UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a – 101)
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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

27 Richmond Road

Pembroke HM 08, Bermuda

 

NOTICE OF 2008 ANNUAL GENERAL MEETING

TO BE HELD ON MAY 8, 2008

March 21, 2008

 

To Our Shareholders:

 

The 2008 Annual General Meeting of Allied World Assurance Company Holdings, Ltd (the “Company”) will be held at 10:00 a.m., local time, on Thursday, May 8, 2008 at the Company’s corporate headquarters, 27 Richmond Road, Pembroke HM 08, Bermuda, for the following purposes:

 

 

Only shareholders of record holding voting common shares, as shown by the transfer books of the Company, as of the close of business on March 12, 2008 are entitled to vote at the Annual General Meeting and at any adjournment or postponement thereof.

 

Please sign, date and return the enclosed proxy in the return envelope furnished for that purpose, as promptly as possible, whether or not you plan to attend the meeting. If you later desire to revoke your proxy for any reason, you may do so in the manner described in the attached Proxy Statement. For further information concerning the individuals nominated as directors, use of the proxy and other related matters, you are urged to read the Proxy Statement on the following pages.

 

By Order of the Board of Directors,

 

 

Wesley D. Dupont

Secretary

TABLE OF CONTENTS

 

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

27 Richmond Road

Pembroke HM 08, Bermuda

 

 

PROXY STATEMENT

 

 

 

 

 

 

 

 

 

 

The Board is divided into three classes of directors, Class I, Class II and Class III, each of approximately equal size. Two director nominees are being presented for election at the Annual General Meeting to serve as Class I Directors until the Annual General Meeting in 2011 or until their successors are duly elected and qualified or their office is otherwise vacated. All of the nominees are current members of the Board. Such nominees were recommended for appointment to the Board by the Nominating & Corporate Governance Committee of the Board.

 

Your Board recommends a vote FOR each of the nominees listed on the enclosed proxy card. It is not expected that any of the nominees will become unavailable for election as a director but, if any nominee should become unavailable prior to the meeting, proxies will be voted for such persons as your Board shall recommend.

 

The name, age, principal occupation and certain other information concerning each nominee is set forth below.

 

Mark R. Patterson (age 56) was appointed to the Board in March 2006. Since 2002, Mr. Patterson has served as Chairman of MatlinPatterson Asset Management, which manages distressed investment funds. From 1994 until 2002, Mr. Patterson was a Managing Director of Credit Suisse First Boston Corporation, where he served as Vice Chairman from 2000 to 2002. Mr. Patterson had 20 years prior experience in commercial and investment banking at Bankers Trust, Salomon Brothers and Scully Brothers & Foss. Mr. Patterson is currently a member of the board of directors of Broadpoint Securities Group, Inc.

 

Samuel J. Weinhoff (age 57) was appointed to the Board in July 2006. Mr. Weinhoff has served as a consultant to the insurance industry since 2000. Prior to this, Mr. Weinhoff was head of the Financial Institutions Group for Schroder & Co. from 1997 until 2000. He was also a Managing Director at Lehman Brothers, where he worked from 1985 to 1997. Mr. Weinhoff had ten years prior experience at Home Insurance Company and the Reliance Insurance Company in a variety of positions, including excess casualty reinsurance treaty underwriter, investment department analyst, and head of corporate planning and reporting. Mr. Weinhoff is currently a member of the board of directors of Infinity Property and Casualty Corporation where he is a member of both the Executive Committee and the Audit Committee, and of Inter-Atlantic Financial, Inc. where he is a member of both the Audit Committee and Nominating Committee.

 

The following individuals are the Company’s continuing directors:

 

 

It is with deep regret that the Company reports the passing of Mr. Philip D. DeFeo. As a Board member of the Company, Mr. DeFeo provided invaluable guidance to the Company.

 

Scott A. Carmilani (age 43) was elected our President and Chief Executive Officer in January 2004 and became a director in September 2003. As of January 1, 2008, Mr. Carmilani was also appointed Chairman of the Board. Mr. Carmilani was, prior to joining our Company as Executive Vice President in February 2002, the President of the Mergers & Acquisition Insurance Division of subsidiaries of American International Group, Inc. (“AIG”) and responsible for the management, marketing and underwriting of transactional insurance products for clients engaged in mergers, acquisitions or divestitures. Mr. Carmilani was previously the Regional Vice-President overseeing the New York general insurance operations of AIG. Before that he was the Divisional President of the Middle Market Division of National Union Fire Insurance Company of Pittsburgh, Pa., which underwrites directors and officers liability, employment practice liability and fidelity insurance for middle-market-sized companies. Prior to joining our Company, he held a succession of underwriting and management positions with subsidiaries of AIG since 1987.

James F. Duffy (age 64) was appointed to the Board in July 2006. Mr. Duffy retired in 2002 as Chairman and Chief Executive Officer of The St. Paul Reinsurance Group, where he originally served from 1993 until 2000 as President and Chief Operating Officer of global reinsurance operations. Prior to this, Mr. Duffy served as an executive vice president of The St. Paul Companies from 1984 to 1993, and as President and Chief Operating Officer of St. Paul Surplus Lines Insurance Company from 1980 until 1984. Mr. Duffy had 15 years prior experience in insurance underwriting with Employers Surplus Lines Insurance Company, First State Insurance Company and New England Re.

 

Bart Friedman (age 63) was appointed to the Board in March 2006 and was elected Deputy Chairman of the Board effective in July 2006. As of January 1, 2008, Mr. Friedman was also appointed Lead Independent Director of the Board. Mr. Friedman has been a partner at Cahill Gordon & Reindel LLP, a New York law firm, since 1980. Mr. Friedman specializes in corporate governance, special committees and director representation. Mr. Friedman worked early in his career at the SEC. Mr. Friedman is currently a member of the board of directors of Sanford Bernstein Mutual Funds, where he is a member of the Audit Committee and the Nominating and Governance Committee.

 

Michael I.D. Morrison (age 78) has been one of our directors since November 2001 and served as Chairman of the Board from July 2006 through December 2007. He currently also serves as a consultant to the Company. Mr. Morrison was our Vice Chairman from January 2004 to October 2004. Prior to this, Mr. Morrison served as our President and Chief Executive Officer from the inception of our Company in November 2001. He also served as a consultant to AIG from July 1997 to November 2001. Before this, he held various positions with AIG or its subsidiaries, including Vice Chairman of American Home Assurance Company and Senior AIG Executive for broker relations. He also served as General Manager for American International Underwriters Overseas Association’s China Division from July 1994 to June 1997, where he was based in Shanghai. He also served as Director of Domestic Branch Operations from 1983 to 1988, President of American Home Assurance Company from 1978 to 1983 and President of Commerce and Industry Insurance Company from 1976 to 1978. Mr. Morrison joined the property-underwriting department of American Home Assurance Company in 1964 and was appointed manager in 1969. He was a broker and an underwriter in the Lloyd’s market from 1953 to 1959, and a New York broker from 1959 to 1963.

 

Scott Hunter (age 56) was appointed to the Board in March 2006. Mr. Hunter has served as an independent consultant to Bermuda’s financial services industry since 2002. From 1986 until 2002, Mr. Hunter was a partner at Arthur Andersen Bermuda, whose clients included numerous insurance and reinsurance companies.

 

The Board has determined that Messrs. Duffy, Friedman, Hunter, Patterson and Weinhoff are independent under the listing standards of the New York Stock Exchange (“NYSE”). The Company requires that a majority of its directors meet the criteria for independence under applicable law and the rules of the NYSE. The Board has adopted a policy to assist it and the Nominating & Corporate Governance Committee in their determination as to whether a nominee or director qualifies as independent. This policy contains categorical standards for determining independence and includes the independence standards required by the SEC and NYSE as well as standards published by institutional investor groups and other corporate governance experts. In making its determination of independence, the Board applied these standards for director independence and determined that no material relationship existed between the Company and these directors. A copy of the Board Policy on Director Independence was attached as an appendix to the Company’s Proxy Statement filed with the SEC on October 19, 2006.

 

Meetings and Committees of the Board

 

During the year ended December 31, 2007, there were five meetings of the Board (including regularly scheduled and special meetings). Each of our directors attended at least 75% of the aggregate Board meetings and committee meetings of which he was a member during the period he served on the Board, except for Messrs. Patterson and Weinhoff. Our non-management directors meet separately from the other directors in an executive session at least quarterly.

Mr. Carmilani, our President and Chief Executive Officer, was appointed Chairman of the Board in January 2008. Concurrent with this appointment, the Board appointed Mr. Friedman, our Deputy Chairman of the Board, to serve as its Lead Independent Director. The Lead Independent Director’s responsibilities include:

 

 

Michael I.D. Morrison, our Chairman of the Board during 2007, served as the presiding director of the executive sessions of our non-management directors held in 2007. As Mr. Morrison is not an independent director, in accordance with NYSE Rule 303A.03, we held one executive session in 2007 with only our independent directors. During this executive session, Mr. Friedman, our Deputy Chairman of the Board, served as the presiding director.

 

Our Board has established an Audit Committee, a Compensation Committee, an Executive Committee, an Investment Committee and a Nominating & Corporate Governance Committee, each of which reports to the Board. During 2007, the Audit Committee held five meetings, the Compensation Committee held five meetings, the Nominating & Corporate Governance Committee held four meetings, the Executive Committee held no meetings and the Investment Committee held four meetings. The Board has adopted an Audit Committee Charter, a Compensation Committee Charter, an Investment Committee Charter and a Nominating & Corporate Governance Committee Charter. Copies of these charters are available on our website at www.awac.com under “Corporate Governance — Charters.” Printed copies are also available by sending a written request to the Company’s Secretary.

 

Our Board has also approved Corporate Governance Guidelines, a Code of Business Conduct and Ethics and a Code of Ethics for Chief Executive Officer and Senior Financial Officers. The foregoing information is available on our website at www.awac.com under “Corporate Governance — Guidelines” and “Corporate Governance — Codes of Ethics.” Printed copies are also available by sending a written request to the Company’s Secretary.

 

Audit Committee.  The Audit Committee presently consists of Messrs. Hunter (Chairman), Duffy and Weinhoff, each of whom is an independent director. Pursuant to its charter, the Audit Committee is responsible for overseeing our independent auditors, internal auditors, compliance with legal and regulatory standards and the integrity of our financial reporting. Each of Messrs. Hunter, Duffy and Weinhoff has been determined by the Board to be “financially literate” within the meaning of the NYSE Listing Standards and each has been designated by the Board as an “audit committee financial expert,” as defined by applicable rules of the SEC, based on either his extensive prior accounting and auditing experience or having a range of experience in varying executive positions in the insurance or financial services industry.

 

Compensation Committee.  The Compensation Committee presently consists of Messrs. Patterson (Chairman), Friedman and Hunter. The Compensation Committee is comprised entirely of independent directors. Pursuant to its charter, the Compensation Committee has the authority to establish compensation policies and recommend compensation programs to the Board, including administering all stock option plans and incentive compensation plans of the Company.

 

Executive Committee.  The Executive Committee presently consists of Messrs. Carmilani (Chairman), Duffy and Weinhoff. The Executive Committee has the authority to oversee the general business and affairs of the Company to the extent permitted by Bermuda law.

Investment Committee.  The Investment Committee presently consists of Messrs. Patterson (Chairman), Hunter and Weinhoff. The Investment Committee is comprised entirely of independent directors. Pursuant to its charter, the Investment Committee is responsible for establishing investment guidelines and supervising our investment activity.

 

Nominating & Corporate Governance Committee.  The Nominating & Corporate Governance Committee consists of Messrs. Friedman (Chairman), Duffy and Hunter. The Nominating & Corporate Governance Committee is comprised entirely of independent directors. Pursuant to its charter, the Nominating & Corporate Governance Committee is responsible for identifying individuals believed to be qualified to become directors and to recommend such individuals to the Board and to set compliance policies and corporate governance standards.

 

The Nominating & Corporate Governance Committee will consider nominees recommended by shareholders and will evaluate such nominees on the same basis as all other nominees. Shareholders who wish to submit nominees for director for consideration by the Nominating & Corporate Governance Committee for election at the Annual General Meeting in 2009 may do so by submitting in writing such nominees’ names and other information required under Bye-law 34(2) of the Company’s Bye-laws, in compliance with the procedures described under “Shareholder Proposals for 2009 Annual General Meeting” in this Proxy Statement.

 

The criteria adopted by the Board for use in evaluating the suitability of all nominees for director include the following:

 

 

In addition to considering candidates suggested by shareholders, the Nominating & Corporate Governance Committee considers candidates recommended by current directors, Company officers and others. The Nominating & Corporate Governance Committee determines whether or not the candidate meets the Company’s general qualifications and specific qualities for directors and whether or not additional information is appropriate.

 

Director Compensation

 

The following table provides information concerning the compensation of the Company’s non-employee directors for fiscal year 2007.

 

Non-Employee Directors Compensation

 

 

 

 

Since March 1, 2006, directors who are not our employees have been paid the following aggregate fees for serving as directors of both the Company and Allied World Assurance Company, Ltd:

 

 

Additionally, we provide to all non-employee directors reimbursement of expenses incurred in connection with their service on the Board, including the reimbursement of director educational expenses. Commencing in January 2007, each non-employee director receives an annual equity award of RSUs of the Company worth $65,000. Each RSU represents the right to receive one newly-issued, fully paid and non-assessable Common Share of the Company at a future date and fully vests on the first anniversary of the date of grant. The RSUs were, and will be, awarded to our non-employee directors pursuant to the Stock Incentive Plan and were, and will be, granted on similar terms and conditions as those granted to our employees generally. On January 3, 2007, each of our non-employee directors received 1,494 RSUs. In 2008, these annual equity awards were granted concurrently with the grant of equity awards to members of our senior management following the preparation and completion of the 2007 year-end financial statements. Accordingly, on February 28, 2008, each of our non-employee directors received 1,502 RSUs.

