a) Employee option plan

The Company has implemented the Allied World Assurance Company Holdings, AG 2001 Employee Stock Option Plan (the "Plan"). Under the Plan, up to 4,000,000 common shares may be issued. Options under the Plan are exercisable in certain limited conditions, expire after 10 years, and generally vest pro-rata over four years from the date of grant. The exercise price of options issued are recommended by the Compensation Committee to the Board of Directors for approval but shall not be less than 100% of the fair market value of the common shares of Allied World Switzerland on the date the option award is granted.


	Nine Months Ended September 30, 2011
				Weighted Average
	Options			Exercise Price
Outstanding at beginning of period		1,272,739		$	38.77
Granted		494,885			61.51
Exercised		(140,792	)		37.77
Forfeited		(44,449	)		51.83
Expired		(1,198	)		43.00

Outstanding at end of period		1,581,185		$	45.61

Assumptions used in the option-pricing model are as follows:


	Options Granted During
	the Nine Months Ended
	September 30, 2011
Expected term of option	5.48 years
Weighted average risk-free interest rate		2.33	%
Weighted average expected volatility		31.51	%
Dividend yield		1.00	%
Weighted average fair value on grant date	$	18.27

The Company has assumed a weighted average annual forfeiture rate of 6.72% in determining the compensation expense over the service period.

Compensation expense of $967 and $3,143 relating to the options has been included in "general and administrative expenses" in the Company's consolidated income statements for the three and nine months ended September 30, 2011, respectively. Compensation expense of $706 and $2,256 relating to the options has been included in "general and administrative expenses" in the Company's consolidated income statements for the three and nine months ended September 30, 2010, respectively. As of September 30, 2011 and December 31, 2010, the Company has recorded in "additional paid-in capital" on the consolidated balance sheets an amount of $42,017 and $41,505, respectively, in connection with all options granted.

b) Stock incentive plan

The Company has implemented the Allied World Assurance Company Holdings, AG Third Amended and Restated 2004 Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for grants of restricted stock, restricted stock units ("RSUs"), dividend equivalent rights and other equity-based awards. A total of 2,000,000 common shares may be issued under the Stock Incentive Plan. To date, only RSUs have been granted. These RSUs generally vest pro-rata over four years from the date of grant or vest in the fourth or fifth year from the date of grant.


	Nine Months Ended September 30, 2011
				Weighted Average
				Grant Date Fair
	RSUs			Value
Outstanding RSUs at beginning of period		851,078		$	39.88
RSUs granted		47,198			58.96
Performance-based RSUs granted		139,210			61.51
RSUs forfeited		(38,643	)		34.31
RSUs fully vested		(338,636	)		37.48

Outstanding RSUs at end of period		660,207		$	47.01

The Company granted performance-based RSUs in lieu of utilizing the LTIP (as defined in Note 12(c)). The performance-based RSUs are structured in exactly the same form as shares issued under the LTIP in terms of vesting restrictions and achievement of established performance criteria. For the performance-based RSUs granted in 2010 and 2011, the Company anticipates that the performance goals are likely to be achieved. Based on the performance goals, the performance-based RSUs granted in 2010 and 2011 are expensed at 100% of the fair market value of Allied World Switzerland's common shares on the date of grant. The expense is recognized over the performance period.

Compensation expense of $2,698 and $10,227 relating to the issuance of the RSUs, including the performance-based RSUs, has been recognized in "general and administrative expenses" in the Company's consolidated income statements for the three and nine months ended September 30, 2011, respectively. Compensation expense of $3,174 and $10,215 relating to the issuance of the RSUs, including the performance-based RSUs, has been recognized in "general and administrative expenses" in the Company's consolidated income statements for the three and nine months ended September 30, 2010, respectively. The compensation expense for the RSUs is based on the fair market value of Allied World Switzerland's common shares at the time of grant. The Company believes it is unlikely that performance-based RSUs will be forfeited as these awards are issued to senior management. Thus, no forfeiture rate is applied to the performance-based RSUs. The Company has assumed a weighted average annual forfeiture rate of 2.80%, excluding performance-based RSUs, in determining the compensation expense over the service period.

