S-1/A 1 y22718a2sv1za.htm AMENDMENT NO.2 TO FORM S-1 S-1/A
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As filed with the Securities and Exchange Commission on July 19, 2006
Registration No. 333-135464
 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Allied World Assurance Company Holdings, Ltd
(Exact Name of Registrant as Specified in Its Charter)
         
BERMUDA   6331   98-0481737
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
43 Victoria Street, Hamilton HM 12, Bermuda (441) 278-5400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant’s Principal Executive Offices)
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, New York 10011
(212) 894-8940
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
         
STEVEN A. SEIDMAN, ESQ.   WESLEY D. DUPONT, ESQ.   LOIS HERZECA, ESQ.
CRISTOPHER GREER, ESQ.   ALLIED WORLD ASSURANCE COMPANY   FRIED, FRANK, HARRIS,
WILLKIE FARR &   HOLDINGS, LTD   SHRIVER & JACOBSON LLP
GALLAGHER LLP   43 VICTORIA STREET   ONE NEW YORK PLAZA
787 SEVENTH AVENUE   HAMILTON, BERMUDA HM 12   NEW YORK, NY 10004
NEW YORK, NY 10019   (441) 278-5400   (212) 859-8000
(212) 728-8000   (441) 292-0055 (FACSIMILE)   (212) 859-4000 (FACSIMILE)
(212) 728-8111 (FACSIMILE)        
     Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
     If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o
     If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
     If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
     If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o
CALCULATION OF REGISTRATION FEE
                         
                         
                         
            Proposed Maximum     Proposed Maximum      
Title of Each Class of     Amount to Be     Offering Price Per     Aggregate Offering     Amount of
Securities to Be Registered(1)     Registered     Note     Price     Registration Fee
                         
    % Senior Notes
    $500,000,000           $500,000,000     $53,500(2)
                         
                         
(1)  This Registration Statement also covers the registration of senior notes for resale by Goldman, Sachs & Co. in market-making transactions.
 
(2)  Previously paid. No fee is required for market-making activities.
     This Registration Statement also covers the registration of senior notes for resale by Goldman, Sachs & Co. in market-making transactions. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 
 


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EXPLANATORY NOTE
This registration statement covers the registration of an aggregate principal amount of $500,000,000 of our      % senior notes due 20     . This registration statement also covers the registration of senior notes for resale by Goldman, Sachs & Co. in market-making transactions. The complete prospectus relating to the offering of senior notes follows immediately after this explanatory note. Following the prospectus are selected pages of the prospectus relating solely to these market making transactions, including alternative front cover and back cover pages and alternate sections entitled “Use of Proceeds” and “Plan of Distribution”. These selected pages and all other sections of the prospectus immediately following this explanatory note (other than the front cover and back cover pages and section entitled “Use of Proceeds” and “Underwriting”) comprise the market-making prospectus.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion. Dated July 19, 2006.
$500,000,000
(LOGO)
Allied World Assurance Company Holdings, Ltd
              % Senior Notes due 20       
 
       Allied World Assurance Company Holdings, Ltd is offering $500 million aggregate principal amount of           % senior notes due                     , 20     (the “notes”).
       We will pay interest on the notes semi-annually in arrears on                     and                     of each year. The first such payment will be made on                     . The notes will be issued only in denominations of $1,000 and integral multiples of $1,000. We may redeem the notes at any time, in whole or in part, at a “make-whole” redemption price as described in this prospectus.
       The notes will be our unsecured and unsubordinated obligations and will rank equal in right of payment with all our other unsubordinated indebtedness. The notes will be effectively subordinated in right of payment to all of our secured indebtedness to the extent of the collateral securing such indebtedness. We currently conduct substantially all of our operations through our subsidiaries and our subsidiaries generate substantially all of our operating income and cash flow. The notes will not be guaranteed by any of our subsidiaries and will be effectively subordinated to all existing and future obligations (including to policyholders, trade creditors, debt holders and taxing authorities) of our subsidiaries.
       The notes will not be listed on any securities exchange. Currently, there is no public market for the notes.
       See “Risk Factors” beginning on page 14 to read about factors you should consider before buying the notes.
 
       Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
             
    Per Note   Total
         
Initial public offering price
      %   $    
Underwriting discount
      %   $    
Proceeds, before expenses, to the company
      %   $    
       The initial public offering price set forth above does not include accrued interest, if any. Interest on the notes will accrue from                    , 20     and must be paid by the purchasers if the notes are delivered after                     , 20     .
 
       The underwriters expect to deliver the notes in book entry form only through the facilities of The Depository Trust Company against payment in New York, New York on or about                     , 2006.
Goldman, Sachs & Co. Banc of America Securities LLC
Wachovia Securities Barclays Capital
 
Prospectus dated                   , 2006.


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      CONSENT UNDER THE BERMUDA EXCHANGE CONTROL ACT 1972 (AND ITS RELATED REGULATIONS) HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND TRANSFER OF OUR NOTES TO AND BETWEEN NON-RESIDENTS OF BERMUDA FOR EXCHANGE CONTROL PURPOSES. THIS PROSPECTUS WILL BE FILED WITH THE REGISTRAR OF COMPANIES IN BERMUDA IN ACCORDANCE WITH BERMUDA LAW. IN GRANTING SUCH CONSENT AND IN ACCEPTING THIS PROSPECTUS FOR FILING, NEITHER THE BERMUDA MONETARY AUTHORITY NOR THE REGISTRAR OF COMPANIES IN BERMUDA ACCEPTS ANY RESPONSIBILITY FOR OUR FINANCIAL SOUNDNESS OR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS EXPRESSED IN THIS PROSPECTUS.


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PROSPECTUS SUMMARY
       This summary highlights selected information described more fully elsewhere in this prospectus. This summary may not contain all the information that is important to you. You should read the entire prospectus, including “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements” and our consolidated financial statements and related notes before making an investment decision with respect to our notes. References in this prospectus to the terms “we,” “us,” “our company,” “the company” or other similar terms mean the consolidated operations of Allied World Assurance Company Holdings, Ltd and its subsidiaries. Allied World Assurance Company Holdings, Ltd operates through subsidiaries in Bermuda, the United States, Ireland and through a branch office in the United Kingdom. References in this prospectus to “$” are to the lawful currency of the United States. The consolidated financial statements and related notes included in this prospectus have been prepared in accordance with accounting principles generally accepted in the United States. For your convenience, we have provided a glossary, beginning on page G-1, of selected insurance and other terms.
Our Company
Overview
       We are a Bermuda-based specialty insurance and reinsurance company that underwrites a diversified portfolio of property and casualty insurance and reinsurance lines of business. We write direct property and casualty insurance as well as reinsurance through our operations in Bermuda, the United States, Ireland and the United Kingdom. For the year ended December 31, 2005, direct property insurance, direct casualty insurance and reinsurance accounted for approximately 26.5%, 40.6% and 32.9%, respectively, of our total gross premiums written of $1,560 million. For the three months ended March 31, 2006, direct property insurance, direct casualty insurance and reinsurance accounted for approximately 24.1%, 26.2% and 49.7%, respectively, of our total gross premiums written of $498 million. On a written basis, our business mix is more heavily weighted to reinsurance during the first three months of the year due to the large number of reinsurance accounts with effective dates in January.
       Since our formation in November 2001, we have focused on the direct insurance markets. Direct insurance is insurance sold by an insurer that contracts directly with an insured, as distinguished from reinsurance, which is insurance sold by an insurer that contracts with another insurer. We offer our clients and producers significant capacity in both the direct property and casualty insurance markets. We believe that our focus on direct insurance and our experienced team of skilled underwriters allow us to have greater control over the risks that we assume and the volatility of our losses incurred and, as a result, ultimately our profitability. Our total gross premiums written for the year ended December 31, 2005 were $1,560 million. Our total net loss for the year ended December 31, 2005 was approximately $160 million, of which approximately $456 million in property losses related to Hurricanes Katrina, Rita and Wilma. Our total gross premiums written for the three months ended March 31, 2006 were approximately $498 million, and our total net income for the three months ended March 31, 2006 was approximately $98 million. We currently have approximately 238 full-time employees worldwide.
       We believe our financial strength represents a significant competitive advantage in attracting and retaining clients in current and future underwriting cycles. Our principal insurance subsidiary, Allied World Assurance Company, Ltd, and our other insurance subsidiaries currently have an “A” (Excellent; 3rd of 16 categories) financial strength rating from A.M. Best and an “A-” (Strong; 7th of 21 categories) financial strength rating from S&P. Our insurance subsidiaries Allied World Assurance Company, Ltd, Allied World Assurance Company (U.S.) Inc. and Newmarket Underwriters Insurance Company currently have an “A2” (Good; 6th of 21 categories) financial strength rating from Moody’s. As of December 31, 2005, we had $6,610 million of total assets and $1,420 million of shareholders’

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equity. As of March 31, 2006, we had $6,642 million of total assets and $1,479 million of shareholders’ equity. We are not currently encumbered by asbestos, environmental or any other similar exposures.
Our Business Segments
       We have three business segments: property insurance, casualty insurance and reinsurance. These segments and their respective lines of business may, at times, be subject to different underwriting cycles. We modify our product strategy as market conditions change and new opportunities emerge by developing new products, targeting new industry classes or de-emphasizing existing lines. Our diverse underwriting skills and flexibility allow us to concentrate on the business lines where we expect to generate the greatest returns.
  •  Property Segment. Our property segment includes the insurance of physical property and business interruption coverage for commercial property and energy-related risks. We write solely commercial coverages. This type of coverage is usually not written in one contract; rather, the total amount of protection is split into layers and separate contracts are written with separate consecutive limits that aggregate to the total amount of coverage required by the insured. We focus on the insurance of primary risk layers, where we believe we have a competitive advantage. This means that we are typically part of the first group of insurers that cover a loss up to a specified limit. Our current average net risk exposure (net of reinsurance) is approximately $3 to $7 million per individual risk. The property segment generated approximately $413 million of gross premiums written in 2005, representing 26.5% of our total gross premiums written and 39.5% of our total direct insurance gross premiums written. For the same period, the property segment had approximately $238 million of net losses related to Hurricanes Katrina, Rita and Wilma, which contributed to an underwriting loss of approximately $209 million. The property segment generated approximately $120 million of gross premiums written in the three months ended March 31, 2006, representing 24.1% of our total gross premiums written and 47.9% of our total direct insurance gross premiums written. For the same period, the property segment generated approximately $12 million of underwriting income.
 
  •  Casualty Segment. Our direct casualty underwriters provide a variety of specialty insurance casualty products to large and complex organizations around the world. Our casualty segment specializes in insurance products providing coverage for general and product liability, professional liability and healthcare liability risks. We focus primarily on insurance of excess layers, which means we are insuring the second and/or subsequent layers of a policy above the primary layer. We limit our maximum net casualty exposure (net of reinsurance) to approximately $25 to $29 million per individual risk. This segment generated approximately $633 million of gross premiums written in 2005, representing 40.6% of our total gross premiums written and 60.5% of our total direct insurance gross premiums written. For the same period, the casualty segment generated approximately $73 million in underwriting income. The casualty segment generated approximately $131 million of gross premiums written in the three months ended March 31, 2006, representing 26.2% of our total gross premiums written and 52.1% of our total direct insurance gross premiums written. For the same period, the casualty segment generated approximately $15 million of underwriting income.
 
  •  Reinsurance Segment. Our reinsurance segment includes the reinsurance of property, general casualty, professional lines, specialty lines and catastrophe coverages written by other insurance companies. We believe we have developed a reputation for skilled underwriting in several niche reinsurance markets including professional lines, specialty casualty, property for U.S. regional insurers, and accident and health. We presently write reinsurance on both a treaty and a facultative basis. The reinsurance segment generated approximately $514 million of gross premiums written in 2005, representing 32.9% of our

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  total gross premiums written. For the same period, the reinsurance segment had approximately $218 million of net losses related to Hurricanes Katrina, Rita and Wilma, which contributed to an underwriting loss of approximately $174 million. Of our total reinsurance premiums written, approximately $364 million, representing 70.8%, were related to specialty and casualty lines, and approximately $150 million, representing 29.2%, were related to property lines. The reinsurance segment generated approximately $248 million of gross premiums written in the three months ended March 31, 2006, representing 49.7% of our total gross premiums written. For the same period, the reinsurance segment generated approximately $19 million of underwriting income. On a written basis, our business mix is more heavily weighted to reinsurance during the first three months of the year due to the large number of reinsurance accounts with effective dates in January. Of our total reinsurance premiums written in the three months ended March 31, 2006, approximately $189 million, representing 76.4%, were related to specialty and casualty lines, and approximately $59 million, representing 23.6%, were related to property lines.
Our Operations
       We operate in three geographic markets: Bermuda, Europe and the United States.
       Our Bermuda insurance operations focus primarily on underwriting risks for U.S. domiciled Fortune 1000 clients and other large clients with complex insurance needs. Our Bermuda reinsurance operations focus on underwriting treaty and facultative risks principally located in the United States, with additional exposures internationally. Our Bermuda office has ultimate responsibility for establishing our underwriting guidelines and operating procedures, although we provide our underwriters outside of Bermuda with significant local autonomy.
       Our European operations focus predominantly on direct property and casualty insurance for large European and international accounts. These operations are becoming an increasingly important part of our growth strategy. We expect to capitalize on opportunities in European countries where terms and conditions are attractive, and where we can develop a strong local underwriting presence.
       Our U.S. operations focus on the middle-market and non-Fortune 1000 companies. We generally operate in the excess and surplus lines segment of the U.S. market. By having offices in the United States, we believe we are better able to target producers and clients that would typically not access the Bermuda insurance market due to their smaller size or particular insurance needs. Our U.S. distribution platform concentrates primarily on direct casualty and property insurance, with a particular emphasis on professional liability, excess casualty risks and commercial property insurance.
       On January 9, 2006, A.M. Best announced that it had downgraded our insurance subsidiaries to “A” (Excellent) from “A+” (Superior) and that these ratings were under review with negative implications pending the successful completion of our capital raising plan. See “Risk Factors — Risks Related to Our Company” for a further description of this downgrade.
History
       We were formed in November 2001 by a group of investors (whom we refer to in this prospectus as our principal shareholders) including AIG, The Chubb Corporation (whom we refer to in this prospectus as Chubb), certain affiliates of The Goldman Sachs Group, Inc. (whom we collectively refer to in this prospectus as the Goldman Sachs Funds) and Securitas Allied Holdings, Ltd. (whom we refer to in this prospectus as the Securitas Capital Fund), an affiliate of Swiss Reinsurance Company (whom we refer to in this prospectus as Swiss Re), to respond to a global reduction in insurance industry capital and a disruption in available insurance and reinsurance coverage. A number of other insurance and reinsurance companies were also formed in 2001 and shortly thereafter, primarily in Bermuda, in response to these conditions. These conditions created a

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disparity between coverage sought by insureds and the coverage offered by direct insurers. Our original business model focused on primary property layers and low excess casualty layers, the same risks on which we currently focus.
Recent Industry Trends
       On August 29, 2005, Hurricane Katrina struck Louisiana, Mississippi, Alabama and surrounding areas, creating industry-wide losses incurred estimated between $40 billion and $60 billion. Hurricane Katrina is widely expected to be the costliest natural disaster in the history of the insurance industry. On September 24, 2005, Hurricane Rita struck Texas and Louisiana. During the latter part of October 2005, Hurricane Wilma hit Florida and the Yucatan Peninsula of Mexico. Total industry losses incurred from Hurricanes Rita and Wilma are estimated to be approximately $12 billion to $19 billion. As a result of the recent hurricanes, premium levels for various catastrophe-exposed insurance risks have increased significantly beginning in 2006 with improved policy terms and conditions in certain instances.
Competitive Strengths
       We believe our competitive strengths have enabled us, and will continue to enable us, to capitalize on market opportunities. These strengths include the following:
  •  Strong Underwriting Expertise Across Multiple Business Lines and Geographies. We have strong underwriting franchises offering specialty coverages in both the direct property and casualty markets as well as the reinsurance market. Our underwriting strengths allow us to assess and price complex risks and direct our efforts to the risk layers within each account that provide the highest potential return for the risk assumed. We are able to opportunistically grow our business in those segments of the market that are producing the most attractive returns and do not rely on any one segment for a disproportionately large portion of our business.
 
  •  Established Direct Casualty Business. We have developed substantial underwriting expertise in multiple specialty casualty niches, including excess casualty, professional lines and healthcare liability. We believe that our underwriting expertise, established presence on existing insurance programs and ability to write substantial participations give us a significant advantage over our competition in the casualty marketplace.
 
  •  Leading Direct Property Insurer in Bermuda. We believe we have developed one of the largest direct property insurance businesses in Bermuda as measured by gross premiums written. We continue to diversify our property book of business, serving clients in various industries, including retail chains, real estate, light manufacturing, communications and hotels. We also insure energy-related risks.
 
  •  Strong Franchise in Niche Reinsurance Markets. We have established a reputation for skilled underwriting in various niche reinsurance markets in the United States and Bermuda, including specialty casualty for small to middle-market commercial risks; liability for directors, officers and professionals; commercial property risks in regional markets; and the excess and surplus lines market for manufacturing, energy and construction risks. In particular, we have developed a niche capability in providing reinsurance capacity to regional specialty carriers.
 
  •  Financial Strength. As of December 31, 2005, we had shareholders’ equity of $1,420 million, total assets of $6,610 million and an investment portfolio with a fair market value of $4,687 million, consisting primarily of fixed-income securities with an average rating of AA by Standard & Poor’s and Aa2 by Moody’s. As of March 31, 2006, we had shareholders’ equity of $1,479 million, total assets of $6,642 million and an investment portfolio with a fair market value of $4,796 million, consisting primarily of fixed-income securities with an average rating of AA by Standard & Poor’s and Aa2 by Moody’s. Our insurance subsidiaries currently have

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  an “A” (Excellent) financial strength rating from A.M. Best and an “A-” (Strong) financial strength rating from S&P. Moody’s has assigned an “A2” (Good) financial strength rating to certain of our insurance subsidiaries.
 
  •  Low-Cost Operating Model. We believe that our operating platform is one of the most efficient among our competitors due to our significantly lower expense ratio as compared to most of our peers. For the year ended December 31, 2005, our expense ratio was 18.7%, compared to an average of 23.8% for U.S. publicly-traded, Bermuda-based insurers and reinsurers. For the three months ended March 31, 2006, our expense ratio was 18.4%, compared to an average of 27.4% for U.S. publicly-traded, Bermuda-based insurers and reinsurers.
 
  •  Experienced Management Team. The seven members of our executive management team have an average of approximately 24 years of insurance industry experience. Most members of our management team are former executives of subsidiaries of AIG, one of our principal shareholders.
Business Strategy
       Our business objective is to generate attractive returns on our equity and book value per share growth for our shareholders by being a leader in direct property and casualty insurance and reinsurance. We intend to achieve this objective through internal growth and our capital raising plan, including the execution of our recently completed initial public offering of common shares, this offering and other opportunistic capital raising events, and by executing the following strategies:
  •  Leverage Our Diversified Underwriting Franchises. Our business is diversified by both product line and geography. Our underwriting skills across multiple lines and multiple geographies allow us to remain flexible and opportunistic in our business selection in the face of fluctuating market conditions.
 
  •  Expand Our Distribution and Our Access to Markets in the United States. We have made substantial investments to expand our U.S. business and expect this business to grow in size and importance in the coming years. We employ a regional distribution strategy in the United States predominantly focused on underwriting direct casualty and property insurance for middle-market and non-Fortune 1000 client accounts. Through our U.S. excess and surplus lines capability, we believe we have a strong presence in specialty casualty lines and maintain an attractive base of U.S. middle-market clients, especially in the professional liability market.
 
  •  Grow Our European Business. We intend to grow our European business, with particular emphasis on the United Kingdom and Western Europe, where we believe the insurance and reinsurance markets are developed and stable. Our European strategy is predominantly focused on direct property and casualty insurance for large European and international accounts. The European operations provide us with diversification and the ability to spread our underwriting risks.
 
  •  Continue Disciplined, Targeted Underwriting of Property Risks. We expect to profit from the increase in property rates for various catastrophe-exposed insurance risks following the 2005 hurricane season. Given our extensive underwriting expertise and strong market presence, we believe we choose the markets and layers that generate the largest potential for profit for the amount of risk assumed.
 
  •  Further Reduce Earnings Volatility by Actively Monitoring Our Catastrophe Exposure. We have historically managed our property catastrophe exposure by closely monitoring our policy limits in addition to utilizing complex risk models. We believe our catastrophe losses from the devastating hurricane season of 2005 were among the lowest as a percentage of June 30, 2005 book value among all major U.S. listed insurance and reinsurance companies

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  that commenced operations in Bermuda in 2001 or shortly thereafter. Following Hurricanes Katrina, Rita and Wilma, we have further enhanced our catastrophe management approach. In addition to our continued focus on aggregate limits and modeled probable maximum loss, we have introduced a strategy based on gross exposed policy limits in critical earthquake and hurricane zones.
 
  •  Expand Our Casualty Business with a Continued Focus on Specialty Lines. We believe we have established a leading excess casualty business. We will continue to target the risk needs of Fortune 1000 companies through our operations in Bermuda, large international accounts through our operations in Europe and middle-market and non-Fortune 1000 companies through our operations in the United States. We believe our focus on specialty casualty lines makes us less dependent on the property underwriting cycle.
 
  •  Continue to Opportunistically Underwrite Diversified Reinsurance Risks. As part of our reinsurance segment, we target certain niche reinsurance markets because we believe we understand the risks and opportunities in these markets. We will continue to seek to selectively deploy our capital in reinsurance lines where we believe there are profitable opportunities. In order to diversify our portfolio and complement our direct insurance business, we target the overall contribution from reinsurance to approximately 30% to 35% of our total annual gross premiums written.
       There are many potential obstacles to the implementation of our proposed business strategies, including a potential failure to successfully implement our capital raising plan (which plan includes this offering) to support our business plans, to successfully transition away from AIG and develop our own independent support systems and U.S. distribution platforms and risks related to operating as an insurance and reinsurance company, as further described below.
Risk Factors
       The competitive strengths that we maintain, the implementation of our business strategy and our future results of operations and financial condition are subject to a number of risks and uncertainties. The factors that could adversely affect our actual results and performance, as well as the successful implementation of our business strategy, are discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” and include, but are not limited to, the following:
  •  Changes in Our Ultimate Liability Due to Recent Weather-Related Losses. Our actual losses from Hurricanes Katrina, Rita and Wilma may vary materially from our estimated losses in which case our financial results could be materially adversely affected.
 
  •  Inability to Obtain or Maintain Our Financial Strength Ratings. If the rating of any of our insurance subsidiaries is revised downward or revoked, our competitive position in the insurance and reinsurance industry may suffer, and it may be more difficult for us to market our products which could result in a significant reduction in the number of contracts we write and in a substantial loss of business.
 
  •  Adequacy of Our Loss Reserves and the Need to Adjust such Reserves as Claims Develop Over Time. To the extent that actual losses or loss expenses exceed our expectations and reserves, we will be required to increase our reserves to reflect our changed expectations which could cause a material increase in our liabilities and a reduction in our profitability, including operating losses and a reduction of capital.
 
  •  Impact of Litigation and Investigations of Governmental Agencies on the Insurance Industry and on Us. Attorneys general from multiple states have been investigating market practices of the insurance industry. Policyholders have filed numerous class action suits alleging that certain insurance brokerage and placement practices violated, among other

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  things, federal antitrust laws. We have been named in one class action suit and are subject to a pending investigation by the Texas Attorney General’s Office, as described in “Business — Legal Proceedings.” The effects of investigations by any attorney general’s office into market practices, in particular insurance brokerage practices, of the insurance industry in general or us specifically, together with the class action litigations and any other legal or regulatory proceedings, related settlements and industry reform or other changes arising therefrom, may materially adversely affect our results of operations, financial condition and financial strength ratings.
 
  •  Unanticipated Claims and Loss Activity. There may be greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices have anticipated. As a result, it is possible that our unearned premium and loss reserves for such catastrophes will be inadequate to cover the losses.
 
  •  Impact of Acts of Terrorism, Political Unrest and Acts of War. It is impossible to predict the timing or severity of acts of terrorism and political instability with statistical certainty or to estimate the amount of loss that any given occurrence will generate. To the extent we suffer losses from these risks, such losses could be significant.
 
  •  Effectiveness of Our Loss Limitation Methods. We cannot be certain that any of the loss limitation methods we employ will be effective. The failure of any of these loss limitation methods could have a material adverse effect on our financial condition or results of operations.
 
  •  Changes in the Availability or Creditworthiness of Our Brokers or Reinsurers. Loss of all or a substantial portion of the business provided by any one of the brokers upon which we rely could have a material adverse effect on our financial condition and results of operations. We also assume a degree of credit risk associated with our brokers in connection with the payment of claims and the receipt of premiums.
 
  •  Changes in the Availability, Cost or Quality of Reinsurance Coverage. We may be unable to purchase reinsurance for our own account on commercially acceptable terms or to collect under any reinsurance we have purchased.
 
  •  Loss of Key Personnel. Our business could be adversely affected if we lose any member of our management team or are unable to attract and retain our personnel.
 
  •  Decreased Demand for Our Products and Increased Competition. Decreased level of demand for direct property and casualty insurance or reinsurance or increased competition due to an increase in capacity of property and casualty insurers or reinsurers could adversely affect our financial results.
 
  •  Changes in the Competitive Landscape. The effects of competitors’ pricing policies and of changes in the laws and regulations on competition, including industry consolidation and development of competing financial products, could negatively impact our business.
Recent Developments
       We experienced approximately 12% growth in gross premiums written for the two months ended May 31, 2006 compared to the same period in 2005. We expanded our U.S. property distribution platform during 2005 and our offices were fully operational during 2006. In addition, property rates continued to increase on certain catastrophe-exposed North American business and rates on other business lines remain attractive. The vast majority of our expenses consist of estimates of losses and loss expenses that require extensive actuarial analyses, which we perform at the end of each quarter.

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       On June 9, 2006, we changed our name from Allied World Assurance Holdings, Ltd to Allied World Assurance Company Holdings, Ltd.
       On July 17, 2006, we completed an initial public offering of our common shares, in which we sold 8,800,000 common shares at an initial public offering price per share of $34.00. The net proceeds to us from our initial public offering, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, was approximately $274.0 million. We intend to use the net proceeds from this offering to repay all amounts outstanding under our bank loan (expected to be approximately $363.0 million after application of $137 million of the proceeds from our initial public offering of common shares), which matures March 30, 2012 and carries a floating rate of interest, and the remainder for general corporate purposes, including to increase the capital of our subsidiaries. This prospectus shall not be deemed an offer to sell or a solicitation of an offer to buy any securities offered in our initial public offering of common shares.
Principal Executive Offices
       Our principal executive offices are located at 43 Victoria Street, Hamilton HM 12, Bermuda, telephone number (441) 278-5400.

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The Offering
       The following is a brief summary of certain terms of this offering. For a more complete description of the terms of the notes, see “Description of The Notes” in this prospectus. The notes may be split into two series with different maturities.
Issuer Allied World Assurance Company Holdings, Ltd
 
Notes offered $500 million aggregate principal amount of           % senior notes due 20     .
 
Interest rate           % per year.
 
Maturity                     , 20     .
 
Interest payment dates                     and                     of each year, beginning on                     , 200     .
 
Ranking The notes will be our unsecured and unsubordinated obligations and will rank equal in right of payment with all of our other unsubordinated indebtedness. The notes, however, will be effectively subordinated in right of payment to all of our secured indebtedness to the extent of the collateral securing such indebtedness.
 
We currently conduct substantially all of our operations through our subsidiaries and our subsidiaries generate substantially all of our operating income and cash flow. The notes will not be guaranteed by any of our subsidiaries and will be effectively subordinated to all existing and future obligations (including to policyholders, trade creditors, debt holders and taxing authorities) of our subsidiaries.
 
As of March 31, 2006, after giving effect to our recently completed initial public offering of common shares and to this offering of notes and the application of the proceeds of our recently completed initial public offering of common shares and this offering as described under “Use of Proceeds,” our outstanding consolidated indebtedness for money borrowed would consist solely of the notes offered hereby. As of March 31, 2006, after giving effect to our recently completed initial public offering of common shares and to this offering of notes and the application of the proceeds of our recently completed initial public offering of common shares and this offering as described under “Use of Proceeds,” the consolidated liabilities of our subsidiaries reflected on our balance sheet would be approximately $4,646.9 million. All such liabilities (including to policyholders, trade creditors, debt holders and taxing authorities) of our subsidiaries would be effectively senior to the notes.
 
Optional redemption We may redeem some or all of the notes at any time at a “make-whole” redemption price equal to the greater of:
 
     • 100% of the principal amount being redeemed and
 
     • the sum of the present values of the remaining scheduled payments of principal and interest (other than accrued interest) on the notes being redeemed, discounted to the redemption date on a semi-annual basis at the Treasury Rate (as defined in “Description of The Notes — Optional Redemption”) plus       basis points;
 
plus, in either case, accrued and unpaid interest to, but excluding, the redemption date.
 
Additional Amounts Subject to certain limitations and exceptions, Allied World Assurance Company Holdings, Ltd will make all payments of

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principal and of premium, if any, interest and any other amounts on, or in respect of, the notes without withholding or deduction at source for, or on account of, any present or future taxes, fees, duties, assessments or governmental charges of whatever nature with respect to payments made by Allied World Assurance Company Holdings, Ltd imposed by or on behalf of Bermuda or any other jurisdiction in which Allied World Assurance Company Holdings, Ltd is organized or otherwise considered to be a resident for tax purposes or any other jurisdiction from which or through which a payment on the notes is made by Allied World Assurance Company Holdings, Ltd. See “Description of The Notes — Payment of Additional Amounts.”
 
Tax redemption We may redeem all of the notes at any time if certain tax events occur as described in “Description of The Notes — Redemption for Tax Purposes.”
 
Sinking fund There are no provisions for a sinking fund.
 
Form and denomination Notes will be represented by global certificates deposited with, or on behalf of, The Depository Trust Company (“DTC”) or its nominee. Notes sold will be issuable in denominations of $1,000 or any integral multiples of $1,000 in excess thereof.
 
Governing law The notes will be governed by the laws of the State of New York.
 
Covenants The indenture under which the notes will be issued will not contain any financial covenants or any provisions restricting us or our subsidiaries from purchasing or redeeming share capital. In addition, we will not be required to repurchase, redeem or modify the terms of any of the notes upon a change of control or other event involving us, which may adversely affect the value of the notes. In addition, the indenture will not limit the aggregate principal amount of debt securities we may issue under it, and we may issue additional debt securities in one or more series.
 
Risk factors See “Risk Factors” and the other information in this prospectus for a discussion of factors you should consider carefully before deciding to invest in the notes.
 