 

The Compensation Committee recently approved an increase in the annual fee that the non-employee directors on the Board are entitled to receive. Commencing in 2008, each non-employee director will receive an aggregate

annual retainer of $55,000 for serving as a director of the Company and Allied World Assurance Company, Ltd. The meeting attendance fees and the dollar amount of RSU awards to be granted annually to the non-employee directors remain unchanged.

 

Committee Fees

 

An attendance fee of $1,500 is paid to each committee member who is not an employee of the Company for attendance at committee meetings thereof. Committee meetings of the Company and Allied World Assurance Company, Ltd held on the same day are considered one meeting for the purpose of calculating attendance fees.

 

The Chairman of a committee of the Board also serves as the Chairman of the same committee of the board of directors of Allied World Assurance Company, Ltd, and receives one retainer, paid annually, for such service. The Chairman of the Audit Committee of both the Company and Allied World Assurance Company, Ltd received an annual retainer of $15,000 in 2007. All other committee chairmen of both the Company and Allied World Assurance Company, Ltd receive an annual retainer of $8,000.

 

The Compensation Committee recently approved changes to the annual retainers received by committee chairmen and other non-employee directors on the Board. Commencing in 2008, the Chairman of the Audit Committee of both the Company and Allied World Assurance Company, Ltd will receive an annual retainer of $25,000, and each other member of the Audit Committee will receive an annual retainer of $10,000. In addition, our Lead Independent Director will receive an annual retainer of $15,000.

 

Stock Ownership Policy

 

In order to promote equity ownership and further align the interests of the Board with our shareholders, in 2007 the Board adopted a stock ownership policy for all non-employee directors. Under this policy, non-employee directors are expected to own, within five years after his joining the Board, equity interests of the Company with a value equal to five times the then-current annual cash retainer for serving on the Board. Mr. Carmilani, our President, Chief Executive Officer and Chairman of the Board, is subject to a stock ownership policy for senior employees as described in “Executive Compensation — Compensation Discussion and Analysis— Stock Ownership Policy.”

 

In accordance with our Bye-Laws, no person may be elected as a director of any of the Company’s non-U.S. subsidiaries (excluding Allied World Assurance Company, Ltd) unless such person has been approved by the Company’s shareholders. The individuals identified below have been nominated to serve as Eligible Subsidiary Directors for certain of our non-U.S. subsidiaries.

 

Your Board recommends a vote FOR each slate of nominees listed as Eligible Subsidiary Directors on the enclosed proxy card. It is not expected that any of the nominees will become unavailable for approval as an Eligible Subsidiary Director but, if any nominee should become unavailable prior to the meeting, proxies will be voted for such persons as your Board shall recommend.

 

Allied World Assurance Holdings (Ireland) Ltd

 

Scott A. Carmilani
John Clifford
Wesley D. Dupont
Hugh Governey
Michael I.D. Morrison
John T. Redmond

 

Allied World Assurance Company (Europe) Limited

 

J. Michael Baldwin
Scott A. Carmilani
John Clifford
Hugh Governey
Michael I.D. Morrison
John T. Redmond

 

Allied World Assurance Company (Reinsurance) Limited

 

J. Michael Baldwin
Scott A. Carmilani
John Clifford
Hugh Governey
Michael I.D. Morrison
John T. Redmond

 

Newmarket Administrative Services (Bermuda), Ltd

 

Scott A. Carmilani
Joan H. Dillard
Wesley D. Dupont
Richard E. Jodoin

 

Newmarket Administrative Services (Ireland) Limited

 

Scott A. Carmilani
John Clifford
Hugh Governey
John T. Redmond

 

J. Michael Baldwin (age 66) served as Managing Director of Allied World Assurance Company (Europe) Limited and Allied World Assurance Company (Reinsurance) Limited from November 2001 through July 2006. Mr. Baldwin worked for The Chubb Corporation (“Chubb”) for almost 30 years, starting in 1972. From 1997 to November 2001, Mr. Baldwin worked for Chubb’s European Commercial Insurance Division in London and was elected Senior Vice President of Chubb Insurance Company of Europe in 1998. From 1991 to 1997, Mr. Baldwin was the Zone Underwriting Officer for Latin America and was elected Vice President in 1996. From 1988 to 1991, Mr. Baldwin managed Chubb’s operations in Italy and from 1984 to 1988, he worked at Chubb U.S. as Home Foreign Manager and Underwriting Officer for Asia/Pacific. Prior to that, Mr. Baldwin held various underwriting and managerial positions at Chubb in Latin America. From 1962 to 1972, Mr. Baldwin worked for Royal Insurance in both the United Kingdom and Venezuela.

 

Scott A. Carmilani.  Please see Mr. Carmilani’s biography under “Election of Directors” elsewhere in this Proxy Statement.

 

John Clifford (age 58) has been a non-executive director of Allied World Assurance Company (Reinsurance) Limited since July 2004. From 1967 to date, Mr. Clifford has held various positions at the Bank of Ireland, including Group Secretary since 2003 to present; General Manager, Group Chief Executive Officer’s Office, from 2000 to 2003; Executive Director GB (London Based), responsible for the Bank’s commercial banking activities in Britain, from 1990 to 1999; General Manager, Group Credit Control, from 1987 to 1989; Group Chief Internal Auditor from 1985 to 1987; and Assistant General Manager Banking from 1983 to 1985. Mr. Clifford is a non-executive director of Irish Clearing House Ltd and a number of subsidiary companies within the Bank of Ireland Group. He is a fellow of the Institute of Bankers and a member of the Institute of Directors.

 

Wesley D. Dupont (age 39) is our Senior Vice President, General Counsel and Secretary. In November 2003, Mr. Dupont began working for American International Company Limited, a subsidiary of AIG, and began providing legal services to us pursuant to a former administrative services contract with American International Company

Limited. Through that contract, Mr. Dupont served as our Senior Vice President, General Counsel and Secretary from April 2004 until November 30, 2005. As of December 1, 2005, Mr. Dupont became an employee of our Company. Prior to joining American International Company Limited, Mr. Dupont worked as an attorney at Paul, Hastings, Janofsky & Walker LLP, a large international law firm, where he specialized in general corporate and securities law. From April 2000 to July 2002, Mr. Dupont was a Managing Director and the General Counsel for Fano Securities, LLC, a specialized securities brokerage firm. Prior to that, Mr. Dupont worked as an attorney at Kelley Drye & Warren LLP, another large international law firm, where he also specialized in general corporate and securities law.

 

Joan H. Dillard, CMA (age 56), is our Senior Vice President and Chief Financial Officer. In April 2003, Ms. Dillard began working for American International Company Limited, a subsidiary of AIG, and began providing accounting services to us pursuant to a former administrative services contract with American International Company Limited. Through that contract, Ms. Dillard served as our Vice President and Chief Accounting Officer until November 30, 2005. As of December 1, 2005, Ms. Dillard became an employee of our Company. From August 2001 until December 2002, Ms. Dillard served as the Chief Financial Officer of Worldinsure Ltd., an insurance technology provider. From May 2000 until April 2001, Ms. Dillard served as the Chief Operating Officer and Chief Financial Officer of CICcorp Inc., a medical equipment service provider. From March 1998 until May 2000, Ms. Dillard served as the Chief Financial Officer of ESG Re Limited, based in Hamburg, Germany, and from 1993 until 1998, Ms. Dillard worked for TIG Holdings, Inc. and served as the Chief Financial Officer of TIG Retail Insurance and later as the Senior Vice President of Alternative Distribution. Prior to that, Ms. Dillard served in various senior financial positions at both USF&G Corporation and American General Corporation. Ms. Dillard is currently a member of the board of directors of RAM Holdings Ltd. where she is a member of the Compensation Committee.

 

Hugh Governey (age 65) served as a non-executive director of Coyle Hamilton Willis Holdings, Ltd., a subsidiary of Willis Group Holdings Ltd., a NYSE-traded company, from August 2005 through December 2007, when he retired. From 2004 to 2005, Mr. Governey was the Chief Executive Officer of Coyle Hamilton Willis Holdings Ltd. From 2000 to 2004, Mr. Governey was the Chief Executive Officer of Coyle Hamilton Holdings Ltd. Prior to that, from 1981 to 2000, he was the Managing Director of Coyle Hamilton Corporate Broking, and from 1970 to 1981, was a Director of Coyle Hamilton Phillips Ltd. From 1965 to 1970, he worked for V.P. Phillips & Co. Ltd. Insurance Brokers (then a part of C.E. Heath) and from 1960 to 1965, he worked for the Royal Exchange Assurance Dublin (now part of the AXA Group). From May 2005 to June 2006, Mr. Governey served as the President of the Bureau International des Producteurs d’Assurances at de Réassurances (“BIPAR”), the European Federation of Insurance Intermediaries, which represents the public affairs interests of insurance intermediaries with European institutions. He was Vice President of BIPAR and Chairman of its EU Executive Committee from 1997 to 1998 and was elected Honorary Vice President in 1999. Mr. Governey served as the President of the Dublin Chamber of Commerce from 1999 to 2000; as a member of the board of the Council of Insurance Agents & Brokers (U.S.) from 1998 to 2004; as Vice President of The Chartered Insurance Institute (U.K.) from 1997 to 1998; and as President of the Irish Brokers Association and the Insurance Institute of Dublin from 1994 to 1995 and 1989 to 1990, respectively.

 

Richard E. Jodoin (age 56) has been the President of Allied World Assurance Company (U.S.) Inc. and Allied World National Assurance Company since July 2002. Prior to joining Allied World Assurance Company (U.S.) Inc., Mr. Jodoin was employed by Lexington Insurance Company in various positions for 17 years, and served as Executive Vice President from 1994 until July 2002.

 

Michael I.D. Morrison.  Please see Mr. Morrison’s biography under “Election of Directors” elsewhere in this Proxy Statement.

 

John T. Redmond (age 52) joined us in July 2002 and is the President of Allied World Assurance Company (Europe) Limited and Allied World Assurance Company (Reinsurance) Limited. Prior to joining our Company, Mr. Redmond held various positions with Chubb, and served as a Senior Vice President of Chubb from 1993 until July 2002.

 

At the Annual General Meeting, the Company’s shareholders will be asked to approve a second amendment to and restatement of the Allied World Assurance Company Holdings, Ltd Amended and Restated 2001 Employee Stock Option Plan. The Board unanimously approved the Second Amended and Restated 2001 Employee Stock Option Plan (which we refer to as the “Amended Plan” for purposes of this proposal only) on February 28, 2008 and recommends that the Company’s shareholders approve and adopt the Amended Plan. The Amended Plan will become effective upon the approval of the Company’s shareholders.

 

In 2001, the Company implemented the Allied World Assurance Holdings, Ltd 2001 Employee Warrant Plan (the “Warrant Plan”), under which up to 2,000,000 of our Common Shares could be issued. On June 9, 2006, the Company amended and restated the 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 “Current Plan” for purposes of this proposal only). Among other things, the amendment and restatement on such date extended the term of the Current Plan to June 9, 2016, required that any repricing of awards under the Current Plan be approved by our shareholders and provided the Compensation Committee additional flexibility with respect to awards in certain corporate events. The warrants that were granted under the Warrant Plan were converted to options under the Current Plan as part of our IPO.

 

Your Board recommends approval of the Amended Plan to:

 

 

 

 

As compared to the Current Plan, additional changes under the Amended Plan include increasing limits on the maximum number of our Common Shares as to which options may be granted to any one person in any one year; eliminating restrictions prohibiting the granting of options to any one person with respect to which the number of our Common Shares underlying options granted to such person exceeds, in the aggregate, 9% of our Common Shares authorized for issuance; and making a technical correction to the determination of fair market value of our Common Shares from the average high and low bid prices on the date of grant to the closing price of the Common Shares on the date of grant.

 

The following summary of the Amended Plan is qualified in its entirety by express reference to the text of the Amended Plan, a copy of which is attached as Appendix A to this Proxy Statement. For more information about our Current Plan, our Stock Incentive Plan and our Amended and Restated Long-Term Incentive Plan (the “LTIP”), please see “Executive Compensation — Narrative Disclosure Regarding Equity Plans and Employment Agreements” elsewhere in this Proxy Statement.

 

General

 

The purposes of the Amended Plan are to provide certain officers, directors, employees, prospective employees, consultants and others who perform services for the Company with the opportunity to acquire a proprietary interest in the success of the Company, to enhance the long-term performance of the Company and to attract to the Company and its subsidiaries and affiliates people with superior training, experience and ability. The Board believes that the Amended Plan furthers these purposes by making available sufficient shares to permit future

awards by the Compensation Committee as a part of the Company’s compensation program and believes that the Amended Plan is important to the success of the Company.

 

As of February 29, 2008, approximately 300 individuals would be eligible to participate in the Amended Plan. The closing price of the Common Shares on the NYSE on February 29, 2008 was $43.55 per share.

 

Administration

 

As with the Current Plan, the Amended Plan will be administered by the Compensation Committee, which will have the authority to establish rules and regulations for the administration of the Amended Plan; to take any action in connection with the Amended Plan that it deems necessary or advisable; to determine who shall receive awards and under what terms; to determine whether, to what extent, and under what circumstances and methods awards may be settled, canceled, forfeited or suspended; to determine whether awards may be settled in Common Shares or cash or other property; and to determine whether amounts payable under an award may be deferred. The determination of the Compensation Committee on all matters relating to the Amended Plan will be final and binding.

