dividing general and administrative expenses by net premiums earned. 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 nine months ended September 30, 2008 and 2007.

Three Months Ended September 30, 2008		Property				Casualty				Reinsurance				Total
Gross premiums written		$	57,437			$	140,003			$	93,541			$	290,981
Net premiums written			35,460				106,157				92,286				233,903
Net premiums earned			42,919				105,492				123,562				271,973
Net losses and loss expenses			(71,243	)			(46,813	)			(57,954	)			(176,010	)
Acquisition costs			(2,434	)			(2,212	)			(23,969	)			(28,615	)
General and administrative expenses			(9,240	)			(19,852	)			(11,702	)			(40,794	)
Underwriting (loss) income			(39,998	)			36,615				29,937				26,554
Net investment income															76,916
Net realized investment losses															(151,876	)
Interest expense															(9,515	)
Foreign exchange gain															2,728
Loss before income taxes														$	(55,193	)
Loss and loss expense ratio			166.0	%			44.4	%			46.9	%			64.7	%
Acquisition cost ratio			5.7	%			2.1	%			19.4	%			10.5	%
General and administrative expense ratio			21.5	%			18.8	%			9.5	%			15.0	%
Combined ratio			193.2	%			65.3	%			75.8	%			90.2	%

Three Months Ended September 30, 2007		Property				Casualty				Reinsurance				Total
Gross premiums written		$	60,192			$	122,212			$	93,849			$	276,253
Net premiums written			32,400				92,917				93,980				219,297
Net premiums earned			44,246				114,977				124,436				283,659
Net losses and loss expenses			(29,271	)			(71,369	)			(72,606	)			(173,246	)
Acquisition costs			811				(2,927	)			(27,082	)			(29,198	)
General and administrative expenses			(8,421	)			(17,876	)			(9,753	)			(36,050	)
Underwriting income			7,365				22,805				14,995				45,165
Net investment income															76,133
Net realized investment losses															(4,196	)
Interest expense															(9,481	)
Foreign exchange gain															976
Income before income taxes														$	108,597
Loss and loss expense ratio			66.2	%			62.1	%			58.4	%			61.1	%
Acquisition cost ratio			(1.8	)%			2.5	%			21.8	%			10.3	%
General and administrative expense ratio			19.0	%			15.6	%			7.8	%			12.7	%
Combined ratio			83.4	%			80.2	%			88.0	%			84.1	%

Nine Months Ended September 30, 2008		Property				Casualty				Reinsurance				Total
Gross premiums written		$	275,470			$	439,277			$	419,891			$	1,134,638
Net premiums written			136,346				326,127				418,252				880,725
Net premiums earned			130,664				320,210				363,047				813,921
Net losses and loss expenses			(148,583	)			(161,692	)			(187,316	)			(497,591	)
Acquisition costs			(7	)			(10,711	)			(71,002	)			(81,720	)
General and administrative expenses			(30,697	)			(67,846	)			(31,902	)			(130,445	)
Underwriting (loss) income			(48,623	)			79,961				72,827				104,165
Net investment income															226,192
Net realized investment losses															(152,804	)
Interest expense															(28,538	)
Foreign exchange gain															2,651
Income before income taxes														$	151,666
Loss and loss expense ratio			113.7	%			50.5	%			51.6	%			61.1	%
Acquisition cost ratio			0.0	%			3.3	%			19.6	%			10.0	%
General and administrative expense ratio			23.5	%			21.2	%			8.8	%			16.0	%
Combined ratio			137.2	%			75.0	%			80.0	%			87.1	%

Nine Months Ended September 30, 2007		Property				Casualty				Reinsurance				Total
Gross premiums written		$	318,520			$	435,492			$	491,196			$	1,245,208
Net premiums written			137,479				335,182				491,067				963,728
Net premiums earned			137,055				363,101				373,188				873,344
Net losses and loss expenses			(70,285	)			(222,644	)			(222,537	)			(515,466	)
Acquisition costs			374				(13,998	)			(76,642	)			(90,266	)
General and administrative expenses			(24,341	)			(49,894	)			(29,450	)			(103,685	)
Underwriting income			42,803				76,565				44,559				163,927
Net investment income															222,718
Net realized investment losses															(12,161	)
Interest expense															(28,337	)
Foreign exchange gain															412
Income before income taxes														$	346,559
Loss and loss expense ratio			51.3	%			61.3	%			59.6	%			59.0	%
Acquisition cost ratio			(0.3	)%			3.9	%			20.5	%			10.3	%
General and administrative expense ratio			17.8	%			13.7	%			7.9	%			11.9	%
Combined ratio			68.8	%			78.9	%			88.0	%			81.2	%

     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 nine months ended September 30, 2008 and 2007.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Bermuda		$	113,301			$	156,166			$	567,865			$	749,248
United States			87,432				34,529				189,790				91,642
Europe			33,170				28,602				123,070				122,838
Total net premiums written		$	233,903			$	219,297			$	880,725			$	963,728