Clearance and settlement The notes will be cleared through DTC.
 
Use of proceeds We expect to receive approximately $495.6 million in net proceeds (after deducting underwriting discounts and commissions and our estimated offering expenses) from the sale of the notes. We intend to use the net proceeds from this offering to repay all amounts outstanding under our bank loan (expected to be approximately $363.0 million after application of $137 million of the proceeds from our recently completed initial public offering of common shares), which matures March 30, 2012 and carries a floating rate of interest, and the remainder for general corporate purposes, including to increase the capital of our subsidiaries.
 
Unless we specifically state otherwise, all information in this prospectus gives effect to a 1-for-3 reverse stock split effected on July 7, 2006 (and assumes no fractional shares will remain outstanding).

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Summary Consolidated Financial Information
       The following table sets forth our summary historical statement of operations data for the three months ended March 31, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003, as well as our summary balance sheet data as of March 31, 2006 and December 31, 2005 and 2004. Statement of operations for the three months ended March 31, 2006 and 2005 and the balance sheet data as of March 31, 2006 are derived from our unaudited financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. GAAP. Statement of operations data for the years ended December 31, 2005, 2004 and 2003 and balance sheet data as of December 31, 2005 and 2004 are derived from our audited consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk see “Risk Factors.” You should read the following summary consolidated financial information together with the other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
                                           
    Three Months Ended    
    March 31,   Year Ended December 31,
         
    2006   2005   2005   2004   2003
                     
    ($ in millions, except per share
    amounts and ratios)
Summary Statement of Operations Data:
Gross premiums written
  $ 498.1     $ 505.3     $ 1,560.3     $ 1,708.0     $ 1,573.7  
                               
Net premiums written
    427.5       438.7     $ 1,222.0     $ 1,372.7     $ 1,346.5  
                               
Net premiums earned
  $ 308.9     $ 324.1     $ 1,271.5     $ 1,325.5     $ 1,167.2  
Net investment income
    62.0       40.3       178.6       129.0       101.0  
Net realized investment (losses) gains
    (5.2 )     (2.5 )     (10.2 )     10.8       13.4  
Net losses and loss expenses
    206.0       238.4       1,344.6       1,013.4       762.1  
Acquisition costs
    36.5       36.5       143.4       170.9       162.6  
General and administrative expenses
    20.3       20.9       94.3       86.3       66.5  
Foreign exchange loss (gain)
    0.5       0.1       2.2       (0.3 )     (4.9 )
Interest expense
    6.5             15.6              
Income tax (recovery) expense
    (2.2 )     1.6       (0.4 )     (2.2 )     6.9  
                               
Net income (loss)
  $ 98.1     $ 64.4     $ (159.8 )   $ 197.2     $ 288.4  
                               
Per Share Data:
                                       
Earnings (loss) per share:(1)
                                       
 
Basic
  $ 1.96     $ 1.28     $ (3.19 )   $ 3.93     $ 5.75  
 
Diluted
    1.94       1.28       (3.19 )     3.83       5.66  
Weighted average number of common shares outstanding:
                                       
 
Basic
    50,162,842       50,162,842       50,162,842       50,162,842       50,162,842  
 
Diluted
    50,485,556       50,455,313       50,162,842       51,425,389       50,969,715  
Dividends paid per share
              $ 9.93              
                                         
    Three Months            
    Ended    
    March 31,   Year Ended December 31,
         
    2006   2005   2005   2004   2003
                     
Selected Ratios:
                                       
Loss ratio(2)
    66.7 %     73.6 %     105.7 %     76.5 %     65.3 %
Acquisition cost ratio(3)
    11.8       11.2       11.3       12.9       13.9  
General and administrative expense ratio(4)
    6.6       6.5       7.4       6.5       5.7  
Expense ratio(5)
    18.4       17.7       18.7       19.4       19.6  
Combined ratio(6)
    85.1       91.3       124.4       95.9       84.9  

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    As of March 31, 2006   As of
        December 31,
    Pro Forma        
    As Adjusted(7)   Actual   2005   2004
                 
    ($ in millions, except per share amounts)
Summary Balance Sheet Data:
                               
Cash and cash equivalents
  $ 458.2     $ 188.6     $ 172.4     $ 190.7  
Investments at fair market value
    4,796.1       4,796.1       4,687.4       4,087.9  
Reinsurance recoverable
    664.0       664.0       716.3       259.2  
Total assets
    6,914.4       6,642.3       6,610.5       5,072.2  
Reserve for losses and loss expenses
    3,421.0       3,421.0       3,405.4       2,037.1  
Unearned premiums
    852.7       852.7       740.1       795.3  
Total debt
    500       500.0       500.0        
Total shareholders’ equity
    1,748.2       1,478.9       1,420.3       2,138.5  
Book value per share:(8)
                               
 
Basic
  $ 29.65     $ 29.48     $ 28.31     $ 42.63  
 
Diluted
    29.43       29.29       28.20       41.58  
 
(1)  Earnings (loss) per share is a measure based on our net income (loss) divided by our weighted average common shares outstanding. Basic earnings (loss) per share is defined as net income (loss) available to common shareholders divided by the weighted average number of common shares outstanding for the period, giving no effect to dilutive securities. Diluted earnings (loss) per share is defined as net income (loss) available to common shareholders divided by the weighted average number of common shares and common share equivalents outstanding calculated using the treasury stock method for all potentially dilutive securities, including warrants and restricted stock units. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted earnings (loss) per share. Certain warrants that were anti-dilutive were excluded from the calculation of the diluted earnings (loss) per share for the three months ended March 31, 2006 and for the year ended December 31, 2004. No common share equivalents were included in calculating the diluted earnings per share for the year ended December 31, 2005 as there was a net loss for this period, and any additional shares would prove to be anti-dilutive.
 
(2)  Calculated by dividing net losses and loss expenses by net premiums earned.
 
(3)  Calculated by dividing acquisition costs by net premiums earned.
 
(4)  Calculated by dividing general and administrative expenses by net premiums earned.
 
(5)  Calculated by combining the acquisition cost ratio and the general and administrative expense ratio.
 
(6)  Calculated by combining the loss ratio, acquisition cost ratio and general and administrative expense ratio.
 
(7)  In the “Pro Forma As Adjusted” column, the calculation of basic and diluted book value per share reflects a $2.8 million non-cash compensation charge resulting from the conversion of our book value equity compensation plans to market value plans at the recent completion of our initial public offering of common shares at the initial public offering price of $34.00 per share, divided by the weighted average number of basic and diluted common shares outstanding, and payment of total fees and expenses of our initial public offering, including underwriting discounts and commissions, of approximately $25.2 million. The “Pro Forma As Adjusted” column also gives effect to our initial public offering of common shares at the initial public offering price of $34.00 per share and the application of the net proceeds thereof to repay indebtedness under our bank loan and for general corporate purposes. The “Pro Forma As Adjusted” column further gives effect to this offering and the application of the use of proceeds thereof as described under “Use of Proceeds.” The “Pro Forma As Adjusted” column also gives effect to the release of $0.7 million of deferred loan arrangement expenses related to the bank loan which is to be fully repaid using the proceeds from this offering, and includes $1.2 million of estimated non-deferred expenses related to this offering.

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(8)  Basic book value per share is defined as total shareholders’ equity available to common shareholders divided by the number of common shares outstanding as at the end of the period, giving no effect to dilutive securities. Diluted book value per share is defined as total shareholders’ equity available to common shareholders divided by the number of common shares and common share equivalents outstanding at the end of the period, calculated using the treasury stock method for all potentially dilutive securities, including warrants and restricted stock units. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted book value per share. Certain warrants that were anti-dilutive were excluded from the calculation of the diluted book value per share as of March 31, 2006 and December 31, 2005 and 2004.

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RISK FACTORS
       Before investing in our notes, you should carefully consider the following risk factors and all other information in this prospectus. The risks described could materially affect our business, results of operations or financial condition and cause the trading price of our notes to decline. You could lose part or all of your investment.
Risks Related to Our Company
Our ultimate liability for recent weather-related losses is subject to significant uncertainty.
       We currently estimate that our net property losses, after our reinsurance coverage, relating to Hurricanes Katrina, Rita and Wilma will be approximately $456 million. These events resulted in the increase of net property losses and loss expenses of approximately $456 million for the year ended December 31, 2005, which contributed to our net loss for the year of $159.8 million. We have also incurred a general liability loss of $25 million relating to Hurricane Katrina. Our estimates for losses relating to Hurricanes Katrina, Rita and Wilma are based mainly on actuarial analysis of loss indications from brokers, client and public announcements to date, current industry loss estimates, output from industry and proprietary models and a review of in-force contracts. Our actual losses may vary materially from our estimated losses. For example, if our estimate of net losses increased by 10%, we expect that we would increase net losses and loss expenses by approximately $46 million in the period in which the loss development occurred. In addition, our estimated losses as a result of Hurricane Katrina are subject to a further level of uncertainty due to the extremely complex and unique causation and related coverage issues associated with the attribution of losses to wind or flood damage or other perils such as fire, business interruption or riot and civil commotion. We expect that these issues will not be resolved for a considerable period of time and may be influenced by evolving legal and regulatory developments. Our actual losses from Hurricanes Katrina, Rita and Wilma may exceed our estimated losses as a result of, among other things, the receipt of additional information from clients, brokers and loss adjusters, the attribution of losses to coverages that, for the purpose of our estimates, we assumed would not be exposed and to a lesser extent an increase in current industry loss estimates, and inflation in repair costs due to the limited availability of labor and materials, in which case our financial results could be materially adversely affected.
       Based on our current estimate of losses related to Hurricane Katrina, we believe we have exhausted our $135 million of property catastrophe reinsurance protection with respect to this event, leaving us with more limited reinsurance coverage available pursuant to our two remaining property quota share treaties should our Hurricane Katrina losses prove to be greater than currently estimated. Under the two remaining quota share treaties we ceded 45% of our general property policies and 66% of our energy-related property policies. As of March 31, 2006, we had estimated gross losses related to Hurricane Katrina of approximately $554 million. Losses ceded related to Hurricane Katrina were $135 million under the property catastrophe reinsurance protection and approximately $149 million under the property quota share treaties. Casualty losses will also arise from weather-related events, and we have received notices of casualty losses relating to Hurricane Katrina on several casualty policies.
Our financial strength ratings were recently revised downward to “A” (Excellent) by A.M. Best. Further downgrades or the revocation of our financial strength ratings would affect our standing among brokers and customers and may cause our premiums and earnings to decrease.
       Ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. A.M. Best has assigned a financial strength rating of “A” (Excellent), and S&P has assigned a financial strength rating of “A-” (Strong), to each of our insurance subsidiaries. Certain of our insurance subsidiaries have an “A2” (Good) financial strength rating from Moody’s. Each rating is subject to periodic review by, and may be revised downward or

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revoked at the sole discretion of, A.M. Best, S&P or Moody’s, respectively. The ratings are neither an evaluation directed to investors in our notes nor a recommendation to buy, sell or hold our notes. On January 9, 2006, A.M. Best announced that it had downgraded our insurance subsidiaries to “A” (Excellent) from “A+” (Superior) and that our ratings were under review with negative implications pending the successful completion of our capital raising plan, which includes our recently completed initial public offering of common shares and this offering.
       If the rating of any of our subsidiaries is further revised downward or revoked by A.M. Best, or if S&P or Moody’s downgrade or revoke any of our financial strength ratings, our competitive position in the insurance and reinsurance industry may suffer, and it may be more difficult for us to market our products. Specifically, any revision or revocation of this kind could result in a significant reduction in the number of insurance and reinsurance contracts we write and in a substantial loss of business as customers and brokers that place this business move to competitors with higher financial strength ratings.
       Additionally, it is increasingly common for our reinsurance contracts to contain terms that would allow the ceding companies to cancel the contract for the portion of our obligations if our insurance subsidiaries are downgraded below an A- by A.M. Best. Whether a ceding company would exercise this cancellation right would depend, among other factors, on the reason for such downgrade, the extent of the downgrade, the prevailing market conditions and the pricing and availability of replacement reinsurance coverage. Therefore, we cannot predict in advance the extent to which this cancellation right would be exercised, if at all, or what effect any such cancellations would have on our financial condition or future operations, but such effect could be material.
       We also cannot assure you that A.M. Best, S&P or Moody’s will not downgrade our insurance subsidiaries even if we successfully complete our capital raising program. In addition, if we have underestimated the amount of our losses from Hurricanes Katrina, Rita and Wilma or, if any adverse settlement or final adjudication is reached in the complaint filed against our Bermuda subsidiary in Georgia or in the ongoing investigation of us by the Texas Attorney’s General Office (or in other states), each as described elsewhere in this prospectus or in any related suit or investigation that may arise in the future, our insurance subsidiaries’ ratings could be subject to downgrade. Even if we have correctly estimated our losses from Hurricanes Katrina, Rita and Wilma, we cannot assure you that A.M. Best, S&P or Moody’s will not downgrade our insurance subsidiaries’ ratings for other reasons such as failing to successfully complete our capital raising plan, failing to successfully transition away from AIG or as a result of other significant insurance losses in the future.
Actual claims may exceed our reserves for losses and loss expenses.
       Our success depends on our ability to accurately assess the risks associated with the businesses that we insure and reinsure. We establish loss reserves to cover our estimated liability for the payment of all losses and loss expenses incurred with respect to the policies we write. 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 actuarial and statistical projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined as experience develops and claims are reported and resolved. Establishing an appropriate level of loss reserves is an inherently uncertain process. It is therefore possible that our reserves at any given time will prove to be inadequate.
       To the extent we determine that actual losses or loss expenses exceed our expectations and reserves reflected in our financial statements, we will be required to increase our reserves to reflect our changed expectations. This could cause a material increase in our liabilities and a reduction in our profitability, including operating losses and a reduction of capital. Our results for the year ended December 31, 2005 included $72.1 million of negative development of reserves (i.e., a loss reserve increase), which included $62.5 million of negative development from 2004 catastrophes, and

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$121.1 million of positive development of reserves (i.e., a loss reserve decrease) relating to losses incurred for the prior accident years. In comparison, for the year ended December 31, 2004, the results included $81.7 million of positive development of reserves for the year and $2.3 million of negative development of reserves. Our results for the year ended December 31, 2003 included $56.8 million of positive reserve development incurred for the accident year 2002.
The impact of investigations of possible anti-competitive practices by the company cannot be predicted and may have a material adverse impact on our results of operations, financial condition and financial strength ratings.
       On or about November 8, 2005, we received a Civil Investigative Demand (“CID”) from the Antitrust and Civil Medicaid Fraud Division of the Office of the Attorney General of Texas, which relates to an investigation (referred to in this prospectus as the Investigation) into (1) the possibility of restraint of trade in one or more markets within the State of Texas arising out of our business relationships with AIG and Chubb, and (2) certain insurance and insurance brokerage practices, including those relating to contingent commissions and false quotes, which are also the subject of industry-wide investigations and class action litigation. Specifically, the CID seeks information concerning our relationship with our investors, and in particular, AIG and Chubb, including their role in our business, sharing of business information and any agreements not to compete. The CID also seeks information regarding (i) contingent commission, placement service or other agreements that we may have had with brokers or producers, and (ii) the possibility of the provision of any non-competitive bids by us in connection with the placement of insurance. We are cooperating in this ongoing Investigation, and we have produced documents and other information in response to the CID. While the full scope and outcome of the Investigation by the Attorney General of Texas cannot currently be predicted, based on our recent discussions with representatives of the Attorney General of Texas on May 26, 2006, the Investigation is expected to proceed to litigation, enforcement proceedings or a voluntary settlement. This is likely to result in civil penalties, restitution to policyholders or other remedial efforts that would be adverse to us. In connection with the Investigation and our review relating to certain insurance brokerage practices, our Chief Underwriting Officer was suspended indefinitely. The outcome of the Investigation is also likely to form a basis for investigations, civil litigation or enforcement proceedings by other state regulators, by policyholders or by other private parties, or other voluntary settlements that could have material adverse effects on us. At this stage in this matter, we cannot estimate, for purposes of reserving or otherwise, the severity of an adverse result or settlement on our results of operations, financial condition, growth prospects and financial strength ratings but the impact could be material. See “A recent complaint filed against our Bermuda insurance subsidiary could, if adversely determined or resolved, subject us to a material loss.” See “Our financial strength ratings were recently revised downward to “A” (Excellent) by A.M. Best. Further downgrades or the revocation of our financial strength ratings would affect our standing among brokers and customers and may cause our premiums and earnings to decrease.”
A recent complaint filed against our Bermuda insurance subsidiary could, if adversely determined or resolved, subject us to a material loss.
       On April 4, 2006, a complaint was filed in U.S. District Court for the Northern District of Georgia (Atlanta Division) by a group of several corporations and certain of their related entities in an action entitled New Cingular Wireless Headquarters, LLC et al, as plaintiffs, against certain defendants, including Marsh & McLennan Companies, Inc., Marsh Inc. and Aon Corporation, in their capacities as insurance brokers, and 78 insurers, including our insurance subsidiary in Bermuda, Allied World Assurance Company, Ltd.
       The action generally relates to broker defendants’ placement of insurance contracts for plaintiffs with the 78 insurer defendants. Plaintiffs maintain that the defendants used a variety of illegal schemes and practices designed to, among other things, allocate customers, rig bids for insurance products and raise the prices of insurance products paid by the plaintiffs. In addition, plaintiffs allege that the broker

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defendants steered policyholders’ business to preferred insurer defendants. Plaintiffs claim that as a result of these practices, policyholders either paid more for insurance products or received less beneficial terms than the competitive market would have charged. The eight counts in the complaint allege, among other things, (i) unreasonable restraints of trade and conspiracy in violation of the Sherman Act, (ii) violations of the Racketeer Influenced and Corrupt Organizations Act, or RICO, (iii) that broker defendants breached their fiduciary duties to plaintiffs, (iv) that insurer defendants participated in and induced this alleged breach of fiduciary duty, (v) unjust enrichment, (vi) common law fraud by broker defendants and (vii) statutory and consumer fraud under the laws of certain U.S. states. Plaintiffs seek equitable and legal remedies, including injunctive relief, unquantified consequential and punitive damages, and treble damages under the Sherman Act and RICO. No specific amount of damages is claimed. The court has issued an order extending our (and all defendants) time to respond to the complaint until the later of August 5, 2006 or 20 days after the Judicial Panel on Multidistrict Litigation rules. We plan to vigorously defend the action. Because this matter is in an early stage, we cannot estimate the possible range of loss, if any.
Government authorities are continuing to investigate the insurance industry, which may adversely affect our business.
       The attorneys general for multiple states and other insurance regulatory authorities have been investigating a number of issues and practices within the insurance industry, and in particular insurance brokerage practices. These investigations of the insurance industry in general, whether involving the company specifically or not, together with any legal or regulatory proceedings, related settlements and industry reform or other changes arising therefrom, may materially adversely affect our business and future prospects.
When we act as a property insurer and reinsurer, we are particularly vulnerable to losses from catastrophes.
       Our direct property insurance and reinsurance operations expose us to claims arising out of catastrophes. Catastrophes can be caused by various unpredictable events, including earthquakes, volcanic eruptions, hurricanes, windstorms, hailstorms, severe winter weather, floods, fires, tornadoes, explosions and other natural or man-made disasters. The international geographic distribution of our business subjects us to catastrophe exposure from natural events occurring in a number of areas throughout the world, including windstorms in Europe, hurricanes and windstorms in Florida, the Gulf Coast and the Atlantic coast regions of the United States, typhoons and earthquakes in Japan and Taiwan and earthquakes in California and parts of the Midwestern United States known as the New Madrid zone. The loss experience of catastrophe insurers and reinsurers has historically been characterized as low frequency but high severity in nature. In recent years, the frequency of major catastrophes appears to have increased. Increases in the values and concentrations of insured property and the effects of inflation have resulted in increased severity of losses to the industry in recent years, and we expect this trend to continue.
       In the event we experience losses from catastrophes, there is a possibility that our unearned premium and loss reserves for such catastrophes will be inadequate to cover the losses. In addition, because U.S. GAAP does not permit insurers and reinsurers to reserve for catastrophes until they occur, claims from these events could cause substantial volatility in our financial results for any fiscal quarter or year and could have a material adverse effect on our financial condition and results of operations.
We could face losses from terrorism and political unrest.
       We have exposure to losses resulting from acts of terrorism and political instability. Although we generally exclude acts of terrorism from our property insurance policies and reinsurance treaties where practicable, we provide coverage in circumstances where we believe we are adequately compensated for assuming those risks. Moreover, even in cases where we seek to exclude coverage, we may not be able to completely eliminate our exposure to terrorist acts. It is impossible

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to predict the timing or severity of these acts with statistical certainty or to estimate the amount of loss that any given occurrence will generate. To the extent we suffer losses from these risks, such losses could be significant.
The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or results of operations.
       We seek to limit our loss exposure by adhering to maximum limitations on policies written in defined geographical zones (which limits our exposure to losses in any one geographic area), limiting program size for each client (which limits our exposure to losses with respect to any one client), adjusting retention levels and establishing per risk and per occurrence limitations for each event and prudent underwriting guidelines for each insurance program written (all of which limit our liability on any one policy). Most of our direct liability insurance policies include maximum aggregate limitations. We cannot assure you that any of these loss limitation methods will be effective. In particular, geographic zone limitations involve significant underwriting judgments, including the determination of the areas of the zones and whether a policy falls within particular zone limits. Disputes relating to coverage and choice of legal forum may also arise. As a result, various provisions of our policies that are designed to limit our risks, such as limitations or exclusions from coverage (which limit the range and amount of liability to which we are exposed on a policy) or choice of forum (which provides us with a predictable set of laws to govern our policies and the ability to lower costs by retaining legal counsel in fewer jurisdictions), may not be enforceable in the manner we intend and some or all of our other loss limitation methods may prove to be ineffective. One or more catastrophic or other events could result in claims and expenses that substantially exceed our expectations and could have a material adverse effect on our results of operations.
We are dependent on affiliates of one of our principal shareholders to provide us with certain administrative services and, upon the termination of our agreements with these service providers, our business and results of operations could be negatively impacted.
       Subsidiaries of one of our principal shareholders, AIG, provide limited administrative services to our company, including information technology services to our subsidiaries in Bermuda, the United States and Europe, and financial reporting and claims management services to our subsidiaries in the United States. Upon the expiration of our agreements with these service providers, or if these service providers terminate their agreements with us, we would be required to devote significant time and resources to replacing these services and we may be unable to replace these services at prices or on terms as favorable as in our current agreements. See “Certain Relationships and Related Party Transactions — Certain Business Relationships — Transactions with Affiliates of American International Group, Inc.” In addition, we may be unable to manage certain operational functions of our business, or incur unexpected costs, if there is any failure or downtime in our financial, administrative or information technology systems during the transitional period. Entry into contracts with less favorable terms or any disruptions in our operational functions may negatively impact our business and results of operations.
For our reinsurance business, we depend on the policies, procedures and expertise of ceding companies; these companies may fail to accurately assess the risks they underwrite which may lead us to inaccurately assess the risks we assume.
       Because we participate in reinsurance markets, the success of our reinsurance underwriting efforts depends in part on the policies, procedures and expertise of the ceding companies making the original underwriting decisions (when an insurer transfers some or all of its risk to a reinsurer, the insurer is sometimes referred to as a “ceding company”). Underwriting is a matter of judgment, involving important assumptions about matters that are inherently unpredictable and beyond the ceding companies’ control and for which historical experience and statistical analysis may not provide sufficient guidance. We face the risk that the ceding companies may fail to accurately assess

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the risks they underwrite, which, in turn, may lead us to inaccurately assess the risks we assume as reinsurance; if this occurs, the premiums that are ceded to us may not adequately compensate us and we could face significant losses on these reinsurance contracts.
The availability and cost of security arrangements for reinsurance transactions may materially impact our ability to provide reinsurance to insurers domiciled in the United States.
       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 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 the 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. Allied World Assurance Company, Ltd uses trust accounts and has access to up to $900 million in letters of credit under two letter of credit facilities. The letter of credit facilities impose restrictive covenants, including restrictions on asset sales, limitations on the incurrence of certain liens and required collateral and financial strength levels. Violations of these or other covenants could result in the suspension of access to letters of credit or such letters of credit becoming due and payable. If these letter of credit facilities are not sufficient or drawable or if Allied World Assurance Company, Ltd is unable to renew either or both of these facilities or to arrange for trust accounts or other types of security on commercially acceptable terms, its ability to provide reinsurance to U.S.-domiciled insurers may be severely limited.
       In addition, security arrangements with ceding insurers may subject our assets to security interests or may require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from our assets while held in trust typically accrues to our benefit, the investment of these assets is governed by the terms of the letter of credit facilities and the investment regulations of the state of domicile of the ceding insurer, which generally regulate the amount and quality of investments permitted and which may be more restrictive than the investment regulations applicable to us under Bermuda law. These restrictions may result in lower investment yields on these assets, which could adversely affect our profitability.
We depend on a small number of brokers for a large portion of our revenues. The loss of business provided by any one of them could adversely affect us.
       We market our insurance and reinsurance products worldwide almost exclusively through insurance and reinsurance brokers. In 2005, our top four brokers represented approximately 74% of our gross premiums written. Marsh & McLennan Companies, Inc., AON Corporation and Willis Group Holdings Ltd were responsible for the distribution of approximately 35%, 22% and 10%, respectively, of our gross premiums written for the year ended December 31, 2005. For the three months ended March 31, 2006, our top four brokers represented approximately 77% of our gross premiums written. Marsh & McLennan Companies, Inc., AON Corporation and Willis Group Holdings Ltd were responsible for the distribution of approximately 37%, 22% and 12%, respectively, of our gross premiums written in the same period. Loss of all or a substantial portion of the business provided by any one of those brokers could have a material adverse effect on our financial condition and results of operations.
Our reliance on brokers subjects us to their credit risk.
       In accordance with industry practice, we frequently pay amounts owed on claims under our insurance and reinsurance contracts to brokers, and these brokers, in turn, pay these amounts to the customers that have purchased insurance or reinsurance from us. If a broker fails to make such a payment, it is likely that, in most cases, we will be liable to the client for the deficiency because of local laws or contractual obligations. Likewise, when a customer pays premiums for policies written

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by us to a broker for further payment to us, these premiums are generally considered to have been paid and, in most cases, the client will no longer be liable to us for those amounts, whether or not we actually receive the premiums. Consequently, we assume a degree of credit risk associated with the brokers we use with respect to our insurance and reinsurance business.
We may be unable to purchase reinsurance for our own account on commercially acceptable terms or to collect under any reinsurance we have purchased.
       We acquire reinsurance purchased for our own account to mitigate the effects of large or multiple losses on our financial condition. From time to time, market conditions have limited, and in some cases prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance they consider adequate for their business needs. For example, following the events of September 11, 2001, terms and conditions in the reinsurance markets generally became less attractive to buyers of such coverage. Similar conditions may occur as a result of Hurricanes Katrina, Rita and Wilma, or at any time in the future, and we may not be able to purchase reinsurance in the areas and for the amounts required or desired. Even if reinsurance is generally available, we may not be able to negotiate terms that we deem appropriate or acceptable or to obtain coverage from entities with satisfactory financial resources.
       In addition, a reinsurer’s insolvency, or inability or refusal to make payments under a reinsurance or retrocessional reinsurance agreement with us, could have a material adverse effect on our financial condition and results of operations because we remain liable to the insured under the corresponding coverages written by us.
Our investment performance may adversely affect our financial performance and ability to conduct business.
       We derive a significant portion of our income from our invested assets. As a result, our operating results depend in part on the performance of our investment portfolio. Our investment performance is subject to a variety of risks, including risks related to general economic conditions, market volatility and interest rate fluctuations, liquidity risk, and credit and default risk. Additionally, with respect to some of our investments, we are subject to pre-payment or reinvestment risk. As authorized by our board of directors, we have invested $200 million of our shareholders’ equity in hedge funds. As a result, we may be subject to restrictions on redemption, which may limit our ability to withdraw funds for some period of time after our initial investment. The values of, and returns on, such investments may also be more volatile.
       Because of the unpredictable nature of losses that may arise under insurance or reinsurance policies written by us, our liquidity needs could be substantial and may arise at any time. To the extent we are unsuccessful in correlating our investment portfolio with our expected liabilities, we may be forced to liquidate our investments at times and prices that are not optimal. This could have a material adverse effect on the performance of our investment portfolio. If our liquidity needs or general liability profile unexpectedly change, we may not be successful in continuing to structure our investment portfolio in its current manner.
Any increase in interest rates could result in significant losses in the fair value of our investment portfolio.
       Our investment portfolio contains interest-rate-sensitive instruments that may be adversely affected by changes in interest rates. Fluctuations in interest rates affect our returns on fixed income investments. Generally, investment income will be reduced during sustained periods of lower interest rates as higher-yielding fixed income securities are called, mature or are sold and the proceeds reinvested at lower rates. During periods of rising interest rates, prices of fixed income securities tend to fall and realized gains upon their sale are reduced. In addition, we are exposed to changes in the level or volatility of equity prices that affect the value of securities or instruments that derive

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their value from a particular equity security, a basket of equity securities or a stock index. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to manage the risks of investing in a changing interest rate environment, we may not be able to effectively mitigate interest rate sensitivity. In particular, a significant increase in interest rates could result in significant losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have an adverse effect on our results of operations.
       In addition, our investment portfolio includes mortgage-backed securities. As of March 31, 2006, mortgage-backed securities constituted approximately 24.9% of the fair market value of our aggregate invested assets. Aggregate invested assets include cash and cash equivalents, restricted cash, fixed-maturity securities, a fund consisting of global high-yield fixed-income securities and four hedge funds. As with other fixed income investments, the fair market value of these securities fluctuates depending on market and other general economic conditions and the interest rate environment. Changes in interest rates can expose us to prepayment risks on these investments. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are prepaid more quickly, requiring us to reinvest the proceeds at the then current market rates.
We may be adversely affected by fluctuations in currency exchange rates.
       The U.S. dollar is our reporting currency and the functional currency of all of our operating subsidiaries. We enter into insurance and reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, we maintain a portion of our investments and liabilities in currencies other than the U.S. dollar. Assets in non-U.S. currencies are generally converted into U.S. dollars at the time of receipt. When we incur a liability in a non-U.S. currency, we carry such liability on our books in the original currency. These liabilities are converted from the non-U.S. currency to U.S. dollars at the time of payment. We may incur foreign currency exchange gains or losses as we ultimately receive premiums and settle claims required to be paid in foreign currencies.
       We have currency hedges in place that seek to alleviate our potential exposure to volatility in foreign exchange rates and intend to consider the use of additional hedges when we are advised of known or probable significant losses that will be paid in currencies other than the U.S. dollar. To the extent that we do not seek to hedge our foreign currency risk or our hedges prove ineffective, the impact of a movement in foreign currency exchange rates could adversely affect our operating results.
We may require additional capital in the future that may not be available to us on commercially favorable terms.
       Our future capital requirements depend on many factors, including our ability to write new business and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that the funds generated by insurance premiums received and sale proceeds and income from our investment portfolio are insufficient to fund future operating requirements and cover losses and loss expenses, we may need to raise additional funds through financings or curtail our growth and reduce our assets. Any future financing, if available at all, may be on terms that are not favorable to us.
Conflicts of interests may arise because affiliates of some of our principal shareholders have continuing agreements and business relationships with us, and also may compete with us in several of our business lines.
       Affiliates of some of our principal shareholders engage in transactions with our company. Subsidiaries of AIG provide limited administrative services to our company. In addition, IPCRe Underwriting Services Limited (who we refer to in this prospectus as IPCUSL), a subsidiary of a

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publicly-traded company in which AIG has approximately a 24% ownership interest, writes property catastrophe treaty reinsurance on our behalf. On December 5, 2005, we delivered a notice to IPCUSL cancelling our agreement with them in order to reduce our incurred loss volatility arising from major catastrophes. However, pursuant to that agreement, the termination will not become effective until November 30, 2007. Affiliates of the Goldman Sachs Funds serve as investment managers for our entire investment portfolio, except for that portion invested in the AIG Select Hedge Fund Ltd., which is managed by a subsidiary of AIG. An affiliate of Chubb provides surplus lines services to our U.S. subsidiaries. The interests of these affiliates of our principal shareholders may conflict with the interests of our company. Affiliates of our principal shareholders, AIG, Chubb and Securitas Capital Fund, are also customers of our company.
       Furthermore, affiliates of AIG, Chubb, Swiss Re and the Goldman Sachs Funds may from time to time compete with us, including by assisting or investing in the formation of other entities engaged in the insurance and reinsurance business. Conflicts of interest could also arise with respect to business opportunities that could be advantageous to AIG, Chubb, Swiss Re, the Goldman Sachs Funds or other existing shareholders or any of their affiliates, on the one hand, and us, on the other hand. AIG, Chubb, Swiss Re and the Goldman Sachs Funds either directly or through affiliates, also maintain business relationships with numerous companies that may directly compete with us. In general, these affiliates could pursue business interests or exercise their voting power as shareholders in ways that are detrimental to us, but beneficial to themselves or to other companies in which they invest or with whom they have a material relationship.
Our business could be adversely affected if we lose any member of our management team or are unable to attract and retain our personnel.
       Our success depends in substantial part on our ability to attract and retain our employees who generate and service our business. We rely substantially on the services of our executive management team. If we lose the services of any member of our executive management team, our business could be adversely affected. If we are unable to attract and retain other talented personnel, the further implementation of our business strategy could be impeded. This, in turn, could have a material adverse effect on our business. We do not currently have written employment agreements with, or maintain key man life insurance policies with respect to, any of our employees.
Risks Related to the Insurance and Reinsurance Business
The insurance and reinsurance business is historically cyclical and we expect to experience periods with excess underwriting capacity and unfavorable premium rates and policy terms and conditions.
       Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of underwriting capacity, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense competition on price and policy terms due to excessive underwriting capacity as well as periods when shortages of capacity permit favorable premium rates and policy terms and conditions. Because premium levels for many products have increased over the past several years, the supply of insurance and reinsurance has increased and is likely to increase further, either as a result of capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers. Continued increases in the supply of insurance and reinsurance may have consequences for us, including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable policy terms and conditions.