 

Awards; Adjustments

 

The Amended Plan provides for the grants of options to purchase Common Shares. The terms and conditions of options granted under the Amended Plan are set out in option agreements between the Company and the individuals receiving such options, including vesting conditions, exercise price and the expiration date of the options, as well as the treatment of such options upon a termination of employment or service with the Company. All options granted under the Amended Plan are “non-qualified stock options” which are not intended to qualify as “incentive stock options” subject to favorable tax treatment under Section 422 of the Code. The exercise price of an option may not be less than the fair market value of our Common Shares on the date the award is granted. Options may be granted with an exercise period lasting not more than ten years from the date of grant. Except as otherwise provided in an option agreement, no option may be exercised after the holder’s termination of employment or service with the Company, except that (i) if such termination of employment or service is on or after the holder’s 65th birthday or is due to such holder’s death or disability, the entire option may be exercised by the holder or his beneficiary at any time within the original term of the option, whether or not such option was exercisable at the time of such termination; and (ii) if such termination of employment or service is prior to the holder’s 65th birthday or not due to such holder’s death or disability, only that portion of such holder’s options that were exercisable as of the date of such termination may be exercised after the date of such termination, and only during the 90-day period following such termination.

 

As with the Current Plan, under the Amended Plan the Compensation Committee will have the authority to make appropriate adjustments to the exercise price and other terms of any outstanding options in the event of changes to the Common Shares by reason of capital adjustments, such as stock splits and recapitalizations. In the event of a merger, amalgamation, consolidation, reorganization, liquidation or sale of a majority of the Company’s securities, the Compensation Committee will have the discretion to provide, as an alternative to the adjustment described above, for the accelerated vesting of options prior to such an event or the cancellation of options in exchange for a payment based on the per-share consideration being paid in connection with the event.

 

Shares Subject to the Amended Plan

 

Subject to the requisite affirmative shareholder vote at the Annual General Meeting, the total number of Common Shares reserved for issuance under the Amended Plan is 4,000,000. During any time that the Company is subject to Section 162(m) of the Code, the maximum number of Common Shares with respect to which awards may be granted to any individual in any one year shall not exceed the maximum number of Common Shares available for issue under the Amended Plan. Common Shares granted pursuant to the Amended Plan may be authorized but unissued Common Shares or authorized and issued Common Shares held by the Company or acquired by the Company for the purposes of the Amended Plan.

Amendment and Termination

 

Except as otherwise provided in an option agreement, the Board retains the right to amend, suspend or terminate the Amended Plan, and the Compensation Committee may amend the terms of any option provided that such amendment may not adversely affect an option holder’s rights with respect to an outstanding option without his or her consent. In addition, no award may be amended if such amendment would constitute a repricing or similar event unless first approved by our shareholders.

 

Nonassignability; No Hedging

 

As with the Current Plan, no award to any person under the Amended Plan may be assigned, transferred or hedged in any manner (except as expressly approved by the Compensation Committee), other than by will or by the laws of descent and distribution, and all such awards shall be exercisable during the life of the option grantee only by the grantee or the grantee’s legal representative. Any assignment or transfer in violation of the applicable provisions of the Amended Plan shall be null and void and any award that is hedged in any manner shall immediately be forfeited.

 

U.S. Federal Income Tax Consequences

 

The following is a brief discussion of the U.S. federal income tax consequences of transactions with respect to options granted under the Amended Plan based on the Code, as in effect as of the date of this summary. This discussion is not intended to be exhaustive and does not describe any foreign, state or local tax consequences. Holders of options under the Amended Plan should consult with their own tax advisors.

 

No income is realized by an optionee at the time an option is granted. Generally, at exercise, ordinary income is realized by the optionee in an amount equal to the excess, if any, of the fair market value of the Common Shares subject to such option on such date over the exercise price, and the Company is generally entitled to a tax deduction in the same amount, subject to applicable tax withholding requirements. Upon a sale of Common Shares acquired due to the exercise of an option, appreciation (or depreciation) after the date of exercise is treated as either short-term or long-term capital gain (or loss) depending on how long the Common Shares have been held.

 

New Plan Benefits

 

The grant of options under the Amended Plan is entirely within the discretion of the Compensation Committee and we cannot forecast the extent to which such grants will be made in the future. Therefore, we have omitted the tabular disclosure of the benefits or amounts allocated under the Amended Plan.

 

Your Board recommends a vote FOR the approval of the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2001 Employee Stock Option Plan.

 

At the Annual General Meeting, the Company’s shareholders will be asked to approve a second amendment to and restatement of the Allied World Assurance Company Holdings, Ltd Amended and Restated 2004 Stock Incentive Plan. The Board unanimously approved the Second Amended and Restated 2004 Stock Incentive Plan (which we refer to as the “Amended Stock Incentive Plan” for purposes of this proposal only) on February 28, 2008 and recommends that the Company’s shareholders approve and adopt the Amended Stock Incentive Plan. The Amended Stock Incentive Plan will become effective upon the approval of the Company’s shareholders.

 

On June 9, 2006, the Company amended and restated the Allied World Assurance Holdings, Ltd 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 “Current Stock Incentive Plan” for purposes of this proposal only).

Your Board recommends approval of the Amended Stock Incentive Plan to:

 

 

The following summary of the Amended Stock Incentive Plan is qualified in its entirety by express reference to the text of the Amended Stock Incentive Plan, a copy of which has been marked to indicate changes from the Current Stock Incentive Plan and is attached as Appendix B to this Proxy Statement. For more information about our Current Stock Incentive Plan, our Amended and Restated 2001 Employee Stock Option Plan and our LTIP, please see “Executive Compensation — Narrative Disclosure Regarding Equity Plans and Employment Agreements” elsewhere in this Proxy Statement.

 

The changes discussed above are the only changes being proposed to the Current Stock Incentive Plan.

 

General

 

The purposes of the Amended Stock Incentive Plan are to attract, retain and motivate officers, directors, employees (including prospective employees), consultants and others who may perform services for the Company, to compensate them for their contributions to the long-term growth and profits of the Company, and to encourage them to acquire a proprietary interest in the success of the Company. The Board believes that the Amended Stock Incentive Plan furthers these purposes by removing limits on the maximum number of our Common Shares that the Compensation Committee may award to a participant under this plan as a part of the Company’s compensation program and believes that the Amended Stock Incentive Plan is important to the success of the Company.

 

As of February 29, 2008, approximately 300 individuals would be eligible to participate in the Amended Stock Incentive Plan. The closing price of the Common Shares on the NYSE on February 29, 2008 was $43.55 per share.

 

Administration

 

As with the Current Stock Incentive Plan, the Amended Stock Incentive Plan will be administered by the Compensation Committee, which will have the authority to establish rules and regulations for the administration of the Amended Stock Incentive Plan; to take any action in connection with the Amended Stock Incentive Plan that it deems necessary or advisable; to determine who shall receive awards and under what terms; to amend any outstanding awards; to determine whether, to what extent, and under what circumstances and methods awards may be settled, cancelled, forfeited or suspended; to determine whether awards may be settled in Common Shares or cash or other property; and to determine whether amounts payable under an award may be deferred. The determination of the Compensation Committee on all matters relating to the Amended Stock Incentive Plan will be final and binding.

 

Awards; Adjustments

 

As with the Current Stock Incentive Plan, the Amended Stock Incentive Plan provides for the grant of restricted Common Shares, RSUs, dividend equivalent rights and other equity-based or equity-related awards. The terms and conditions of any such awards granted under the Amended Stock Incentive Plan are set out in award agreements between the Company and the individuals receiving such awards. No options to purchase Common Shares may be granted under the Amended Stock Incentive Plan. Only RSUs have been granted under the Current Stock Incentive Plan.

 

As with the Current Stock Incentive Plan, under the Amended Stock Incentive Plan, the Compensation Committee will have the authority to make appropriate adjustments to the number of Common Shares authorized for issuance under the Amended Stock Incentive Plan, the number of Common Shares covered by each outstanding award and the type of property to which an award is subject, in each case in such manner as it deems appropriate to preserve the benefits intended to be made available to grantees of awards for any changes to the Common Shares by reason of capital adjustments, such as stock splits and recapitalizations. In the event of a merger, amalgamation,

consolidation, reorganization, liquidation or sale of a majority of the Company’s securities, the Compensation Committee will have the discretion to provide, as an alternative to the adjustment described above, for the accelerated vesting of awards prior to such an event or the cancellation of awards in exchange for a payment based on the per-share consideration being paid in connection with the event.

 

Shares Subject to the Amended Stock Incentive Plan

 

The total number of Common Shares reserved for issuance under the Amended Stock Incentive Plan is 2,000,000, which is unchanged from the Current Stock Incentive Plan. During any time that the Company is subject to Section 162(m) of the Code, the maximum number of Common Shares with respect to which awards may be granted to any individual in any one year shall not exceed the maximum number of Common Shares available for issue under the Amended Stock Incentive Plan. Common Shares granted pursuant to the Amended Stock Incentive Plan may be authorized but unissued Common Shares or authorized and issued Common Shares acquired by the Company for the purposes of the Amended Stock Incentive Plan.

 

Amendment and Termination

 

Except as otherwise provided in an award agreement, the Board retains the right to suspend, discontinue, revise or amend the Amended Stock Incentive Plan without any grantee’s consent, including in any manner that may adversely affect an grantee’s rights with respect to an outstanding award.

 

Nonassignability; No Hedging

 

As with the Current Stock Incentive Plan, no award to any person under the Amended Stock Incentive Plan may be assigned, transferred or hedged in any manner (except as expressly approved by the Compensation Committee), other than by will or by the laws of descent and distribution, and all such awards shall be exercisable during the life of the grantee only by the grantee or the grantee’s legal representative. Any assignment or transfer in violation of the applicable provisions of the Amended Stock Incentive Plan shall be null and void, and any award that is hedged in any manner shall immediately be forfeited.

 

New Plan Benefits

 

The grant of awards under the Amended Stock Incentive Plan is entirely within the discretion of the Compensation Committee and we cannot forecast the extent to which such grants will be made in the future. Therefore, we have omitted the tabular disclosure of the benefits or amounts allocated under the Amended Stock Incentive Plan.

 

Your Board recommends a vote FOR the approval of the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2004 Stock Incentive Plan.

 

At the Annual General Meeting, the Company’s shareholders will be asked to approve the Company’s 2008 Employee Share Purchase Plan (the “Share Purchase Plan”). The Board unanimously approved the Company’s Share Purchase Plan on February 28, 2008 and recommends that the Company’s shareholders approve and adopt the Share Purchase Plan. The Share Purchase Plan will become effective upon the approval of the Company’s shareholders.

 

The Company is seeking shareholder approval of the Share Purchase Plan in order to comply with the requirements of Section 423 of the Code and in order that the Share Purchase Plan qualify as an “employee share purchase plan” thereunder. In the event that the Company’s shareholders do not approve the Share Purchase Plan, it will not qualify as an “employee share purchase plan” under Section 423 of the Code, and no offerings will be made. The Company has reserved for issuance under the Share Purchase Plan 1,000,000 Common Shares.

The following summary of the Share Purchase Plan is qualified in its entirety by express reference to the text of the Share Purchase Plan, a copy of which is attached as Appendix C to this Proxy Statement.

 

Eligibility and Participation

 

All employees of the Company and its subsidiaries are eligible to participate if they are employed by the Company or its subsidiaries for more than 20 hours per week and for more than five months in any calendar year. However, no employee is eligible to participate who, after the grant of options under the Share Purchase Plan, would own (including all Common Shares which may be purchased under any outstanding options under the Share Purchase Plan) 5% or more of the total Voting Shares issued and outstanding. The purposes of the Share Purchase Plan are to provide employees of the Company and its subsidiaries with an opportunity to purchase our Common Shares, help such employees to provide for their future security and encourage such employees to remain in the employment of the Company and its subsidiaries.

 

The Share Purchase Plan provides for consecutive six-month offering periods (or other offering periods of not more than 27 months as determined by the Compensation Committee) under which participating employees can elect to have amounts withheld from their total compensation during the offering period and applied to purchase our Common Shares at the end of such offering period (each, an “exercise date”). An eligible employee may become a participant in the Share Purchase Plan for an offering period by completing a subscription agreement authorizing payroll deductions and filing it with the Company at least 15 business days prior to the first day of such offering period.

 

Payroll Deductions

 

A participating employee may authorize after-tax payroll deductions of a specific whole percentage of his or her compensation between 1% and 10%, subject to the limitation that no employee may purchase more than $25,000 of the Common Shares in any one calendar year.

 

Payroll deductions will commence on the first payroll date on or following the commencement of an offering period and will end on the last payroll date in the offering period to which such subscription agreement applies, unless terminated sooner by the participating employee. Deductions are accumulated in the participating employee’s account during the applicable offering period. In the event that any participating employee’s payroll deductions exceed the limits under the Code, his or her payroll deductions will automatically be decreased until such limits are satisfied.

 

A participating employee may discontinue participation in the Share Purchase Plan at any time during the offering period prior to the exercise date. Once an offering period has begun, a participating employee may increase or decrease the rate of payroll deductions for that offering period by completing a new subscription agreement. The Compensation Committee may limit the number of rate changes that a participating employee may elect during any offering period.

 

Grant and Exercise of Option

 

The Company will grant to each participating employee an option, effective on each enrollment date, to purchase on the exercise date the number of full Common Shares that may be purchased with the accumulated payroll deductions in his or her account. Unless otherwise determined by the Compensation Committee before an offering period, the purchase price for each offering period will be 85% of the fair market value of the Common Shares on the exercise date. Unless a participant withdraws from the Share Purchase Plan, his or her option for the purchase of Common Shares will be exercised automatically on the exercise date.

 

Delivery; Transfer Restrictions

 

The Common Shares will be purchased by a participating employee directly from the Company and will be deemed to have been issued and sold at the close of business on the exercise date. As promptly as practicable after each exercise date on which a purchase of shares occurs, the Company will arrange for the full Common Shares purchased to be issued to each participant and the Company may arrange for the deposit of such Common Shares

into each such participant’s account with any broker designated by the Company to administer the Share Purchase Plan; provided, however, that no Participant shall be permitted to dispose of or transfer any Common Shares purchased pursuant to an option under the Share Purchase Plan prior to the date that is 12 months following the date upon which such Common Shares were so purchased, in which case the Compensation Committee may provide, in its sole discretion, that the Common Shares so purchased shall be held in book entry form, rather than delivered to the Participant, through the expiration of such 12-month period. If certificates representing the Common Shares are registered in the name of the Participant, the Compensation Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Common Shares and that the Company retain physical possession of the certificates.