As of September 30, 2011 and December 31, 2010, the Company has recorded $25,362 and $37,991, respectively, in "additional paid-in capital" on the consolidated balance sheets in connection with the RSUs awarded.

c) Long-term incentive plan

The Company has implemented the Allied World Assurance Company Holdings, AG Third Amended and Restated Long-Term Incentive Plan ("LTIP"). Each award under the LTIP represents the right to receive a number of common shares in the future, based upon the achievement of established performance criteria during the applicable three-year performance period. A total of 2,000,000 common shares may be issued under the LTIP. The awards granted in 2009 will vest after the fiscal year ending December 31, 2011, subject to the achievement of the performance conditions and terms of the LTIP. The awards granted in 2008 generally vested after the fiscal year ended December 31, 2010, however, a portion of this award will vest after the fourth or fifth year from the original grant date, subject to the achievement of the performance conditions and terms of the LTIP.


	Nine Months Ended September 30, 2011
				Weighted Average
				Grant Date Fair
	LTIP			Value
Outstanding LTIP awards at beginning of period		773,411		$	41.74
Additional LTIP awards granted due to the achievement of 2008 — 2010 performance criteria		212,938			43.27
LTIP forfeited		(19,750	)		41.39
LTIP awards vested		(642,563	)		43.25

Outstanding LTIP awards at end of period		324,036		$	39.78

Compensation expense of $1,140 and $3,547 relating to the LTIP has been recognized in "general and administrative expenses" in the Company's consolidated income statements for the three and nine months ended September 30, 2011, respectively. Compensation expense of $3,843 and $12,706 relating to the LTIP has been recognized in "general and administrative expenses" in the Company's consolidated income statements for the three and nine months ended September 30, 2010, respectively. The decrease in compensation expense relating to LTIP is primarily the result of the Company issuing performance-based RSUs in lieu of LTIP as discussed in Note 12(b). The compensation expense for the LTIP is based on the fair market value of Allied World Switzerland's common shares at the time of grant. The LTIP is deemed to be an equity plan and as such, $47,991 and $77,728 have been included in "additional paid-in capital" on the consolidated balance sheets as of September 30, 2011 and December 31, 2010, respectively.

In calculating the compensation expense and in the determination of share equivalents for the purpose of calculating diluted earnings per share, it is estimated for the unvested LTIP awards granted in 2008 and 2009 that the maximum performance goals as set by the LTIP are likely to be achieved over the performance period. Based on the performance goals, the unvested LTIP awards granted in 2008 and 2009 are expensed at 150% of the fair market value of Allied World Switzerland's common shares on the date of grant. The expense is recognized over the performance period.

d) Cash-equivalent stock awards

Since 2009, as part of the Company's annual year-end compensation awards, the Company granted both stock-based awards and cash-equivalent stock awards. The cash-equivalent awards were granted to employees who received RSU, LTIP and performance- based RSU awards and were granted in lieu of granting the full award as a stock-based award. The cash-equivalent RSU awards vest pro-rata over four years from the date of grant. The cash-equivalent LTIP and performance-based RSU awards vest after a three-year performance period. As the cash-equivalent awards are settled in cash, we establish a liability equal to the product of the fair market value of Allied World Switzerland's common shares as of the end of the reporting period and the total awards outstanding. The liability is included in "accounts payable and accrued expenses" in the balance sheets and changes in the liability are recorded in "general and administrative expenses" in the consolidated income statements. For the three and nine months ended September 30, 2011, the expense recognized for the cash-equivalent stock awards was $3,048 and $11,623, respectively. For the three and nine months ended September 30, 2010, the expense recognized for the cash-equivalent stock awards was $4,767 and $10,088, respectively.

The following table shows the stock related compensation expense relating to the stock options, RSUs, LTIP and cash equivalent awards:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Stock Options	$	967	$	706	$	3,143	$	2,256
RSUs		2,698		3,174		10,227		10,215
LTIP		1,140		3,843		3,547		12,706
Cash-equivalent stock awards		3,048		4,767		11,623		10,088

Total	$	7,853	$	12,490	$	28,540	$	35,265