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Increased competition in the insurance and reinsurance markets in which we operate could adversely impact our operating margins.
       The insurance and reinsurance industries are highly competitive. We compete with major U.S. and non-U.S. insurers and reinsurers, including other Bermuda-based insurers and reinsurers, on an international and regional basis. Many of our competitors have greater financial, marketing and management resources. Since September 2001, a number of new Bermuda-based insurance and reinsurance companies have been formed and some of those companies compete in the same market segments in which we operate. Some of these companies have more capital than us. As a result of Hurricane Katrina, the insurance industry’s largest natural catastrophe loss, and two subsequent substantial hurricanes (Rita and Wilma), existing insurers and reinsurers have been raising new capital and significant investments are being made in new insurance and reinsurance companies in Bermuda.
       In addition, risk-linked securities and derivative and other non-traditional risk transfer mechanisms and vehicles are being developed and offered by other parties, including entities other than insurance and reinsurance companies. The availability of these non-traditional products could reduce the demand for traditional insurance and reinsurance. A number of new, proposed or potential industry or legislative developments could further increase competition in our industry. These developments include:
  •  legislative mandates for insurers to provide specified types of coverage in areas where we or our ceding clients do business, such as the terrorism coverage mandated in the United States Terrorism Risk Insurance Act of 2002 and the Terrorism Risk Insurance Extension Act of 2005, could eliminate or reduce opportunities for us to write those coverages and
 
  •  programs in which state-sponsored entities provide property insurance in catastrophe prone areas or other “alternative market” types of coverage could eliminate or reduce opportunities for us to write those coverages.
       New competition from these developments could result in fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention and less favorable policy terms and conditions.
The effects of emerging claims and coverage issues on our business are uncertain.
       As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance and reinsurance contracts may not be known for many years after a contract is issued. Recent examples of emerging claims and coverage issues include:
  •  larger settlements and jury awards in cases involving professionals and corporate directors and officers covered by professional liability and directors and officers liability insurance and
 
  •  a growing trend of plaintiffs targeting property and casualty insurers in class action litigation related to claims handling, insurance sales practices and other practices related to the conduct of our business.

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Risks Related to Laws and Regulations Applicable to Us
Compliance by our insurance subsidiaries with the legal and regulatory requirements to which they are subject is expensive. Any failure to comply could have a material adverse effect on our business.
       Our insurance subsidiaries are required to comply with a wide variety of laws and regulations applicable to insurance or reinsurance companies, both in the jurisdictions in which they are organized and where they sell their insurance and reinsurance products. The insurance and regulatory environment, in particular for offshore insurance and reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including the United States, various states within the United States and the United Kingdom. In the past, there have been Congressional and other initiatives in the United States regarding increased supervision and regulation of the insurance industry, including proposals to supervise and regulate offshore reinsurers. It is not possible to predict the future impact of changes in laws and regulations on our operations. The cost of complying with any new legal requirements affecting our subsidiaries could have a material adverse effect on our business.
       In addition, our subsidiaries may not always be able to obtain or maintain necessary licenses, permits, authorizations or accreditations. They also may not be able to fully comply with, or to obtain appropriate exemptions from, the laws and regulations applicable to them. Any failure to comply with applicable law or to obtain appropriate exemptions could result in restrictions on either the ability of the company in question, as well as potentially its affiliates, to do business in one or more of the jurisdictions in which they operate or on brokers on which we rely to produce business for us. In addition, any such failure to comply with applicable laws or to obtain appropriate exemptions could result in the imposition of fines or other sanctions. Any of these sanctions could have a material adverse effect on our business.
       Our principal insurance subsidiary, Allied World Assurance Company, Ltd, is registered as a Class 4 Bermuda insurance and reinsurance company and is subject to regulation and supervision in Bermuda. The applicable Bermudian statutes and regulations generally are designed to protect insureds and ceding insurance companies rather than shareholders or noteholders. Among other things, those statutes and regulations:
  •  require Allied World Assurance Company, Ltd to maintain minimum levels of capital and surplus,
 
  •  impose liquidity requirements which restrict the amount and type of investments it may hold,
 
  •  prescribe solvency standards that it must meet and
 
  •  restrict payments of dividends and reductions of capital and provide for the performance of periodic examinations of Allied World Assurance Company, Ltd and its financial condition.
       These statutes and regulations may, in effect, restrict the ability of Allied World Assurance Company, Ltd to write new business. Although it conducts its operations from Bermuda, Allied World Assurance Company, Ltd is not authorized to directly underwrite local risks in Bermuda.
       Allied World Assurance Company (U.S.) Inc., a Delaware domiciled insurer, and Newmarket Underwriters Insurance Company, a New Hampshire domiciled insurer, are both subject to the statutes and regulations of their relevant state of domicile as well as any other state in the United States where they conduct business. In the eleven states where the companies are admitted, the companies must comply with all insurance laws and regulations, including insurance rate and form requirements. Insurance laws and regulations may vary significantly from state to state. In those states where the companies act as surplus lines carriers, the state’s regulation focuses mainly on the company’s solvency.

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       Allied World Assurance Company (Europe) Limited, an Irish domiciled insurer, is subject to the statutes and regulations of the European Union as contained within the provisions of the Insurance Acts and Regulation as defined in the European Communities (Insurance Undertakings: Accounts) Regulations, 1996. In addition, Allied World Assurance Company (Europe) Limited should comply with the specific “general good” requirements in each member state of the European Union.
       Allied World Assurance Company (Reinsurance) Limited, an Irish domiciled insurer, presently has a branch office license in London and is subject to various insurance and reinsurance regulations promulgated by the Financial Services Authority in the United Kingdom. With the passing of the EU Reinsurance Directive (in December 2005) and expected transposition into Irish legislation in 2006, both the company and branch will be subject to regulation in Ireland via the Financial Regulator.
Our Bermudian entities could become subject to regulation in the United States.
       Neither Allied World Assurance Company Holdings, Ltd, Allied World Assurance Company, Ltd nor Allied World Assurance Holdings (Ireland) Ltd is licensed or admitted as an insurer, nor is any of them accredited as a reinsurer, in any jurisdiction in the United States. More than 80% of the gross premiums written by Allied World Assurance Company, Ltd, however, are derived from insurance or reinsurance contracts entered into with entities domiciled in the United States. The insurance laws of each state in the United States regulate the sale of insurance and reinsurance within the state’s jurisdiction by foreign insurers. Allied World Assurance Company, Ltd conducts its business through its offices in Bermuda and does not maintain an office, and its personnel do not solicit insurance business, resolve claims or conduct other insurance business, in the United States. While Allied World Assurance Company, Ltd does not believe it is in violation of insurance laws of any jurisdiction in the United States, we cannot be certain that inquiries or challenges to our insurance and reinsurance activities will not be raised in the future. It is possible that, if Allied World Assurance Company, Ltd were to become subject to any laws of this type at any time in the future, we would not be in compliance with the requirements of those laws.
Our holding company structure and regulatory and other constraints affect our ability to pay dividends and make other payments.
       Allied World Assurance Company Holdings, Ltd is a holding company, and as such has no substantial operations of its own. It does not have any significant assets other than its ownership of the shares of its direct and indirect subsidiaries, including Allied World Assurance Company, Ltd, Allied World Assurance Holdings (Ireland) Ltd, Allied World Assurance Company (Europe) Limited, Allied World Assurance Company (U.S.) Inc., Newmarket Underwriters Insurance Company and Allied World Assurance Company (Reinsurance) Limited. Dividends and other permitted distributions from insurance subsidiaries are expected to be the sole source of funds for Allied World Assurance Company Holdings, Ltd to meet any ongoing cash requirements, including any debt service payments and other expenses, and to pay any dividends to shareholders. Bermuda law, including Bermuda insurance regulations and the Companies Act 1981 of Bermuda (which we refer to in this prospectus as the Companies Act), restricts the declaration and payment of dividends and the making of distributions by Allied World Assurance Company Holdings, Ltd, Allied World Assurance Company, Ltd, and Allied World Assurance Holdings (Ireland) Ltd, unless specified requirements are met. Allied World Assurance Company, Ltd is prohibited from paying dividends of more than 25% of its total statutory capital and surplus (as shown in its previous financial year’s statutory balance sheet) unless it files with the Bermuda Monetary Authority at least seven days before payment of such dividend an affidavit stating that the declaration of such dividends has not caused it to fail to meet its minimum solvency margin and minimum liquidity ratio. Allied World Assurance Company, Ltd is also prohibited from declaring or paying dividends without the approval of the Bermuda Monetary Authority if Allied World Assurance Company, Ltd failed to meet its minimum solvency margin and minimum liquidity ratio on the last day of the previous financial year. Furthermore, in

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order to reduce its total statutory capital by 15% or more, Allied World Assurance Company, Ltd would require the prior approval of the Bermuda Monetary Authority. In addition, Bermuda corporate law prohibits a company from declaring or paying a dividend if there are reasonable grounds for believing that (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of the company’s assets would thereby be less than the aggregate of its liabilities, its issued share capital and its share premium accounts. The inability by Allied World Assurance Company, Ltd or Allied World Assurance Holdings (Ireland) Ltd to pay dividends in an amount sufficient to enable Allied World Assurance Company Holdings, Ltd to meet its cash requirements at the holding company level could have a material adverse effect on our business, our ability to make payments on any indebtedness, our ability to transfer capital from one subsidiary to another and our ability to declare and pay dividends to our shareholders.
       In addition, Allied World Assurance Company (Europe) Limited, Allied World Assurance Company (Reinsurance) Limited, Allied World Assurance Company (U.S.) Inc. and Newmarket Underwriters Insurance Company are subject to significant regulatory restrictions limiting their ability to declare and pay any dividends. In particular, payments of dividends by Allied World Assurance Company (U.S.) Inc. and Newmarket Underwriters Insurance Company are subject to restrictions on statutory surplus pursuant to Delaware law and New Hampshire law, respectively. Both states require prior regulatory approval of any payment of extraordinary dividends.
Our business could be adversely affected by Bermuda employment restrictions.
       We will need to hire additional employees to work in Bermuda. Under Bermuda law, non-Bermudians (other than spouses of Bermudians, holders of a permanent resident’s certificate and holders of a working resident’s certificate) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government if it is shown that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian, holder of a permanent resident’s certificate or holder of a working resident’s certificate) is available who meets the minimum standard requirements for the advertised position. In 2001, the Bermuda government announced a new immigration policy limiting the total duration of work permits, including renewals, to six to nine years, with specified exemptions for key employees. In March 2004, the Bermuda government announced an amendment to this policy which expanded the categories of occupations recognized by the government as “key” and with respect to which businesses can apply to be exempt from the six-to-nine-year limitations. The categories include senior executives, managers with global responsibility, senior financial posts, certain legal professionals, senior insurance professionals, experienced/specialized brokers, actuaries, specialist investment traders/analysts and senior information technology engineers and managers. All of our Bermuda-based professional employees who require work permits have been granted permits by the Bermuda government. It is possible that the Bermuda government could deny work permits for our employees in the future, which could have a material adverse effect on our business.
Risks Relating to the Notes
Our obligations under the notes are unsecured and subordinated in right of payment to any secured debt that we may incur in the future.
       The notes will be our unsecured and unsubordinated obligations and will:
  •  rank equal in right of payment with all our other unsubordinated indebtedness;
 
  •  be effectively subordinated in right of payment to all our secured indebtedness to the extent of the value of the collateral securing such indebtedness; and

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  •  not be guaranteed by any of our subsidiaries and, therefore, will be effectively subordinated to the obligations (including to policyholders, trade creditors, debt holders and taxing authorities) of our subsidiaries.
       As a result, in the event of the bankruptcy, liquidation or reorganization of Allied World Assurance Company Holdings, Ltd, or upon acceleration of the notes due to an event of default, Allied World Assurance Company Holdings, Ltd’s assets will be available to pay its obligations on the notes only after all secured indebtedness has been paid in full. There may not be sufficient assets remaining to pay amounts due on any or all of the notes then outstanding.
       As of March 31, 2006, after giving effect to our recently completed initial public offering of common shares and to this offering of notes and the application of the proceeds of our recently completed initial public offering of common shares and this offering as described under “Use of Proceeds,” our outstanding consolidated indebtedness for money borrowed would consist solely of the notes offered hereby.
Because the notes will not be guaranteed by any of our subsidiaries, the notes will be structurally subordinated to the obligations of our subsidiaries.
       We are a holding company whose assets primarily consist of the shares in our subsidiaries and we conduct substantially all of our business through our subsidiaries. Because our subsidiaries are not guaranteeing our obligations under the notes, holders of the notes will have a junior position to the claims of creditors of our subsidiaries (including insurance policyholders, trade creditors, debt holders and taxing authorities) on their assets and earnings. All obligations (including insurance obligations) of our subsidiaries would be effectively senior to the notes. As a result, in the event of the bankruptcy, liquidation or reorganization of Allied World Assurance Company Holdings, Ltd or upon acceleration of the notes due to an event of default, Allied World Assurance Company Holdings, Ltd’s subsidiaries’ assets will be available to pay its obligations on the notes only after all of the creditors of those subsidiaries have been paid in full. As of March 31, 2006, after giving effect to our recently completed initial public offering of common shares and to this offering of notes and the application of the proceeds of our recently completed initial public offering of common shares and this offering as described under “Use of Proceeds,” the consolidated liabilities of our subsidiaries reflected on our balance sheet were approximately $4,646.9 million. All such liabilities (including to policyholders, trade creditors, debt holders and taxing authorities) of our subsidiaries would be effectively senior to the notes.
Allied World Assurance Company Holdings, Ltd will depend upon dividends from its subsidiaries to meet its obligations under the notes.
       Allied World Assurance Company Holdings, Ltd’s ability to meet its obligations under the notes will be dependent upon the earnings and cash flows of its subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to Allied World Assurance Company Holdings, Ltd. Dividends and other permitted distributions from its insurance subsidiaries are expected to be the main source of funds to meet its obligations under the notes. Allied World Assurance Company Holdings, Ltd’s insurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay any dividends. See “Risk Factors — Risks Related to Laws and Regulations Applicable to Us — Our holding company structure and regulatory and other constraints affect our ability to pay dividends and make other payments.”
       The inability of its subsidiaries to pay dividends to Allied World Assurance Company Holdings, Ltd in an amount sufficient to enable it to meet its cash requirements at the holding company level could have a material adverse effect on its operations and ability to satisfy its obligations to you under the notes. Dividend payments and other distributions from the subsidiaries of Allied World Assurance Company Holdings, Ltd may also be subject to withholding tax.

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Allied World Assurance Company Holdings, Ltd may incur additional indebtedness that could limit the amount of funds available to make payments on the notes.
       Neither the notes nor the indenture prohibit or limit the incurrence of secured or senior indebtedness or the incurrence of other indebtedness and liabilities by Allied World Assurance Company Holdings, Ltd or its subsidiaries. Any additional indebtedness or liabilities so incurred would reduce the amount of funds Allied World Assurance Company Holdings, Ltd would have available to pay its obligations under the notes.
The indenture under which the notes will be issued will contain only limited protection for holders of the notes in the event we are involved in a highly leveraged transaction, reorganization, restructuring, merger, amalgamation or similar transaction in the future.
       The indenture under which the notes will be issued may not sufficiently protect holders of notes in the event we are involved in a highly leveraged transaction, reorganization, restructuring, merger, amalgamation or similar transaction. The indenture will not contain any provisions restricting our ability to:
  •  incur additional debt, including debt effectively senior in right of payment to the notes;
 
  •  pay dividends on or purchase or redeem share capital;
 
  •  sell assets (other than certain restrictions on our ability to consolidate, merge, amalgamate or sell all or substantially all of our assets and our ability to sell the shares of certain subsidiaries);
 
  •  enter into transactions with affiliates;
 
  •  create liens (other than certain limitations on creating liens on the shares of certain subsidiaries) or enter into sale and leaseback transactions; or
 
  •  create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
       Additionally, the indenture will not require us to offer to purchase the notes in connection with a change of control or require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth.
An active trading market for the notes may not develop.
       The notes are a new issue of securities and there is currently no public market for the notes. We do not intend to apply for listing of the notes on any securities exchange, the PORTAL market or any quotation system. Although the underwriters have informed us that they intend to make a market in the notes, they are under no obligation to do so and may discontinue any market making activities at any time without notice. We cannot assure you that an active trading market for the notes will develop or as to the liquidity or sustainability of any such market, the ability of the holders to sell their notes or the price at which holders of the notes will be able to sell their notes. Future trading prices of the notes will depend on many factors, including, among other things, prevailing interest rates, the market for similar securities, our performance, credit agency ratings and other factors.
The notes may be redeemed prior to maturity, which may adversely affect your return on the notes.
       The notes may be redeemed in whole or in part on one or more occasions at any time. If redeemed, the “make-whole” redemption price for the notes would be equal to the greater of (1) 100% of the principal amount being redeemed and (2) the sum of the present values of the remaining scheduled payments of the principal and interest (other than accrued interest) on the notes being redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in “Description of

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the Notes — Optional Redemption”), plus       basis points, plus, in either case, accrued and unpaid interest to, but excluding, the redemption date.
       Redemption may occur at a time when prevailing interest rates are relatively low. If this happens, you generally will not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the redeemed notes. See “Description of The Notes — Optional Redemption” in this prospectus for a more detailed discussion of redemption of the notes.
U.S. persons who own our notes may have more difficulty in protecting their interests than U.S. persons who are creditors of a U.S. corporation.
       Creditors of a company in Bermuda, such as Allied World Assurance Company Holdings, Ltd, may enforce their rights against the company by legal process in Bermuda. The creditor would first have to obtain a judgment in its favor against Allied World Assurance Company Holdings, Ltd by pursuing a legal action against Allied World Assurance Company Holdings, Ltd in Bermuda. This would entail retaining attorneys in Bermuda and (in the case of a plaintiff who is a U.S. person) pursuing an action in a jurisdiction that would be foreign to the plaintiff. The costs of pursuing such an action could be more costly than pursuing corresponding proceedings against a U.S. person.
       Appeals from decisions of the Supreme Court of Bermuda (the first instance court for most civil proceedings in Bermuda) may be made in certain cases to the Court of Appeal for Bermuda. In turn, appeals from the decisions of the Court of Appeal may be made in certain cases to the English Privy Council. Rights of appeal in Bermuda may be more restrictive than rights of appeal in the United States.
In the event that we become insolvent, the rights of a creditor against us would be severely impaired.
       In the event of our insolvent liquidation (or appointment of a provisional liquidator), a creditor may pursue legal action only upon obtaining permission to do so from the Supreme Court of Bermuda. The rights of creditors in an insolvent liquidation will extend only to proving a claim in the liquidation and receiving a dividend pro rata along with other unsecured creditors to the extent of our available assets (after the payment of costs of the liquidation). However, creditors are not prevented from taking action against the Company in places outside Bermuda unless there has been an injunction preventing them from doing so in that particular place. Any judgment thus obtained may be capable of enforcement against the Company’s assets located outside Bermuda.
       The impairment of the rights of an unsecured creditor may be more severe in an insolvent liquidation in Bermuda than would be the case where a U.S. person has a claim against a U.S. corporation which becomes insolvent. This is so mainly because in the event of an insolvency, Bermuda law may be more generous to secured creditors (and hence less generous to unsecured creditors) than U.S. law. The rights of secured creditors in an insolvent liquidation in Bermuda remain largely unimpaired, with the result that secured creditors will be paid in full to the extent of the value of the security they hold. Another possible consequence of the favorable treatment of secured creditors under Bermuda insolvency law is that a rehabilitation of an insolvent company in Bermuda may be more difficult to achieve than the rehabilitation of an insolvent U.S. corporation.
It may be difficult to enforce service of process and enforcement of judgments against us and our officers and directors.
       Our company is a Bermuda company and it may be difficult for investors in the notes to enforce judgments against us or our directors and executive officers.
       We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside

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the United States. As such, it may be difficult or impossible to effect service of process within the United States upon us or those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws.
       Further, no claim may be brought in Bermuda against us or our directors and officers in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial jurisdiction under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.
       We have been advised by Conyers Dill & Pearman, our Bermuda legal counsel, that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, as well as the experts named herein, predicated upon the civil liability provisions of the U.S. federal securities laws or original actions brought in Bermuda against us or such persons predicated solely upon U.S. federal securities laws. Further, we have been advised by Conyers Dill & Pearman that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as contrary to that jurisdiction’s public policy. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for investors to recover against us based upon such judgments.
Risks Related to Taxation
U.S. taxation of our non-U.S. companies can materially adversely affect our financial condition and results of operations.
       Allied World Assurance Company Holdings, Ltd, Allied World Assurance Holdings (Ireland) Ltd and Allied World Assurance Company, Ltd are Bermuda companies, and Allied World Assurance Company (Europe) Limited and Allied World Assurance Company (Reinsurance) Limited are Irish companies (collectively, the “non-U.S. companies”). We believe that the non-U.S. companies have operated and will operate their respective businesses in a manner that will not cause them to be subject to U.S. tax (other than U.S. federal excise tax on insurance and reinsurance premiums and withholding tax on specified investment income from U.S. sources) on the basis that none of them is engaged in a U.S. trade or business. However, there are no definitive standards under current law as to those activities that constitute a U.S. trade or business and the determination of whether a non-U.S. company is engaged in a U.S. trade or business is inherently factual. Therefore, we cannot assure you that the U.S. Internal Revenue Service (the “IRS”) will not contend that a non-U.S. company is engaged in a U.S. trade or business. If any of the non-U.S. companies is engaged in a U.S. trade or business and does not qualify for benefits under the applicable income tax treaty, such company may be subject to U.S. federal income taxation at regular corporate rates on its premium income from U.S. sources and investment income that is effectively connected with its U.S. trade or business. In addition, a U.S. federal branch profits tax at the rate of 30% will be imposed on the earnings and profits attributable to such income. All of the premium income from U.S. sources and a significant portion of investment income of such company, as computed under Section 842 of the Code, requiring that a foreign company carrying on a U.S. insurance or reinsurance business have a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of U.S. risks insured or reinsured by such company, may be subject to U.S. federal income and branch profits taxes.

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       If Allied World Assurance Company, Ltd (the “Bermuda insurance subsidiary”) is engaged in a U.S. trade or business and qualifies for benefits under the United States-Bermuda tax treaty, U.S. federal income taxation of such subsidiary will depend on whether (i) it maintains a U.S. permanent establishment and (ii) the relief from taxation under the treaty generally applies to non-premium income. We believe that the Bermuda insurance subsidiary has operated and will operate its business in a manner that will not cause it to maintain a U.S. permanent establishment. However, the determination of whether an insurance company maintains a U.S. permanent establishment is inherently factual. Therefore, we cannot assure you that the IRS will not successfully assert that the Bermuda insurance subsidiary maintains a U.S. permanent establishment. In such case, the subsidiary will be subject to U.S. federal income tax at regular corporate rates and branch profit tax at the rate of 30% with respect to its income attributable to the permanent establishment. Furthermore, although the provisions of the treaty clearly apply to premium income, it is uncertain whether they generally apply to other income of a Bermuda company. Therefore, if the Bermuda insurance subsidiary is engaged in a U.S. trade or business, qualifies for benefits under the treaty and does not maintain a U.S. permanent establishment but the treaty is interpreted not to apply to income other than premium income, such subsidiary will be subject to U.S. federal income and branch profits taxes on its investment and other non-premium income as described in the preceding paragraph.
       If any of Allied World Assurance Holdings (Ireland) Ltd or our Irish companies is engaged in a U.S. trade or business and qualifies for benefits under the Ireland-United States income tax treaty, U.S. federal income taxation of such company will depend on whether it maintains a U.S. permanent establishment. We believe that each such company has operated and will operate its business in a manner that will not cause it to maintain a U.S. permanent establishment. However, the determination of whether a non-U.S. company maintains a U.S. permanent establishment is inherently factual. Therefore, we cannot assure you that the IRS will not successfully assert that any of such companies maintains a U.S. permanent establishment. In such case, the company will be subject to U.S. federal income tax at regular corporate rates and branch profits tax at the rate of 5% with respect to its income attributable to the permanent establishment.
       U.S. federal income tax, if imposed, will be based on effectively connected or attributable income of a non-U.S. company computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that all deductions and credits claimed by a non-U.S. company in a taxable year can be disallowed if the company does not file a U.S. federal income tax return for such year. Penalties may be assessed for failure to file such return. None of our non-U.S. companies filed U.S. federal income tax returns for the 2002 and 2001 taxable years. However, we have filed protective U.S. federal income tax returns on a timely basis for each non-U.S. company for 2003, and we plan to timely file returns for subsequent years in order to preserve our right to claim tax deductions and credits in such years if any of such companies is determined to be subject to U.S. federal income tax.
       If any of our non-U.S. companies is subject to such U.S. federal taxation, our financial condition and results of operations could be materially adversely affected.
Our U.S. subsidiaries may be subject to additional U.S. taxes in connection with our interaffiliate arrangements.
       Allied World Assurance Company (U.S.) Inc. and Newmarket Underwriters Insurance Company (the “U.S. subsidiaries”) are U.S. companies. They reinsure a substantial portion of their insurance policies with Allied World Assurance Company, Ltd. While we believe that the terms of these reinsurance arrangements are arm’s length, we cannot assure you that the IRS will not successfully assert that the payments made by the U.S. subsidiaries with respect to such arrangements exceed arm’s length amounts. In such case, our U.S. subsidiaries will be treated as realizing additional income that may be subject to additional U.S. income tax, possibly with interest and penalties. Such excess amount may also be deemed to have been distributed as dividends to the direct parent of the

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U.S. subsidiaries, Allied World Assurance Holdings (Ireland) Ltd, in which case this deemed dividend will also be subject to a U.S. federal withholding tax of 5%, assuming that the parent is eligible for benefits under the United States-Ireland income tax treaty (or a withholding tax of 30% if the parent is not so eligible). If any of these U.S. taxes are imposed, our financial condition and results of operations could be materially adversely affected.
Application of a recently published IRS Revenue Ruling with respect to our insurance or reinsurance arrangements can materially adversely affect us.
       Recently, the IRS published Revenue Ruling 2005-40 (the “Ruling”) addressing the requirement of adequate risk distribution among insureds in order for a primary insurance arrangement to constitute insurance for U.S. federal income tax purposes. If the IRS successfully contends that our insurance or reinsurance arrangements, including such arrangements with affiliates of our principal shareholders, and with our U.S. subsidiaries, do not provide for adequate risk distribution under the principles set forth in the Ruling, we could be subject to material adverse U.S. federal income tax consequences. See “Certain Tax Considerations.”
Future U.S. legislative action or other changes in U.S. tax law might adversely affect us.
       The tax treatment of non-U.S. insurance companies and their U.S. insurance subsidiaries has been the subject of discussion and legislative proposals in the U.S. Congress. We cannot assure you that future legislative action will not increase the amount of U.S. tax payable by our non-U.S. companies, our U.S. subsidiaries. If this happens, our financial condition and results of operations could be materially adversely affected.
We may be subject to U.K. tax, which may have a material adverse effect on our results of operations.
       None of our companies are incorporated in the United Kingdom. Accordingly, none of our companies should be treated as being resident in the United Kingdom for corporation tax purposes unless our central management and control of any such company is exercised in the United Kingdom. The concept of central management and control is indicative of the highest level of control of a company, which is wholly a question of fact. Each of our companies currently intend to manage our affairs so that none of our companies are resident in the United Kingdom for tax purposes.
       The rules governing the taxation of foreign companies operating in the United Kingdom through a branch or agency were amended by the Finance Act 2003. The current rules apply to the accounting periods of non-U.K. resident companies which start on or after January 1, 2003. Accordingly, a non-U.K. resident company will only be subject to U.K. corporation tax if it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom. In that case, the company is, in broad terms, taxable on the profits and gains attributable to the permanent establishment in the United Kingdom. Broadly a company will have a permanent establishment if it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on or if an agent acting on behalf of the company habitually exercises authority in the United Kingdom to do business on behalf of the company. Each of our companies, other than Allied World Assurance Company (Reinsurance) Limited and Allied World Assurance Company (Europe) Limited (which have established branches in the United Kingdom), currently intend that we will operate in such a manner so that none of our companies, other than Allied World Assurance Company (Reinsurance) Limited and Allied World Assurance Company (Europe) Limited, carry on a trade through a permanent establishment in the United Kingdom.
       If any of our U.S. subsidiaries were trading in the United Kingdom through a branch or agency and the U.S. subsidiaries were to qualify for benefits under the applicable income tax treaty between the United Kingdom and the United States, only those profits which were attributable to a permanent establishment in the United Kingdom would be subject to U.K. corporation tax.