 

Withdrawal; Termination of Employment

 

At any time prior to the exercise date, a participant may give written notice to the Company to withdraw payroll deductions credited to his or her account and not yet used to exercise his or her option. Once a participant withdraws, such participant’s account balance will be distributed to him or her as soon as practicable, and no Common Shares will be purchased for such participant. Upon a participant’s ceasing to be an employee of the Company or its subsidiaries for any reason, he or she will be deemed to have elected to withdraw from the Share Purchase Plan, and such participant’s account balance will be distributed to him or her as soon as practicable, and no Common Shares will be purchased for such participant.

 

Administration

 

The Share Purchase Plan will be administered by the Compensation Committee of the Board. Subject to the provisions of the Share Purchase Plan, the Compensation Committee will have the authority to adopt rules and regulations for the interpretation and administration of the Share Purchase Plan. In addition, the Compensation Committee may adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Share Purchase Plan by employees who are foreign nationals or employed outside of the United States and to accommodate the specific requirements of the local laws and procedures of the relevant jurisdiction.

 

Adjustment Relating to Shares

 

The Compensation Committee will have the authority to adjust the number of Common Shares authorized for issuance under the Share Purchase Plan, the maximum number of Common Shares each participant may purchase in each offering period, and the price per Common Share and the number of Common Shares covered by each unexercised option for increases or decreases in the number of issued Common Shares resulting from a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification of the Common Shares, or any other event that the Compensation Committee determines affects our capitalization, other than regular cash dividends.

 

In the event the Company proposes to merge or amalgamate with or into another corporation or proposes to sell all or substantially all of its assets, each option under the Share Purchase Plan shall be assumed, or an equivalent option shall be substituted by the successor or amalgamated corporation. In the event that these options are not assumed or substituted, or in the event of the proposed dissolution or liquidation of the Company, the Compensation Committee may shorten the offering period then in progress and set a new exercise date to occur no later than immediately prior to the effective date of the applicable merger, amalgamation, sale, dissolution or liquidation.

 

Amendment and Termination of the Share Purchase Plan

 

The Board may at any time and for any reason terminate or amend the Share Purchase Plan. Amendments may be made without regard as to whether any participant’s rights are adversely affected and without shareholder approval except as required to satisfy Section 423 of the Code. Except as provided above in “Adjustments Relating to Shares”, no termination may adversely affect options previously granted; provided, that an offering period may be terminated by the Board on any exercise date if it determines that the termination of the Share Purchase Plan is in the best interests of the Company and its shareholders.

Term

 

The Share Purchase Plan became effective upon its adoption by the Board on February 28, 2008. Subject to approval by the shareholders of the Company, the Share Purchase Plan will continue in effect for a term of ten years thereafter unless all Common Shares authorized to be issued under it have been exhausted or the plan is otherwise terminated sooner.

 

U.S. Federal Income Tax Consequences

 

The following is a brief discussion of the U.S. federal income tax consequences of transactions under the Share Purchase Plan based on the Code, as in effect as of the date of this summary. The Share Purchase Plan is not qualified under Section 401(a) of the Code. This discussion does not address all aspects of U.S. federal income taxation and does not describe foreign, state, or local tax consequences. Participants in the Share Purchase Plan should consult with their own tax advisors.

 

Under Section 423(a) of the Code, the transfer to a participating employee of Common Shares pursuant to the Share Purchase Plan is entitled to the benefits of Section 421(a) of the Code. Under that section of the Code, a participant will not be required to recognize income at the time the option is granted or at the time the option is exercised. Section 423(c) of the Code requires that, provided the holding periods described below are met, when the Common Shares acquired during an offering period pursuant to the Share Purchase Plan are sold or otherwise disposed of in a taxable transaction (or in the event of the death of the participant while owning such shares whether or not the holding period requirements are met), the participant will recognize income subject to U.S. federal income tax as “ordinary income” for the taxable year in which disposition or death occurs in an amount equal to the lesser of (i) the excess of the fair market value of the Common Shares at the time of such disposition or death over the purchase price and (ii) the excess of the fair market value of the Common Shares on the enrollment date of the applicable offering period over the purchase price, determined on the enrollment date. Such recognition of income upon disposition shall have the effect of increasing the taxable basis of the shares in the participant’s possession by an amount equal to the income subject to U.S. federal income tax. Any additional gain or loss resulting from the disposition, provided it is not a “disqualifying disposition” (as defined below), measured by the difference between the amount paid for the shares and the amount realized (less the amount recognized as income as described above), will be recognized by the participant as long-term capital gain or loss. No portion of the amount received pursuant to such a disposition will be subject to withholding for U.S. federal income taxes or subject to withholding under the U.S. Federal Insurance Contribution Act (“FICA”) or the U.S. Federal Unemployment Tax Act (“FUTA”).

 

The Company will not be entitled to any deduction in the determination of its taxable income with respect to the Share Purchase Plan, except in connection with a disqualifying disposition as discussed below.

 

In order for a participant to receive the favorable tax treatment provided in Section 421(a) of the Code, Section 423(a) of the Code requires that the participant make no disposition of the shares acquired during an offering period within two years from the enrollment date of an applicable offering period, or within one year from the exercise date of such offering period. If a participant disposes of Common Shares acquired pursuant to the Share Purchase Plan before the expiration of these holding period requirements, it will be deemed a “disqualifying disposition” and the participant will realize, at the time of disposition, “ordinary income” to the extent the fair market value of the Common Shares on the exercise date exceeds the purchase price. The difference between the fair market value of the Common Shares on the exercise date and the amount realized on disposition is treated as long-term or short-term capital gain or loss, depending on the participant’s holding period in the Common Shares. The amount treated as “ordinary income” will not be subject to the income tax or FICA or FUTA withholding requirements of the Code.

 

New Plan Benefits

 

Because participation in the Share Purchase Plan is entirely within the discretion of the eligible employees of the Company and its subsidiaries, the Company cannot forecast the extent of participation in the future. Accordingly, the Company has omitted the tabular disclosure of the benefits or amounts allocated under the Share Purchase Plan.

 

Your Board recommends a vote FOR the approval and adoption of the Allied World Assurance Company Holdings, Ltd 2008 Employee Share Purchase Plan.

 

At the Annual General Meeting, the Company’s shareholders will be asked to approve and adopt the Company’s Second Amended and Restated Bye-Laws. Pursuant to Section 13(5) of the Companies Act 1981 of Bermuda, as amended (the “Companies Act”) and the Company’s current Bye-Laws, any amendment to the Company’s Bye-Laws must receive shareholder approval. The Board unanimously approved the Company’s Second Amended and Restated Bye-Laws on February 28, 2008 and recommends that the Company’s shareholders approve and adopt the Second Amended and Restated Bye-Laws. The Second Amended and Restated Bye-Laws will become effective upon the approval of the Company’s shareholders.

 

The following summary of the proposed changes to the Company’s current Bye-laws is qualified in its entirety by express reference to the text of the Second Amended and Restated Bye-Laws, a copy of which has been marked to indicate changes from the Company’s current Bye-Laws and is attached as Appendix D to this Proxy Statement.

 

Proposed Changes

 

The proposed Second Amended and Restated Bye-Laws provide greater flexibility to the Company to purchase its shares for cancellation because they allow such repurchases to be done only in a manner that the Board, in its sole and absolute discretion, reasonably believes would not result in, or materially increase the risk of, a material adverse regulatory or tax treatment of the Company, any subsidiary thereof or any shareholder in any jurisdiction. To provide for this ability, the proposed Second Amended and Restated Bye-Laws modify Bye-Law 11 and add a new Bye-Law 64(13) which clarifies that the transfer provisions in Bye-Law 64 shall not apply to purchases of shares by the Company pursuant to Bye-Law 11.

 

Additionally, the proposed Second Amended and Restated Bye-Laws revise the director and bye-law requirements relating to the Company’s subsidiaries as set forth in Bye-Laws 90, 91, 92 and 93 of the Company’s current Bye-Laws. These changes will make it easier for the Company to acquire and form any new insurance subsidiaries in the future. The proposed Second Amended and Restated Bye-Laws also make certain conforming and definitional changes to reflect the foregoing.

 

It is no longer a mandatory requirement of the Companies Act that deeds or other documents be executed under seal in order to be effective as a matter of Bermuda law. The requirements for issuing share certificates under seal have also been modernized to provide increased flexibility. The proposed Second Amended and Restated Bye-Laws amend Bye-Laws 86 and 87 of the Company’s current Bye-Laws to provide the Company greater flexibility in terms of the use or non-use of its corporate seal.

 

Finally, the proposed Second Amended and Restated Bye-Laws also provide for certain technical amendments, specifically to Bye-law 51(4), and revise Bye-law 64 to give the Board sole and absolute discretion to decline to register a share transfer in certain circumstances, particularly if there is reason to believe that such transfer may expose, or materially increase the risk of, a material adverse regulatory or tax treatment of the Company, any subsidiary thereof or any shareholder in any jurisdiction.

 

Your Board recommends a vote FOR the approval and adoption of the Second Amended and Restated Bye-Laws of Allied World Assurance Company Holdings, Ltd.

 

The appointment of independent auditors is subject to approval annually by the Company’s shareholders. Deloitte & Touche has served as the Company’s independent auditors since April 9, 2002. The Audit Committee of

your Board has recommended the appointment of Deloitte & Touche as our independent auditors for the fiscal year ending December 31, 2008.

 

Representatives of Deloitte & Touche are expected to attend the Annual General Meeting and will have an opportunity to make a statement if they wish. They will also be available to answer questions at the meeting. If approved, Deloitte & Touche will serve as the Company’s auditor until the Company’s Annual General Meeting in 2009 for such compensation as the Audit Committee of your Board shall determine.

 

Fees to Independent Registered Public Accountants for Fiscal 2007 and 2006

 

The following table shows information about fees billed to us by Deloitte & Touche for services rendered for the fiscal years ended December 31, 2007 and 2006.

 

 

 

 

The Audit Committee has a policy to pre-approve all audit and non-audit services to be provided by the independent auditors and estimates therefor. The Audit Committee pre-approved all audit services and non-audit services and estimates therefor provided to the Company by the independent auditors in 2007 and 2006.

 

Your Board recommends a vote FOR the appointment of Deloitte & Touche as the Company’s independent auditors.

 

 

The following summarizes certain relationships and the material terms of certain of our agreements. This summary is subject to, and is qualified in its entirety by reference to, all of the provisions of the relevant agreements. A copy of certain of these agreements has been previously filed with the SEC and is listed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, a copy of which will be provided upon request. See “General Meeting Information — How may I receive a copy of the Company’s Annual Report on Form 10-K?”.

 

Founding Shareholders

 

We were formed in November 2001, by a group of investors, including AIG, Chubb, certain affiliates of The Goldman Sachs Group, Inc. (the “Goldman Sachs Funds”) and Securitas Allied Holdings, Ltd, an affiliate of Swiss Reinsurance Company. These investors purchased Common Shares and the shareholders listed below were granted warrants that entitle them to purchase a total of 5,500,000 additional Common Shares, or approximately 11% of all Common Shares outstanding at our formation, at an exercise price of $34.20 per Common Share. These warrants expire on November 21, 2011.

 

The warrants are exercisable, in whole or in part, (1) in connection with any sale of Common Shares by the exercising selling shareholder or (2) to avoid a reduction of the exercising selling shareholder’s equity ownership below a certain percentage. The exercise price and number of shares issuable under each warrant are subject to

adjustment with respect to certain dilution events. The following table shows the ownership of warrants as of February 29, 2008:

 

 

Certain Business Relationships

 

We have assumed, and continue to assume, premiums from, and have paid, and continue to pay, production fees to affiliates of some of our shareholders. We also have ceded and assumed and will continue to cede and assume reinsurance to and from affiliates of some of our principal shareholders.

 

Transactions with Affiliates of American International Group, Inc.

 

Stock Purchase Agreement

 

On December 14, 2007, we entered into a stock purchase agreement with AIG pursuant to which we purchased an AIG subsidiary whose sole asset was its holding of 11,693,333 Common Shares. These shares equated to approximately 19.4% of the Common Shares outstanding as of November 30, 2007. The purchase price per share was $48.19 for an aggregate price of $563.4 million and was based on and reflected a 0.5% discount from the volume-weighted average trading price of the Common Shares during the ten consecutive trading day period leading up to December 14, 2007.

 

Software License

 

On February 16, 2007, Allied World Assurance Company, Ltd entered into an amended and restated software license agreement, effective as of November 17, 2006, with Transatlantic Holdings, Inc., a publicly traded company in which AIG holds a controlling interest, for certain reinsurance accounting management information software proprietary to Transatlantic Holdings, Inc. The initial term of the agreement expires on November 17, 2009 and will automatically renew for successive one-year terms unless either party delivers prior written notice to terminate at least 90 days prior to the end of any current term. Allied World Assurance Company, Ltd has paid $3.9 million to Transatlantic Holdings, Inc. for the initial term of the license.

 

Guarantee

 

On May 22, 2006, Allied World Assurance Company, Ltd entered into a guarantee in favor of AIG. Pursuant to the guarantee, Allied World Assurance Company, Ltd absolutely, unconditionally and irrevocably guaranteed the payment of all amounts legally due and owed by either Allied World Assurance Company (Europe) Limited or Allied World Assurance Company (Reinsurance) Limited to certain reinsurance subsidiaries of AIG under any new or renewal contract of reinsurance entered into between such AIG subsidiaries and Allied World Assurance Company (Europe) Limited and/or Allied World Assurance Company (Reinsurance) Limited on or after January 1, 2006.

 

Office Space

 

Allied World Assurance Company, Ltd entered into a lease on November 29, 2006 with American International Company Limited, a subsidiary of AIG, under which Allied World Assurance Company, Ltd rents 78,057 square feet of office space at 27 Richmond Road, Pembroke HM 08, Bermuda that serves as the Company’s corporate headquarters. The lease is for a 15-year term commencing on October 1, 2006 with an option to extend for

an additional ten years. For the first five years under the lease, Allied World Assurance Company, Ltd will pay an aggregate monthly rent and user fees of approximately $0.4 million. In addition to the rent, Allied World Assurance Company, Ltd will also pay certain maintenance expenses. Effective as of October 1, 2011, and on each five-year anniversary date thereafter, the rent payable under the lease will be mutually agreed to by Allied World Assurance Company, Ltd and American International Company Limited.

 

Hedge Fund

 

Since April 1, 2004, Allied World Assurance Company, Ltd has invested a total of $56.6 million in shares of AIG Select Hedge Ltd. (the “Select Fund”). The Select Fund is a fund of hedge funds and is a Cayman Islands exempted company incorporated under the Companies Law of the Cayman Islands. The Select Fund’s investment objective is to seek attractive long-term, risk-adjusted absolute returns in a variety of capital market conditions. The investment manager of the Select Fund is AIG Global Investment Corp., a wholly-owned subsidiary of AIG. Allied World Assurance Company, Ltd may request a redemption of all or some of its shares by giving notice three business days prior to the last business day of any calendar month for the redemption to be effective the last business day of the next following month. The Select Fund will pay the investment manager both a management fee and an incentive fee. The management fee is an annual asset-based fee of 1.5%, payable quarterly, and a 5% incentive fee is paid to the investment manager at the end of each year on the net capital appreciation of our shares, so long as a 5% non-cumulative annual return is obtained. The aggregate fees for the year ended December 31, 2007 were $1.0 million.

 

Deferred Compensation Plan

 

Scott A. Carmilani, President and Chief Executive Officer of the Company; W. Gordon Knight, President, U.S. Operations, Distribution and Marketing; and Richard E. Jodoin, President of Allied Word Assurance Company (U.S.) Inc. and Allied World National Assurance Company (formerly known as Newmarket Underwriters Insurance Company), participated in the Starr International Company, Inc. Deferred Compensation Profit Participation Plan in connection with services previously rendered to AIG prior to joining us.

 

Transactions with AIG in the Ordinary Course of Business

 

Our company either accepts or rejects reinsurance offered by subsidiaries of AIG based upon our assessment of the risk selection, pricing, terms and conditions. All of our reinsurance transactions with AIG or its subsidiaries are open-market transactions that we believe have been on customary, arm’s length terms. We assumed premiums from subsidiaries of AIG of approximately $106.7 million for the year ended December 31, 2007, and we ceded premiums to subsidiaries of AIG during the same period of approximately $13.3 million.

 

Transactions with Affiliates of the Goldman Sachs Funds

 

Investment Management Services

 

Certain affiliates of the Goldman Sachs Funds provide us with investment management services pursuant to several investment management agreements. Pursuant to these agreements, affiliates of the Goldman Sachs Funds manage substantially all of our investment portfolio. The investment management agreements are generally in force for an initial three-year term with subsequent one-year period renewals, during which they may be terminated by either party upon 60 days prior written notice. Each investment management agreement prohibits the investment manager from executing trades with or through itself or any of its affiliates acting as agent or principal. However, each investment management agreement does allow the investment manager to invest a portion of the portfolio in funds for which the investment manager or any of its affiliates serves as investment adviser, provided that these investments are made in money market sweep or similar funds for the management of short-term cash balances in the account. We must pay all fees associated with these investments; however, these fees will be offset against the fee to be paid by us pursuant to the investment management agreements. With respect to Allied World Assurance Company, Ltd, the investment manager may also invest up to $150 million in the Goldman Sachs Global High Yield Portfolio of the Goldman Sachs Funds SICAV and the restrictions and limits of our investment guidelines shall not apply to this investment. Mutual fund fees that will be deducted on both a monthly and quarterly basis will vary by fund and will include investment management fees, sales and distribution fees and operational expense fees. The aggregate fees for our investment in the Goldman Sachs Global High Yield Portfolio for the fiscal year ended

December 31, 2007 were $0.4 million. The investment manager is also authorized to effect cross transactions between our account and other accounts managed by the investment manager and its affiliates.

 

We pay affiliates of the Goldman Sachs Funds an annual fee of 0.12% on the first $1 billion of our aggregate funds under management, 0.10% on the next $1 billion of our aggregate funds under management and 0.08% on all of our aggregate funds managed greater than $2 billion. A pro rata portion of these annual fees is payable quarterly. The total advisory fee for investment management services provided by affiliates of the Goldman Sachs Funds with respect to the investment management agreements totaled $5.2 million for the year ended December 31, 2007. Our Investment Committee periodically reviews the performance of the investment managers under these investment management agreements.

 

Hedge Funds

 

Allied World Assurance Company, Ltd invested a total of $57 million in shares of the Goldman Sachs Global Alpha Hedge Fund, plc (the “Alpha Fund”) in December 2004. The Alpha Fund is an Irish open-ended investment company registered under the Companies Act, 1990 of Ireland. The Alpha Fund’s investment objective is to seek attractive long-term, risk-adjusted returns across a variety of market environments with volatility and correlations that are lower than those of the broad equity markets. The investment manager of the Alpha Fund is Goldman Sachs Asset Management, L.P., an affiliate of the Goldman Sachs Funds. The Alpha Fund pays the investment manager both a management fee and an incentive fee. The management fee is an annual asset-based fee of 2.0%, payable quarterly, and a 20% incentive fee is paid to the investment manager on the net capital appreciation of our shares. The aggregate fees for the year ended December 31, 2007 were $0.9 million. On December 31, 2007, Allied World Assurance Company, Ltd sold its shares in the Alpha Fund.

 

Effective February 1, 2005, Allied World Assurance Company, Ltd invested $62 million in shares of the Goldman Sachs Multi-Strategy Portfolio VI, Ltd. (the “Portfolio VI Fund”). Allied World Assurance Company, Ltd is the sole investor in the Portfolio VI Fund. The Portfolio VI Fund is a fund of hedge funds and is an exempted limited company incorporated under the laws of the Cayman Islands. The Portfolio VI Fund’s investment objective is to seek attractive long-term, risk-adjusted absolute returns in U.S. dollars with volatility lower than, and minimal correlation to, the broad equity markets. The investment manager of the Portfolio VI Fund is Goldman Sachs Hedge Fund Strategies LLC, an affiliate of the Goldman Sachs Funds. Allied World Assurance Company, Ltd may request a redemption of all or some of its shares at any time or from time to time by giving notice; provided, however, that the aggregate net asset value of the remaining shares held by the redeeming shareholders is not less than $30 million. The Portfolio VI Fund pays the investment manager both a management fee and an incentive fee. The management fee is an annual asset-based fee of 1.0%, payable quarterly, and a 5% incentive fee is paid to the investment manager at the end of each year on the net capital appreciation of our shares. The aggregate fees for the year ended December 31, 2007 were $1.2 million.

 

Allied World Assurance Company, Ltd invested a total of $45 million in shares of the Goldman Sachs Liquid Trading Opportunities Fund Offshore, Ltd. (the “Opportunity Fund”) in December 2004. The Opportunity Fund is an exempted limited company incorporated under the laws of the Cayman Islands. The Opportunity Fund’s investment objective is to seek attractive total returns through both capital appreciation and current return from a portfolio of investments mainly in currencies, publicly traded securities and derivative instruments, primarily in the fixed income and currency markets. The investment manager of the Opportunity Fund is Goldman Sachs Asset Management, an affiliate of the Goldman Sachs Funds. The Opportunity Fund pays the investment manager both a management fee and an incentive fee. The management fee is an annual asset-based fee of 1.0%, payable quarterly, and a 20% incentive fee is paid to the investment manager on the net capital appreciation of our shares. The aggregate fees for the year ended December 31, 2007 were $0.4 million. On June 30, 2007, Allied World Assurance Company, Ltd sold its shares in the Opportunity Fund.

 

On August 20, 2007, Allied World Assurance Company, Ltd invested $50 million in the Goldman Sachs Global Equity Opportunities Fund, plc (the “Global Equity Fund”). The Global Equity Fund is an open-ended investment company incorporated in Ireland as a public limited company. The fund seeks to achieve attractive total returns through both capital appreciation and current returns in the global equity market. The investment manager of the Global Equity Fund is Goldman Sachs Asset Management, L.P., an affiliate of the Goldman Sachs Funds. The Global Equity Fund allows for monthly liquidity with a 15-day notification period, after a six month initial lock-up. The fund pays the investment manager both a management fee and an incentive fee. The management fee is an

annual asset-based fee of 1.5%, payable monthly, and a 20% incentive fee is paid to the investment manager on the net capital appreciation of our shares. The aggregate fees for the year ended December 31, 2007 were $0.3 million. On February 29, 2008, Allied World Assurance Company, Ltd sold its shares in the Global Equity Fund.

 

Investment Banking Services

 

Pursuant to the Placement Agency Agreement, dated October 25, 2001, among the Company, AIG, Chubb and GS Capital Partners 2000, L.P., in the event we determine to undertake any transaction in connection with which we will utilize investment banking or financial advisory services, we have agreed to offer Goldman, Sachs & Co. (“Goldman Sachs”) directly or to one of its affiliates the right to act in such transaction as sole lead manager or agent in the case of any offering or placement of securities, lead arranger, underwriter and syndication agent in the case of any syndicated bank loan, or as sole advisors or dealer managers, as applicable in the case of any other transaction. If Goldman Sachs or any of its affiliates agrees to act in any such capacity, we will enter into an appropriate agreement with Goldman Sachs or its affiliate, as applicable, which will contain customary terms and conditions. These investment banking rights of Goldman Sachs shall terminate upon the earlier of (a) the sale, transfer or other disposition of our capital stock to one party, other than AIG, Chubb or GS Capital Partners 2000, L.P. or their respective affiliates, if as a result of such sale, transfer or other disposition such party holds more than 50% of our outstanding voting capital stock; (b) GS Capital Partners 2000, L.P., together with related investment funds, ceasing to retain in the aggregate ownership of at least 25% of its original shareholding in Allied World Assurance Company Holdings, Ltd (including any shares that may be issued upon the exercise of warrants); or (c) the second anniversary of our IPO. This arrangement may be terminated by us with cause, or without cause upon a change of control of Goldman Sachs. There were no fees incurred under this Placement Agency Agreement for the year ended December 31, 2007.

 

Transactions with Affiliates of The Chubb Corporation

 

Surplus Lines Agreement

 

Allied World Assurance Company (U.S.) Inc. and Allied World National Assurance Company (formerly known as Newmarket Underwriters Insurance Company) are each party to a surplus lines agreement, effective June 11, 2002, with Chubb Custom Market, Inc., an affiliate of Chubb. Under these two agreements, Chubb Custom Market, Inc. underwrites surplus lines insurance on behalf of Allied World Assurance Company (U.S.) Inc. and Allied World National Assurance Company, subject to underwriting guidelines provided by our U.S. subsidiaries. Under these agreements, Chubb Custom Market, Inc., on behalf of our U.S. subsidiaries, also processes applications, collects and remits premiums, issues quotes, policies and other insurance documentation, keeps records, secures and maintains insurance licenses and provides and trains employees to perform these services. Total fees and commissions incurred under these agreements for the year ended December 31, 2007 were $0.4 million. The amount of premiums placed through these surplus lines agreements for the year ended December 31, 2007 totaled $1.7 million. These agreements were terminated effective as of June 2007.

 

Transactions with Chubb in the Ordinary Course of Business

 

Our company either accepts or rejects reinsurance offered by subsidiaries of Chubb based upon our assessment of risk selection, pricing, terms and conditions. All of our reinsurance transactions with Chubb or its subsidiaries are open-market transactions that we believe have been on customary, arm’s length terms. We assumed premiums from subsidiaries of Chubb of approximately $10.7 million for the year ended December 31, 2007, and we ceded premiums to subsidiaries of Chubb during the same period of approximately $8.2 million.

 

Registration Rights

 

We executed a Registration Rights Agreement upon the closing of our IPO that provided AIG, Chubb, the Goldman Sachs Funds or Securitas Allied Holdings, Ltd. (the “Specified Shareholders”) with registration rights for Common Shares held by them (or obtainable pursuant to warrants held by them) or any of their affiliates. Each of the Specified Shareholders has the right under this agreement to require us to register Common Shares under the Securities Act of 1933, as amended (the “Securities Act”) for sale in the public market, in an underwritten offering, block trades from time to time, or otherwise. For the Specified Shareholders (other than AIG), the total amount of Common Shares requested to be registered under any demand of that kind must, as of the date of the demand, equal

or exceed 10% of all Common Shares outstanding or Common Shares having a value of $100 million (based on the average closing price during any 15 consecutive trading days ending within 30 days prior to but not including such date of demand). We agreed to waive this provision for AIG in connection with our purchase of an AIG subsidiary holding 11,693,333 Common Shares so that AIG may still make a demand registration request for Common Shares underlying its warrant. We may include other Common Shares in any demand registration of that kind on a second-priority basis subject to a customary underwriter’s reduction. If we propose to file a registration statement covering Common Shares at any time, each Specified Shareholder will have the right to include Common Shares held by it (or obtainable pursuant to warrants held by it) in the registration on a second-priority basis with us, ratably according to the relevant respective holdings and subject to a customary underwriter’s reduction. We have agreed to indemnify each Specified Shareholder with respect to specified liabilities, including civil liabilities under the Securities Act, and to pay specified expenses relating to any of these registrations. In addition, the Goldman Sachs Funds, as the financial founder, have the right under the Registration Rights Agreement to appoint Goldman Sachs as the lead managing underwriter if the Goldman Sachs Funds are selling more than 20% of the Common Shares sold in a registered public offering.