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       If Allied World Assurance Holdings (Ireland) Ltd was trading in the United Kingdom through a branch or agency and it was entitled to the benefits of the tax treaty between Ireland and the United Kingdom, it would only be subject to U.K. taxation on its profits which were attributable to a permanent establishment in the United Kingdom. The branches established in the United Kingdom by Allied World Assurance Company (Reinsurance) Limited and Allied World Assurance Company (Europe) Limited constitute a permanent establishment of those companies and the profits attributable to those permanent establishments are subject to U.K. corporation tax.
       The United Kingdom has no income tax treaty with Bermuda.
       There are circumstances in which companies that are neither resident in the United Kingdom nor entitled to the protection afforded by a double tax treaty between the United Kingdom and the jurisdiction in which they are resident may be exposed to income tax in the United Kingdom (other than by deduction or withholding) on the profits of a trade carried on there even if that trade is not carried on through a branch or agency, but each of our companies currently intend to operate in such a manner that none of our companies will fall within the charge to income tax in the United Kingdom (other than by deduction or withholding) in this respect.
       If any of our companies were treated as being resident in the United Kingdom for U.K. corporation tax purposes, or if any of our companies, other than Allied World Assurance Company (Reinsurance) Limited and Allied World Assurance Company (Europe) Limited, were to be treated as carrying on a trade in the United Kingdom through a branch or agency or of having a permanent establishment in the United Kingdom, our results of operations and your investments could be materially adversely affected.
We may be subject to Irish tax, which may have a material adverse effect on our results of operations.
       Companies resident in Ireland are generally subject to Irish corporation tax on their worldwide income and capital gains. None of our companies, other than our Irish companies and Allied World Assurance Holdings (Ireland) Ltd, which resides in Ireland, should be treated as being resident in Ireland unless our central management and control is exercised in Ireland. The concept of central management and control is indicative of the highest level of control of a company, and is wholly a question of fact. Each of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, currently intend to operate in such a manner so that the central management and control of each of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, is exercised outside of Ireland. Nevertheless, because central management and control is a question of fact to be determined based on a number of different factors, the Irish Revenue Commissioners might contend successfully that the central management and control of any of our companies, other than Allied World Assurance Holdings (Ireland) Ltd or our Irish companies, is exercised in Ireland. Should this occur, such company will be subject to Irish corporation tax on their worldwide income and capital gains.
       The trading income of a company not resident in Ireland for Irish tax purposes can also be subject to Irish corporation tax if it carries on a trade through a branch or agency in Ireland. Each of our companies currently intend to operate in such a manner so that none of our companies carry on a trade through a branch or agency in Ireland. Nevertheless, because neither case law nor Irish legislation definitively defines the activities that constitute trading in Ireland through a branch or agency, the Irish Revenue Commissioners might contend successfully that any of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, is trading through a branch or agency in Ireland. Should this occur, such companies will be subject to Irish corporation tax on profits attributable to that branch or agency.
       If any of our companies, other than Allied World Assurance Holdings (Ireland) Ltd and our Irish companies, were treated as resident in Ireland for Irish corporation tax purposes, or as carrying on a

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trade in Ireland through a branch or agency, our results of operations and your investment could be materially adversely affected.
If corporate tax rates in Ireland increase, our business and financial results could be adversely affected.
       Trading income derived from the insurance and reinsurance businesses carried on in Ireland by our Irish companies is generally taxed in Ireland at a rate of 12.5%. Over the past number of years, various European Union Member States have, from time to time, called for harmonization of corporate tax rates within the European Union. Ireland, along with other member states, has consistently resisted any movement towards standardized corporate tax rates in the European Union. The Government of Ireland has also made clear its commitment to retain the 12.5% rate of corporation tax until at least the year 2025. Should, however, tax laws in Ireland change so as to increase the general corporation tax rate in Ireland, our results of operations could be materially adversely affected.
If investments held by our Irish companies are determined not to be integral to the insurance and reinsurance businesses carried on by those companies, additional Irish tax could be imposed and our business and financial results could be adversely affected.
       Based on administrative practice, taxable income derived from investments made by our Irish companies is generally taxed in Ireland at the rate of 12.5% on the grounds that such investments either form part of the permanent capital required by regulatory authorities, or are otherwise integral to the insurance and reinsurance businesses carried on by those companies. Our Irish companies intend to operate in such a manner so that the level of investments held by such companies does not exceed the amount that is integral to the insurance and reinsurance businesses carried on by our Irish companies. If, however, investment income earned by our Irish companies exceeds these thresholds, or if the administrative practice of the Irish Revenue Commissioners changes, Irish corporations tax could apply to such investment income at a higher rate (currently 25%) instead of the general 12.5% rate, and our results of operations could be materially adversely affected.
We may become subject to taxes in Bermuda after March 28, 2016, which may have a material adverse effect on our results of operations and our investment.
       The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act, 1966 of Bermuda, has given each of Allied World Assurance Company Holdings, Ltd, Allied World Assurance Company, Ltd and Allied World Assurance Holdings (Ireland) Ltd an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Allied World Assurance Company Holdings, Ltd, Allied World Assurance Company, Ltd and Allied World Assurance Holdings (Ireland) Ltd or any of their operations, shares, debentures or other obligations until March 28, 2016. See “Certain Tax Considerations — Taxation of Our Companies — Bermuda.” Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.

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The Organization for Economic Cooperation and Development and the European Union are considering measures that might increase our taxes and reduce our net income.
       The Organization for Economic Cooperation and Development (the “OECD”) has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s report dated April 18, 2002 and updated as of June 2004 and November 2005 via a “Global Forum,” Bermuda was not listed as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
       Some of the statements in “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements include in general forward-looking statements both with respect to us and the insurance industry. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “seek,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws and otherwise.
       All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are important factors that could cause actual results to differ materially from those indicated in those statements. In addition to the factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we believe that these factors include, but are not limited to, the following:
  •  changes in our ultimate liability due to recent weather-related losses,
 
  •  the inability to obtain or maintain financial strength ratings by one or more of our insurance subsidiaries,
 
  •  changes in insurance or financial rating agency policies or practices,
 
  •  the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time,
 
  •  the impact of investigations of possible anti-competitive practices by the company,
 
  •  the effects of investigations into market practices, in particular insurance and insurance brokerage practices, together with any legal or regulatory proceedings, related settlements and industry reform or other changes arising therefrom,
 
  •  greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices have anticipated,
 
  •  the impact of acts of terrorism, political unrest and acts of war,
 
  •  the effects of terrorist-related insurance legislation and laws,
 
  •  the effectiveness of our loss limitation methods,
 
  •  dependence on affiliates of one of our principal shareholders to provide us with certain administrative services,
 
  •  changes in the availability or creditworthiness of our brokers or reinsurers,
 
  •  changes in the availability, cost or quality of reinsurance coverage,
 
  •  changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates, prevailing credit terms and other factors that could affect our investment portfolio,
 
  •  changes in agreements and business relationships with affiliates of some of our principal shareholders,
 
  •  loss of key personnel,
 
  •  decreased level of demand for direct property and casualty insurance or reinsurance or increased competition due to an increase in capacity of property and casualty insurers or reinsurers,

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  •  the effects of competitors’ pricing policies and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products,
 
  •  changes in Bermuda law or regulation or the political stability of Bermuda,
 
  •  changes in legal, judicial and social conditions,
 
  •  if we or one of our non-U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States or elsewhere and
 
  •  changes in regulations or tax laws applicable to us, our subsidiaries, brokers, customers or U.S. insurers or reinsurers.
       The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

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USE OF PROCEEDS
       The net proceeds to us from the sale by us of our notes in this offering, after deducting underwriting discounts and commissions and the estimated expenses of the offering payable by us, will be approximately $495.6 million. We intend to use the net proceeds from this offering to repay all amounts outstanding under our bank loan (expected to be approximately $363.0 million, after application of $137 million of the proceeds of our recently completed initial public offering of common shares), which matures March 30, 2012, and through March 31, 2006 carried an average floating rate of interest of 4.30%, and to use the remainder for general corporate purposes, including to increase the capital of our subsidiaries. We will pay specified fees and expenses related to this offering. The total fees and expenses, including underwriting discounts and commissions, to be paid by us are estimated to be $4.4 million.

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RATIO OF EARNINGS TO FIXED CHARGES
       The following table sets forth the ratio of our earnings to fixed charges for each of the periods indicated:
                                                 
        Year Ended December 31,
    Three Months Ended    
    March 31, 2006   2005(2)   2004   2003   2002   2001
                         
Ratio of Earnings to Fixed Charges(1)
    15.9       (9.3 )     *       *       *       *  
Pro Forma Ratio of Earnings to Fixed Charges (3)
    10.8       (4.4 )     *       *       *       *  
 
(1)  For purposes of determining this ratio, “earnings” consist of consolidated net income before federal income taxes plus fixed charges. “Fixed charges” consist of interest expense on our bank loan.
  * Our bank loan was funded on March 30, 2005. Prior to this date, we did not have any fixed charges and, accordingly, no ratios have been provided for the years ended December 31, 2001 through December 31, 2004.
(2)  For the year ended December 31, 2005, earnings were insufficient to cover fixed charges by $175.8 million.
 
(3)  Assumes the proceeds from the offering of the notes are used to repay our $500 million bank loan (funded on March 30, 2005), and therefore no interest or other fixed charges arising from the $500 million bank loan are included in this calculation. This calculation assumes the sale of $500 million aggregate principal amount of notes at an assumed interest rate of 7.85%. This may change based on the actual interest rate of the notes.

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CAPITALIZATION
       The following table sets forth our consolidated capitalization as of March 31, 2006 (i) on an historical basis; (ii) as adjusted to reflect a charge of approximately $2.8 million resulting from the conversion of our book value equity compensation plans to market value plans that took place upon the recent completion of our initial public offering of common shares and to give effect to the recent completion of our initial public offering of common shares and the application of the net proceeds therefrom (approximately $274.0 million); and (iii) as further adjusted to give effect to this offering and the application of the net proceeds thereof as described in “Use of Proceeds”. This table should be read in conjunction with “Selected Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
                             
            As Further
    Actual   As Adjusted,   Adjusted,
    March 31,   March 31,   March 31,
    2006   2006   2006
             
    ($ in millions)
Long-term debt
  $ 500     $ 363     $ 500  
Shareholders’ equity:
                       
 
Common shares, $0.03 par value per share, outstanding 50,162,842 (as further adjusted: 58,962,842)(1)
    1       2 (2)     2 (2)
 
Additional paid-in capital
    1,489       1,762 (2)     1,762 (2)
 
Retained earnings
    54       51 (3)     49 (3)(4)
 
Accumulated other comprehensive income
    (65 )     (65 )     (65 )
                   
Total shareholders’ equity
  $ 1,479     $ 1,750     $ 1,748  
                   
   
Total capitalization
  $ 1,979     $ 2,113     $ 2,248  
                   
 
(1)  Excludes: 5,500,000 common shares issuable upon the exercise of warrants granted to our principal shareholders, exercisable at an exercise price of $34.20 per share; 2,000,000 common shares reserved for issuance pursuant to the Allied World Assurance Company Holdings, Ltd Amended and Restated 2001 Stock Option Plan, of which 1,182,984 common shares will be issuable upon exercise of stock options granted to employees, which options will be exercisable over ten years from the date of grant, at exercise prices ranging from $23.61 to $35.01 per share; and 2,000,000 common shares reserved for issuance pursuant to the Allied World Assurance Company Holdings, Ltd Amended and Restated 2004 Stock Incentive Plan, of which 213,447 restricted stock units were issued. See a detailed description of these plans in “Management — Executive Compensation.”
 
(2)  Includes 8,800,000 common shares issued upon the recent completion of our initial public offering of common shares, net of estimated offering expenses and underwriting discounts and commissions of $25.2 million.
 
(3)  Includes a $2.8 million non-cash compensation charge resulting from the conversion of our book value equity compensation plans to market value plans upon the recent completion of our initial public offering of common shares.
 
(4)  Includes the release of $0.7 million of deferred loan arrangement expenses related to the bank loan which is to be fully repaid using the net proceeds from this offering. Also includes $1.2 million of estimated non-deferred expenses related to this offering.

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SELECTED CONSOLIDATED FINANCIAL INFORMATION
       The following table sets forth our summary historical statement of operations data for the three months ended March 31, 2006 and 2005 and for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, as well as our summary balance sheet data as of March 31, 2006 and December 31, 2005, 2004, 2003, 2002 and 2001. Statement of operations data for the three months ended March 31, 2006 and 2005 and balance sheet data as of March 31, 2006 are derived from our unaudited financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. GAAP. Statement of operations data for the years ended December 31, 2005, 2004 and 2003 and balance sheet data as of December 31, 2005 and 2004 are derived from our audited consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. GAAP. Statement of operations data for the years ended December 31, 2002 and 2001 and balance sheet data as of December 31, 2003, 2002 and 2001 are derived from our audited consolidated financial statements not included in this prospectus, which have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk see “Risk Factors.” You should read the following summary consolidated financial information together with the other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
                                                           
    Three Months Ended    
    March 31,   Year Ended December 31,
         
    2006   2005   2005   2004   2003   2002   2001
                             
    ($ in millions, except per share amounts and ratios)
Summary Statement of Operations Data:
                                                       
Gross premiums written
  $ 498.1     $ 505.3     $ 1,560.3     $ 1,708.0     $ 1,573.7     $ 922.5     $ 12.1  
                                           
Net premiums written
  $ 427.5     $ 438.7     $ 1,222.0     $ 1,372.7     $ 1,346.5     $ 846.0     $ 12.1  
                                           
Net premiums earned
  $ 308.9     $ 324.1     $ 1,271.5     $ 1,325.5     $ 1,167.2     $ 434.0     $ 0.4  
Net investment income
    62.0       40.3       178.6       129.0       101.0       81.6       2.2  
Net realized investment (losses) gains
    (5.2 )     (2.5 )     (10.2 )     10.8       13.4       7.1        
Net losses and loss expenses
    206.0       238.4       1,344.6       1,013.4       762.1       304.0       0.2  
Acquisition costs
    36.5       36.5       143.4       170.9       162.6       58.2        
General and administrative expenses
    20.3       20.9       94.3       86.3       66.5       31.5       0.6  
Foreign exchange loss (gain)
    0.5       0.1       2.2       (0.3 )     (4.9 )     (1.5 )      
Interest expense
    6.5             15.6                          
Income tax (recovery) expense
    (2.2 )     1.6       (0.4 )     (2.2 )     6.9       2.9        
                                           
Net income (loss)
  $ 98.1     $ 64.4     $ (159.8 )   $ 197.2     $ 288.4     $ 127.6     $ 1.8  
                                           
Per Share Data:
                                                       
Earnings (loss) per share:(1) Basic
  $ 1.96     $ 1.28     $ (3.19 )   $ 3.93     $ 5.75     $ 2.55     $ 0.04  
 
Diluted
    1.94       1.28       (3.19 )     3.83       5.66       2.55       0.04  
Weighted average number of common shares outstanding:
                                                       
 
Basic
    50,162,842       50,162,842       50,162,842       50,162,842       50,162,842       50,089,767       50,016,642  
 
Diluted
    50,485,556       50,455,313       50,162,842       51,425,389       50,969,715       50,089,767       50,016,642  
Dividends paid per share
              $ 9.93                          

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    Three Months                    
    Ended    
    March 31,   Year Ended December 31,
         
    2006   2005   2005   2004   2003   2002   2001
                             
Selected Ratios:
                                                       
Loss ratio(2)
    66.7 %     73.6 %     105.7 %     76.5 %     65.3 %     70.1 %     55.2 %
Acquisition cost ratio(3)
    11.8       11.2       11.3       12.9       13.9       13.4       6.5  
General and administrative expense ratio(4)
    6.6       6.5       7.4       6.5       5.7       7.3       152.8  
Expense ratio(5)
    18.4       17.7       18.7       19.4       19.6       20.7       159.3  
Combined ratio(6)
    85.1       91.3       124.4       95.9       84.9       90.8       214.5  
                                                   
    As of March 31,   As of December 31,
         
    2006   2005   2004   2003   2002   2001
                         
    ($ in millions, except per share amounts)
Selected Balance Sheet Data:
                                               
Cash and cash equivalents
  $ 188.6     $ 172.4     $ 190.7     $ 66.1     $ 87.9     $ 1,492.1  
Investments at fair market value
    4,796.1       4,687.4       4,087.9       3,184.9       2,129.9       411.1  
Reinsurance recoverable
    664.0       716.3       259.2       93.8       10.6        
Total assets
    6,642.3       6,610.5       5,072.2       3,849.0       2,560.3       1,916.4  
Reserve for losses and loss expenses
    3,421.0       3,405.4       2,037.1       1,058.7       310.5       0.2  
Unearned premiums
    852.7       740.1       795.3       725.5       475.8       11.7  
Total debt
    500.0       500.0                          
Total shareholders’ equity
    1,478.9       1,420.3       2,138.5       1,979.1       1,682.4       1,490.4  
Book value per share:(7)
                                               
 
Basic
  $ 29.48     $ 28.31     $ 42.63     $ 39.45     $ 33.59     $ 29.80  
 
Diluted
    29.29       28.20       41.58       38.83       33.59       29.80  
 
(1)  Earnings (loss) per share is a measure based on our net income (loss) divided by our weighted average common shares outstanding. Basic earnings (loss) per share is defined as net income (loss) available to common shareholders divided by the weighted average number of common shares outstanding for the period, giving no effect to dilutive securities. Diluted earnings (loss) per share is defined as net income (loss) available to common shareholders divided by the weighted average number of common shares and common share equivalents outstanding calculated using the treasury stock method for all potentially dilutive securities, including warrants and restricted stock units. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted earnings (loss) per share. Certain warrants that were anti-dilutive were excluded from the calculation of the diluted earnings (loss) per share for the three months ended March 31, 2006 and for the year ended December 31, 2004. No common share equivalents were included in calculating the diluted earnings per share for the year ended December 31, 2005 as there was a net loss for this period, and any additional shares would prove to be anti-dilutive.
 
(2)  Calculated by dividing net losses and loss expenses by net premiums earned.
 
(3)  Calculated by dividing acquisition costs by net premiums earned.
 
(4)  Calculated by dividing general and administrative expenses by net premiums earned.
 
(5)  Calculated by combining the acquisition cost ratio and the general and administrative expense ratio.
 
(6)  Calculated by combining the loss ratio, acquisition cost ratio and general and administrative expense ratio.
 
(7)  Basic book value per share is defined as total shareholders’ equity available to common shareholders divided by the number of common shares outstanding as at the end of the period, giving no effect to dilutive securities. Diluted book value per share is defined as total shareholders’ equity available to common shareholders divided by the number of common shares and common share equivalents outstanding at the end of the period, calculated using the treasury stock method for all potentially dilutive securities, including warrants and restricted stock units. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted book value per share. Certain warrants that were anti-dilutive were excluded from the calculation of the diluted book value per share as of March 31, 2006 and December 31, 2005 and 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
       The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or included elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Please see the “Cautionary Statement Regarding Forward-Looking Statements” for more information. You should review the “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements.
Overview
Our Business
       We were formed in November 2001 by a group of investors, including AIG, Chubb, the Goldman Sachs Funds and the Securitas Capital Fund, to respond to a global reduction in insurance industry capital and a disruption in available insurance and reinsurance coverage. As of March 31, 2006, we had $6,642 million of total assets, $1,479 million of shareholders’ equity and $1,979 million of total capital. We write a diversified portfolio of property and casualty insurance and reinsurance lines of business internationally through our insurance subsidiaries or branches based in Bermuda, the United States, Ireland and the United Kingdom. We manage our business through three operating segments: property, casualty and reinsurance.
Relevant Factors
Revenues
       We derive our revenues primarily from premiums on our insurance policies and reinsurance contracts, net of any reinsurance or retrocessional coverage purchased. Insurance and reinsurance premiums are a function of the amounts and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, are known. In addition, our revenues include income generated from our investment portfolio, consisting of net investment income and net realized gains or losses. Our investment portfolio is currently comprised primarily of fixed maturity investments, the income from which is a function of the size of invested assets and relevant interest rates.
Expenses
       Our expenses consist largely of net losses and loss expenses, acquisition costs and general and administrative expenses. Net losses and loss expenses are comprised of paid losses and reserves for losses less recoveries from reinsurers. Losses and loss expense reserves are estimated by management and reflect our best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. In accordance with U.S. GAAP, we reserve for catastrophic losses as soon as the loss event is known to have occurred. There were an exceptional number and intensity of storms during the year ended December 31, 2005, and we have estimated property losses from Hurricanes Katrina, Rita and Wilma and Windstorm Erwin of $469.4 million net of reinsurance recoverables. Acquisition costs consist principally of commissions and brokerage expenses that are typically a percentage of the premiums on insurance policies or reinsurance contracts written, net of any commissions received by us on risks ceded to reinsurers. General and administrative expenses include fees paid to subsidiaries of AIG in return for the provision of various administrative services. Prior to January 1, 2006, these fees were based on a percentage of our gross premiums written. Effective January 1, 2006, our administrative services

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agreements with AIG subsidiaries were amended and now contain both cost-plus and flat-fee arrangements for a more limited range of services. The services no longer included within the agreements are now provided through additional staff and infrastructure of the company. General and administrative expenses include personnel expenses, professional fees, rent and other general operating expenses. As a result of our recently completed initial public offering of common shares, we anticipate increases in general and administrative expenses as we add personnel and become subject to reporting regulations applicable to publicly-held companies.
Critical Accounting Policies
       It is important to understand our accounting policies in order to understand our financial position and results of operations. Our 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, including those described in “Risk Factors,” cause actual results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. The following are the accounting policies that, in management’s judgment, are critical due to the judgments, assumptions and uncertainties underlying the application of those policies and the potential for results to differ from management’s assumptions. If actual events differ from the underlying assumptions or estimates, there could be a material impact on our results of operations, financial condition or liquidity.
Reserve for Losses and Loss Expenses
       The reserve for losses and loss expenses is comprised of two main elements: outstanding loss reserves, also known as “case reserves,” and reserves for losses incurred but not reported, also known as “IBNR”. Outstanding loss reserves relate to known claims and represent management’s best estimate of the likely loss settlement. Thus, there is a significant amount of estimation involved in determining the likely loss payment. IBNR reserves require substantial judgment because they relate to unreported events that, based on industry information, management’s experience and actuarial evaluation, can reasonably be expected to have occurred and are reasonably likely to result in a loss to our company.
       Reserves for losses and loss expenses as of March 31, 2006 and December 31, 2005, 2004 and 2003 were comprised of the following:
                                 
    March 31,   December 31,
    2006   2005   2004   2003
                 
    ($ in millions)
Case reserves
  $ 933.3     $ 921.2     $ 321.9     $ 152.0  
IBNR
    2,487.6       2,484.2       1,715.2       906.7  
                         
Reserve for losses and loss expenses
    3,420.9       3,405.4       2,037.1       1,058.7  
Reinsurance recoverables
    (664.0)       (716.3 )     (259.2 )     (93.8 )
                         
Net reserve for losses and loss expenses
  $ 2,756.9     $ 2,689.1     $ 1,777.9     $ 964.9  
                         
       IBNR reserves are estimated for each business segment based on various factors, including underwriters’ expectations about loss experience, actuarial analysis, comparisons with industry benchmarks and loss experience to date. Our actuaries employ generally accepted actuarial methodologies to determine estimated ultimate expected losses and loss expenses. The IBNR reserve is calculated by reducing these estimated ultimate losses and loss expenses by the cumulative paid amount of losses and loss expenses and the current carried outstanding loss reserves for losses and loss expenses. The adequacy of our reserves is tested quarterly by our actuaries. At the completion of each quarterly review of the reserves, a reserve analysis and memorandum are written and reviewed with our loss reserve committee. This committee determines

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management’s best estimate for loss and loss expense reserves based upon the reserve analysis and memorandum. A loss reserve study is prepared by an independent actuary annually in order to provide additional insight into the reasonableness of our reserves for losses and loss expenses.
       Estimating reserves for our property segment relies primarily on traditional loss reserving methodologies, utilizing selected paid and reported loss development factors. In property lines of business, claims are generally reported and paid within a relatively short period of time (“shorter tail lines”) during and following the policy coverage period. This enables us to determine with greater certainty our estimate of ultimate losses and loss expenses.
       Our casualty segment includes general liability risks, healthcare and professional liability risks, such as directors and officers and errors and omissions risks. Our average attachment points for these lines is high, making reserving for these lines of business more difficult. Claims may be reported several years after the coverage period has terminated (“longer tail lines”). We establish a case reserve when sufficient information is gathered to make a reasonable estimate of the liability, often requiring a significant amount of information and time. Due to the lengthy reporting pattern of these casualty lines, reliance is placed on industry benchmarks of expected loss ratios and reporting patterns in addition to our own experience.
       Our reinsurance segment is a composition of shorter tail lines similar to our property segment and longer tail lines similar to our casualty segment. Our reinsurance treaties are reviewed individually, based upon individual characteristics and loss experience emergence.
       Loss reserves on assumed reinsurance have unique features that make them more difficult to estimate. Reinsurers have to rely upon the cedents and reinsurance intermediaries to report losses in a timely fashion. Reinsurers must rely upon cedents to price the underlying business appropriately. Reinsurers have less predictable loss emergence patterns than direct insurers, particularly when writing excess of loss treaties.
       For excess of loss treaties, cedents generally are required to report losses that either exceed 50% of the retention, have a reasonable probability of exceeding the retention or meet serious injury reporting criteria in a timely fashion. All reinsurance claims that are reserved are reviewed at least every six months. For proportional treaties, cedents are required to give a periodic statement of account, generally monthly or quarterly. These periodic statements typically include information regarding written premiums, earned premiums, unearned premiums, ceding commissions, brokerage amounts, applicable taxes, paid losses and outstanding losses. They can be submitted 60 to 90 days after the close of the reporting period. Some proportional treaties have specific language regarding earlier notice of serious claims. Generally our reinsurance treaties contain an arbitration clause to resolve disputes. Since our inception, there has been one dispute, which was resolved through arbitration. Currently there are no material disputes outstanding.
       Reinsurance generally has a greater time lag than direct insurance in the reporting of claims. There is the lag caused by the claim first being reported to the cedent, then the intermediary (such as a broker) and finally the reinsurer. This lag can be three to six months. There is also a lag because the insurer may not be required to report claims to the reinsurer until certain reporting criteria are met. In some instances this could be several years, while a claim is being litigated. We use reporting factors from the Reinsurance Association of America to adjust for this time lag. We also use historical treaty-specific reporting factors when applicable. Loss and premium information are entered into our reinsurance system by our claims department and our accounting department on a timely basis. To date, there has not been any significant backlog.
       We record the individual case reserves sent to us by the cedents through the reinsurance intermediaries. Individual claims are reviewed by our reinsurance claims department and additional case reserves are established as deemed appropriate. The loss data received from the intermediaries is checked for reasonability and also for known events. The loss listings are reviewed when performing regular claim audits.