 

Review, Approval or Ratification of Transactions with Related Persons

 

Pursuant to our Audit Committee charter, the Audit Committee reviewed and approved the related party transactions we entered into during 2007. We do not have written standards in connection with the review and approval of related party transactions as we believe each transaction should be analyzed on its own merits. In making its decision, the Audit Committee reviews, among other things, the relevant agreement, analyzes the specific facts and circumstances and speaks with, or receives a memorandum from, management that outlines the background and terms of the transaction. As insurance and reinsurance companies enter into various transactions in the ordinary course of business, the Audit Committee does not review these types of transactions to the extent they are open-market transactions that happen to involve related parties.

 

The table below sets forth information as of March 3, 2008 regarding the beneficial ownership of our Common Shares by:

 

 

 

 

 

 

 

Our executive officers are elected by and serve at the discretion of your Board. The following table identifies the executive officers of the Company, including their respective ages and positions as of the date hereof.

 

 

 

 

Marshall J. Grossack has been our Senior Vice President — Chief Corporate Actuary since July 2004. From June 2002 until July 2004, Mr. Grossack was a Vice President and Actuary for American International Company Limited, a subsidiary of AIG, and provided services to us pursuant to a former administrative services contract with American International Company Limited. From June 1999 until June 2002, Mr. Grossack worked as the Southwest Region Regional Actuary for subsidiaries of AIG in Dallas, Texas.

 

W. Gordon Knight joined Allied World National Assurance Company as President, U.S. Operations, Distribution and Marketing in January 2008. Prior to joining our Company, Mr. Knight held various global management and underwriting positions for AIG and its subsidiaries since 1982, most recently as President of Sales &

Marketing for AIG Domestic Brokerage Group from 2005 to January 2008. Mr. Knight began his career as a casualty underwriter at Hartford Insurance Company in 1981.

 

Executive Summary

 

Overview.  The Company is a Bermuda-based specialty insurance and reinsurance company that underwrites a diversified portfolio of property and casualty insurance and reinsurance lines of business. The Company became a public company in July 2006 after the successful completion of its IPO. In anticipation of its IPO, the Company reconstituted the Board and appointed five new independent board members, three of whom serve on the current Compensation Committee in accordance with the rules of the NYSE. The Board also adopted a Compensation Committee Charter discussed elsewhere in this Proxy Statement.

 

The Compensation Committee oversees our compensation programs and makes all final compensation decisions regarding the NEOs. The Company has achieved considerable growth since its inception in November 2001 and its compensation programs and plans have been designed to reward executives who contribute to the continuing success of the Company.

 

Compensation Philosophy.  The Compensation Committee believes than an effective executive compensation program is one that is designed to reward strong Company and individual performance, which serves to align the interests of the NEO and the Company’s shareholders and which balances the objectives of pay-for-performance and retention. The insurance and reinsurance industry is very competitive, cyclical and often volatile, and the Company’s success depends in substantial part on its ability to attract and retain successful, high-achieving employees who will remain motivated and committed to the Company during all insurance industry cycles.

 

2007 NEO Compensation Structure.  In keeping with this philosophy, our NEO compensation structure is comprised of cash compensation primarily consisting of base salary and annual cash bonus, and long-term equity-based compensation consisting of RSUs granted under the Company’s Stock Incentive Plan and performance-based awards granted under the Company’s LTIP. For 2007, the Compensation Committee targeted total cash compensation at approximately the 50^th percentile and total direct compensation (including both cash compensation and equity-based compensation) at approximately the 75^th percentile of our Bermuda Peer Group described herein, with actual pay delivered dependent on Company and individual performance. The Compensation Committee believes that setting total cash compensation at approximately the 50^th percentile of our Bermuda Peer Group enables the Company to remain competitive with our Bermuda Peer Group in attracting and retaining employees. Setting total direct compensation at approximately the 75^th percentile of our Bermuda Peer Group means that a substantial portion of each NEO’s compensation is in the form of long-term equity awards, much of which is “at risk” with vesting dependent on the Company achieving certain performance targets that should benefit shareholders as well. The Compensation Committee believes that by having a substantial portion of NEO compensation in the form of these long-term equity awards, the Company pays for performance and the interests of the NEOs and the Company’s shareholders are better aligned.

 

Compensation Objectives

 

The Compensation Committee’s objectives for the Company’s compensation programs include:

 

 

 

Compensation Oversight and Process

 

The Compensation Committee has established a number of processes to assist it in ensuring that NEO compensation is achieving its objectives. Among those are:

 

 

In determining the level of compensation for the NEOs in 2007, both quantitative and qualitative factors of the Company’s and each NEO’s performance were analyzed.

 

Assessment of Company Performance

 

The Company’s performance was assessed using various factors that the Compensation Committee believed were relevant to creating value for its shareholders. These factors include growth in book value, earnings before interest and taxes, return on equity and the Company’s combined ratio. The Company’s performance was considered in light of the current market conditions in the insurance industry, which include increased competition, decreasing rates for new and renewal business and, for the casualty segment of the Company’s business, pressure on insurance policy terms and conditions to broaden coverage.

 

Assessment of Individual Performance

 

Each NEO’s performance is reviewed annually by Mr. Carmilani, our CEO, on his or her individual skills and qualifications, management responsibilities and initiatives, staff development and the achievement of departmental, geographic and/or established business goals and objectives, depending on the role of the NEO. Each NEO’s performance was also assessed in light of current market conditions in the insurance industry. In 2007, these performance reviews formed the basis on which compensation-related decisions were made for annual cash bonuses and grants of RSUs under the Company’s Stock Incentive Plan as well as 2008 base salaries and grants of performance-based awards granted under the Company’s LTIP. Due to the volatility of the insurance industry and thus the Company’s financial results, the Compensation Committee believes that pure quantitative performance measures are not the most appropriate measure of rewarding NEO performance.

 

The CEO’s Role.  The Compensation Committee determines the Company’s compensation philosophy and objectives and sets the framework for the NEO’s compensation structure. Within this framework, Mr. Carmilani, our CEO, is responsible for recommending to the Compensation Committee all aspects of compensation for each NEO, excluding himself. He reviews the recommendations, survey data and other materials provided to him by Watson Wyatt (our independent compensation consultant) as well as proxy statements and other publicly available information, and consults with our Senior Vice President of Human Resources in making his recommendations. He also assesses the Company’s and each NEO’s performance as described above. The conclusions and recommendations resulting from these reviews and consultations, including proposed salary adjustments, annual cash bonus amounts and equity award amounts, are then presented to the Compensation Committee for its consideration and approval. The Compensation Committee has discretion to modify any recommendation it receives from management, but strongly relies on Mr. Carmilani’s recommendations.

 

The Board and NEO Interactions.  The Board has the opportunity to meet with the NEOs regularly during the year. In 2007, the Company’s NEOs met with and made many presentations to the Board regarding their respective business lines or responsibilities. The Company believes that the interaction among its NEOs and the Board is important in enabling the Board, including the members of the Compensation Committee, to form its own assessment of each NEO’s performance.

Timing of Awards.  The Compensation Committee believes that compensation decisions regarding employees should be made after year-end results have been determined to better align employee compensation with Company performance and shareholder value. This requires that annual cash bonuses, equity awards and base salary adjustments be determined after year-end financials have been prepared and completed. The Compensation Committee’s policy is to approve compensation decisions at its regularly scheduled meeting during the first quarter of the year.

 

Benchmarking

 

The Role of Watson Wyatt, Our Independent Compensation Consultant.  The Company has engaged Watson Wyatt for the benefit of the Compensation Committee to conduct analyses on key aspects of NEO and other senior officer pay and performance, and to provide recommendations about compensation plan design. Watson Wyatt reports directly to the Compensation Committee. Watson Wyatt meets with members of senior management to gain a greater understanding of key issues facing the Company and its equity and retirement plans and other benefits. The Compensation Committee meets separately with Watson Wyatt to review in detail all compensation-related decisions regarding the CEO. During this review, the Compensation Committee receives Watson Wyatt’s recommendations, surveys (including Bermuda Peer Group compensation information) and other materials.

 

The survey data and other information provided by Watson Wyatt is used as a frame of reference for setting the total cash and total direct compensation of our NEOs. With the aid of this data, the Compensation Committee has sought to target cash compensation (base salary and annual cash bonus) at approximately the 50^th percentile and total direct compensation (both cash and equity-based compensation) at approximately the 75^th percentile among the Bermuda Peer Group. Setting compensation targets based on data provided by an independent third party is intended to ensure that our compensation practices are both prudent and effective.

 

Compensation Benchmarking to Bermuda Peer Group.  The Company’s Bermuda Peer Group consists of seven companies that were reviewed with Watson Wyatt and adopted by the Compensation Committee based on being within the range of annual revenue, market to book value, net income, total assets and return on equity similar to the Company. The Bermuda Peer Group includes: Arch Capital Group Ltd., Aspen Insurance Holdings Limited, Axis Capital Holdings Limited, Endurance Specialty Holdings Ltd., Max Capital Group, Ltd., Montpelier Re Holdings Ltd. and Platinum Underwriters Holdings, Ltd. Watson Wyatt compared key aspects of these companies’ executive compensation programs and also compared the pay of individual executives where the jobs are sufficiently similar to make the comparison meaningful.

 

Total Compensation Review

 

In 2007, the Compensation Committee reviewed a summary report or “tallysheet” prepared by the Company for each NEO as well as other senior officers. The purpose of a tallysheet is to show the aggregate dollar value of each officer’s total annual compensation, including base salary, annual cash bonus, equity-based compensation, perquisites and all other compensation. The tallysheet also shows amounts payable to each NEO upon termination of his or her employment under various severance and change-in-control scenarios. Tallysheets are reviewed by our Compensation Committee for primarily informational purposes and are not a material factor in making determinations as to compensation amounts.

 

Components of Executive Compensation

 

For 2007, total compensation for the NEOs consisted of the following components:

 

 

Cash Compensation

 

Base Salary

 

Overview.  Base salary is the guaranteed element of the NEO’s annual cash compensation. Having competitive base salaries is an important part of attracting and retaining key employees. Base salaries are benchmarked to our Bermuda Peer Group and are also impacted by the NEO’s performance as well as the Company’s performance. In 2007, the Compensation Committee wanted to reward the NEOs and our other senior officers for their and the Company’s strong performance in 2006. The Compensation Committee reviewed the base salaries of our NEOs with the objective of benchmarking total cash compensation (base salaries and annual cash bonuses) at approximately the 50^th percentile of the Bermuda Peer Group. The base salaries of the NEOs were increased effective retroactive to January 1, 2007 and are reflected in the Summary Compensation Table below.

 

Based on the market comparison data and survey data reviewed by the Compensation Committee, our NEOs were relatively close to the 50^th percentile for base salaries, other than Mr. Carmilani whose base salary was significantly below the median. The Compensation Committee decided to raise Mr. Carmilani’s salary to be closer to the median, to compensate him for his greater level of responsibilities compared to the other NEOs, to recognize his leadership role in developing, and executing on, the Company’s business plan and to help ensure his retention with the Company. For 2006 and 2007, the annualized base salary rates for the NEOs are summarized below:

 

 

Annual Cash Bonus

 

Overview.  The Company pays annual cash bonuses pursuant to its cash bonus program, which is designed to align individual performance with the Company’s performance and earnings growth objectives for the year. The Company’s annual cash bonus program is another important element in retaining talented employees and rewarding performance. Cash bonuses paid to our NEOs for 2007 appear in the Summary Compensation Table under the “Non-Equity Incentive Plan Compensation” column.

 

After extensive internal reviews and discussions, as well as consultations with Watson Wyatt, the Company established a structured, yet still flexible, cash bonus program that has been implemented by the Compensation Committee.

 

Cash Bonus Program.  The cash bonus program has two facets: (1) an overall cash bonus pool that is funded and out of which individual annual cash bonuses are paid; and (2) a process by which individual annual cash bonuses are determined. For each senior officer eligible to participate in the cash bonus program, a target bonus percentage was established during the first quarter of 2007. Each officer’s 2007 target bonus was based on a percentage of his or her base salary. Target bonus percentages for the NEOs and other senior officers were recommended by the CEO and approved by the Compensation Committee. The CEO’s target bonus percentage was determined solely by the Compensation Committee. These bonus targets below were established so that total cash compensation (base salaries and annual cash bonuses) of each NEO was at approximately the 50^th percentile of the Bermuda Peer Group. Our NEOs were eligible to receive an annual cash bonus based on a percentage of their annual base salary as follows:

 

 

The methodology used to determine the annual cash bonus pool from which individual bonuses are paid contains both a formulaic element and a discretionary element. The formulaic element makes up 50% of the cash bonus pool funding, and the discretionary element makes up the other 50% of this pool. The objective is to provide structure and predictability for the Company’s senior officers while also permitting the Compensation Committee to take actions when necessary in light of the cyclicality and volatility of the insurance and reinsurance industry.

 

The Formulaic Element.  For the 2007 fiscal year, the annual cash bonus pool used earnings before interest and taxes (“EBIT”) as the financial metric to establish funding targets in one of three categories: (1) Minimum Target, (2) Target and (3) Maximum Target. The Minimum Target category was the lowest EBIT number that could be reached and still obtain funding of the formulaic element. The annual cash bonus pool is only 50% funded if the Minimum Target is reached. The Target category is where EBIT meets the goal set by the Compensation Committee, and if the Company reaches this category, the annual cash bonus pool is 100% funded. The Maximum Target occurs when the Company equals or exceeds 120% of its EBIT goal and the cash bonus pool is 150% funded.

 

For 2007, the following EBIT amounts and annual cash bonus pool funding were approved:

 

 

Why use EBIT as the financial metric?  The Compensation Committee selected the EBIT financial metric for the 2007 fiscal year because they believed it was the most relevant measure of the Company’s annual results.