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       The expected loss ratios that we assign to each treaty are based upon analysis and modeling performed by a team of actuaries. The historical data reviewed by the team of pricing actuaries is considered in setting the reserves for all treaty years with each cedent. The historical data in the submissions is matched against our carried reserves for our historical treaty years.
       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 actuarial and statistical projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined as experience develops and as claims are reported and resolved. In addition, the relatively long periods between when a loss occurs and when it may be reported to our claims department for our casualty lines of business also increase the uncertainties of our reserve estimates in such lines.
       The following tables provide our ranges of loss and loss expense reserve estimates by business segment as of March 31, 2006:
                         
    Reserve for Losses and Loss Expenses
    Gross of Reinsurance Recoverable
     
    Carried Reserves   Low Estimate   High Estimate
             
    ($ in millions)
Property
  $ 990.9     $ 803.5     $ 1,121.6  
Casualty
    1,622.7       1,169.1       1,781.5  
Reinsurance
    807.3       604.6       852.7  
Consolidated reserves and estimates(1)
  $ 3,420.9     $ 2,749.8     $ 3,583.3  
                         
    Reserve for Losses and Loss Expenses
    Net of Reinsurance Recoverable
     
    Carried Reserves   Low Estimate   High Estimate
             
    ($ in millions)
Property
  $ 525.3     $ 447.0     $ 608.9  
Casualty
    1,480.3       1,056.6       1,627.1  
Reinsurance
    751.3       556.8       793.0  
Consolidated reserves and estimates(1)
  $ 2,756.9     $ 2,202.3     $ 2,887.2  
 
(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.
       Our range for each business segment was determined by utilizing multiple actuarial loss reserving methods along with varying assumptions of reporting patterns and expected loss ratios by loss year. In addition, for Hurricanes Katrina, Rita and Wilma, we have reviewed our insured risks in the exposed areas and the potential losses to each risk. These hurricanes have caused us to have relatively wide ranges for the property lines reflecting the uncertainty of the ultimate losses from these storms. The various outcomes of these techniques were combined to determine a reasonable range of required loss and loss expense reserves.
       We utilize a variety of standard actuarial methods in our analysis. The selections from these various methods are based on the loss development characteristics of the specific line of business. For lines of business with extremely long reporting periods such as casualty reinsurance, we may

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rely more on an expected loss ratio method (as described below) until losses begin to develop. The actuarial methods we utilize include:
       Paid Loss Development Method. We estimate ultimate losses by calculating past paid loss development factors and applying them to exposure periods with further expected paid loss development. The paid loss development method assumes that losses are paid at a consistent rate. It provides an objective test of reported loss projections because paid losses contain no reserve estimates. In some circumstances, paid losses for recent periods may be too varied for accurate predictions. For many coverages, claim payments are made very slowly and it may take years for claims to be fully reported and settled. These payments may be unreliable for determining future loss projections because of shifts in settlement patterns or because of large settlements in the early stages of development. Choosing an appropriate “tail factor” to determine the amount of payments from the latest development period to the ultimate development period may also require considerable judgment, especially for coverages which have long payment patterns. As we have limited payment history, we have had to supplement our loss development patterns with other methods.
       Reported Loss Development Method. We estimate ultimate losses by calculating past reported loss development factors and applying them to exposure periods with further expected reported loss development. Since reported losses include payments and case reserves, changes in both of these amounts are incorporated in this method. This approach provides a larger volume of data to estimate ultimate losses than paid loss methods. Thus, reported loss patterns may be less varied than paid loss patterns, especially for coverages that have historically been paid out over a long period of time but for which claims are reported relatively early and case loss reserve estimates established. This method assumes that reserves have been established using consistent practices over the historical period that is reviewed. Changes in claims handling procedures, large claims or significant numbers of claims of an unusual nature may cause results to be too varied for accurate forecasting. Also, choosing an appropriate “tail factor” to determine the change in reported loss from that latest development period to the ultimate development period may require considerable judgment. As we have limited reported history, we have had to supplement our loss development patterns with appropriate benchmarks.
       Expected Loss Ratio Method. To estimate ultimate losses under the expected loss ratio method, we multiply earned premiums by an expected loss ratio. The expected loss ratio is selected utilizing industry data, historical company data and professional judgment. This method is particularly useful for new insurance companies or new lines of business where there are no historical losses or where past loss experience is not credible.
       Bornhuetter-Ferguson Paid Loss Method. The Bornhuetter-Ferguson paid loss method is a combination of the paid loss development method and the expected loss ratio method. The amount of losses yet to be paid is based upon the expected loss ratios. These expected loss ratios are modified to the extent paid losses to date differ from what would have been expected to have been paid based upon the selected paid loss development pattern. This method avoids some of the distortions that could result from a large development factor being applied to a small base of paid losses to calculate ultimate losses. This method will react slowly if actual loss ratio ratios develop differently because of major changes in rate levels, retentions or deductibles, the forms and conditions of reinsurance coverage, the types of risks covered or a variety of other changes.
       Bornhuetter-Ferguson Reported Loss Method. The Bornhuetter-Ferguson reported loss method is similar to the Bornhuetter-Ferguson paid loss method with the exception that it uses reported losses and reported loss development factors.
       Our selection of the actual carried reserves has typically been above the midpoint of the range. We believe that we should be conservative 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 historically carried our reserve for losses and loss

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expenses 4% to 11% above the mid-point of the low and high estimates. A provision for uncertainty is embedded in our reserves through our selection of the high estimate for long-tail lines of business. We believe that relying on the most conservative actuarial indications for these lines of business is prudent for a relatively new company.
       The key assumptions used to arrive at our best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, selection of benchmarks and reported and paid loss emergence patterns. Our reporting patterns and expected loss ratios were based on either benchmarks for longer tail business or historical reporting patterns for shorter tail business. The benchmarks selected were those that we believe are most similar to our underwriting business.
       The key assumptions that have changed historically are the expected loss ratios. Our expected loss ratios for property lines change from year to year. As our losses from property lines are reported relatively quickly, we select our expected loss ratios for the most recent years based upon our actual loss ratios for our older years adjusted for rate changes, inflation, cost of reinsurance and average storm activity. For the property lines, we initially used benchmarks for reported and paid loss emergence patterns. As we mature as a company, we have begun supplementing those benchmark patterns with our actual patterns as appropriate. Our net expected loss ratios for the property lines at the end of 2003 were 50% to 55%. They have been increased to 65% to 70% for the current year. This increase in expected loss ratios is largely due to the increased cost of catastrophe reinsurance post Hurricanes Katrina, Rita and Wilma. For the casualty lines, we continue to use benchmark patterns, though we update the benchmark patterns as additional information is published regarding the benchmark data. At the end of 2003, we were selecting expected loss ratios for the casualty lines at approximately 81%. Our selected expected loss ratios for the casualty lines have been decreased to 70% to 75% depending on the line and year of loss. These decreases in casualty expected loss ratios have been driven by low reported loss activity within our book of business and favorable loss ratios reported by peer insurance companies of comparable or greater size.
       The selection of the expected loss ratios for the casualty lines of business is our most significant assumption. If our final casualty insurance and casualty reinsurance loss ratios vary by ten points from the expected loss ratios in aggregate, our required net reserves after reinsurance recoverable would need to change by approximately $277 million. As we commonly write net lines of casualty insurance exceeding $25 million, we expect that ultimate loss ratios could vary substantially from our initial loss ratios. Because we expect a small volume of large claims, we believe the variance of our loss ratio selection could be relatively wide. Thus, a ten-point change in loss ratios is reasonably likely to occur. This would result in either an increase or decrease to net income and shareholders’ equity of approximately $277 million. As of March 31, 2006, this represented approximately 19% of shareholders’ equity. In terms of liquidity, our contractual obligations for reserve for losses and loss expenses would decrease or increase by $277 million after reinsurance recoverable. If our obligations were to increase by $277 million, we believe we currently have sufficient cash and investments to meet those obligations.
       While management believes that our case reserves and IBNR reserves are sufficient to cover losses assumed by us, ultimate losses and loss expenses may deviate from our reserves, possibly by material amounts. It is possible that our current estimates of the 2005 hurricane losses may be adjusted as we receive new information from clients, loss adjusters or ceding companies. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e., negative reserve development), and to the extent actual reported losses are less than our expectations, the carried estimate of ultimate losses will be reduced (i.e., positive reserve development). In addition, the methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. We record any changes in our loss reserve estimates and the related reinsurance recoverables in the periods in which they are determined regardless of the accident year (i.e., the year in which a loss occurs).

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Reinsurance Recoverable
       We determine what portion of the losses will be recoverable under our reinsurance policies by reference to the terms of the reinsurance protection purchased. This determination is necessarily based on the underlying loss estimates and, accordingly, is subject to the same uncertainties as the estimate of case reserves and IBNR reserves. We remain liable to the extent that our reinsurers do not meet their obligations under the reinsurance agreements, and we therefore regularly evaluate the financial condition of our reinsurers and monitor concentration of credit risk. No provision has been made for unrecoverable reinsurance as of March 31, 2006 and December 31, 2005 and 2004, as we believe that all reinsurance balances will be recovered.
Premiums and Acquisition Costs
       Premiums are recognized as written on the inception date of a policy. For proportional types of reinsurance written by us, premiums may not be known with certainty at the policy inception date. In the case of proportional treaties assumed by us, the underwriter makes an estimate of premiums at inception. The underwriter’s estimate is based on statistical data provided by reinsureds and the underwriter’s judgment and experience. Those estimates are refined over the reporting period of each treaty as actual written premium information is reported by ceding companies and intermediaries. Management reviews estimated premiums at least quarterly, and any adjustments are recorded in the period in which they become known. As of March 31, 2006, our changes in premium estimates have been upward adjustments ranging from approximately 8% for the 2004 treaty year to 20% for the 2002 treaty year. Applying this range, hypothetically, to our 2005 proportional treaties, our gross premiums written in the reinsurance segment could increase by approximately $15 million to $39 million over the next three years. As of March 31, 2006, gross premiums written for 2005 proportional treaties have been adjusted upward by approximately 6%. Total premiums estimated on proportional contracts for the three months ended March 31, 2006 and 2005 represented approximately 22% and 24%, respectively, of total gross premiums written. Total premiums estimated on proportional contracts for the years ended December 31, 2005, 2004 and 2003 represented approximately 17%, 13% and 16%, respectively, of total gross premiums written. Gross premiums written on proportional contracts represent a larger portion of total gross premiums written during the first quarter of the year than of total gross premiums written annually due to the large number of reinsurance contracts carrying January effective dates.
       Other insurance and reinsurance policies can require that the premium be adjusted at the expiry of a policy to reflect the risk assumed by us. Premiums resulting from those adjustments are estimated and accrued based on available information.
       Premiums are earned over the period of policy coverage in proportion to the risks to which they relate. Premiums relating to unexpired periods of coverage are carried on the balance sheet as unearned premiums.
       Acquisition costs, primarily brokerage fees, commissions and insurance taxes, are incurred in the acquisition of new and renewal business and are expensed as the premiums to which they relate are earned. Acquisition costs relating to the reserve for unearned premiums are deferred and carried on the balance sheet as an asset. Anticipated losses and loss expenses, other costs and investment income related to these unearned premiums are considered in determining the recoverability or deficiency of deferred acquisition costs. If it is determined that deferred acquisition costs are not recoverable, they are expensed. Further analysis is performed to determine if a liability is required to provide for losses, which may exceed the related unearned premiums.
Investments
       Our investments primarily consist of fixed income securities, which are considered available for sale as defined in Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and are carried at their estimated market value

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as of the balance sheet date. The fair market value is estimated based on quoted market prices. Unrealized gains and losses on these investments, which represent the difference between the amortized cost and the estimated market value of securities, are reported on the balance sheet, net of taxes, as “accumulated other comprehensive income” as a separate component of shareholders’ equity.
       Other invested assets include our holdings in three hedge funds and a global high-yield bond fund. The fair market values of these assets are estimated based on quoted market prices or net asset values provided by their respective fund managers. Unrealized gains or losses on these investments, which represent the difference between the cost and the estimated market values, are reported on the balance sheet, net of taxes, as “accumulated other comprehensive income” as a separate component of shareholders’ equity. In 2005, the three hedge funds distributed dividends on a periodic basis based on the funds’ income and capital appreciation. During the three months ended March 31, 2006, we continued to receive dividends-in-kind from the three hedge funds based on final 2005 valuations. The dividend distributions were included in our investment income. For 2006 and thereafter, we have elected not to receive dividends from these three hedge funds. Changes in the values of the funds will continue to be reflected as changes in our book value as unrealized gains or losses.
       Also included within other invested assets are the investments held by a hedge fund in which Allied World Assurance Company, Ltd is the sole investor. In accordance with Financial Accounting Standards Board Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” this hedge fund has been consolidated. The hedge fund is a fund of hedge funds and as such, investments held by the fund are carried at fair value based on the net asset values as provided by the respective fund managers. Unrealized gains or losses, which represent the difference between the cost and estimated market values, are reported on the balance sheet, net of taxes, as “accumulated other comprehensive income” as a separate component of shareholders’ equity.
       We regularly review the carrying value of our investments to determine if a decline in value is considered 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 their liquidity, business prospects and overall financial position and (iv) our intent and ability to hold the investment for a sufficient period of time for the value to recover. The identification of potentially impaired investments involves significant management judgment which 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 finally considered other than temporary, then we record a realized loss in the statement of operations in the period that it is determined.
Stock Compensation
       In 2001, we implemented the Allied World Assurance Holdings, Ltd 2001 Employee Warrant Plan, under which up to 2,000,000 common shares could be issued. On June 9, 2006, we amended and restated the 2001 employee warrant plan and renamed it the Allied World Assurance Company Holdings, Ltd Amended and Restated 2001 Employee Stock Option Plan (which we refer to as the stock option plan). Among other things, the amendment and restatement extends the term of the stock option plan from November 21, 2011 to a date that is ten years from the date of approval of the amendment and restatement, requires that any repricing of awards under the stock option plan be approved by our shareholders and provides the compensation committee of the board of directors additional flexibility with respect to awards in certain corporate events and in connection with compliance with Section 409A of the U.S. Internal Revenue Code of 1986, as amended (“Section 409A”). The warrants that were granted under the stock option plan prior to the amendment and restatement were converted to options as part of our recently completed initial public offering of common shares and are exercisable in certain limited conditions, expire after ten years and generally vest ratably over four years from the date of grant.

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       In 2004, we implemented the Allied World Assurance Holdings, Ltd 2004 Stock Incentive Plan, under which up to 1,000,000 common shares could be issued. On June 9, 2006, we amended and restated the 2004 stock incentive plan and renamed it the Allied World Assurance Company Holdings, Ltd Amended and Restated 2004 Stock Incentive Plan (which we refer to as the stock incentive plan). Among other things, the amendment and restatement increases to 2,000,000 the number of common shares available for issuance under the stock incentive plan and provides the compensation committee of the board of directors additional flexibility with respect to awards in certain corporate events and in connection with compliance with Section 409A. Awards under the stock incentive plan prior to amendment and restatement remain outstanding and generally vest either four years from the date of grant or ratably over four years from the date of grant.
       Prior to our recently completed initial public offering of common shares, valuations under each of the above plans has been based on our book value per share. We calculated expenses related to grants of warrants by subtracting from our book value as at the end of each applicable period (either quarter end or year end) the exercise price of the individual warrants at the date of grant. The compensation expense for the restricted stock units (“RSUs”) was based on our book value per share and recognized over the four-year vesting period.
       For those warrants issued prior to, and converted to options as part of, our recently completed initial public offering of common shares, it is intended that the exercise price and the vesting period of each option granted under the stock option plan will remain the same as under the former employee warrant plan. However, for valuation purposes, the new grant date will become the date that the warrants were converted to options as part of our recently completed initial public offering of common shares. Accordingly, in accordance with the Financial Accounting Standards Board (“FASB”) issuance of SFAS No. 123(R) “Share Based Payments” (“FAS 123R”), the fair value of these options when converted will be determined as of this new grant date and expensed over the remaining vesting period. The stock option plan is also converting to a fair market value plan from a book value plan. As such, we will incur a one-time expense to recognize the difference between the expense taken to date under the former employee warrant plan and the expenses that would have been incurred and expensed to date had all of the warrants we granted been granted under the stock option plan. For those warrants that were fully vested at the time of conversion, the full amount of the fair value of the options will be recognized as an expense on the new grant date. Any future options granted under the stock option plan will be valued on the date of grant and expensed over the vesting period.
       The RSUs issued prior to our recently completed initial public offering of common shares will remain essentially unchanged due to the amendment and restatement. The vesting period of these RSUs will remain the same. However, the fair value of the RSUs will be reassessed and converted to the fair market value of our common shares on the date the stock incentive plan is amended and restated. The total expenses to date under the stock incentive plan will be adjusted to the fair market value based expense under the stock incentive plan. As such, a one-time expense was incurred to adjust the stock based plan to market value at the time of our recently completed initial public offering of common shares. In the future, newly issued RSUs will be valued as of the grant date based on the average market value of the common shares on the grant date. The total expense will be recognized over the vesting period on a straight-line basis.
New Accounting Pronouncements
       In December 2004, FASB issued FAS 123R. This statement requires that compensation costs related to share-based payment transactions be recognized in the financial statements. The amount of compensation costs will be measured based on the grant-date fair value of the awards issued and will be recognized over the period that an employee provides services in exchange for the award or the requisite service or vesting period. FAS 123R is effective for the first interim or annual reporting period beginning after June 15, 2005 and may not be applied retroactively to prior years’ financial statements. We have adopted FAS 123(R) using the prospective method for the fiscal year beginning

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January 1, 2006. We have recorded compensation expense related to the equity-based plans using book value per share, which approximated the fair value of the awards as at March 31, 2006. As such, the adoption of FAS 123(R) did not have a material impact on the consolidated financial statements. Compensation expense for warrants granted to employees is recorded over the warrant vesting period and continues to be based on the difference between the exercise price of the warrants, and our current book value per share. The compensation expense for the RSUs is based on our book value per share and recognized over the four-year vesting period.
       In February 2006, the FASB issued FAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“FAS 155”). This statement amends FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and FASB Statement No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). This statement resolves issues addressed in FAS 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.”
       The significant points of FAS 155 are that this statement:
  •  permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation,
 
  •  clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS 133,
 
  •  establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation,
 
  •  clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and
 
  •  amends FAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
       FAS 155 is effective for all instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. As we do not intend to invest in or issue such hybrid instruments, adoption of FAS 155 is not expected to have any material impact on our results of operations or financial condition.
       In March 2006, the FASB issued FAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (“FAS 156”). This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. FAS 156 should be adopted as of the beginning of the first fiscal year that begins after September 15, 2006. We do not enter into contracts to service financial assets under which the estimated future revenues from contractually specified servicing fees, late charges, and other ancillary revenues are expected to adequately compensate us for performing the servicing. As such, adoption of FAS 156 is not expected to have any material impact on our results of operations or financial condition.

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Results of Operations
       The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.
                                         
    Three Months    
    Ended March 31,   Year Ended December 31,
         
    2006   2005   2005   2004   2003
                     
    ($ in millions)
Gross premiums written
  $ 498.1     $ 505.3     $ 1,560.3     $ 1,708.0     $ 1,573.7  
                               
Net premiums written
    427.5       438.7     $ 1,222.0     $ 1,372.7     $ 1,346.5  
                               
Net premiums earned
    308.9       324.1     $ 1,271.5     $ 1,325.5     $ 1,167.2  
Net investment income
    62.0       40.3       178.6       129.0       101.0  
Net realized investment (losses) gains
    (5.2 )     (2.5 )     (10.2 )     10.8       13.4  
                               
    $ 365.7     $ 361.9     $ 1,439.9     $ 1,465.3     $ 1,281.6  
                               
Net losses and loss expenses
  $ 206.0     $ 238.4     $ 1,344.6     $ 1,013.4     $ 762.1  
Acquisition costs
    36.5       36.5       143.4       170.9       162.6  
General and administrative expenses
    20.3       20.9       94.3       86.3       66.5  
Interest expense
    6.5             15.6              
Foreign exchange loss (gain)
    0.5       0.1       2.2       (0.3 )     (4.9 )
                               
    $ 269.8     $ 295.9     $ 1,600.1     $ 1,270.3     $ 986.3  
                               
Income (loss) before income taxes
  $ 95.9     $ 66.0     $ (160.2 )   $ 195.0     $ 295.3  
Income tax (recovery) expense
    (2.2 )     1.6       (0.4 )     (2.2 )     6.9  
                               
Net income (loss)
  $ 98.1     $ 64.4     $ (159.8 )   $ 197.2     $ 288.4  
                               
Comparison of Three Months Ended March 31, 2006 and 2005
Premiums
       Gross premiums written decreased by $7.2 million, or 1.4%, for the three months ended March 31, 2006 compared to the three months ended March 31, 2005. The decrease was partially the result of a decline in volume due to the cancellation of surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. Gross premiums written through these agreements for the three months ended March 31, 2006 were $0.3 million compared to $17.1 million for the three months ended March 31, 2005. Although the agreements were cancelled, we continued to receive premium adjustments during the three months ended March 31, 2006. We also had a reduction in the volume of property catastrophe business written on our behalf by IPCUSL under an underwriting agency agreement. We reduced our exposure limits on this business, which resulted in $13.4 million less premiums written in the three months ended March 31, 2006 compared to the same period in 2005. There was also a decline of approximately $3.3 million in gross premiums written through surplus lines agreements with an affiliate of Chubb for the three months ended March 31, 2006 compared to the three months ended March 31, 2005. This decline was due to a number of factors including the timing of policy recording and a change in our underwriting guidelines with Chubb, which decreased our limits for certain business and eliminated directors and officers as well as errors and omissions business.
       Offsetting these decreases was an increase in general property gross premiums written. We benefitted from the significant rate increases on certain catastrophe exposed North American general property business resulting from record industry losses following the hurricanes that occurred during

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the second half of 2005. We also had an increase in the volume of general property business written due to increased market opportunities. The majority of North American accounts are currently written by our Bermuda office. General property gross premiums written by our Bermuda office therefore increased by approximately $21.4 million for the three months ended March 31, 2006 compared to the same period in 2005. We also had an increase in the volume of business written by our underwriters in our U.S. offices. During the second half of 2005, we added staff members to our New York and Boston offices and opened offices in Chicago and San Francisco in order to expand our U.S. distribution platform. Gross premiums written by our underwriters in our U.S. offices were $21.3 million for the three months ended March 31, 2006 compared to $15.1 million for the three months ended March 31, 2005.
       The table below illustrates our gross premiums written by geographic location. Gross premiums written by our Bermuda operating subsidiary increased by 3.9%. Gross premiums written by our European operating subsidiaries decreased by 9.9% primarily due to several policies written in the three months ended March 31, 2005 having renewal dates after March 31, 2006 as well as a decline in volume of casualty pharmaceutical business as a result of companies self insuring certain exposures. Gross premiums written by our U.S. operating subsidiaries decreased by 36.5% due to the cancellation of the surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG.
                                 
    Three   Three        
    Months   Months        
    Ended   Ended        
    March 31,   March 31,   Dollar   Percentage
    2006   2005   Change   Change
                 
    ($ in millions)    
Bermuda
  $ 398.1     $ 383.1     $ 15.0       3.9 %
Europe
    75.8       84.1       (8.3 )     (9.9 )
United States
    24.2       38.1       (13.9 )     (36.5 )
                         
    $ 498.1     $ 505.3     $ (7.2 )     (1.4 )%
                         
       We expect gross premiums written by our U.S. subsidiaries to increase moderately during 2006 as we continue to develop and expand our U.S. distribution platform. We plan to employ a regional distribution strategy in the United States via our wholesalers and brokers targeting middle-market clients. We believe this business will be complimentary to our current casualty and property direct insurance business produced through Bermuda and European markets, which primarily focus on underwriting risks for large multi-national and Fortune 1000 clients with complex insurance needs.
       Net premiums written decreased by $11.2 million, or 2.6%, for the three months ended March 31, 2006 compared to the three months ended March 31, 2005. The difference between gross and net premiums written is the cost to us of purchasing reinsurance, both on a proportional and a non-proportional basis, including the cost of property catastrophe reinsurance coverage. We ceded 14.2% of premiums written for the three months ended March 31, 2006 compared to 13.2% for the same period in 2005.
       Net premiums earned decreased by $15.2 million, or 4.7%, for the three months ended March 31, 2006 due to the decrease in net premiums written since 2004. Net premiums earned for the three months ended March 31, 2006 included $4.5 million in costs related to our property catastrophe reinsurance protection compared to $8.1 million for the three months ended March 31, 2005. The decrease reflected the decrease in our property catastrophe exposures. The cost of our property catastrophe reinsurance protection will increase for the remainder of 2006, as a result of increased rates arising primarily from the losses experienced by the industry in 2004 and 2005. We

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anticipate that the cost of this protection for the remainder of 2006 will be approximately $30 million on an earned basis for our property segment.
       We evaluate our business by segment, distinguishing between property insurance, casualty insurance and reinsurance. The following chart illustrates the mix of our business on a gross premiums written basis and net premiums earned basis:
                                 
    Gross   Net Premiums
    Premiums Written   Earned
         
    Three Months Ended March 31,
     
    2006   2005   2006   2005
                 
Property
    24.1 %     20.6 %     15.9 %     23.0 %
Casualty
    26.2       28.0       42.7       46.7  
Reinsurance
    49.7       51.4       41.4       30.3  
       On a written basis, our business mix is more heavily weighted to reinsurance during the first three months of the year due to the large number of reinsurance accounts with effective dates in January. The increase in the percentage of property segment gross premiums written reflects the increase in rates and opportunities in certain areas of the North American property insurance market. On a net premiums earned basis, the percentage of reinsurance has increased for the three months ended March 31, 2006 compared to the same period in 2005 due to the continued earning of increased premiums written over the past two years. The percentage of property net premiums earned was considerably less than for gross premiums written because we cede a larger portion of our property business compared to casualty and reinsurance.
Net Investment Income
       Our invested assets are managed by two investment managers affiliated with the Goldman Sachs Funds, one of our principal shareholders. Our primary investment objective is the preservation of capital. A secondary objective is obtaining returns commensurate with a benchmark, primarily defined as 35% of the Lehman U.S. Government Intermediate Index, 40% of the Lehman Corp. 1-5 year A3/ A- or Higher Index and 25% of the Lehman Securitized Index. We adopted this benchmark effective January 1, 2006. Prior to this date, the benchmark was defined as 80% of a 1-5 year “AAA/ AA-” rated index (as determined by Standard & Poor’s and Moody’s) and 20% of a 1-5 year “A” rated index (as determined by Standard & Poor’s and Moody’s).
       Investment income is principally derived from interest and dividends earned on investments, partially offset by investment management fees and fees paid to our custodian bank. Net investment income earned during the three months ended March 31, 2006 was $62.0 million, compared to $40.3 million during the three months ended March 31, 2005. The $21.7 million increase was primarily the result of increases in prevailing interest rates, combined with an 8.4% increase in average aggregate invested assets. We also received an annual dividend of $8.4 million from an investment in a high-yield bond fund during the three-month period ended March 31, 2006, which was $6.3 million greater than the amount received in the three-month period ended March 31, 2005. In addition, we also had increased income from our hedge funds. In the three months ended March 31, 2006, we received distributions of $3.9 million in dividends-in-kind from three of our hedge funds based on the final 2005 asset values, which amount was included in net investment income. Comparatively, we received $2.8 million in dividends during the three-month period ended March 31, 2005. For 2006 and thereafter, we have elected not to receive dividends from these three hedge funds. Investment management fees of $1.2 million and $1.1 million were incurred during the three months ended March 31, 2006 and 2005, respectively.
       The annualized period book yield of the investment portfolio for the three months ended March 31, 2006 and 2005 was 4.3% and 3.4%, respectively. The increase in yield was primarily the

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result of increases in prevailing market interest rates over the past year. We continue to maintain a conservative investment posture. Approximately 99% of our fixed income investments (which included individually held securities and securities held in a high-yield bond fund) consisted of investment grade securities. The average credit rating of our fixed income portfolio is AA as rated by Standard & Poor’s and Aa2 as rated by Moody’s with an average duration of 2.9 years as of March 31, 2006. We realigned our investment portfolio during the three-month period ended March 31, 2006 to align our portfolio with the new benchmark, and we increased the average duration from 2.3 years as of December 31, 2005 to 2.9 years as of March 31, 2006.
       As of March 31, 2006, we had investments in four hedge funds, three funds that are managed by our investment managers, and one fund managed by a subsidiary of AIG. The market value of our investments in these hedge funds as of March 31, 2006 totaled $234.8 million compared to $215.1 million as of December 31, 2005. These investments generally impose restrictions on redemption, which may limit our ability to withdraw funds for some period of time after our initial investment. We also had an investment in a high-yield bond fund included within other invested assets on our balance sheet, the market value of which was $30.7 million as of March 31, 2006 compared to $81.9 million as of December 31, 2005. During the three-month period ended March 31, 2006, we reduced our investment in this fund by approximately $50 million. As our reserves and capital build, we may also consider other alternative investments in the future.
       The following table shows the components of net realized investment gains and losses.
                 
    Three Months Ended
     
    March 31,   March 31,
    2006   2005
         
    ($ in millions)
Net (loss) from the sale of securities
  $ (5.7 )   $ (2.5 )
Net gain on interest rate swaps
  $ 0.5     $  
             
Net realized investment (losses)
  $ (5.2 )   $ (2.5 )
             
       The recognition of realized gains and losses is considered to be a typical consequence of ongoing investment management. A large proportion of our portfolio is invested in fixed income securities and, therefore, our unrealized gains and losses are correlated with fluctuations in interest rates. Interest rates increased during the three months ended March 31, 2006 as well as the three months ended March 31, 2005; consequently, we realized losses from the sale of some of our fixed income securities. We also sold a higher volume of securities during the three-month period ended March 31, 2006 as we realigned our portfolio with the new investment benchmark.
       We analyze gains or losses on sales of securities separately from gains or losses on interest rate swaps. On April 21, 2005, we entered into certain interest rate swaps in order to fix the interest cost of our $500 million floating rate term loan. On January 31, 2006, these swaps were terminated with an effective date of June 30, 2006. In both periods we recorded no losses on investments as a result of declines in values determined to be other than temporary.
Net Losses and Loss Expenses
       Net losses and loss expenses incurred comprise three main components:
  •  losses paid, which are actual cash payments to insureds, net of recoveries from reinsurers;
 
  •  outstanding loss or case reserves, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and

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  •  IBNR reserves, which are reserves established by us for claims that are not yet reported but can reasonably be expected to have occurred based on industry information, management’s experience and actuarial evaluation. The portion recoverable from reinsurers is deducted from the gross estimated loss.
       Establishing an appropriate level of loss reserves is an inherently uncertain process. It is therefore possible that our reserves at any given time will prove to be either inadequate or overstated. See “— Relevant Factors — Critical Accounting Policies — Reserve for Losses and Loss Expenses” for further discussion.
       Net losses and loss expenses for the three-month period ended March 31, 2005 included estimated losses from windstorm Erwin of $13.4 million and additional development on the 2004 storms of $5.7 million, net of recoverables from our reinsurers. Comparatively, there were no net losses incurred related to catastrophes during the three months ended March 31, 2006, although we redistributed some of the catastrophe reserves among our reporting segments. We have estimated our net losses from catastrophes based on actuarial analysis of claims information received to date, industry modeling and discussions with individual insureds and reinsureds. Accordingly, actual losses may vary from those estimated, and will be adjusted in the period in which further information becomes available. Based on our current estimate of losses related to Hurricane Katrina, we believe we have exhausted our $135 million of property catastrophe reinsurance protection with respect to this event, leaving us with more limited reinsurance coverage available pursuant to our two remaining property quota share treaties should our Hurricane Katrina losses prove to be greater than currently estimated. Under the two remaining quota share treaties, we ceded 45% of our general property policies and 66% of our energy-related property policies. As of March 31, 2006, we had estimated gross losses related to Hurricane Katrina of $554 million. Losses ceded related to Hurricane Katrina were $135 million under the property catastrophe reinsurance protection and approximately $149 million under the property quota share treaties.
       The following table shows the components of the decrease of net losses and loss expenses of $32.4 million for the three months ended March 31, 2006 from the three months ended March 31, 2005.
                 