 

How is EBIT calculated?  EBIT is calculated by taking the Company’s net income and adding back interest expense and tax expense. In 2007, EBIT was derived as follows (based on approximate totals): $469.2 million of net income, plus $37.8 million of interest expense, plus $1.1 million of income tax expense equals $508.1 million of EBIT. Based on the $424 million Maximum Target reflected in the table above, the Company exceeded the maximum target by approximately $84.1 million, or 19.8%.

 

How were the targets determined?  The targets for 2007 for the annual cash bonus pool were the same targets established in 2006, which was a record year for the Company. Given the significant increase in competition and reduced insurance rates in some lines of business, the Compensation Committee did not adjust the 2007 targets from the prior year. The factors that primarily contributed to the Company exceeding the maximum target in 2007 included the benign level of catastrophe activity in the United States during the year, favorable releases of reserves from prior loss years and increased investment income due to interest rate movements. For 2008, the target is based on budgeted EBIT for the Company, which budgeted amount is an increase over 2007.

 

The Discretionary Element.  As stated above, the discretionary portion of the award is intended to give the Compensation Committee flexibility in light of the cyclicality and volatility of the insurance and reinsurance industry. The Compensation Committee first funds the annual cash bonus pool based on EBIT and then funds 50% of the annual cash bonus pool based on various discretionary considerations. The Compensation Committee then determines each senior officer’s annual cash bonus, which is paid out of the total pool.

 

Depending on the overall cash bonus pool funding level, awards to individual officers are made based on the CEO’s and Compensation Committee’s assessment of individual performance.

 

The Compensation Committee sought to reward the NEOs for their performance and achievements in 2007, including:

 

 

 

Based on the EBIT calculations above, the annual cash bonus pool was funded at 150% of the “Target” column in the table above. The annual cash bonus earned for 2007 by each of the NEOs as a percentage of his or her salary and as a percentage of target bonus is as follows:

 

 

Equity Compensation

 

For the NEOs in 2007, the Company’s long-term incentive compensation was structured under:

 

 

Overview.  The Compensation Committee believes that a substantial portion of each NEO’s compensation should be in the form of long-term equity awards, the largest portion of which should be “at risk” awards with vesting dependent on the Company achieving certain performance targets. Equity awards serve to align the interests of the NEOs and the Company’s shareholders. Equity awards also help to ensure a strong connection between NEO compensation and the Company’s financial performance because the value of the award depends on the Company’s future performance and share price. Long-term equity awards, meaning awards that vest over a period of years, also serve as a management retention tool. The Compensation Committee utilizes equity awards to accomplish its compensation objectives while recognizing its duty to the Company’s shareholders to limit equity dilution. The Compensation Committee has received analysis from Watson Wyatt on relevant factors of its equity compensation program, including the values of the vested and unvested equity stakes, burn rates and comparisons to the equity compensation programs of the Bermuda Peer Group.

 

RSU Awards.  An RSU gives a holder the right to receive a specified number of Common Shares at no cost if the holder remains employed at the Company through the applicable vesting date. Although an RSU’s value may increase or decrease with changes in the share price during the period before vesting, an RSU will have value in the long term, encouraging retention. While the bulk of the Company’s RSU awards to NEOs have historically been made pursuant to our annual grant program, the Compensation Committee retains the discretion to make additional awards at other times. In July 2006, the Board awarded special retention RSUs to key employees of the Company, including the NEOs, prior to the IPO. The Compensation Committee wanted to ensure the long-term retention of our senior officers, including the NEOs. The objectives of these RSU awards primarily were to motivate and retain senior officers, including the NEOs, by increasing their unvested equity stakes, and to ensure continuity of management as the Company approached its IPO. The RSUs were awarded under the Stock Incentive Plan with vesting terms as follows: 50% vest after the fourth anniversary of the date of grant and the remaining 50% vest after the fifth anniversary.

The Company also grants RSUs as part of its equity compensation package to its employees, including the NEOs. Generally these RSUs vest pro rata over four years. The Company granted the following awards in the fiscal years 2007 and 2008 to date:

 

 

LTIP Awards.  Each LTIP award represents the right to receive a number of the Company’s Common Shares in the future, based upon the achievement of established performance criteria during an applicable three-year performance period. Awards issued in 2007 will vest after the fiscal year ending December 31, 2009 in accordance with the terms and performance conditions of the LTIP as described in more detail below. The LTIP awards are “at risk,” meaning should the Company fail to perform at a minimum prescribed level, no LTIP awards will vest and no compensation will be derived by the NEOs from these awards. The Compensation Committee believes that the performance-based LTIP awards serve to promote the Company’s growth and profitability over the long term. By having a three-year vesting period, the LTIP awards also encourage employee retention.

 

Financial Metric.  The Compensation Committee selected “adjusted book value” as the financial metric for the 2007 grant of performance-based LTIP awards because it believes this metric correlated best with long-term shareholder value and the long-term health of the Company.

 

For 2007, vesting of the performance shares is based on an average annual growth in the adjusted book value of the Company’s Common Shares as follows:

 

 

No performance-based equity awards vest if the Company’s average annual growth in adjusted book value for the three-year period ending December 31, 2009 falls below 9%. The Compensation Committee believes that even at this threshold amount, there is a significant increase in value to the Company’s shareholders, and the NEO’s and shareholders’ interests are aligned because the NEOs’ receipt of Common Shares is conditioned upon the Company performing well. LTIPs were first awarded in 2006 and again in 2007. None of these LTIP awards have vested because the performance metric is not measured until after the completion of the third year.

 

In 2007, each of the Company’s NEOs received an award of performance shares as follows:

 

How is Adjusted Book Value calculated?  For purposes of vesting performance shares under the LTIP, adjusted book value is defined as “total shareholder’s equity” adjusted for (1) any special, one-time dividends declared; (2) accumulated other comprehensive income (consisting primarily of unrealized gains and losses on the investment portfolio); and (3) any capital events (such as capital contributions or share repurchases).

 

Is there a Discretionary Element?  In addition to the above three factors, the Compensation Committee may consider in its discretion any other extraordinary events that may affect year-end results.

 

The number of performance-based awards available for grant each year is determined by the Compensation Committee. In making its determination, the Compensation Committee may consider the number of available shares remaining under the LTIP, the number of employees who will be participating in the LTIP, market data from competitors with respect to the percentage of outstanding shares made available for annual grants to employees and the need to retain and motivate key employees. In 2007, performance-based awards and RSUs were granted in an aggregate amount to each of our NEOs so that his or her total direct compensation (including both cash compensation and equity-based compensation) was at approximately the 75^th percentile of our Bermuda Peer Group.

 

Benefits and Perquisites

 

The location of our global headquarters in Bermuda affects our ability to attract and retain talented employees as well as the ways in which we compensate these employees. Because many of our NEOs are non-Bermudians who have relocated to Bermuda, we believe it is important to remain competitive with other Bermuda insurance and reinsurance companies regarding compensation in order to attract and retain talented employees to grow our business. Many of the benefits and perquisites discussed below are offered only to those NEOs who have relocated to Bermuda. Some of the NEOs have not received one or more of the benefits or perquisites in 2007. Mr. Jodoin was not eligible to receive the benefits and perquisites described below because he is a U.S. citizen based out of the Company’s Boston office.

 

Perquisites.  Our NEOs receive various perquisites paid by the Company. In 2007, these perquisites included a housing allowance, cost of living allowance (“COLA”), club membership and return flights to their home country for executives and their family members who are in Bermuda. Many of these perquisites are typical of perquisites provided to the Company’s other expatriate employees located in Bermuda. Similar perquisites are provided by the Company’s competitors for employees in a similar position and have been necessary for recruitment and retention purposes. The Company’s perquisites generally include:

 

Housing Allowance.  Non-Bermudians are significantly restricted by law from owning property in Bermuda. This has resulted in a housing market that is largely based on renting to expatriates who work on the island. Housing allowances are a near universal practice for expatriates. The Company bases its housing allowances on available rental market information and the Company’s knowledge of the housing rental market in general. Each housing allowance is based on the level of the employment position and the size of the employee’s family living in Bermuda compared with such market data.

 

COLA.  In addition to the base salary, the NEOs and other senior officers who work on the island also receive a monthly COLA based upon the amount of base salary that would have been spent on a “basket” of goods and services had such individual not relocated to Bermuda versus the cost of the same “basket” of goods and services in Bermuda. Factors in determining COLA also include the level of base salary (capped at $300,000) and the size of the senior officer’s family living in Bermuda. The Compensation Committee recently reviewed this benefit and decided to eliminate in 2008 the COLA as a separate benefit and instead combine the amount of COLA each senior officer was receiving with his or her annual base salary.

 

Club Membership.  The provision of a club membership or financial assistance with joining a club in Bermuda is common practice in the marketplace and enables the NEOs and other employees who are expatriates to settle into the community. It also has the benefit of enabling the NEOs to establish social networks with clients and others.

 

Home Leave.  Reimbursement for airfare to a home country is common practice for expatriates who are working in Bermuda. The Company believes that this helps the expatriate and his or her family to better keep in

touch with relatives and other social networks. Such a benefit is provided by the Bermuda Peer Group companies and is necessary for both recruitment and retention purposes.

 

Financial and Tax Planning.  Because many of the Company’s senior officers are non-Bermudians and are subject to complicated tax issues from working abroad, the Company provides reimbursement or payment of the cost of financial and tax planning to certain of the senior officers, including its NEOs. The Company believes this perquisite is necessary for retention purposes and is important for the financial welfare of the Company’s expatriated employees.

 

Tax “Gross-Ups”.  In 2006, the U.S. Tax Increase Prevention and Reconciliation Act of 2005 (the “Tax Act”) was passed, which significantly increased the amount of U.S. federal tax our employees that are U.S. citizens have to pay. As a result of the Tax Act, the Company agreed to “gross-up” U.S. taxpayers who are employees working in Bermuda in connection with these additional tax obligations. The Company believes this perquisite is important in retaining employees affected by the Tax Act.

 

Aircraft Usage.  One of the Company’s subsidiaries leases the fractional use of one aircraft and fractionally owns another. The Company determined that these aircraft were necessary primarily to facilitate directors attending Board meetings in Bermuda. During 2007, certain of the NEOs used these aircraft from time to time for business purposes. If the aircraft are used for personal reasons, the incremental cost for such use, not including fixed costs, shall be included in total perquisites for the NEO. During 2007, certain of our NEOs did use the aircraft for personal reasons. See “Summary Compensation Table” below for more information.

 

Retirement, Health and Welfare Benefits

 

The Company offers a variety of health and welfare programs to all eligible employees. The NEOs are generally eligible for the same benefit programs on the same basis as the rest of the Company’s employees. The health and welfare programs are intended to protect employees against catastrophic loss and include medical, pharmacy, dental, vision, life insurance, accidental death and disability, and short- and long-term disability. The Company provides full-time employees with these benefits at no cost to the employee. We offer a qualified 401(k) savings and retirement plan for our employees who are U.S. citizens (wherever they may be located) and similar plans for our other employees. All Company employees, including the NEOs, are generally eligible for these plans. The Company contributes to such employees’ accounts as well.

 

We have established the Allied World Assurance Company (U.S.) Inc. Supplemental Executive Retirement Plan (the “SERP”), effective as of January 1, 2005, for certain of our employees who are U.S. citizens (generally assistant vice presidents and up) wherever they may be located. Each of our NEOs participates in the SERP. Under the SERP, the Company or its subsidiaries will make a contribution equal to 10% of a participant’s annual salary, and participants may voluntarily contribute up to 25% of their annual salary (for these purposes annual salary is currently capped at $200,000). Participant contributions to the SERP vest immediately. There is a five-year cumulative vesting period for all Company contributions so that upon completion of five years of service, a participant will be 100% vested in all prior and future contributions made on his or her behalf by the Company or its subsidiaries. The Company contributions shall also fully vest upon a participant’s retiring after attaining the age of 65. Executives may defer receipt of part or all of their cash compensation under the SERP. The program allows U.S. officers to save for retirement in a tax-effective way at minimal cost to the Company. The investment alternatives under the SERP are the same choices available to all participants under the 401(k) plan, and the NEOs do not receive preferential treatment on their investments. The Company believes that contributing to a participant’s retirement and having a five-year cumulative vesting for the Company’s contributions on behalf of a participant attracts senior officers who want to remain with the Company for the long term and help it achieve its business objectives.

 

Stock Ownership Policy

 

In order to promote equity ownership and further align the interests of management with our shareholders, in 2007 the Board adopted a stock ownership policy for senior employees. Under this policy, all of our employees with

titles of vice president and above are expected to own within five years after his or her joining us or after a promotion, equity interests in the Company, expressed as a multiple of base salary as follows:

 

 

Under the Company’s Policy Regarding Insider Trading for all Directors, Officers and Employees and its Code of Conduct and Business Ethics, employees are prohibited from engaging in speculative or “in and out” trading in securities of the Company. In addition, the Company also prohibits hedging and derivative transactions in its securities (other than transactions in the Company’s employee stock options). These transactions are characterized by short sales, buying or selling publicly traded options, swaps, collars or similar derivative transactions.

 

Employment Agreements/Severance Arrangements

 

The Company has entered into employment agreements with each of Messrs. Carmilani, Dupont and Grossack and Ms. Dillard — the four NEOs who reside in Bermuda. Apart from name, title, base salary and housing allowance, the employment agreements of these NEOs are identical to each other as well as to other senior officers. The Company believes that entering into these employment agreements supports its compensation objectives of attracting and retaining talented and highly-skilled employees and remaining competitive with other insurance and reinsurance companies in Bermuda that offer similar benefits.

 

Generally, these employment agreements provide each NEO with two years’ base salary and annual bonus, among other things, should he or she be terminated by the Company without cause or should he or she terminate the employment agreement with good reason. Should an NEO’s employment be terminated for these reasons, in order to receive this payout they are subject to two year non-compete and non-solicitation provisions, which serve to protect the Company and its business objectives.

 

The two-year period for base salary and annual bonus increases to three should such termination occur within 12 months of a change in control. The Company believes that the change in control provisions are appropriate for certain of the NEOs to further align their interests and shareholders’ interests when considering corporate transactions that may be in the best interests of the shareholders without causing undue concern over whether the transaction may jeopardize the NEO’s own employment.

 

In addition, all equity-based awards shall fully vest immediately prior to such change in control, regardless of whether or not the NEO is terminated. The Board approved the acceleration of vesting of equity awards in the event of a change in control to permit the NEOs to participate in the transaction in the same manner that all other shareholders will be participating, without being exposed to continuing vesting risk. As the full vesting of equity awards does not occur until immediately prior to the change in control, the acceleration provision also has a retention element in that it helps to ensure that the NEOs will remain with the Company through the entire transaction process. The increase in the Severance Multiplier (from two to three) upon a qualified termination within 12 months of a change in control also provides a greater incentive for the NEO to remain with the Company through the change in control regardless of potential redundancies in executive personnel. Please see “— Narrative Disclosure Regarding Equity Plans and Employment Agreements — Employment Agreements” for more information.

 

Summary Compensation Table

 

The following table provides information concerning the compensation for services in all capacities earned by the NEOs for fiscal years 2007 and 2006.

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The following table provides information concerning grants of share-based awards made to our NEOs in fiscal year 2007.

 

 

 

 

 

 

 

Narrative Disclosure Regarding Equity Plans and Employment Agreements

 

Stock Option Plan

 

The following description of the Stock Option Plan does not include any of the proposed changes to this plan as set forth in the Company’s Second Amended and Restated 2001 Employee Stock Option Plan, which is attached as Appendix A to this Proxy Statement and which is also described under the proposal “Approval of the Allied World Assurance Company Holdings, Ltd Second Amended and Restated 2001 Employee Stock Option Plan” elsewhere in this Proxy Statement. We implemented the Stock Option Plan, under which up to 2,000,000 Common Shares may be issued, subject to adjustment as described below. Of that amount, 590,656 Common Shares remained available for issuance as of December 31, 2007. During 2007, the Company granted stock options to purchase 261,650 Common Shares under the Stock Option Plan. These stock options are exercisable in certain limited conditions, expire after ten years and generally vest pro rata over four years from the date of grant. Awards may be made to any of our directors, officers, employees (including prospective employees), consultants and other individuals who perform services for us, as determined by the Compensation Committee in its discretion. The Compensation Committee may grant non-qualified stock options to purchase Common Shares (at the price set forth in the award agreement, but in no event less than 100% of the fair market value of the Common Shares on the date of grant) subject to the terms and conditions as it may determine. While the Board retains the right to terminate the Stock Option Plan at any time, in any case the Stock Option Plan will terminate on the tenth anniversary of the approval of its amendment and restatement.

 

The shares subject to the Stock Option Plan are authorized but unissued Common Shares. If any award is forfeited or is otherwise terminated or canceled without the delivery of Common Shares, if Common Shares are surrendered or withheld from any award to satisfy a grantee’s income tax or other withholding obligations or if Common Shares owned by a grantee are tendered to pay the exercise price of stock option awards, then such shares will again become available under the Stock Option Plan. Generally, the maximum number of Common Shares with respect to which options may be granted to an individual grantee in any one year is 16,667 (subject to the adjustment described below) and any one grantee may not be granted options, in the aggregate, relating to more than 9% of the Common Shares authorized for issuance under the Stock Option Plan. Our Compensation Committee has the authority to adjust the terms of any outstanding awards and the number of Common Shares issuable under the Stock Option Plan for any increase or decrease in the number of issued Common Shares resulting from a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification of the Common Shares, or any other event that the Compensation Committee determines affects our capitalization, other than regular cash dividends. In the event of a merger, amalgamation, consolidation, reorganization, liquidation or sale of a majority of the Company’s securities, the Compensation Committee will have the discretion to provide, as an alternative to the adjustment described above, for the accelerated vesting of options prior to such an event or the cancellation of options in exchange for a payment based on the per-share consideration being paid in connection with the event.

 

Stock Incentive Plan

 

The following description of the Stock Incentive Plan does not include any proposed changes to this plan as set forth in the Company’s Second Amended and Restated 2004 Stock Incentive Plan, which is attached as Appendix B to this Proxy Statement and which is also described under the proposal “Approval of the Allied World Assurance

Company Holdings, Ltd Second Amended and Restated 2004 Stock Incentive Plan” elsewhere in this Proxy Statement. We implemented the Stock Incentive Plan, under which up to 2,000,000 Common Shares may be issued, subject to adjustment as described below. Of that amount, 1,141,393 Common Shares remained available for issuance as of December 31, 2007. During 2007, the Company granted 196,158 RSUs under the Stock Incentive Plan. The Stock Incentive Plan provides for awards of restricted stock, RSUs, dividend equivalent rights and other equity-based or equity-related awards. We will not grant stock options pursuant to the plan. Awards under the Stock Incentive Plan may be made to any of our directors, officers, employees (including prospective employees), consultants and other individuals who perform services for us, as determined by the Compensation Committee in its discretion. Only RSUs have been granted under the Stock Incentive Plan and these RSUs generally vest in the fourth or fifth year from the original grant date, or pro rata over four years from the date of grant. For additional information regarding RSUs granted under the Stock Incentive Plan, see “— Compensation Discussion and Analysis — Equity Compensation — RSU Awards.” While the Board retains the right to terminate the Stock Incentive Plan at any time, the plan will automatically terminate on May 27, 2014.

 

The shares subject to the Stock Incentive Plan may be either authorized but unissued Common Shares or Common Shares previously issued and reacquired by the Company. If any award expires, terminates or otherwise lapses, in whole or in part, any Common Shares subject to such award will again become available for issuance under the Stock Incentive Plan. Generally, the maximum number of Common Shares with respect to which awards may be granted to an individual grantee in any one year is 16,667 and any one grantee may not be granted stock appreciation rights with respect to more than 16,667 Common Shares in any calendar year. Our Compensation Committee has the authority to adjust the terms of any outstanding awards as it deems appropriate and the number of Common Shares issuable under the Stock Incentive Plan for any increase or decrease in the number of issued Common Shares resulting from a stock split, stock dividend, recapitalization, combination or exchange of the Common Shares, merger, amalgamation, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or Common Shares. In the event of a merger, amalgamation, consolidation, reorganization, liquidation or a sale of a majority of the Company’s securities, the Compensation Committee will have the discretion to provide, as an alternative to the adjustment described above, for the accelerated vesting of awards prior to such an event or the cancellation of awards in exchange for a payment based on the per-share consideration being paid in connection with the event.

 

Long-Term Incentive Plan

 

On May 22, 2006, the Board adopted the Long-Term Incentive Plan. On November 7, 2007, the Board adopted the Amended and Restated Long-Term Incentive Plan to make certain changes necessary to comply with Section 409A of the Code. Under the LTIP, up to 2,000,000 Common Shares may be issued pursuant to the terms of the plan. Of that amount, 1,379,166 Common Shares remained available for issuance as of December 31, 2007. Participation in the LTIP is limited to employees who are selected by the Compensation Committee. During 2007, the Company granted 392,500 performance-based equity awards under the LTIP. See “— Compensation Discussion and Analysis — Equity Compensation — LTIP Awards” for more information about the performance-based awards made under the LTIP.

 

The LTIP provides for grants of long-term incentive awards that are earned based upon the achievement of applicable performance conditions over a three consecutive fiscal-year period. Performance conditions are selected by the Compensation Committee or the Board prior to the commencement of an applicable performance period from a list of permissible financial metrics, including (i) consolidated earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per share; (v) book value per share; (vi) return on shareholders’ equity; (vii) return on investment; (viii) stock price; (ix) improvements in capital structure; (x) revenue or sales; and (xi) total return to shareholders. Awards are expressed as a target amount representing the number of shares to be issued upon 100% achievement of applicable performance conditions, with the actual number of shares delivered ranging from 0% to 150% of the target amount based on the level of actual achievement of applicable performance conditions.

 

The shares subject to the LTIP shall be authorized but unissued Common Shares. If any award expires or is canceled, forfeited or otherwise terminated, any Common Shares subject to such award will again become available

for issuance under the LTIP. The Compensation Committee has the authority to adjust the terms of any outstanding awards, as it deems appropriate, and the number of Common Shares issuable under awards for any increase or decrease in the number of issued Common Shares resulting from a stock split, stock dividend, recapitalization, combination or exchange of the Common Shares, merger, consolidation or reorganization, or any other change in the capital structure or Common Shares.

 

Equity Compensation Plan Information

 

The following table presents information concerning our equity compensation plans as of December 31, 2007.

 

 

 

 

Employment Agreements

 

Effective as of November 1, 2006, the Company entered into employment agreements with Messrs. Carmilani and Dupont and Ms. Dillard. Effective as of December 1, 2006, the Company entered into an employment agreement with Mr. Grossack. Mr. Jodoin does not have an employment agreement. Apart from name, title, base salary and housing allowance, the employment agreements for Messrs. Carmilani, Dupont, Grossack and Ms. Dillard are identical. Under their respective employment agreements, each NEO receives an enumerated base salary that may be increased only upon approval of the Board. In addition, each NEO is eligible for a discretionary annual cash bonus.

 

The employment agreements provide for a cost of living allowance in addition to base salary, financial and tax planning, expense reimbursement for housing, club membership fees for a club in Bermuda and other business expenses, subject to applicable limits set forth in each employment agreement and the policies of the Company as approved from time to time by the Board. As discussed above under “— Compensation Discussion and Analysis — Benefits and Perquisites,” these types of perquisites are standard in the compensation packages of executives among the Company’s Bermuda Peer Group and other Bermuda companies.

 

Under the employment agreements, during the term of employment and ending on the 24-month anniversary following any termination of employment, the NEO is subject to a non-interference covenant. Generally, the non-interference covenant prevents the NEO from soliciting or hiring employees or other service providers of the Company or its subsidiaries and from inducing any customer, supplier, licensee or other business relation of the Company or its subsidiaries to cease doing business, or reduce the amount of business conducted, with the Company or its subsidiaries, or in any other manner interfering with the Company’s or its subsidiaries’ relationship with these parties. During the term of employment and ending following the Non-Compete Period (as defined below), the NEO is subject to a non-competition covenant. Generally, the non-competition covenant prevents the NEO from

engaging in activities that are competitive with the business of the Company or its subsidiaries in certain jurisdictions. Each employment agreement also contains standard confidentiality and assignment of inventions provisions. In addition, each employment agreement provides that the Company shall generally indemnify the NEO to the fullest extent permitted by Bermuda law, except in certain limited circumstances.

 

The “Non-Compete Period” means the period commencing on the date of the employment agreement and (i) in the case of the NEO’s termination of employment by the Company with cause, ending on the date of such termination; (ii) in the case of a NEO’s termination of employment by the Company without cause or by the NEO for good reason, ending on the 24-month anniversary of the date of such termination; and (iii) in the case of a NEO’s termination of employment by the NEO without good reason or as a result of a disability, ending on the date of such termination; provided, however, in the case of clause (iii) above, the Company may elect to extend the Non-Compete Period up to an additional 12 months following the date of such termination, during which period the Company will be required to continue to pay the NEO his or her base salary and provide coverage under the Company’s health and insurance plans (or the economic equivalent of such coverage, including its cash value).

 

Each employment agreement terminates upon the earliest to occur of (i) the NEO’s death, (ii) a termination by reason of a disability, (iii) a termination by the Company with or without cause and (iv) a termination by the NEO with or without good reason. Upon any termination of the NEO’s employment for any reason, except as may otherwise be requested by the Company in writing and agreed upon in writing by the NEO, the NEO will resign from any and all directorships, committee memberships or any other positions the NEO holds with the Company or any of its subsidiaries.

 

Upon termination of the NEO’s employment with the Company for any reason, including a termination by the Company with cause or by the NEO without good reason, the NEO will be entitled to all prior accrued obligations. Upon termination of the NEO’s employment due to his or her death or disability, the NEO (or his or her estate or beneficiaries), in addition to all prior accrued obligations, will be entitled to any (i) unpaid annual bonus in respect to any completed fiscal year prior to such termination, (ii) a pro rata annual bonus if such termination occurs during a fiscal year and (iii) vesting, as of the date of termination, in the number of equity-based awards that otherwise would have vested during the one-year period immediately following such termination.

 

Upon termination of the NEO’s employment by the Company without cause or by the NEO with good reason, in addition to any prior accrued obligations and unpaid annual bonus, the NEO will receive (i) an amount equal to the Severance Multiplier (as defined below) multiplied by the sum of the NEO’s base salary and annual bonus to be paid in substantially equal monthly installments over the period beginning on the termination date and ending one day prior to two and one-half months following the end of the Company’s fiscal year in which such termination occurs, (ii) continuation of coverage under the Company’s health and insurance plans (or the economic equivalent of such coverage, including its cash value) for a period of years equal to the Severance Multiplier and (iii) vesting, as of the date of termination, in the number of equity-based awards that otherwise would have vested during the two-year period immediately following such termination. The “Severance Multiplier” will equal two; provided, however, if the NEO’s termination occurs within the 12-month period following a change in control, the Severance Multiplier will equal three. The Company may require the NEO to execute a general release prior to payment of any amount or provision of any benefit as a result of termination of employment by the Company without cause or by the NEO for good reason. In addition, upon the occurrence of a change in control, all equity-based awards received by the NEO will fully vest immediately prior to such change in control.

Outstanding Equity Awards at Fiscal Year-End

 

The following table summarizes the number of securities underlying awards for each NEO at December 31, 2007.