    Three Months Ended
     
    March 31,   March 31,
    2006   2005
         
    ($ in millions)
Net losses paid
  $ 138.4     $ 96.5  
Net change in reported case reserves
    (11.8 )     72.5  
Net change in IBNR
    79.4       69.4  
             
Net losses and loss expenses
  $ 206.0     $ 238.4  
             
       Net losses paid have increased $41.9 million, or 43.4%, to $138.4 million for the three months ended March 31, 2006 primarily due to payments resulting from the 2004 and 2005 storms. During the three months ended March 31, 2006, $85.4 million of net losses were paid in relation to the 2004 and 2005 catastrophic windstorms compared to $25.1 million during the three months ended March 31, 2005. This increase was partially offset by a reduction in non-catastrophe related claims payments made on our property business of $19.8 million.
       The decrease in case reserves during the period ended March 31, 2006 was primarily due to the increase in net losses paid reducing the case reserves established. The decrease from the prior year has also resulted from the maturation of our catastrophe case reserves. The net change in reported case reserves for the three months ended March 31, 2006 included a $3.0 million increase

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relating to the 2004 and 2005 storms compared to $43.6 million for 2004 storms and windstorm Erwin during the three months ended March 31, 2005.
       The increase in net change in IBNR is primarily the result of the accumulation of earned premium for which we estimate losses incurred.
       Our overall net loss reserve estimates as of December 31, 2005 did not change during the three months ended March 31, 2006. No prior period net reserve adjustments were made in the three months ended March 31, 2006.
       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended March 31, 2006 and 2005. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Three Months
    Ended March 31,
     
    2006   2005
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 2,689.1     $ 1,777.9  
Incurred related to:
               
 
Current period non-catastrophe
    206.0       219.3  
 
Current period property catastrophe
          13.4  
 
Prior period non-catastrophe
           
 
Prior period property catastrophe
          5.7  
             
   
Total incurred
  $ 206.0     $ 238.4  
Paid related to:
               
 
Current period non-catastrophe
    0.9       1.3  
 
Current period property catastrophe
          0.2  
 
Prior period non-catastrophe
    52.1       70.1  
 
Prior period property catastrophe
    85.4       24.9  
             
   
Total paid
  $ 138.4     $ 96.5  
Foreign exchange revaluation
    0.2       (0.7 )
             
Net reserve for losses and loss expenses, March 31
    2,756.9       1,919.1  
Losses and loss expenses recoverable
    664.0       281.5  
             
Reserve for losses and loss expenses, March 31
  $ 3,420.9     $ 2,200.6  
Acquisition Costs
       Acquisition costs consist primarily of brokerage fees and commissions paid to intermediaries and insurance taxes. Brokerage fees and commissions 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 that part of acquisition costs relating to unearned premiums and (3) including the amortization of previously deferred acquisition costs.
       Acquisition costs were $36.5 million for the three months ended March 31, 2006 as compared to $36.5 million for the three months ended March 31, 2005. Acquisition costs as a percentage of net premiums earned were 11.8% for the three months ended March 31, 2006, compared to 11.2% for the same period in 2005. Ceding commissions, which are deducted from gross acquisition costs, were comparable between the three months ended March 31, 2006 and the three months ended March 31, 2005. Although our ceding commission rates declined on a written basis during the three months ended March 31, 2006 compared to the same period in 2005, we benefited from continued earning of higher ceding commissions on business written during the prior year. We expect ceding commissions to decline through the remainder of 2006 as the commission rate for our general

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property treaty changed effective October 1, 2005 from a flat rate of 26% applied to gross premiums ceded to an overriding commission of 7.5% applied to gross premiums ceded plus original commissions paid by us.
       Pursuant to our agreement with IPCUSL, we paid an agency commission of 6.5% of gross premiums written by IPCUSL on our behalf plus original commissions. Total acquisition costs incurred by us related to this agreement for the three months ended March 31, 2006 and 2005 were $2.1 million and $2.8 million, respectively.
General and Administrative Expenses
       General and administrative expenses represent overhead costs such as salaries and related costs, rent, travel and professional fees. They also include fees paid to subsidiaries of AIG in return for the provision of administrative services. These fees were based on a percentage of our gross premiums written, the rate for which varied with the volume of gross premiums written. Effective January 1, 2006, the administrative services agreements with AIG subsidiaries provide for a more limited range of services on either a cost-plus or flat fee basis depending on the agreement. The services no longer included within the agreements are provided through our own additional staff and infrastructure.
       General and administrative expenses decreased by $0.6 million, or 2.8%, for the three months ended March 31, 2006 compared to the same period in 2005. Fixed costs replaced the administrative services fees paid under our administrative services agreements with AIG subsidiaries, which were based on gross premiums written. The salary and infrastructure costs related to those services expensed in the three months ended March 31, 2006 were approximately $1.7 million less than the cost of the administrative services fees based on gross premiums written in the three months ended March 31, 2005. We do not expect this trend to continue because we anticipate adding further staff and resources through the remainder of 2006. We also expect information technology costs to increase during the year as we continue to put our own infrastructure in place. Offsetting the decrease in administrative costs was an increase in costs of approximately $0.8 million associated with our Chicago and San Francisco offices that opened in the fourth quarter of 2005. Our general and administrative expense ratio was 6.6% for the three months ended March 31, 2006, which was comparable to 6.5% for the three months ended March 31, 2005.
       Our expense ratio was 18.4% for the three months ended March 31, 2006 compared to 17.7% for the three months ended March 31, 2005. The slight increase related to an increase in acquisition cost ratio. We expect that the expense ratio will increase as administrative expenses increase with the further development of our own staff and infrastructure to replace the administrative services performed by AIG subsidiaries. We also anticipate increases in general and administrative expenses due to additional staff and professional services necessary as a publicly held company.
Interest Expense
       Interest expense of $6.5 million representing interest and financing costs was incurred in the three months ended March 31, 2006 for our $500 million term loan, which was funded on March 30, 2005. We expect to use a portion of the proceeds of this offering to repay the remaining portion of the term loan (expected to be approximately $363.0 million after the application of $137 million of the net proceeds of our recently completed initial public offering of common shares) to repay such term loan.
Net Income
       As a result of the above, net income for the three months ended March 31, 2006 was $98.1 million compared to net income of $64.4 million for the three months ended March 31, 2005. Net income for the three months ended March 31, 2006 included foreign exchange loss of $0.5 million and an income tax recovery of $2.2 million. Net income for the three months ended March 31, 2005 included foreign exchange loss of $0.1 million and income tax expense of $1.6 million.

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Comparison of Years Ended December 31, 2005 and 2004
Premiums
       Gross premiums written decreased by $147.7 million, or 8.6%, for the year ended December 31, 2005 compared to the year ended December 31, 2004. The decrease was mainly the result of a decline in the volume of gross premiums written by our U.S. subsidiaries of $189.2 million, which was partially offset by an increase in the volume of gross premiums written by our Bermuda subsidiary of $53.8 million.
       The decrease in the volume of business written by our U.S. subsidiaries was the result of the cancellation of surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. Gross premiums written through the program administrator agreements and reinsurance agreement with AIG subsidiaries for the year ended December 31, 2005 were approximately $22.2 million compared to approximately $273.9 million for the year ended December 31, 2004. Absent these agreements, total gross premiums written were $1,538.1 million for the year ended December 31, 2005 compared to $1,434.1 million for the year ended December 31, 2004. Partially offsetting the decline in business written through agreements with AIG subsidiaries was an increase in the volume of U.S. business written by our own U.S. underwriters, which was approximately $94.0 million in 2005 compared to $30.7 million in 2004.
       The table below illustrates gross premiums written by geographic location. Gross premiums written by our European subsidiaries decreased due to a decrease in rates for casualty business as well as decreased pharmaceutical casualty premiums due to decreased exposures and limits. Gross premiums written by our Bermuda subsidiary increased by $53.8 million, or 4.9%, due to an increase in reinsurance premiums written for casualty and specialty business as we took advantage of opportunities within these lines. This increase was offset partially by a decrease in gross premiums written by our Bermuda property and casualty insurance segments, which experienced decreasing rates.
                                 
    Year Ended        
    December 31,        
        Dollar   Percentage
    2005   2004   Change   Change
                 
    ($ in millions)    
Bermuda
  $ 1,159.2     $ 1,105.4     $ 53.8       4.9 %
Europe
    265.0       277.3       (12.3 )     (4.4 )
United States
    136.1       325.3       (189.2 )     (58.2 )
                         
    $ 1,560.3     $ 1,708.0     $ (147.7 )     (8.6 )%
                         
       Net premiums written decreased by $150.7 million, or 11.0%, for the year ended December 31, 2005 compared to the year ended December 31, 2004. The difference between gross and net premiums written is the cost to us of purchasing reinsurance, both on a proportional and a non-proportional basis, including the cost of property catastrophe cover. The cost of our property catastrophe cover was $44.0 million for the year ended December 31, 2005 compared to $30.7 million for the year ended December 31, 2004. The increase mainly reflected the reinstatement premium charged in 2005 due to claims made for Hurricanes Katrina and Rita while no reinstatement premium was charged in 2004. Excluding property catastrophe cover, we ceded 18.8% of gross premiums written for the year ended December 31, 2005 compared to 17.8% for the year ended December 31, 2004.
       Net premiums earned decreased by $54.0 million, or 4.1%, for the year ended December 31, 2005, a smaller percentage than the decrease in net premiums written due to the earning of premiums written in prior years.

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       We evaluate our business by segment, distinguishing between property insurance, casualty insurance and reinsurance. The following chart illustrates the mix of our business on a gross premiums written and net premiums earned basis:
                                 
    Gross   Net
    Premiums   Premiums
    Written   Earned
         
    Year Ended   Year Ended
    December 31,   December 31,
         
    2005   2004   2005   2004
                 
Property
    26.5 %     32.1 %     17.8 %     25.1 %
Casualty
    40.6       44.0       45.7       48.0  
Reinsurance
    32.9       23.9       36.5       26.9  
       Our business mix shifted from property and casualty insurance to reinsurance due primarily to a decrease in property and casualty business written in the United States and an increase in the amount of reinsurance business written in 2005.
Net Investment Income
       Our invested assets are managed by two investment managers affiliated with the Goldman Sachs Funds, one of our principal shareholders. We also have investments in one hedge fund managed by a subsidiary of AIG. Our primary investment objective is the preservation of capital. A secondary objective is obtaining returns commensurate with a benchmark, primarily defined as 80% of a 1-5 year “AAA/ AA-” rated index (as determined by Standard & Poor’s and Moody’s) and 20% of a 1-5 year “A” rated index (as determined by Standard & Poor’s and Moody’s).
       Investment income is principally derived from interest and dividends earned on investments, partially offset by investment management fees and fees paid to our custodian bank. Net investment income earned during the year ended December 31, 2005 was $178.6 million, compared to $129.0 million during the year ended December 31, 2004. Investment management fees of $4.4 million and $3.7 million were incurred during the years ended December 31, 2005 and 2004, respectively. The increase in net investment income was due to an increase in aggregate invested assets, which increased 14.3% over the balance as of December 31, 2004, and an increase in prevailing interest rates. We also had increased income from our hedge fund investments, which were fully deployed during the period. We received $17.5 million in dividends from three hedge funds, which was included in investment income, compared to $0.2 million in 2004.
       The annualized period book yield of the investment portfolio for the years ended December 31, 2005 and 2004 was 3.9% and 3.5%, respectively. The increase in yield was primarily the result of increasing interest rates in 2005. We continued to maintain a conservative investment posture. Approximately 98% of our fixed income investments (which included individually held securities and securities held in a high-yield bond fund) consisted of investment grade securities. The average credit rating of our fixed income portfolio is rated AA by Standard & Poor’s and Aa2 by Moody’s with an average duration of 2.3 years as of December 31, 2005.
       At December 31, 2005, we had investments in four hedge funds, three funds that are managed by our investment managers, and one fund managed by a subsidiary of AIG. The market value of our investments in these hedge funds as of December 31, 2005 totaled $215.1 million compared to $96.7 million as of December 31, 2004; additional investments of $105 million were made during the year ended December 31, 2005. These investments generally impose restrictions on redemption, which may limit our ability to withdraw funds for some period of time after our initial investment. We also had an investment in a high-yield bond fund included within other invested assets on our balance sheet, the market value of which was $81.9 million as of December 31, 2005 compared to

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$87.5 million as of December 31, 2004. As our reserves and capital build, we may consider other alternative investments in the future.
       The following table shows the components of net realized investment gains and losses. Our investment managers are charged with the dual objectives of preserving capital and obtaining returns commensurate with our benchmark. In order to meet these objectives, it is often desirable to sell securities to take advantage of prevailing market conditions. As a result, the recognition of realized gains and losses is considered to be a typical consequence of ongoing investment management. A large proportion of our portfolio is invested in the fixed income markets and, therefore, our unrealized gains and losses are correlated with fluctuations in interest rates. Interest rates increased during the year ended December 31, 2005; consequently, we realized losses from the sale of some of our fixed income securities.
       We analyze gains or losses on sales of securities separately from gains or losses on interest rate swaps and gains or losses on the settlement of futures contracts, which were used to manage our portfolio’s duration. We have since discontinued the use of such futures contracts. In both years we recorded no losses on investments as a result of declines in values determined to be other than temporary.
                 
    Year Ended
    December 31,
     
    2005   2004
         
    ($ in millions)
Net (loss) gain from the sale of securities
  $ (15.0 )   $ 13.2  
Net loss on settlement of futures
          (2.4 )
Net gain on interest rate swaps
    4.8        
             
Net realized investment (losses) gains
  $ (10.2 )   $ 10.8  
             
Net Losses and Loss Expenses
       Net losses and loss expenses incurred comprise three main components:
  •  losses paid, which are actual cash payments to insureds, net of recoveries from reinsurers;
 
  •  outstanding loss or case reserves, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers; and
 
  •  IBNR reserves, which are reserves established by us for claims that are not yet reported but can reasonably be expected to have occurred based on industry information, management’s experience and actuarial evaluation. The portion recoverable from reinsurers is deducted from the gross estimated loss in the statement of operations.
       Establishing an appropriate level of loss reserves is an inherently uncertain process. It is therefore possible that our reserves at any given time will prove to be either inadequate or overstated. See “— Relevant Factors — Critical Accounting Policies — Reserve for Losses and Loss Expenses” for further discussion.
       Net losses and loss expenses for the year ended December 31, 2005 included estimated property losses from Hurricanes Katrina, Rita and Wilma and Windstorm Erwin of $469.4 million, and also included a general liability loss of $25 million that related to Hurricane Katrina. Adverse development from 2004 hurricanes and typhoons of $62.5 million net of recoverables from our reinsurers was also included. Our reserves are adjusted for development arising from new information from clients, loss adjusters or ceding companies. Comparatively, net losses and loss expenses for the year ended December 31, 2004 included estimated losses from Hurricanes Charley, Frances, Ivan and Jeanne and Typhoons Chaba and Songda of $186.2 million net of

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recoverables from our reinsurers. U.S. GAAP requires that we reserve for catastrophic losses as soon as the loss event is known to have occurred. We have estimated our net losses from these catastrophes based on actuarial analysis of claims information received to date, industry modeling and discussions with individual insureds and reinsureds. Accordingly, actual losses may vary from those estimated, and will be adjusted in the period in which further information becomes available.
       The following table shows the components of the increase of net losses and loss expenses of $331.2 million for the year ended December 31, 2005 from the year ended December 31, 2004.
                 
    Year Ended
    December 31,
     
    2005   2004
         
    ($ in millions)
Net losses paid
  $ 430.1     $ 202.5  
Net change in reported case reserves
    410.1       126.9  
Net change in IBNR
    504.4       684.0  
             
Net losses and loss expenses
  $ 1,344.6     $ 1,013.4  
             
       Net losses paid have increased $227.6 million, or 112.4%, to $430.1 million for the year ended December 31, 2005 primarily due to property losses paid on the catastrophic windstorms. The year ended December 31, 2005 included $194.6 million of net losses paid on the 2004 and 2005 storms listed above compared to $57.1 million for the 2004 storms listed above during the year ended December 31, 2004. The balance of the increase is from claims on policies written by us in previous years.
       The increase in case reserves during the year ended December 31, 2005 was primarily due to an increase in reserves for property catastrophe losses. The net change in reported case reserves for the year ended December 31, 2005 included $325.5 million relating to 2004 and 2005 storms listed above compared to $64.8 million for 2004 storms listed above during the year ended December 31, 2004.
       The decrease in net change in IBNR reflected the larger proportion of losses reported. The net change in IBNR for the year ended December 31, 2005 also included a net reduction in prior period losses of $111.5 million excluding development of 2004 storms compared to $79.4 million of net positive reserve development in the year ended December 31, 2004. This positive development was the result of actual loss emergence in the non-casualty lines and the casualty claims-made lines being lower than the initial expected loss emergence.
       Our overall loss reserve estimates did not significantly change during 2005. On an opening carried reserve base of $1,777.9 million, after reinsurance recoverable, we had a net decrease of $49 million including development of 2004 storms, a change of less than 3%. The primary assumption that changed related to reported and paid loss emergence patterns. The changes in our estimates were entirely driven by losses reported during 2005. For the four major hurricanes of 2004, we had loss activity reported above our initial estimates. In the third quarter of 2005, we increased our net reserves by $62.5 million to account for this increased loss activity. The loss reserve reductions were in property lines (both direct insurance and reinsurance), which had lower than expected reported losses in 2005, excluding the hurricanes, and in claims-made casualty lines, after an evaluation by claims staff. Based upon these discussions, we gave more weight to the Bornhuetter-Ferguson loss development methods for the claims-made components of our business. As our book matures in the occurrence casualty lines of business and in reinsurance, we intend to begin giving greater weight to the Bornhuetter-Ferguson loss development methods. Recognition of the reserve changes was made in the third and fourth quarters of 2005 after sufficient development of reported losses had occurred. We believe recognition of reserve changes prior to this time was not warranted as a pattern of reported losses had not yet emerged.

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       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2005 and 2004. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2005   2004
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 1,777.9     $ 964.9  
Incurred related to:
               
 
Current year non-catastrophe
    924.2       906.6  
 
Current year property catastrophe
    469.4       186.2  
 
Prior year non-catastrophe
    (111.5 )     (79.4 )
 
Prior year property catastrophe
    62.5        
             
   
Total incurred
  $ 1,344.6     $ 1,013.4  
Paid related to:
               
 
Current year non-catastrophe
    40.8       12.1  
 
Current year property catastrophe
    84.2       57.1  
 
Prior year non-catastrophe
    194.7       133.3  
 
Prior year property catastrophe
    110.4        
             
   
Total paid
  $ 430.1     $ 202.5  
Foreign exchange revaluation
    (3.3 )     2.1  
             
Net reserve for losses and loss expenses, December 31
    2,689.1       1,777.9  
Losses and loss expenses recoverable
    716.3       259.2  
             
Reserve for losses and loss expenses, December 31
  $ 3,405.4     $ 2,037.1  
Acquisition Costs
       Acquisition costs were $143.4 million for the year ended December 31, 2005 as compared to $170.9 million for the year ended December 31, 2004. Acquisition costs as a percentage of net premiums earned were 11.3% for the year ended December 31, 2005 versus 12.9% for the year ended December 31, 2004. The reduction in acquisition costs was the result of a general decrease in brokerage rates being paid by us. We do not believe that this trend will continue. The decline in the acquisition cost ratio in 2005 also reflected the cancellation of surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG pursuant to which we paid additional commissions to the program administrators and cedent equal to 7.5% of the gross premiums written. Total acquisition costs relating to premiums written through these agreements with subsidiaries of AIG were $18.4 million for the year ended December 31, 2005 compared to $45.2 million for the year ended December 31, 2004. Ceding commissions, which are deducted from gross acquisition costs, increased moderately, both in volume (ceding a slightly larger percentage of business) and in rates.
       Pursuant to our agreement with IPCUSL, we paid an agency commission of 6.5% of gross premiums written by IPCUSL on our behalf plus original commissions. Total acquisition costs incurred by us related to this agreement for the years ended December 31, 2005 and 2004 were $13.1 million and $11.0 million, respectively.
General and Administrative Expenses
       General and administrative expenses represent overhead costs such as salaries and related costs, rent, travel and professional fees. They also include fees paid to subsidiaries of AIG in return for the provision of administrative services. These fees were based on a percentage of our gross premiums written, the rate for which varied with the volume of gross premiums written.

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       General and administrative expenses were $94.3 million for the year ended December 31, 2005 as compared to $86.3 million for the year ended December 31, 2004. This represented an increase of $8.0 million, or 9.3%, for the year ended December 31, 2005 compared to the year ended December 31, 2004. Salaries and employee welfare expenses exceeded the prior period by approximately $5.9 million. The number of warrants and restricted stock units issued as well as vested grew in the current period, resulting in an increased expense of $0.5 million over the prior period. The increase in salaries and employee welfare also reflected a full year of expense for staff in our New York office, which opened in June 2004, as well as an increase in worldwide staff count. There was also an increase in building rental expense of approximately $0.8 million due to the full year expense of additional office space in Bermuda and the office in New York. We also opened offices in San Francisco and Chicago during the fourth quarter of 2005. This was offset partially by a decrease in depreciation expense of approximately $1.9 million due to the full depreciation of office furniture and fixtures in Bermuda. As we expect to incur office refit expenditures for new offices in Bermuda, San Francisco and Chicago in 2006, this expense is anticipated to increase. The administrative fees paid to AIG subsidiaries decreased with the decline in gross premiums written. However, we accrued an estimated termination fee of $5 million as a result of the termination of the administrative services agreement in Bermuda with an AIG subsidiary. The total expense related to administrative services agreements with AIG subsidiaries was $36.9 million for the year ended December 31, 2005 compared to $34.0 million for the year ended December 31, 2004.
       Our expense ratio was 18.7% for the year ended December 31, 2005, compared to 19.4% for the year ended December 31, 2004. The expense ratio declined principally due to the decline in acquisition costs. We do not believe this trend will continue. We expect the expense ratio may increase as acquisition costs increase and as additional staff and infrastructure are acquired. We also anticipate increases in general and administrative expenses due to additional staff and professional services required once we become subject to reporting requirements applicable to publicly held companies.
Interest Expense
       Interest expense of $15.6 million representing interest and financing costs was incurred in the year ended December 31, 2005 for our $500 million term loan, which was funded on March 30, 2005. We expect to use the proceeds of this offering, in part, to repay the remaining portion of the term loan.
Net (Loss) Income
       As a result of the above, net loss for the year ended December 31, 2005 was $159.8 million compared to net income of $197.2 million for the year ended December 31, 2004. Net loss for the year ended December 31, 2005 included a foreign exchange loss of $2.2 million and an income tax recovery of $0.4 million. Net income for the year ended December 31, 2004 included a foreign exchange gain of $0.3 million and income tax recovery of $2.2 million.
Comparison of Years Ended December 31, 2004 and December 31, 2003
Premiums
       The insurance industry witnessed a declining rate environment in some lines of business during the latter part of 2004. Even in this environment, we were able to increase our gross premiums written by 8.5% to $1,708.0 million for the year ended December 31, 2004 from $1,573.7 million for the year ended December 31, 2003. We accomplished this growth mainly through continued expansion of our European operations and U.S. casualty operations.

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       The table below illustrates gross premiums written by geographic location for the years ended December 31, 2004 and 2003.
                                 
    Year Ended        
    December 31,        
        Dollar   Percentage
    2004   2003   Change   Change
                 
    ($ in millions)    
Bermuda
  $ 1,105.4     $ 1,097.3     $ 8.1       0.7 %
Europe
    277.3       118.1       159.2       134.8  
United States
    325.3       358.3       (33.0 )     (9.2 )
                         
    $ 1,708.0     $ 1,573.7     $ 134.3       8.5 %
                         
       The European offices were the primary source of growth in 2004 where gross premiums written grew $159.2 million or 134.8%. In August 2004, Allied World Assurance Company (Reinsurance) Limited established and opened a branch office in London. The licensing of the branch in London further expanded our capabilities in the European markets and offered customers a broader range of insurance solutions. The year ended December 31, 2004 was also the first full year of operations for Allied World Assurance Company (Reinsurance) Limited, which commenced operations in August 2003, as well as the London branch of Allied World Assurance Company (Europe) Limited, which commenced operations in June 2003.
       The U.S. offices produced $33.0 million, or 9.2%, less gross premiums written during 2004 than 2003. This was the result of a decrease in premiums written through surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. The amount of gross premiums written through these agreements was $273.9 million for the year ended December 31, 2004 compared to $320.8 million for the year ended December 31, 2003. This trend continued in 2005, due to the cancellation of the surplus lines program administrator agreements and reinsurance agreement with subsidiaries of AIG. In June 2004, Allied World Assurance Company (U.S.) Inc. opened an office in New York to expand its distribution of professional liability, excess liability and errors and omissions coverages. The gross premiums written by this office have partially offset the decline.
       Bermuda production remained consistent in 2004, increasing by $8.1 million, or 0.7%, amidst a market characterized by stable or decreasing rates.
       Net premiums written increased by $26.2 million, or 1.9%, to $1,372.7 million for the year ended December 31, 2004 from $1,346.5 million for the year ended December 31, 2003. The percentage increase was less than that for gross premiums written due to the increase in the amount of reinsurance purchased. The cost of reinsurance increased from $227.2 million in 2003 to $335.3 million in 2004. Including property catastrophe cover, we ceded 19.6% of our gross premiums written in 2004 compared to 14.4% in 2003. The increase over 2003 reflected four key factors:
  •  Increase in treaty reinsurance purchased. 2004 was the first full fiscal year that one of our treaties was in place and another treaty commenced June 2004. Our Bermuda operation ceded $25.6 million more through our treaties during the year ended 2004 compared to 2003.
 
  •  Increase in European business, which is subject to our reinsurance treaty arrangements. Our European premiums ceded through treaty arrangements increased $63.9 million during 2004 compared to 2003.
 
  •  One fronting agreement entered into in 2004 for which premiums of $11.3 million were 100% ceded.

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  •  Increase in the amount of facultative reinsurance purchased in order to take advantage of attractive rates and to limit net exposure. We ceded $10.4 million more on a facultative basis during 2004 compared to 2003.
       These factors were partially offset by a decrease in the cost of our property catastrophe cover from $34.3 million in 2003 to $30.7 million in 2004.
       Net premiums earned increased 13.6% to $1,325.5 million for the year ended December 31, 2004 from $1,167.2 million for the year ended December 31, 2003. Net premiums earned increased by a larger percentage than net premiums written due to the earning of premiums written in the prior years.
       In 2003, our business mix shifted from property insurance to casualty insurance and reinsurance as we took advantage of attractive rates, terms and conditions in the casualty and reinsurance markets. This trend continued in 2004 as we added further resources to our business in several casualty lines. 2003 was the first full year of operations for our reinsurance segment, which began in early 2002 but was not fully staffed until after the January 2002 renewal season. The growth of the reinsurance segment continued in 2004 as we expanded the reinsurance segment by writing more risks outside of North America (mainly in Europe).
Net Investment Income
       Net investment income earned during the year ended December 31, 2004 was $129.0 million, compared to $101.0 million during the year ended December 31, 2003. Investment management fees of $3.7 million and $3.0 million were incurred during the years ended December 31, 2004 and 2003, respectively. The increase in net investment income in 2004 was principally due to an increase of 31.9% in aggregate invested assets.
       The annual book yield of the investment portfolio for the years ended December 31, 2004 and 2003 was 3.5% and 3.7%, respectively. The decrease in yields was primarily the result of a shift to shorter duration assets by the end of 2004. We continued to maintain a conservative investment posture. Approximately 98% of our fixed income investments (which included individually held securities and securities held in a high-yield bond fund) consisted of investment grade securities at December 31, 2004. The average credit rating of our fixed income portfolio was rated AA by Standard & Poor’s and Aa2 by Moody’s with an average duration of 2.4 years.
       At December 31, 2004, we had investments in three hedge funds, two funds that are managed by our investment managers affiliated with the Goldman Sachs Funds, and one fund managed by a subsidiary of AIG. The market value of our investments in these hedge funds at December 31, 2004 totaled $96.7 million. These investments generally impose restrictions on redemption, which may limit our ability to withdraw funds for some period of time after our initial investment. We had income from our hedge fund investments in the form of dividends of $0.2 million for the year ended December 31, 2004.

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       The following table shows the components of net realized investment gains. We analyze gains or losses on sales of securities separately from gains or losses on the settlement of futures contracts, which were used to manage our portfolio’s duration. We have since discontinued the use of such futures contracts. In both years we recorded no losses on investments as a result of declines in values determined to be other than temporary.
                 
    Year Ended
    December 31,
     
    2004   2003
         
    ($ in millions)
Net gain from the sale of securities
  $ 13.2     $ 9.2  
Net (loss) gain on settlement of futures
    (2.4 )     4.2  
             
Net realized investment gains
  $ 10.8     $ 13.4  
             
Net Losses and Loss Expenses
       The following table shows the components of the increase of net losses and loss expenses of $251.3 million for the year ended December 31, 2004 from the year ended December 31, 2003.
                 
    Year Ended
    December 31,
     
    2004   2003
         
    ($ in millions)
Net losses paid
  $ 202.5     $ 98.8  
Net change in reported case reserves
    126.9       107.1  
Net change in IBNR
    684.0       556.2  
             
Net losses and loss expenses
  $ 1,013.4     $ 762.1  
             
       Net losses paid increased over the prior year as our business matured and customers presented claims on policies previously written by us. The year ended 2004 also included net losses paid on claims from the third quarter 2004 hurricanes and two of the 2004 typhoons of approximately $57 million. The increase in 2004 was net of an increase in loss recoveries of $32 million, as a result of the increase in reinsurance purchased.
       The increase in net losses and loss expenses in 2004, which included increases in both net change in case reserves and IBNR, resulted primarily from our estimates of property losses incurred from Hurricanes Charley, Frances, Ivan and Jeanne and Typhoons Chaba and Songda. The net losses from these storms were estimated to be $186.2 million after giving consideration to amounts recoverable from our reinsurers. The balance of the 2004 increase is reflective of the increase in net premiums earned, offset by net positive reserve development of $79.4 million in estimated losses for accident years 2003 and 2002. Comparatively, we reported positive reserve development of $56.8 million in 2003. The positive development is the result of actual loss emergence in the non-casualty lines and the casualty claims made lines being lower than the initial expected loss emergence.

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       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2004 and 2003. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2004   2003
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 964.9     $ 299.9  
Incurred related to:
               
 
Current year non-catastrophe
    906.6       818.9  
 
Current year property catastrophe
    186.2        
 
Prior year non-catastrophe
    (79.4 )     (56.8 )
 
Prior year property catastrophe
           
             
   
Total incurred
  $ 1,013.4     $ 762.1  
Paid related to:
               
 
Current year non-catastrophe
    12.1       46.7  
 
Current year property catastrophe
    57.1        
 
Prior year non-catastrophe
    133.3       52.1  
 
Prior year property catastrophe
           
             
   
Total paid
  $ 202.5     $ 98.8  
Foreign exchange revaluation
    2.1       1.7  
             
Net reserve for losses and loss expenses, December 31
    1,777.9       964.9  
Losses and loss expenses recoverable
    259.2       93.8  
             
Reserve for losses and loss expenses, December 31
  $ 2,037.1     $ 1,058.7  
Acquisition Costs
       Acquisition costs were $170.9 million for the year ended December 31, 2004 as compared to $162.6 million for the year ended December 31, 2003. Acquisition costs as a percentage of net premiums earned were 12.9% in 2004 versus 13.9% in 2003. The reduction in this percentage in 2004 was largely the result of the increase in ceding commissions, both in volume (ceding more business) and in rates. The amount of ceding commissions received is offset against our gross acquisition cost.
       We also acquired premiums through several surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. For this business, we paid additional commissions to the program administrators and the cedent equal to 7.5% of the gross premiums written. Total acquisition costs incurred by us related to premiums written through these agreements were $45.2 million and $40.0 million for the years ended December 31, 2004 and 2003, respectively. The program administrator agreements were cancelled effective January 1, 2005, and the reinsurance agreement was cancelled effective December 21, 2004.
       Pursuant to our underwriting agency agreement with IPCUSL, we paid an agency commission of 6.5% of gross premiums written by IPCUSL on our behalf plus original commissions. Total acquisition costs incurred by us related to this agreement for the years ended December 31, 2004 and 2003 were $11.0 million and $9.9 million, respectively.
General and Administrative Expenses
       Total general and administrative expenses were $86.3 million for the year ended December 31, 2004 as compared to $66.5 million for the year ended December 31, 2003. This represents an

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increase of $19.8 million, or 29.8%, in 2004 as compared to 2003. The expansion of our business platform and personnel in the United States and Europe contributed to the increase.
       Effective April 1, 2004, the Bermuda administrative services agreement with a subsidiary of AIG was amended to reduce the fee rates and to terminate the provision for actuarial and claims management services. The administrative fee owed under this agreement increased by approximately $1.8 million over 2003, which comprised an increase of approximately $3.7 million due to the increase in gross premiums written offset by a decrease of approximately $1.9 million due to the fee reduction. The portion of our general and administrative expenses representing administrative fees was $34.0 million and $32.2 million, or 39.4% and 48.3%, of our total general and administrative expenses during the years ended December 31, 2004 and 2003, respectively.
       Our expense ratio, which is calculated as acquisition costs plus general and administrative expenses divided by net premiums earned, was 19.4% in the year ended December 31, 2004, compared to 19.6% in the year ended December 31, 2003. The expense ratio declined slightly in 2004 largely because of the decrease in acquisition costs as a percentage of our premiums earned, described above.
Net Income
       As a result of the above, net income for the year ended December 31, 2004 was $197.2 million compared to net income of $288.4 million for the year ended December 31, 2003. Net income for the year ended December 31, 2004 included foreign exchange gain of $0.3 million and income tax recovery of $2.2 million. Net income for the year ended December 31, 2003 included foreign exchange gain of $4.9 million and income tax expense of $6.9 million. The decrease in foreign exchange gain in 2004 reflected the foreign exchange hedge program that was established during the year. The decrease in income tax expense reflected the reduction of net income for our U.S. and European subsidiaries.
Underwriting Results by Operating Segments
       Our company is organized into three operating segments:
       Property Segment. Our property segment includes the insurance of physical property and business interruption coverage for commercial property and energy-related risks. We write solely commercial coverages and focus on the insurance of primary risk layers, where we believe we have a competitive advantage. This means that we are typically part of the first group of insurers that cover a loss up to a specified limit. We believe that there is generally less pricing competition in these layers, which allows us to retain greater control over our pricing and terms. These risks also carry higher premium rates and require specialized underwriting skills. Additionally, participation in the primary insurance layers, rather than the excess layers, helps us to better define and manage our property catastrophe exposure. Our current average net risk exposure (net of reinsurance) is approximately $3 to $7 million per individual risk.
       Casualty Segment. Our direct casualty underwriters provide a variety of specialty insurance casualty products to large and complex organizations around the world. Our casualty segment specializes in insurance products providing coverage for general and product liability, professional liability and healthcare liability risks. We focus primarily on insurance of excess layers, where we insure the second and/or subsequent layers of a policy above the primary layer. We limit our maximum net casualty exposure (net of reinsurance) to approximately $25 to $29 million per individual risk.
       Reinsurance Segment. Our reinsurance segment includes the reinsurance of property, general casualty, professional lines, specialty lines and catastrophe coverages written by other insurance companies. We believe we have developed a reputation for skilled underwriting in several niche reinsurance markets including professional lines, specialty casualty, property for U.S. regional

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insurers, and accident and health. We presently write reinsurance on both a treaty and a facultative basis. Pricing in the reinsurance market tends to be more cyclical than in the direct insurance market. As a result, we seek to increase or decrease our presence in this marketplace based on market conditions.
       Beginning in 2003, our business mix shifted from property insurance to casualty insurance and reinsurance as we took advantage of attractive rates, terms and conditions in the casualty and reinsurance markets. This trend continued in 2004 as we added further resources to our business in several casualty lines. 2003 was the first full year of operations for our reinsurance segment, which began in early 2002 but was not fully staffed until after the January 2002 renewal season. The growth of the reinsurance segment continued in 2004 as we expanded the reinsurance segment by writing more risks outside of North America (mainly in Europe). The reinsurance segment grew in 2005 relative to our direct insurance segments as a result of a decline in casualty and property gross premiums written due primarily to the cancellation of the surplus lines program administrator agreements and a reinsurance agreement with AIG subsidiaries in the United States. We also took advantage of growth opportunities within the reinsurance casualty and specialty lines during that period. On a written basis, our business mix is more heavily weighted to reinsurance during the first three months of the year due to the large number of reinsurance accounts with effective dates in January.
       Gross premiums written and net premiums earned by segment for the three months ended March 31, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003 are illustrated in the following charts:
     
(GRAPH)
  (GRAPH)
       Management measures results for each segment on the basis of the “loss ratio,” “acquisition cost ratio,” “general and administrative 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, among others, staff count and each segment’s proportional share of gross premiums written.

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Property Segment
       The following table summarizes the underwriting results and associated ratios for the property segment for the three months ended March 31, 2006 and 2005, and the years ended December 31, 2005, 2004 and 2003.
                                         
    Three Months    
    Ended   Year Ended
    March 31,   December 31,
         
    2006   2005   2005   2004   2003
                     
    ($ in millions)
Revenues
                                       
Gross premiums written
  $ 119.8     $ 104.0     $ 412.9     $ 548.0     $ 554.7  
Net premiums written
    67.2       56.5       170.8       308.6       383.3  
Net premiums earned
    49.1       74.7       226.8       333.2       356.3  
Expenses
                                       
Net losses and loss expenses
  $ 33.3     $ 50.4     $ 410.3     $ 320.5     $ 183.1  
Acquisition costs
    (1.5 )     5.4       5.7       30.4       39.2  
General and administrative expenses
    5.1       4.3       20.2       25.5       20.9  
Underwriting income (loss)
    12.2       14.6       (209.4 )     (43.2 )     113.1  
Ratios
                                       
Loss ratio
    67.9 %     67.4 %     180.9 %     96.2 %     51.4 %
Acquisition cost ratio
    (3.0 )     7.2       2.5       9.1       11.0  
General and administrative expense ratio
    10.4       5.8       8.9       7.7       5.9  
Expense ratio
    7.4       13.0       11.4       16.8       16.9  
Combined ratio
    75.3       80.4       192.3       113.0       68.3  
Comparison of Three Months Ended March 31, 2006 and 2005
       Premiums. Gross premiums written were $119.8 million for the three months ended March 31, 2006 compared to $104.0 million for the three months ended March 31, 2005, an increase of $15.8 million or 15.2%. The increase in gross premiums written was primarily due to significant market rate increases on certain catastrophe exposed North American general property business, resulting from record industry losses following the hurricanes which occurred in the second half of 2005. We also had an increase in the volume of business written due to increased opportunities in the property insurance market. The majority of North American general property accounts are currently written out of our Bermuda office, where gross premiums increased by $21.4 million, or 100.3%, for the three months ended March 31, 2006. We expect rates on this business to continue to increase in the near term. Offsetting these increases was a reduction in gross premiums written generated by our U.S. offices. This decrease reflected the cancellation of surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. Gross premiums written under these agreements in the three months ended March 31, 2006 were nil compared to $10.4 million written in the three months ended March 31, 2005. During the second half of 2005, we added staff members to our New York and Boston offices and opened offices in Chicago and San Francisco in order to expand our U.S. property distribution platform. We continued this development in the three-month period ending March 31, 2006 and gross premiums written by our underwriters in these offices were $5.3 million for the period compared to nil for the three months ended March 31, 2005. We expect continued development of our property business for the remainder of 2006 through these newly formed offices.
       Net premiums written increased by $10.7 million, or 18.9%, a slightly greater rate than gross premiums written. This was primarily due to a decline in the quota share percentage of our general

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property treaty from 45% to 35%, effective October 1, 2005. Effective April 1, 2006, the quota share percentage on this treaty returned to 45%. The $25.6 million decline in net premiums earned was primarily due to the loss of earned premiums resulting from the cancellation of the surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG, partially offset by increased earnings from the Bermuda general property business. Net premiums earned for the three months ended March 31, 2006 included $1.6 million in ceded premium related to our property catastrophe reinsurance protection. The cost of our property catastrophe reinsurance protection will increase for the remainder of the 2006, as a result of increased rates arising from the losses experienced by the industry in 2004 and 2005. We anticipate that the cost of this protection for the remainder of 2006 will be approximately $30 million on an earned basis.
       Net losses and loss expenses. Net losses and loss expenses decreased by 33.9% to $33.3 million for the three months ended March 31, 2006 from $50.4 million for the three months ended March 31, 2005, consistent with the decrease in net premiums earned. The property loss ratio of 67.9% for the period ended March 31, 2006 was comparable to the loss ratio of 67.4% for the same period in 2005. Net paid losses for the three months ended March 31, 2006 and 2005 were $51.9 million and $63.0 million, respectively. Net paid losses for the three months ended March 31, 2006 included $10.1 million recovered from our property catastrophe reinsurance coverage as a result of losses paid due to Hurricanes Katrina and Rita. The net losses and loss expenses for the segment for the three- month period ended March 31, 2006 included $2.5 million of unfavorable development relating to the 2005 storms. In comparison, no adjustments relating to development on the reserves of prior years were included in net losses and loss expenses for the three-month period ended March 31, 2005.
       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended March 31, 2006 and 2005. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Three Months
    Ended
    March 31,
     
    2006   2005
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 543.7     $ 404.2  
Incurred related to:
               
 
Current period non-catastrophe
    30.8       50.4  
 
Current period property catastrophe
           
 
Prior period non-catastrophe
           
 
Prior period property catastrophe
    2.5        
             
   
Total incurred
  $ 33.3     $ 50.4  
Paid related to:
               
 
Current period non-catastrophe
          0.8  
 
Current period property catastrophe
           
 
Prior period non-catastrophe
    29.5       48.5  
 
Prior period property catastrophe
    22.4       13.7  
             
   
Total paid
  $ 51.9     $ 63.0  
Foreign exchange revaluation
    0.2       (0.7 )
             
Net reserve for losses and loss expenses, March 31
    525.3       390.9  
Losses and loss expenses recoverable
    465.6       193.1  
             
Reserve for losses and loss expenses, March 31
  $ 990.9     $ 584.0  
       As a result of our 2005 hurricane losses and the recoverables due to us from reinsurers that participated in our property treaties and property catastrophe reinsurance contract, our losses and

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loss expenses recoverable balance increased significantly in the first quarter ended March 31, 2006 compared to the first quarter ended March 31, 2005.
       Acquisition costs. Acquisition costs decreased to negative $1.5 million for the three months ended March 31, 2006 from $5.4 million for the three months ended March 31, 2005. 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 to negative 3.0% for the three months ended March 31, 2006 from 7.2% for the same period 2005 primarily as a result of structural changes in our U.S. distribution platform. Historically, our U.S. business was generated via surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. Under these agreements, we paid additional commissions to the program administrators and cedent equal to 7.5% of the gross premiums written. These agreements were cancelled and the related gross premiums written were substantially earned by December 31, 2005. In the three-month period ended March 31, 2005, $34.5 million, or 46.1%, of the property segment’s net premiums earned related to business generated via these agreements versus a negligible amount in the three months ended March 31, 2006. Gross written premiums from our U.S. offices are now underwritten by the company’s own staff and, as a result, we do not incur the 7.5% override commission historically paid to AIG. In addition, we now cede a portion of our U.S. business on a quota share basis under our general property treaty. This cession generates an overriding commission of 7.5% and has helped to further reduce acquisition costs on our U.S. business. The factors that will determine the amount of acquisition costs going forward are the amount of brokerage fees and commissions incurred on policies we write less ceding commissions earned on reinsurance we purchase. We normally negotiate our reinsurance treaties on an annual basis, so the rates will vary from renewal period to renewal period. If the amount of ceding commissions earned exceeds the brokerage fees and commissions incurred, the overall acquisition costs will be negative. Based on these factors, we expect our ceding commissions to decrease for the remainder of 2006.
       General and administrative expenses. General and administrative expenses increased to $5.1 million for the three months ended March 31, 2006 from $4.3 million for the three months ended March 31, 2005. The increase in general and administrative expenses was primarily attributable to additional staff and administrative expenses incurred in conjunction with the development of our U.S. property distribution platform. We opened our Chicago and San Francisco offices after the first quarter of 2005 and also increased our staffing presence in New York to include property underwriters after the first quarter of 2005. The cost of salaries and employee welfare also increased for existing staff. The increase in the general and administrative expense ratio from 5.8% for the three months ended March 31, 2005 to 10.4% for the same period in 2006 was the result of start-up costs in the United States rising at a faster rate than premiums.
Comparison of Years Ended December 31, 2005 and 2004
       Premiums. Gross premiums written were $412.9 million for the year ended December 31, 2005 compared to $548.0 million for the year ended December 31, 2004. The decrease in gross premiums written of $135.1 million for the year ended December 31, 2005 compared to the year ended December 31, 2004 was primarily due to the cancellation of surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG, which had been our major distribution channel for property business in the United States. We wrote gross premiums of approximately $164.8 million under these agreements for the year ended December 31, 2004 compared to $14.5 million written for the year ended December 31, 2005. During 2005, we added staff members to our New York and Boston offices in order to build our U.S. property distribution platform. We opened an office in San Francisco in October 2005 and an office in Chicago in November 2005, and we expect to continue to develop our property business in the United States in 2006 through these newly formed offices. Gross premiums written by our underwriters in these offices were $10.9 million for the year ended December 31, 2005 compared to nil in the year ended December 31, 2004. Gross premiums written by our Bermuda and European offices were

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comparable to the prior year, increasing slightly by $4.7 million primarily due to an increase in volume produced by our European offices.
       Net premiums written decreased by 44.7%, or $137.8 million, for the year ended December 31, 2005 compared to the year ended December 31, 2004. Of this decline in net premiums written, $148.7 million was due to the loss of AIG-sourced production offset by approximately an $11.3 million increase in net premiums written by our European offices. Excluding property catastrophe cover, we ceded 51.9% of gross premiums written for the year ended December 31, 2005 compared to 39.5% in the year ended December 31, 2004. Although we reduced exposure in the United States, the cost of our property catastrophe reinsurance coverage allocated to the property segment in 2005 was $4.9 million greater than the prior period due to reinstatement premiums from claims for Hurricanes Katrina and Rita in 2005. This cost is reflected as a reduction in our net premiums written. This reinsurance protects our property book of business from any catastrophic event such as a hurricane, earthquake or flood, with the coverage formulated to mitigate the likelihood of a single catastrophic loss exceeding 10% of our total capital for a “one-in-250-year” event. It is expected that the cost of property catastrophe coverage will increase significantly in 2006 due to an increase in rates arising from the losses experienced by the industry in 2004 and 2005.
       The decrease in net premiums earned of $106.4 million, or 31.9%, reflected the decrease in net premiums written. The percentage decrease of 31.9% was less than that for net premiums written of 44.7% due to the earning of prior year premiums.
       Net losses and loss expenses. Net losses and loss expenses increased by $89.8 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The property loss ratio increased 84.7 points in 2005 primarily due to the exceptional number and intensity of storms during the year. Net losses and loss expenses included $237.8 million in net losses resulting from windstorm catastrophes in 2005 (adversely impacting the loss ratio by 104.9 points) and net losses from development of 2004 storms equal to $49.0 million (adversely impacting the loss ratio by 21.6 points) and $71.8 million in net positive development from prior accident years, which was the result of continued favorable loss emergence (favorably impacting the loss ratio by 31.7 points). Comparatively, net losses and loss expenses for the year ended December 31, 2004 included $104.5 million in net losses resulting from third quarter 2004 hurricanes (adversely impacting the loss ratio by 31.4 points), and included net positive development relating to prior accident years of $18.4 million (favorably impacting the loss ratio by 5.5 points). The loss ratio after the effect of catastrophes and prior year development was higher for 2005 versus 2004 due to the impact of certain rate decreases since 2003, the increase in reported loss activity during 2005 and the effect of additional property catastrophe reinsurance coverage paid by us, reducing our net premiums earned. Net paid losses increased from $140.2 million for the year ended December 31, 2004 to $267.5 million for the year ended December 31, 2005, reflecting the development of our book of business along with increased payments for catastrophe claims.

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       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2005 and 2004. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2005   2004
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 404.2     $ 221.7  
Incurred related to:
               
 
Current year non-catastrophe
    195.3       234.4  
 
Current year property catastrophe
    237.8       104.5  
 
Prior year non-catastrophe
    (71.8 )     (18.4 )
 
Prior year property catastrophe
    49.0        
             
   
Total incurred
  $ 410.3     $ 320.5  
Paid related to:
               
 
Current year non-catastrophe
    38.6       10.9  
 
Current year property catastrophe
    36.6       32.2  
 
Prior year non-catastrophe
    122.9       97.1  
 
Prior year property catastrophe
    69.3        
             
   
Total paid
  $ 267.5     $ 140.2  
Foreign exchange revaluation
    (3.3 )     2.2  
             
Net reserve for losses and loss expenses, December 31
    543.7       404.2  
Losses and loss expenses recoverable
    515.1       185.1  
             
Reserve for losses and loss expenses, December 31
  $ 1,058.8     $ 589.3  
       Acquisition costs. Acquisition costs decreased to $5.7 million for the year ended December 31, 2005 from $30.4 million for the year ended December 31, 2004, representing a decrease of 81.3%. The decrease resulted from a greater amount of ceding commissions received from reinsurance treaties as we ceded a larger proportion of property business. It was also due to a general decrease in brokerage rates during 2005. In addition, our surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG were cancelled, which carried an additional 7.5% commission on the gross premiums written. Total acquisition costs relating to premiums written through these agreements with subsidiaries of AIG were $12.8 million for the year ended December 31, 2005 compared to $30.2 million for the year ended December 31, 2004. Effective October 1, 2005, the ceding commission for our general property quota share treaty declined from a flat rate of 26% applied to gross premiums ceded to an overriding commission of 7.5% applied to gross premiums ceded plus original commissions paid by us.
       General and administrative expenses. General and administrative expenses decreased to $20.2 million for the year ended December 31, 2005 from $25.5 million for the year ended December 31, 2004. The decrease in general and administrative expenses for 2005 versus 2004 reflected the decrease in the production of business. Fees paid to subsidiaries of AIG in return for the provision of administrative services were based on a percentage of our gross premiums written. The general and administrative expense ratio increased during the period as expenses did not decrease to the same extent as net premiums earned.
Comparison of Years Ended December 31, 2004 and December 31, 2003
       Premiums. Our property premiums remained relatively constant in 2004 compared to 2003, with only a slight decrease in gross premiums written of 1.2% or $6.7 million. Our European offices contributed growth of about $106.1 million in 2004, the first full year of operations for the property segment in Europe.

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       Our Bermuda office wrote $238.0 million in property premiums in 2004, which was 19.7% less than in 2003, due in part to the transfer of some business to our fully operational European offices, but also due to a modest decline in prices. Although premium rates in this segment increased significantly in recent years, they began to decline compared to levels in 2002 and 2003. Terms and conditions and client self-insured retention levels remained at desired levels in 2004.
       Our U.S. offices wrote $165.0 million in property premiums in 2004, which was 24.8% less than in 2003. The amount of premiums written through surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG declined in 2004, and the agreements were cancelled prior to the 2005 calendar year. The amount of property premiums written through these distribution channels in 2004 and 2003 was $164.8 million and $218.7 million, respectively (30.1% and 39.4% of total property gross premiums written, respectively).
       Net premiums written decreased by 19.5% in 2004 from 2003, a larger decrease than that of gross premiums written. This reflected additional premiums ceded to reinsurers in 2004 (43.7% of our gross premiums written including property catastrophe cover) as it was the first full year ceding general property business on a proportional basis from our Bermuda and European subsidiaries. There was also an increase in energy gross premiums written in Europe, which were also covered by treaty reinsurance. We also increased the amount of facultative reinsurance purchased during 2004 compared to 2003 in order to take advantage of attractive rates and to limit our exposure. In addition, we ceded $11.3 million in premiums relating to an energy fronting agreement for the first time in 2004.
       Offsetting the increases in ceded premiums was the decrease in the cost of property catastrophe cover allocated to the property segment from $34.3 million in 2003 to $22.8 million in 2004. In October 2003, we began to reduce our limits on U.S. business with catastrophe exposure, which reduced our catastrophe reinsurance cost in 2004. Catastrophe reinsurance protects our property book of business from any catastrophic event such as a hurricane, earthquake or flood, with the coverage formulated to mitigate the likelihood of a single catastrophic loss exceeding 10% of our total capital for a “one-in-250-year” event.
       Net premiums earned decreased in 2004 as compared to 2003 primarily due to the increase in premiums ceded.
       Net losses and loss expenses. Net losses and loss expenses increased to $320.5 million for the year ended December 31, 2004 from $183.1 million for the year ended December 31, 2003. The property loss ratio had an increase of 44.8 points in 2004 primarily due to the exceptional number of storms in the third quarter. Net losses and loss expenses included $104.5 million in net losses resulting from third quarter hurricanes (adversely impacting the loss ratio by 31.4 points). Offsetting this increase was $18.4 million in net positive development from prior accident years included in 2004 results, which was the result of continued favorable loss emergence. Comparatively, 2003 results included $50.2 million of positive development relating to reductions in estimated ultimate losses incurred for the accident year 2002. Rate decreases in property insurance also contributed to the increase in the loss ratio in 2004 over 2003. Net paid losses increased from $71.8 million in 2003 to $140.2 million in 2004, reflecting the development of our book of business along with increased payments resulting from catastrophe claims.

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       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2004 and 2003. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2004   2003
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 221.7     $ 108.8  
Incurred related to:
               
 
Current year non-catastrophe
    234.4       233.3  
 
Current year property catastrophe
    104.5        
 
Prior year non-catastrophe
    (18.4 )     (50.2 )
 
Prior year property catastrophe
           
             
   
Total incurred
  $ 320.5     $ 183.1  
Paid related to:
               
 
Current year non-catastrophe
    10.9       32.8  
 
Current year property catastrophe
    32.2        
 
Prior year non-catastrophe
    97.1       39.0  
 
Prior year property catastrophe
           
             
   
Total paid
  $ 140.2     $ 71.8  
Foreign exchange revaluation
    2.2       1.6  
             
Net reserve for losses and loss expenses, December 31
    404.2       221.7  
Losses and loss expenses recoverable
    185.1       70.6  
             
Reserve for losses and loss expenses, December 31
  $ 589.3     $ 292.3  
       Acquisition costs. Acquisition costs decreased to $30.4 million for the year ended December 31, 2004 from $39.2 million for the year ended December 31, 2003. The acquisition cost ratio for 2004 declined by 1.9 points due to the increase in the amount of ceding commissions received, which offsets our gross acquisition cost. This was the result of the increase in volume of business ceded to reinsurers.
       General and administrative expenses. General and administrative expenses increased to $25.5 million for the year ended December 31, 2004 from $20.9 million for the year ended December 31, 2003. The increase in general and administrative expenses of $4.6 million in 2004 reflected primarily the growth of our underwriting staff in Europe. The increase was also the result of maintaining staff levels while more business was ceded during the year, so relatively fixed costs were spread over a smaller net premium base. Thus, the overall expense ratio for 2004 remained comparable to that of 2003 as the increase in ceding commission lowered the acquisition cost ratio while the reduction in net premium base similarly increased the general and administrative expense ratio.

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Casualty Segment
       The following table summarizes the underwriting results and associated ratios for the casualty segment for the three months ended March 31, 2006 and 2005, and the years ended December 31, 2005, 2004 and 2003.
                                         
    Three Months    
    Ended   Year Ended
    March 31,   December 31,
         
    2006   2005   2005   2004   2003
                     
    ($ in millions)
Revenues
                                       
Gross premiums written
  $ 130.5     $ 141.6     $ 633.0     $ 752.1     $ 678.6  
Net premiums written
    114.2       124.7       557.6       670.0       622.8  
Net premiums earned
    132.0       151.3       581.3       636.3       536.1  
Expenses
                                       
Net losses and loss expenses
  $ 97.6     $ 110.9     $ 431.0     $ 436.1     $ 431.9  
Acquisition cost
    9.3       9.1       33.5       59.5       57.3  
General and administrative expenses
    9.9       8.6       44.3       39.8       31.8  
Underwriting income
    15.2       22.7       72.5       100.9       15.1  
Ratios
                                       
Loss ratio
    73.9 %     73.3 %     74.1 %     68.5 %     80.6 %
Acquisition cost ratio
    7.1       6.0       5.8       9.4       10.7  
General and administrative expense ratio
    7.5       5.7       7.6       6.2       5.9  
Expense ratio
    14.6       11.7       16.6       15.6       16.6  
Combined ratio
    88.5       85.0       87.5       84.1       97.2  
Comparison of Three Months Ended March 31, 2006 and 2005
       Premiums. Gross premiums written declined $11.1 million, or 7.8%, for the three months ended March 31, 2006 compared to the same period in 2005. The decrease reflected the cancellation of surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. Gross premiums written under these agreements in the three months ended March 31, 2006 were approximately $0.3 million compared to $6.6 million in the three months ended March 31, 2005. Although the agreements were cancelled, we continued to receive premium adjustments during the three months ended March 31, 2006. There was also a decline in volume of premiums written through surplus lines agreements with an affiliate of Chubb of approximately $3.3 million for the three months ended March 31, 2006 compared to the three months ended March 31, 2005. This decline was due to a number of factors including the timing of policy recording and a change in our underwriting guidelines with Chubb, which decreased our limits for certain business and eliminated directors and officers as well as errors and omissions business. As well, we had a decline of approximately $2.7 million in pharmaceutical business as a result of companies self insuring certain exposures rather than purchasing insurance. Partially offsetting these decreases was an increase in the volume of business written through our U.S. offices with the opening of offices in Chicago and San Francisco in the fourth quarter of 2005, which increased gross premiums written by approximately $1 million. Premium rates for the casualty segment during the three months ended March 31, 2006 remained relatively stable compared to those for the three months ended March 31, 2005.

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       Net premiums written decreased in line with the decrease in gross premiums written. The $19.3 million, or 12.8%, decline in net premiums earned was the result of the decline in gross premiums written since 2004.
       Net losses and loss expenses. Net losses and loss expenses decreased to $97.6 million for the three months ended March 31, 2006 from $110.9 million for the three months ended March 31, 2005. The casualty loss ratio of 73.9% for the period ended March 31, 2006 was comparable to 73.3% for the same period in 2005. Net paid losses for the three months ended March 31, 2006 and 2005 were $36.4 million and $12.9 million, respectively. Net paid losses for the three months ended March 31, 2006 included $25 million for a general liability loss that occurred during Hurricane Katrina.
       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the three months ended March 31, 2006 and 2005. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Three Months
    Ended March 31,
     
    2006   2005
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 1,419.1     $ 1,019.6  
Incurred related to:
               
 
Current period non-catastrophe
    97.6       110.9  
 
Current period catastrophe
           
 
Prior period non-catastrophe
           
 
Prior period catastrophe
           
             
   
Total incurred
  $ 97.6     $ 110.9  
Paid related to:
               
 
Current period non-catastrophe
           
 
Current period catastrophe
           
 
Prior period non-catastrophe
    11.4       12.9  
 
Prior period catastrophe
    25.0        
             
   
Total paid
  $ 36.4     $ 12.9  
Foreign exchange revaluation
           
             
Net reserve for losses and loss expenses, March 31
    1,480.3       1,117.6  
Losses and loss expenses recoverable
    142.4       87.5  
             
Reserve for losses and loss expenses, March 31
  $ 1,622.7     $ 1,205.1  
       Acquisition costs. Acquisition costs were $9.3 million for the three months ended March 31, 2006, compared to $9.1 million for the three months ended March 31, 2005. The acquisition cost ratio increased from 6.0% for the three months ended March 31, 2005 to 7.1% for the same period in 2006. The increase was primarily the result of an increase in brokerage fees and commissions on premiums earned as well as a decrease in ceding commission rates for professional lines business ceded on a facultative basis. The amount of ceding commissions received from treaty and facultative reinsurance is offset against our gross acquisition cost.
       General and administrative expenses. General and administrative expenses increased to $9.9 million for the three months ended March 31, 2006 from $8.6 million for the three months ended March 31, 2005. The increase in general and administrative expenses was primarily attributable to additional staff and infrastructure expenses associated with the opening of offices in Chicago and San Francisco during the fourth quarter of 2005. The cost of salaries and employee

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welfare also increased for existing staff. The increase in the general and administrative expense ratio from 11.7% for the three months ended March 31, 2005 to 14.6% for the same period in 2006 was the result of start-up costs in the United States rising at a faster rate than premiums.
Comparison of Years Ended December 31, 2005 and 2004
       Premiums. Gross premiums written declined $119.1 million, or 15.8%, for the year ended December 31, 2005 compared to the year ended December 31, 2004. The decrease reflected the cancellation of surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. Gross premiums written under these agreements in the year ended December 31, 2004 were approximately $109.1 million compared to $7.7 million written in the year ended December 31, 2005. The decline was partially offset by premiums written through our own underwriters in U.S. offices equal to approximately $83.2 million during the year ended December 31, 2005 compared to $30.7 million for the year ended December 31, 2004. The decrease in gross premiums written also reflected a number of accounts that were non-recurring in 2005 as well as decreasing industry rates for casualty lines of business. Casualty rates began to decline in 2004 and continued to decline in 2005. Terms and conditions and client self-insured retention levels, however, remained at desired levels. During 2005, we also reduced our maximum gross limit for pharmaceutical accounts in order to prudently manage this exposure. The change in gross limit resulted in a year-over-year decline in gross premiums written of about $12 million.
       In June 2004, Allied World Assurance Company (U.S.) Inc. opened a branch office in New York, which expanded our distribution in the United States. We have also opened offices in San Francisco and Chicago, which will further expand our presence in the United States.
       Net premiums written decreased in line with the decrease in gross premiums written. The $55.0 million decline in net premiums earned was less than that for premiums written due to the continued earning of premiums written in 2004.
       Net losses and loss expenses. Net losses and loss expenses decreased to $431.0 million for the year ended December 31, 2005 from $436.1 million for the year ended December 31, 2004. The casualty loss ratio for the year ended December 31, 2005 increased by 5.6 points from the year ended December 31, 2004 due largely to a $25 million general liability loss that occurred during Hurricane Katrina. Net losses and loss expenses for the year ended December 31, 2005 also included positive reserve development of $22.7 million compared to positive reserve development of $43.3 million in the year ended December 31, 2004. The decrease in estimated losses from prior accident years was the result of very low loss emergence to date on the claims-made lines of business. Net paid losses for the years ended December 31, 2005 and 2004 were $31.5 million and $7.1 million, respectively.

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       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2005 and 2004. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2005   2004
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 1,019.6     $ 590.6  
Incurred related to:
               
 
Current year non-catastrophe
    428.7       479.4  
 
Current year catastrophe
    25.0        
 
Prior year non-catastrophe
    (22.7 )     (43.3 )
 
Prior year catastrophe
           
             
   
Total incurred
  $ 431.0     $ 436.1  
Paid related to:
               
 
Current year non-catastrophe
          0.9  
 
Current year catastrophe
           
 
Prior year non-catastrophe
    31.5       6.2  
 
Prior year catastrophe
           
             
   
Total paid
  $ 31.5     $ 7.1  
Foreign exchange revaluation
           
             
Net reserve for losses and loss expenses, December 31
    1,419.1       1,019.6  
Losses and loss expenses recoverable
    128.6       73.6  
             
Reserve for losses and loss expenses, December 31
  $ 1,547.7     $ 1,093.2  
       Acquisition costs. Acquisition costs decreased to $33.5 million for the year ended December 31, 2005 from $59.5 million for the year ended December 31, 2004. Total acquisition costs relating to premiums written through surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG were approximately $5.6 million for the year ended December 31, 2005 compared to approximately $15.0 million for the year ended December 31, 2004. The acquisition cost ratio decreased from 9.4% for the year ended December 31, 2004 to 5.8% for the year ended December 31, 2005. The decrease was due to a general decrease in industry brokerage rates paid by us, the cancellation of the surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG, which carried an additional 7.5% commission on the gross premiums written, and a slight increase in the rate of ceding commissions. The amount of ceding commissions received from treaty and facultative reinsurance is offset against our gross acquisition costs.
       General and administrative expenses. General and administrative expenses increased to $44.3 million for the year ended December 31, 2005 from $39.8 million for the year ended December 31, 2004. The increase in general and administrative expenses for 2005 versus 2004 was largely attributable to additional expenses related to the New York office, which was fully operational for the full year in 2005 while it had just opened in June 2004. The increase in the general and administrative expense ratio is a result of the start-up costs in the United States causing expenses to rise at a faster rate than premiums.
Comparison of Years Ended December 31, 2004 and December 31, 2003
       Premiums. Gross premiums written increased 10.8%, or $73.5 million, for the year ended December 31, 2004 compared to the year ended December 31, 2003. While premium rates in the casualty segment began to decline in 2004, terms and conditions and client self-insured retention levels remained at desired levels. We continued to grow despite the decrease in rates due mainly to

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expansion in the United States (where gross premiums increased by 15.4%) and Europe (where gross premiums increased by 67.2%). Bermuda production of business remained constant in 2004. In May 2003, the London branch of Allied World Assurance Company (Europe) Limited commenced operations and enabled us to better access brokers in continental Europe. This accessibility provided continued growth for a full year in 2004. In June 2004, Allied World Assurance Company (U.S.) Inc. formed a branch office in New York, which expanded its distribution in the United States and increased our penetration into the professional liability market. In August 2004, the New York branch expanded capabilities to underwrite excess liability and errors and omissions coverages. The New York branch produced approximately $11.9 million in gross premiums written during 2004.
       Distribution of our insurance products in the United States was accomplished mainly through agreements between our U.S. subsidiaries and subsidiaries of AIG. The surplus lines program administrator agreements were cancelled effective January 1, 2005, and the reinsurance agreement was cancelled effective December 21, 2004. Gross premiums written under these agreements in each of 2004 and 2003 were $109.3 million and $101.9 million, respectively, representing 14.5% and 15.0%, respectively, of total casualty gross premiums written.
       Net premiums written increased more modestly than gross premiums written in 2004. During 2003, we ceded 8.2% of our casualty premiums to reinsurers while in 2004 we ceded 10.9%. The increase in ceded premiums reflects a full year of treaty reinsurance on general casualty business from Bermuda and Europe, and to a lesser extent, an added quota share component of the treaty effective March 1, 2004.
       Net earned premium growth of $100.2 million in 2004 benefited from the growth of written premiums in 2003.
       Net losses and loss expenses. Net losses and loss expenses increased to $436.1 million for the year ended December 31, 2004 from $431.9 million for the year ended December 31, 2003. The 2004 casualty loss ratio decreased 12.1 points primarily due to positive development on prior accident years of $43.3 million reported in 2004 versus no positive development recorded in 2003. The decrease in estimated losses from prior accident years was the result of very low loss emergence to date on the claims-made lines of business. The mix of business contributed to the decrease in the loss ratio as more business was produced by Europe, having lower expected loss expenses due to a more favorable European regulatory environment.
       We had paid losses of $7.1 million in 2004 and $0.9 million in 2003.

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       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2004 and 2003. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2004   2003
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 590.6     $ 159.6  
Incurred related to:
               
 
Current year non-catastrophe
    479.4       431.9  
 
Current year catastrophe
           
 
Prior year non-catastrophe
    (43.3 )      
 
Prior year catastrophe
           
             
   
Total incurred
  $ 436.1     $ 431.9  
Paid related to:
               
 
Current year non-catastrophe
    0.9       0.6  
 
Current year catastrophe
           
 
Prior year non-catastrophe
    6.2       0.3  
 
Prior year catastrophe
           
             
   
Total paid
  $ 7.1     $ 0.9  
Foreign exchange revaluation
           
             
Net reserve for losses and loss expenses, December 31
    1,019.6       590.6  
Losses and loss expenses recoverable
    73.6       23.2  
             
Reserve for losses and loss expenses, December 31
  $ 1,093.2     $ 613.8  
       Acquisition costs. Acquisition costs increased slightly to $59.5 million for the year ended December 31, 2004 from $57.3 million for the year ended December 31, 2003. The acquisition cost ratio decreased from 10.7% in 2003 to 9.4% in 2004. The decrease primarily relates to the increased level of premiums ceded in 2004. The amount of ceding commissions received from treaty and facultative reinsurance is offset against our gross acquisition costs. Brokerage rates also declined slightly in 2004.
       General and administrative expenses. General and administrative expenses increased to $39.8 million for the year ended December 31, 2004 from $31.8 million for the year ended December 31, 2003. The increase of $8.0 million in general and administrative expenses in 2004 reflected the continued staff growth within the casualty segment, particularly with the opening of our New York branch office. The increase in the general and administrative expense ratio is a result of the start-up costs in the United States causing expenses to rise at a faster rate than premiums.

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Reinsurance Segment
       The following table summarizes the underwriting results and associated ratios for the reinsurance segment for the three months ended March 31, 2006 and 2005, and the years ended December 31, 2005, 2004 and 2003.
                                         
    Three Months    
    Ended   Year Ended
    March 31,   December 31,
         
    2006   2005   2005   2004   2003
                     
    ($ in millions)
Revenues
                                       
Gross premiums written
  $ 247.8     $ 259.8     $ 514.4     $ 407.9     $ 340.4  
Net premiums written
    246.1       257.4       493.5       394.1       340.4  
Net premiums earned
    127.9       98.0       463.4       356.0       274.8  
Expenses
                                       
Net losses and loss expenses
  $ 75.0     $ 77.1     $ 503.3     $ 256.7     $ 147.1  
Acquisition costs
    28.6       21.9       104.2       80.9       66.1  
General and administrative expenses
    5.3       8.0       29.8       21.1       13.8  
Underwriting income (loss)
    19.0       (9.0 )     (173.9 )     (2.7 )     47.8  
Ratios
                                       
Loss ratio
    58.7 %     78.6 %     108.6 %     72.1 %     53.5 %
Acquisition cost ratio
    22.4       22.4       22.5       22.8       24.0  
General and administrative expense ratio
    4.2       8.1       6.4       5.9       5.0  
Expense ratio
    26.6       30.5       28.9       28.7       29.0  
Combined ratio
    85.3       109.1       137.5       100.8       82.5  
Comparison of Three Months Ended March 31, 2006 and 2005
       Premiums. Gross premiums written were $247.8 million for the three months ended March 31, 2006 compared to $259.8 million for the three months ended March 31, 2005, a decrease of $12.0 million or 4.6%. The decrease in gross premiums written was primarily due to a reduction in the business written on our behalf by IPCUSL under an underwriting agency agreement. We have reduced our exposure limits on this business, which has prompted a reduction in gross premiums written. IPCUSL wrote $22.3 million of property catastrophe business on our behalf in the three months ended March 31, 2006 versus $35.7 million in the three-month period ending March 31, 2005.
       Net premiums written decreased by $11.3 million, or 4.4%, consistent with the decrease in gross premiums written. The $29.9 million increase in net premiums earned was the result of a continued increase in gross premiums written over the past two years. 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 proportional 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 proportional contract may extend up to 24 months. Property catastrophe premiums earn ratably over the term of the reinsurance contract.
       Net losses and loss expenses. Net losses and loss expenses decreased to $75.0 million for the three months ended March 31, 2006 from $77.1 million for the three months ended March 31, 2005. The loss ratio for the three months ended March 31, 2006 decreased 19.9 points from the three-month period ended March 31, 2005. During the three months ended March 31, 2005,

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$13.4 million was incurred for estimated losses as a result of windstorm Erwin, and unfavorable development of $5.7 million was recognized in relation to 2004 storms. Comparatively, favorable reserve development of $2.5 million relating to the 2005 storms was recognized in the three-month period ended March 31, 2006. Net paid losses were $50.0 million for the three months ended March 31, 2006, compared to $20.6 million for the three months ended March 31, 2005. The increase primarily relates to losses paid as a result of the 2005 catastrophes.
       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the quarters ended March 31, 2006 and 2005. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Three Months
    Ended
    March 31,
     
    2006   2005
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 726.3     $ 354.1  
Incurred related to:
               
 
Current period non-catastrophe
    77.5       58.0  
 
Current period property catastrophe
          13.4  
 
Prior period non-catastrophe
           
 
Prior period property catastrophe
    (2.5 )     5.7  
             
   
Total incurred
  $ 75.0     $ 77.1  
Paid related to:
               
 
Current period non-catastrophe
    0.9       0.5  
 
Current period property catastrophe
          0.2  
 
Prior period non-catastrophe
    11.1       8.7  
 
Prior period property catastrophe
    38.0       11.2  
             
   
Total paid
  $ 50.0     $ 20.6  
Foreign exchange revaluation
           
Net reserve for losses and loss expenses, March 31
    751.3       410.6  
Losses and loss expenses recoverable
    56.0       0.9  
             
Reserve for losses and loss expenses, March 31
  $ 807.3     $ 411.5  
       Acquisition costs. Acquisition costs increased $6.7 million to $28.6 million for the three months ended March 31, 2006 from $21.9 million for the three months ended March 31, 2005 primarily as a result of the increase in net premiums earned. The acquisition cost ratio of 22.4% for the three-month period ended March 31, 2006 was consistent with the 22.4% acquisition cost ratio for the three-month period ended March 31, 2005.
       General and administrative expenses. General and administrative expenses decreased to $5.3 million for the three months ended March 31, 2006 from $8.0 million for the three months ended March 31, 2005. The decrease in general and administrative expenses was primarily a result of changes in the cost structure for our administrative functions. General and administrative expenses included fees paid to subsidiaries of AIG in return for the provision of various administrative services. Prior to January 1, 2006, these fees were based on a percentage of our gross premiums written. Effective January 1, 2006, our administrative agreements with AIG subsidiaries were amended and now contain both cost-plus and flat-fee arrangements for a more limited range of services. The services no longer included within the agreements are now provided through additional staff and infrastructure of the company. Prior to January 1, 2006, fees paid to subsidiaries of AIG were allocated to the reinsurance segment based on the segment’s proportionate

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share of gross premiums written; the reinsurance segment constituted 51.4% of consolidated gross premiums written for the three months ended March 31, 2005 and, therefore, was allocated a significant portion of the fees paid to AIG. As a result of the change in the cost structure related to our administrative functions, these expenses are now relatively fixed in nature, so do not vary according to the level of gross premiums written. This has resulted in a decreased allocation of expenses to the reinsurance segment.
Comparison of Years Ended December 31, 2005 and 2004
       Premiums. Gross premiums written were $514.4 million for the year ended December 31, 2005 as compared to $407.9 million for the year ended December 31, 2004. The $106.5 million, or 26.1%, increase in gross premiums written for the year ended December 31, 2005 over the year ended December 31, 2004 was predominantly the result of continued growth of our specialty and traditional casualty reinsurance lines, which grew $84.7 million over the prior year. Although rates generally stabilized in 2005, we believe we have gained market recognition since our reinsurance segment started operations in 2002, and our financial strength has provided us with a competitive advantage and opportunities in the market. Included within the reinsurance segment is business written on our behalf by IPCUSL under an underwriting agency agreement. IPCUSL wrote $83.0 million of property catastrophe business in the year ended December 31, 2005 versus $68.0 million in the year ended December 31, 2004. The rise reflected an increase in reinstatement premiums from a larger number of catastrophe claims on storm activity during 2005. Of the remaining premiums, 15.6% related to property and 84.4% related to casualty risks for the year ended December 31, 2005 versus 22.6% property and 77.4% casualty for the year ended December 31, 2004. We also commenced reinsuring accident and health business in June 2004, which increased gross premiums written by $6.4 million in 2005 over 2004.
       Net premiums written increased by a slightly smaller percentage than gross premiums written during 2005 because we allocated a portion of our property catastrophe coverage to the reinsurance segment, which equaled $16.4 million for the year ended December 31, 2005 compared to $8.1 million for the year ended December 31, 2004. The increase reflected the cost of reinstatement premiums due to claims from Hurricanes Katrina and Rita.
       Net earned premium growth in 2005 benefited from the continued earning of premiums written in 2003 and 2004. 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 proportional 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 proportional contract may extend up to 24 months. Property catastrophe premiums earn ratably over the term of the reinsurance contract. On an earned basis, business written on our behalf by IPCUSL represented 18.1% of total reinsurance earned premium in the year ended December 31, 2005 compared to 18.6% in the year ended December 31, 2004.
       Net losses and loss expenses. Net losses and loss expenses increased to $503.3 million for the year ended December 31, 2005 from $256.7 million for the year ended December 31, 2004. The loss ratio for the year ended December 31, 2005 increased 36.5 points from the year ended December 31, 2004. The increase resulted from increased windstorm activity during 2005. Net losses and loss expenses included $231.6 million of estimated losses relating to Hurricanes Katrina, Rita and Wilma and Windstorm Erwin (adversely impacting the loss ratio by 50.0 points) and $13.5 million of negative development on estimated losses from 2004 storms (adversely impacting the loss ratio by 2.9 points). Comparatively, $81.6 million of estimated losses were incurred during the year ended December 31, 2004 relating to the third quarter hurricanes and typhoons (adversely impacting the loss ratio by 22.9 points). Net losses and loss expenses for the year ended December 31, 2005 also included $17.0 million of positive development relating to reductions in estimated ultimate losses incurred for accident years 2002, 2003 and 2004 (favorably impacting the loss ratio by 3.7 points). Comparatively, there was positive development of $17.8 million on prior

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accident year ultimate losses during the year ended December 31, 2004 (favorably impacting the loss ratio by 5.0 points). The adjusted loss ratio after catastrophes and prior period development was 59.4% for 2005 compared to 54.2% for 2004 — the increase reflects the shift in product mix in 2005 from property to casualty, which generally carries a higher loss ratio than property.
       Paid losses in our reinsurance segment increased from $55.2 million for the year ended December 31, 2004 to $131.1 million for the year ended December 31, 2005, reflecting payment of catastrophe losses as well as the growth and maturity of this segment.
       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2005 and 2004. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2005   2004
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 354.1     $ 152.6  
Incurred related to:
               
 
Current year non-catastrophe
    275.2       192.9  
 
Current year property catastrophe
    231.6       81.6  
 
Prior year non-catastrophe
    (17.0 )     (17.8 )
 
Prior year property catastrophe
    13.5        
             
   
Total incurred
  $ 503.3     $ 256.7  
Paid related to:
               
 
Current year non-catastrophe
    2.1       0.4  
 
Current year property catastrophe
    47.6       24.9  
 
Prior year non-catastrophe
    40.3       29.9  
 
Prior year property catastrophe
    41.1        
             
   
Total paid
  $ 131.1     $ 55.2  
Foreign exchange revaluation
           
             
Net reserve for losses and loss expenses, December 31
    726.3       354.1  
Losses and loss expenses recoverable
    72.6       0.5  
             
Reserve for losses and loss expenses, December 31
  $ 798.9     $ 354.6  
       Acquisition costs. Acquisition costs increased to $104.2 million for the year ended December 31, 2005 from $80.9 million for the year ended December 31, 2004 primarily as a result of the increase in gross premiums written. The acquisition cost ratio for 2005 was 22.5%, as compared to the acquisition ratio of 22.8% for 2004.
       General and administrative expenses. General and administrative expenses increased to $29.8 million for the year ended December 31, 2005 from $21.1 million for the year ended December 31, 2004. The $8.7 million increase in general and administrative expenses in 2005 reflected the increase in underwriting staff and the growth of the business. Fees paid to subsidiaries of AIG in return for the provision of administrative services were based on a percentage of our gross premiums written. The fees charged to the reinsurance segment increased by $5.6 million due to the increase in gross premiums written. Letter of credit costs also increased with the increase in volume of business and property catastrophe loss reserves.
Comparison of Years Ended December 31, 2004 and December 31, 2003
       Premiums. Gross premiums written increased in 2004 by $67.5 million or approximately 19.8%. The largest source of growth in 2004 came from the expansion into international lines. We began reinsuring risks outside of North America late in 2003, and this business grew considerably in

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2004. We also continued to grow specialty lines including accident and health risks, which commenced in 2004. Included within the reinsurance segment is business written on our behalf by IPCUSL under an underwriting agency agreement. IPCUSL wrote 18.0% of total reinsurance premiums in 2003 and 16.7% in 2004. Of the remaining premium, 22.6% related to property and 77.4% related to casualty risks in 2004 versus 29.2% property and 70.8% casualty in 2003.
       During 2004, rate increases moderated or leveled for several business lines within the reinsurance segment, and prices for some risk classes declined from their highs. However, terms and conditions under our treaty and facultative contracts remained favorable.
       Net premiums written increased by a smaller percentage than gross premiums written during 2004 because we began to cede a portion of our accident and health reinsurance premiums to a retrocessionaire.
       Net earned premium growth in 2004 benefited from the growth in written premiums in 2003. On an earned basis, business written on our behalf by IPCUSL represented 18.6% of total reinsurance earned premium in 2004 compared to 21.4% in 2003.
       Net losses and loss expenses. Net losses and loss expenses increased to $256.7 million for the year ended December 31, 2004 from $147.1 million for the year ended December 31, 2003. The loss ratio for the year ended December 31, 2004 increased 18.6 points from 2003. The increase resulted mainly from hurricane and typhoon losses that amounted to $81.6 million (adversely impacting the loss ratio by 22.9 points). Partially offsetting a portion of these losses was $17.8 million in positive development relating to reductions in estimated ultimate incurred property losses for accident years 2002 and 2003. Comparatively, results for 2003 included $6.6 million of positive development in property reinsurance losses due to low loss experience and few natural catastrophes. Paid losses in our reinsurance segment increased from $26.1 million in 2003 to $55.2 million in 2004, reflecting the growth and maturity of this segment as well as payment of some hurricane losses in 2004.

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       The table below is a reconciliation of the beginning and ending reserves for losses and loss expenses for the years ended December 31, 2004 and 2003. Losses incurred and paid are reflected net of reinsurance recoverables.
                     
    Year Ended
    December 31,
     
    2004   2003
         
    ($ in millions)
Net reserves for losses and loss expenses, January 1
  $ 152.6     $ 31.6  
Incurred related to:
               
 
Current year non-catastrophe
    192.9       153.7  
 
Current year property catastrophe
    81.6        
 
Prior year non-catastrophe
    (17.8 )     (6.6 )
 
Prior year property catastrophe
           
             
   
Total incurred
  $ 256.7     $ 147.1  
Paid related to:
               
 
Current year non-catastrophe
    0.4       13.3  
 
Current year property catastrophe
    24.9        
 
Prior year non-catastrophe
    29.9       12.8  
 
Prior year property catastrophe
           
             
   
Total paid
  $ 55.2     $ 26.1  
Foreign exchange revaluation
           
             
Net reserve for losses and loss expenses, December 31
    354.1       152.6  
Losses and loss expenses recoverable
    0.5        
             
Reserve for losses and loss expenses, December 31
  $ 354.6     $ 152.6  
       Acquisition costs. Acquisition costs increased to $80.9 million for the year ended December 31, 2004 from $66.1 million for the year ended December 31, 2003. The acquisition cost ratio of 22.8% in 2004 was lower than that of 24.0% in 2003 primarily as a result of the increased proportion of international reinsurance, which had lower acquisition costs.
       General and administrative expenses. General and administrative expenses increased to $21.1 million for the year ended December 31, 2004 from $13.8 million for the year ended December 31, 2003. The increase in general and administrative expenses of $7.3 million in 2004 primarily reflected the further growth in our underwriting staff, costs to establish a new reinsurance processing system and an increase in the allocation of administration service fees due to the proportional increase in gross premiums written by the reinsurance segment. The increase in the general and administrative expense ratio is a result of these additional costs exceeding the rate of growth in our net premiums earned.

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Reserves for Losses and Loss Expenses
       Reserves for losses and loss expenses as of March 31, 2006 and December 31, 2005, 2004 and 2003 were comprised of the following:
                                                                                                                                 
    Property   Casualty   Reinsurance   Total
                 
    Mar. 31,   December 31,   Mar. 31,   December 31,   Mar. 31,   December 31,   Mar. 31,   December 31,
    2006   2005   2004   2003   2006   2005   2004   2003   2006   2005   2004   2003   2006   2005   2004   2003
                                                                 
    ($ in millions)
Case reserves
  $ 643.9     $ 602.8     $ 224.5     $ 127.6     $ 52.0     $ 77.6     $ 29.7     $ 4.9     $ 237.4     $ 240.8     $ 67.7     $ 19.5     $ 933.3     $ 921.2     $ 321.9     $ 152.0  
IBNR
    347.0       456.0       364.8       164.7       1,570.7       1,470.1       1,063.5       608.9       569.9       558.1       286.9       133.1       2,487.6       2,484.2       1,715.2       906.7  
                                                                                                 
Reserve for losses and loss expenses
    990.9       1,058.8       589.3       292.3       1,622.7       1,547.7       1,093.2       613.8       807.3       798.9       354.6       152.6       3,420.9       3,405.4       2,037.1       1,058.7  
Reinsurance recoverables
    (465.6 )     (515.1 )     (185.1 )     (70.6 )     (142.4 )     (128.6 )     (73.6 )     (23.2 )     (56.0 )     (72.6 )     (0.5 )           (664.0 )     (716.3 )     (259.2 )     (93.8 )
                                                                                                 
Net reserve for losses and loss expenses
  $ 525.3     $ 543.7     $ 404.2     $ 221.7     $ 1,480.3     $ 1,419.1     $ 1,019.6     $ 590.6     $ 751.3     $ 726.3     $ 354.1     $ 152.6     $ 2,756.9     $ 2,689.1     $ 1,777.9     $ 964.9  
                                                                                                 
       We participate in certain lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims on these lines are necessarily a valid means for estimating ultimate liabilities. We use statistical and actuarial methods to reasonably estimate ultimate expected 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 actuarial and statistical projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined as experience develops and as claims are reported and 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. See “— Critical Accounting Policies — Reserve for Losses and Loss Expenses” for further details.
Ceded Insurance
       For purposes of managing risk, we reinsure a portion of our exposures, paying reinsurers a part of premiums received on policies we write. Total premiums ceded pursuant to reinsurance contracts entered into by our company with a variety of reinsurers were $70.6 million and $66.6 million for the three months ended March 31, 2006 and 2005, respectively, and were $338.3 million, $335.3 million and $227.2 million for the years ended December 31, 2005, 2004 and 2003, respectively. Certain reinsurance contracts provide us with protection related to specified catastrophes insured by our property segment. We also cede premiums on a proportional basis to limit total exposures in the property, casualty and to a lesser extent reinsurance segments. The following table illustrates our gross premiums written and ceded for the three months ended March 31, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003:
                                         
    Gross Premiums Written and
    Premiums Ceded
     
    Three Months    
    Ended    
    March 31,   Year Ended December 31,
         
    2006   2005   2005   2004   2003
                     
    ($ in millions)
Gross
    498.1       505.3     $ 1,560.3     $ 1,708.0     $ 1,573.7  
Ceded
    (70.6 )     (66.6 )     (338.3 )     (335.3 )     (227.2 )
                               
Net
    427.5       438.7     $ 1,222.0     $ 1,372.7     $ 1,346.5  
                               
Ceded as percentage of Gross
    14.2 %     13.2 %     21.7 %     19.6 %     14.4 %
                               

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       The following table illustrates the effect of our reinsurance ceded strategies on our results of operations:
                                         
    Three Months    
    Ended   Year Ended
    March 31,   December 31,
         
    2006   2005   2005   2004   2003
                     
    ($ in millions)
Premiums written ceded
    70.6       66.6       338.3       335.3       227.2  
Premiums earned ceded
    76.6       80.9       344.2       312.7       156.8  
Losses and loss expenses ceded
    15.1       46.1       602.1       200.1       86.7  
Acquisition costs ceded
    15.9       16.0       66.9       59.1       30.0  
       Our net cash flows relating to ceded reinsurance activities (premiums paid less losses recovered and acquisition costs ceded) were approximately $4 million for the three months ended March 31, 2006 compared to net cash paid of $32 million for the three months ended March 31, 2005. We paid approximately $154 million relating to reinsurance ceded activities for the year ended December 31, 2005 compared to $221 million and $165 million, respectively, for the years ended December 31, 2004 and 2003.
       Our reinsurance ceded strategies have remained relatively consistent since 2003. Our property segment has purchased quota share reinsurance almost from inception. From June 2002 through March 2003, we ceded 50% of up to $10 million of each applicable policy limit of energy business, from April 2003 to June 2006, we ceded 66% of up to $20 million of each applicable policy limit of energy business. From June 2006 to June 2007, we will cede 58.5% of up to $15 million of each applicable policy limit of energy business. From August 2003 to October 2005, we ceded 45% of up to $10 million of each applicable policy limit of general property business, from October 2005 to April 2006, we ceded 35% of up to $10 million of each applicable policy limit of general property business and from April 2006 through October 2006 we will cede 45% of up to $10 million of each applicable policy limit. There are also occurrence limits on our general property treaty of $250 million for U.S. general property business and $100 million for international general property business for the period October 2005 through October 2006. Occurrence limits restrict our ability to recover losses, in the aggregate, for a single event. Notwithstanding the occurrence limit subject to this treaty contract, in the event any loss under this treaty attaches both to policies incepting during the treaty period and to policies incepting outside such period, the sum of losses of all treaty contract years shall not exceed $450 million. Our property reinsurance treaties did not cover property premiums written under the surplus lines program administrator agreements and a reinsurance agreement with subsidiaries of AIG. Our property reinsurance treaties do cover property premiums written by our U.S. underwriters since 2005.
       We also purchase reinsurance to provide protection for specified catastrophes insured by our property segment. The limits for catastrophe protection have decreased from 2003 to 2006 as a result of reducing our exposures in catastrophe-exposed areas. Our strategy regarding the amount of property catastrophe coverage purchased has changed based on our experience with the storms that occurred during 2005. Prior to 2006, our targeted exposure level was up to 10% of capital for any “one-in-250-year” event based on modeled probable losses. For 2006, we are also managing our portfolio of catastrophe exposures based on our gross exposed policy limits and probable loss factors from worst-case historical data. Using this method, we believe that our net probable maximum losses for a “one-in-250-year” event would be manageable under our current property catastrophe reinsurance and capital structure. No assurance can be given, however, as to what our actual losses would be from any such 2006 event.
       Our reinsurance strategy for the casualty segment has also not changed significantly since 2003. We have purchased variable quota share reinsurance for general casualty business since

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December 2002. From December 2002 to March 2004, on policies with limits in excess of $25 million, we ceded 80% of up to $25 million part of $50 million of applicable policy limits while retaining the other $25 million (plus the remaining 20% of up to $25 million part of $50 million). From March 2004 to March 2005, we purchased additional quota share reinsurance equal to 10% of policies with limits of less than or equal to $25 million (or its currency equivalent), and ceded 85% of up to $25 million part of $50 million on a variable quota share basis. From March 2005 to March 2006, we ceded 12% of policies with limits less than or equal to $25 million (or its currency equivalent) and 85% of up to $25 million part of $50 million on a variable quota share basis. For the treaty period from March 2006 to March 2007, we will cede 12% of policies with limits less than or equal to $25 million (or its currency equivalent) and 95% of up to $25 million part of $50 million on a variable quota share basis. Effective March 1, 2006, we will also cede 20% of general casualty policies with limits less than or equal to $25 million written by our U.S. subsidiaries. Since 2003, we have also purchased a limited amount of facultative reinsurance for professional liability policies. We do not anticipate changing this strategy in 2006.
       We purchase a limited amount of retrocession coverage for our reinsurance segment. From June 1, 2004 to March 31, 2006, we ceded approximately $10 million of accident and health reinsurance premiums on a quota share basis. We did not renew this treaty when it expired on June 1, 2006.
       The availability and cost of reinsurance is subject to market conditions, which may be beyond our control. For example, capacity within the property reinsurance market is currently limited. If reinsurance capacity is available in the future, but only from reinsurers that do not meet our minimum financial strength requirements, then we may not be able to purchase the level of protection as we have in the past. Even if reinsurance capacity is available at past levels and from financially acceptable reinsurers, the contractual terms and conditions of such reinsurance could change in the future in ways that would make the reinsurance less financially attractive to us or that could restrict our ability to cede certain types of losses to reinsurers. If such changes occurred, we may choose to reduce our reinsurance purchasing and retain more risk, or we may have to reduce the original policy limits we write.
       The absence of remaining limits also restricts the amount of losses we can recover from reinsurance. Based on our current estimate of losses related to Hurricane Katrina, we believe we have exhausted our $135 million of property catastrophe reinsurance protection with respect to this event.
       We believe we have been successful in obtaining reinsurance protection, and our purchase of reinsurance has allowed us to form strong trading relationships with reinsurers. However, it is not certain that we will be able to obtain adequate protection at cost effective levels in the future. We therefore may not be able to successfully mitigate risk through reinsurance arrangements. Further, we are subject to credit risk with respect to our reinsurers because the ceding of risk to reinsurers does not relieve us of our liability to the clients or companies we insure or reinsure. Our failure to establish adequate reinsurance arrangements or the failure of existing reinsurance arrangements to protect us from overly concentrated risk exposure could adversely affect our financial condition and results of operations.

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       The following table illustrates our reinsurance recoverable as of March 31, 2006 and December 31, 2005 and 2004: