UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(A) of the Securities
Exchange Act of 1934 (Amendment No.  )

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ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

(Name of Registrant as Specified in Its Charter)

Not Applicable

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Dear Shareholders:

 

On November 18, 2010, commencing at 10:00 a.m., local time, we will hold special court-ordered meetings of our voting and non-voting common shareholders at our corporate headquarters located at 27 Richmond Road, Pembroke HM 08, Bermuda.

 

Our board of directors has unanimously approved, and is recommending that our common shareholders approve, a proposal that would result in your holding shares in a Swiss corporation rather than a Bermuda company. The proposed scheme of arrangement under Bermuda law will effectively change our place of incorporation from Bermuda to Switzerland. The number of common shares you will own in Allied World Assurance Company Holdings, AG, the new Swiss corporation, will be the same as the number of common shares you held in Allied World Assurance Company Holdings, Ltd, the existing Bermuda company, immediately prior to the completion of the transaction, and your relative economic interest in the company will remain unchanged.

 

After the completion of the transaction, our company will continue to conduct the same business operations as we conducted prior to the transaction, with the Swiss corporation as our ultimate holding company instead of the Bermuda company. We expect the voting shares of the Swiss corporation to be listed on the NYSE under the symbol “AWH,” the same symbol under which our common shares are currently listed. Upon completion of the transaction, we will remain subject to the U.S. Securities and Exchange Commission reporting requirements, the mandates of the Sarbanes-Oxley Act and the applicable corporate governance rules of the NYSE, and we will continue to report our consolidated financial results in U.S. dollars and under U.S. generally accepted accounting principles.

 

The planned change to our place of incorporation from Bermuda to Switzerland will locate the company in a country that is a leading financial center with a strong reputation for economic and political stability, a shareholder-friendly governance environment and a corporate tax regime that will allow us to maintain a competitive worldwide effective corporate tax rate.

 

Under U.S. federal income tax law, our shareholders generally will not recognize a gain or loss in the transaction.

 

This proxy statement provides you with detailed information regarding the transaction. We encourage you to read this entire document carefully. You should carefully consider “Risk Factors” beginning on page 22 for a discussion of risks before voting at the meeting.

 

The transaction cannot be completed without, among other things, (1) the affirmative vote of a majority in number of the holders of Allied World Assurance Company Holdings, Ltd voting common shares present and voting on the proposal, whether in person or by proxy, representing 75% or more in value of the voting common shares present and voting on the proposal, whether in person or by proxy; (2) the affirmative vote of a majority in number of the holders of Allied World Assurance Company Holdings, Ltd non-voting common shares present and voting on the proposal, whether in person or by proxy, representing 75% or more in value of the non-voting common shares present and voting on the proposal, whether in person or by proxy; and (3) the approval of the Supreme Court of Bermuda. Your board of directors unanimously recommends that you vote to approve the transaction.

 

Please date, sign and return the enclosed proxy card(s) in the enclosed, postage-paid envelope as promptly as possible, or appoint a proxy to vote your shares by using the telephone or Internet, as described in the attached proxy statement, so that your shares may be represented at the relevant special court-ordered meeting and voted in accordance with your wishes.

 

If you have any questions about the meeting, or if you require assistance, please call our proxy solicitor, MacKenzie Partners, Inc., at (800) 322-2885 or our Corporate Secretary at (441) 278-5400.

 

If you attend the relevant meeting, you may vote in person, even if you have previously submitted a proxy card.

 

Sincerely,

 

 

Scott A. Carmilani

President, Chief Executive Officer and Chairman of the Board

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in the transaction or determined if this proxy statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated October 14, 2010 and is first being mailed to shareholders on or about October 14, 2010.

 

FOR HOLDERS OF VOTING COMMON SHARES ONLY

 

 

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
27 Richmond Road
Pembroke HM 08, Bermuda

 

NOTICE OF SPECIAL COURT-ORDERED MEETING OF

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

VOTING COMMON SHAREHOLDERS

TO BE HELD ON NOVEMBER 18, 2010

 

October 14, 2010

 

To Our Voting Shareholders:

 

We will hold a special court-ordered meeting of our voting common shareholders at our corporate headquarters, located at 27 Richmond Road, Pembroke HM 08, Bermuda, commencing at 10:00 a.m., local time, on November 18, 2010 to vote:

 

 

 

Under Bermuda law, the Scheme of Agreement must be separately approved by the holders of Allied World Bermuda’s voting and non-voting common shares. Only shareholders of record holding voting common shares, as shown by the transfer books of Allied World Bermuda, as of the close of business on October 12, 2010 are entitled to vote at the special court-ordered meeting and at any adjournment or postponement thereof. If you are a holder of non-voting common shares, you may ignore this Notice. Instead, please see the notice specifically for our non-voting shareholders.

 

Please sign, date and return the enclosed proxy card 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 use of the proxy and other related matters, you are urged to read the proxy statement on the following pages.

 

If you are a record holder of voting common shares and plan to attend the meeting, please check the appropriate box on the proxy card or, if you appoint a proxy by Internet or telephone, indicate your plans to attend when prompted.

 

The Scheme of Arrangement will be subject to an application to the Supreme Court of Bermuda seeking sanction or approval of the Scheme of Arrangement, which application will be heard on or about November 26, 2010.

 

By Order of the Board of Directors,

 

 

 

Wesley D. Dupont

Corporate Secretary

 

This proxy statement incorporates documents by reference. See “Where You Can Find More Information” beginning on page 85 for a listing of documents incorporated by reference. These documents are available to any person, including any beneficial owner of common shares, upon request directed to Wesley D. Dupont, Corporate Secretary, Allied World Assurance Company Holdings, Ltd, 27 Richmond Road, Pembroke HM 08, Bermuda. To ensure timely delivery of these documents, any request should be made by November 11, 2010. The exhibits to these documents will generally not be made available unless they are specifically incorporated by reference in this proxy statement.

FOR HOLDERS OF NON-VOTING COMMON SHARES ONLY

 

 

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
27 Richmond Road
Pembroke HM 08, Bermuda

 

NOTICE OF SPECIAL COURT-ORDERED MEETING OF

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD

NON-VOTING COMMON SHAREHOLDERS

TO BE HELD ON NOVEMBER 18, 2010

 

October 14, 2010

 

To Our Non-Voting Shareholders:

 

We will hold a special court-ordered meeting of our non-voting common shareholders at our corporate headquarters, located at 27 Richmond Road, Pembroke HM 08, Bermuda, commencing at 10:30 a.m., local time, on November 18, 2010 to vote:

 

 

 

Under Bermuda law, the Scheme of Agreement must be separately approved by the holders of Allied World Bermuda’s voting and non-voting common shares. Only shareholders of record holding non-voting common shares, as shown by the transfer books of Allied World Bermuda, as of the close of business on October 12, 2010 are entitled to vote at the special court-ordered meeting and at any adjournment or postponement thereof. If you are a holder of voting common shares, you may ignore this Notice. Instead, please see the notice specifically for our voting shareholders.

 

Please sign, date and return the enclosed proxy card 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 use of the proxy and other related matters, you are urged to read the proxy statement.

 

If you are a record holder of non-voting common shares and plan to attend the meeting, please check the appropriate box on the proxy card or, if you appoint a proxy by Internet or telephone, indicate your plans to attend when prompted.

 

The Scheme of Arrangement will be subject to an application to the Supreme Court of Bermuda seeking sanction or approval of the Scheme of Arrangement, which application will be heard on or about November 26, 2010.

 

By Order of the Board of Directors,

 

 

 

Wesley D. Dupont

Corporate Secretary

 

This proxy statement for our non-voting common shareholders incorporates documents by reference. See “Where You Can Find More Information” beginning on page 85 for a listing of documents incorporated by reference. These documents are available to any person, including any beneficial owner of common shares, upon request directed to Wesley D. Dupont, Corporate Secretary, Allied World Assurance Company Holdings, Ltd, 27 Richmond Road, Pembroke HM 08, Bermuda. To ensure timely delivery of these documents, any request should be made by November 11, 2010. The exhibits to these documents will generally not be made available unless they are specifically incorporated by reference in this proxy statement.

 

TABLE OF CONTENTS

 

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
27 Richmond Road
Pembroke HM 08, Bermuda

 

 

PROXY STATEMENT

 

 

For the Special Court-Ordered Meetings of

Voting Common Shareholders and

Non-Voting Common Shareholders

To be held on November 18, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We are seeking your approval of the Scheme of Arrangement at the Special Meetings that will effectively change our place of incorporation from Bermuda to Switzerland.

 

The Scheme of Arrangement involves several steps. Allied World Bermuda, the Bermuda company whose common shares you currently own, has formed a new corporation registered in Switzerland named Allied World Assurance Company Holdings, AG (as defined above, “Allied World Switzerland”) as a direct, wholly-owned subsidiary. On October 1, 2010, we made application to the Supreme Court of Bermuda (the “Supreme Court”) to order the calling of a meeting of holders of Allied World Bermuda voting common shares (and immediately thereafter a meeting of holders of Allied World Bermuda non-voting common shares) to approve the Scheme of Arrangement. On October 7, 2010, the Supreme Court ordered us to seek your approval of the Scheme of Arrangement. We will hold the Special Meetings to approve the Scheme of Arrangement on November 18, 2010. If we obtain the necessary shareholder approval, the Supreme Court will have a sanction hearing on or about November 26, 2010 to approve the Scheme of Arrangement (the “Sanction Hearing”). Assuming we receive the necessary approvals from the shareholders and the Supreme Court and the other conditions to consummation of the Scheme of Arrangement are satisfied, the following steps will occur pursuant to the Scheme of Arrangement:

 

(1) all previously outstanding common shares of Allied World Bermuda will be cancelled;

 

(2) Allied World Bermuda will issue such number of voting and non-voting common shares as are outstanding as of the effectiveness of the Scheme of Arrangement to Allied World Switzerland (which will constitute all of Allied World Bermuda’s outstanding common shares at such time); and

 

(3) Allied World Switzerland will issue (i) voting shares of Allied World Switzerland on a one-for-one basis to the holders of Allied World Bermuda voting common shares that have been cancelled and (ii) non-voting participation certificates of Allied World Switzerland having no voting rights on a one-for-one basis to the holders of Allied World Bermuda non-voting common shares that have been cancelled.

 

As a result of the Scheme of Arrangement, the holders of voting common shares of Allied World Bermuda will become holders of voting shares of Allied World Switzerland, the holders of non-voting common shares of Allied World Bermuda will become holders of non-voting participation certificates of Allied World Switzerland, and Allied World Bermuda will become a wholly-owned subsidiary of Allied World Switzerland.

 

In connection with the consummation of the Scheme of Arrangement:

 

 

 

As of September 30, 2010, there were 38,944,723 voting common shares of Allied World Bermuda outstanding, 3,449,853 non-voting common shares outstanding, and warrants outstanding to purchase up to 2,000,000 voting common shares and up to 1,500,000 non-voting common shares of Allied World Bermuda. In addition, as of such date there were 3,060,433 voting common shares of Allied World Bermuda reserved for issuance pursuant to outstanding equity awards and an additional 3,519,864 voting common shares available for issuance but unissued under Allied World Bermuda’s equity-based incentive plans. Allied World Bermuda also held 8,399,326 common shares in treasury. Immediately after completion of the Redomestication (as defined below), our new parent company Allied World Switzerland will have the same number of Allied World Switzerland voting

shares and non-voting participation certificates as there were voting common shares and non-voting common shares, respectively, outstanding for Allied World Bermuda immediately before completion of the transaction. Prior to the effective date of the Scheme of Arrangement, we plan to cancel a sufficient number of Allied World Bermuda common shares held in treasury so that the aggregate par value of all Allied World Switzerland voting shares and non-voting participation certificates we may hold in treasury will be 10% or less of the aggregate share and participation capital.

 

We refer to the foregoing transactions, including the steps of the Scheme of Arrangement, as the “Redomestication.”

 

The following diagram shows the structure of Allied World Bermuda before the Redomestication and following the Redomestication. The diagram does not reflect all of the legal entities owned by Allied World Bermuda.

 

 

Following the Redomestication, our outstanding 7.50% Senior Notes due August 1, 2016 (the “Senior Notes”) will remain outstanding at Allied World Bermuda. Subsequent to the solicitation of votes pursuant to this proxy statement, Allied World Bermuda will seek the consent of the noteholders solely for the purpose of removing the contractual requirement in the indenture governing the notes that would require Allied World Bermuda to continue to file periodic reports with the U.S. Securities and Exchange Commission (“SEC”) following the Redomestication (which would be in addition to the SEC reports that will be required of Allied World Switzerland). The consent of the noteholders is not a condition to the completion of the Scheme of Arrangement. Following the Redomestication, Allied World Switzerland will fully and unconditionally guarantee the Senior Notes.

 

In this proxy statement, we sometimes refer to Allied World Bermuda and Allied World Switzerland as “we,” “our,” “us” or “the company” and which, as the context so requires, includes Allied World Bermuda or Allied World Switzerland and its subsidiaries as a consolidated group. Also, in this proxy statement, “$” refers to U.S. dollars and “CHF” to Swiss francs. All amounts of Swiss francs reported in this proxy statement, or metrics reported in U.S. dollars that are based on Swiss francs (for example par value and share capital amounts for Allied World Switzerland), assume an exchange rate of CHF 1.085 to $1.00, the exchange rate prevailing on June 30, 2010.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MacKenzie Partners, Inc., the proxy solicitor

105 Madison Avenue

New York, NY, 10016

Telephone: (800) 322-2885

 

or

 

Wesley D. Dupont, Corporate Secretary

Allied World Assurance Company Holdings, Ltd

27 Richmond Road

Pembroke HM 08, Bermuda

Telephone: (441) 278-5400

 

This summary highlights selected information from this proxy statement. It does not contain all of the information that is important to you. To understand the Redomestication more fully, and for a more complete legal description of the Scheme of Arrangement, you should read carefully the entire proxy statement, including “Risk Factors” and the annexes. The Scheme of Arrangement, attached as Annex A to this proxy statement, is the legal document that governs the Scheme of Arrangement. The articles of association and organizational regulations of Allied World Switzerland, substantially in the forms attached as Annex D and Annex E to this proxy statement, respectively, will govern our company after the completion of the Redomestication. We encourage you to read those documents carefully.

 

Allied World Bermuda.  We are a Bermuda-based holding company with subsidiaries that underwrite a diversified portfolio of property and casualty lines of business through offices located in Bermuda, Hong Kong, Ireland, Singapore, Switzerland, the United Kingdom and the United States. For the year ended December 31, 2009, our U.S. insurance, international insurance and reinsurance segments accounted for 39.8%, 32.8% and 27.4%, respectively, of our total gross premiums written of $1,696.3 million. As of December 31, 2009, we had $9,653.2 million of total assets and $3,213.3 million of shareholders’ equity.

 

We were formed in November 2001 by a group of investors, including American International Group, Inc. (“AIG”), The Chubb Corporation (“Chubb”), the GSCP Funds and an affiliate of Swiss Reinsurance Company. Since our formation, we have focused primarily on the direct insurance markets. We offer our clients and producers significant capacity in both the direct property and casualty insurance markets as well as the reinsurance market.

 

We have undergone significant corporate expansion since our formation, and we now have 16 offices located in eight different countries.

 

Internationally, we first established a presence in Europe when Allied World Assurance Company (Europe) Limited was approved to carry on business in the European Union from its office in Ireland in October 2002 and from a branch office in London in May 2003. Allied World Assurance Company (Reinsurance) Limited was approved to write reinsurance in the European Union from its office in Ireland in July 2003 and from a branch office in London, England in August 2004. In October 2008, we expanded our European presence when Allied World Assurance Company (Reinsurance) Limited opened a branch office in Zug, Switzerland to further penetrate the European market.

 

In July 2002, we established a presence in the United States when we acquired two insurance companies, Allied World Assurance Company (U.S.) Inc. and Allied World National Assurance Company. We have recently made substantial investments to expand our U.S. business, which grew significantly in 2009 and which we expect will continue to grow in size and importance in the coming years. In February 2008, we acquired a U.S. reinsurance company we subsequently renamed Allied World Reinsurance Company and we write our U.S. reinsurance business through this company. In October 2008, we acquired Darwin Professional Underwriters, Inc. and its subsidiaries to expand our U.S. insurance platform. We currently have nine offices in the United States, including offices in Atlanta, Georgia and Costa Mesa and Los Angeles, California that opened in 2008 and an office in Dallas, Texas that opened in 2009.

 

Our corporate expansion continued into Asia when Allied World Assurance Company, Ltd opened branch offices in Hong Kong in March 2009 and in Singapore in December 2009.

 

Our principal executive office is located at 27 Richmond Road, Pembroke HM 08, Bermuda, and our telephone number is (441) 278-5400.

 

Allied World Switzerland.  Allied World Switzerland is a newly formed Swiss corporation and is currently wholly-owned by Allied World Bermuda. Allied World Switzerland has only nominal assets and capitalization and has not engaged in any business or other activities other than in connection with its formation and the Scheme of

Arrangement. As a result of the Redomestication, Allied World Switzerland will become the parent holding company of Allied World Bermuda and its subsidiaries.

 

The principal executive office of Allied World Switzerland is expected to be located at Lindenstrasse 8, CH-6340 Zug, Switzerland.

 

The Scheme of Arrangement will effectively change our place of incorporation from Bermuda to Switzerland.

 

Scheme of Arrangement.  The Scheme of Arrangement involves several steps. Allied World Bermuda, the Bermuda company whose common shares you currently own, has formed Allied World Switzerland, as a direct, wholly-owned subsidiary. On October 1, 2010, we made application to the Supreme Court to order the calling of a meeting of holders of Allied World Bermuda voting common shares (and immediately thereafter a meeting of holders of Allied World Bermuda non-voting common shares) to approve the Scheme of Arrangement. On October 7, 2010, the Supreme Court ordered us to seek your approval of the Scheme of Arrangement. We will hold the Special Meetings to approve the Scheme of Arrangement on November 18, 2010. If we obtain the necessary shareholder approval, the Supreme Court will have the Sanction Hearing on or about November 26, 2010 to approve the Scheme of Arrangement. Assuming we receive the necessary approvals from the shareholders and the Supreme Court, we will file the court order sanctioning the Scheme of Arrangement with the Bermuda Registrar of Companies, at which time the Scheme of Arrangement will be effective.

 

Once the Scheme of Arrangement is effective, and the other conditions to consummation of the Scheme of Arrangement are satisfied, the following steps will occur:

 

(1) all previously outstanding common shares of Allied World Bermuda will be cancelled;

 

(2) Allied World Bermuda, acting on behalf of its shareholders, pursuant to a Contribution-in-Kind Agreement entered into by Allied World Bermuda and Allied World Switzerland (the “Contribution-in-Kind Agreement”) substantially in the form attached as Annex F to this proxy statement, will issue such number of voting common shares and non-voting common shares as are outstanding as of the effectiveness of the Scheme of Arrangement to Allied World Switzerland (which will constitute all of Allied World Bermuda’s outstanding common shares at such time);

 

(3) Allied World Switzerland will increase its share and participation capital by an amount equal to the aggregate par value of the new voting shares and non-voting participation certificates and file amended articles of association reflecting the share and participation capital increase with the Swiss commercial register (the “commercial register”); and

 

(4) the new voting shares of Allied World Switzerland will be delivered on a one-for-one basis to the holders of Allied World Bermuda voting common shares that have been cancelled and the new non-voting participation certificates of Allied World Switzerland will be delivered on a one-for-one basis to the holders of Allied World Bermuda non-voting common shares that have been cancelled.

 

As a result of the Scheme of Arrangement, the holders of voting common shares of Allied World Bermuda will become holders of voting common shares of Allied World Switzerland, the holders of non-voting common shares of Allied World Bermuda will become holders of non-voting participation certificates of Allied World Switzerland, and Allied World Bermuda will become a wholly-owned subsidiary of Allied World Switzerland.

 

In connection with consummation of the Scheme of Arrangement:

 

 

 

As of September 30, 2010, there were 38,944,723 voting common shares of Allied World Bermuda outstanding, 3,449,853 non-voting common shares outstanding, and warrants outstanding to purchase up to 2,000,000 voting common shares and up to 1,500,000 non-voting common shares of Allied World Bermuda. In addition, as of such date there were an aggregate of 6,969,717 voting common shares of Allied World Bermuda reserved for issuance pursuant to outstanding equity awards, or available for issuance but unissued, under its equity compensation plans. Further, we held 8,399,326 common shares of Allied World Bermuda in treasury.

 

After the Redomestication, you will continue to own an interest in a parent company that will continue to conduct the same business operations as conducted by Allied World Bermuda before the Redomestication. The number of shares you will own in Allied World Switzerland will be the same as the number of shares you owned in Allied World Bermuda immediately prior to the Redomestication, and your relative economic interest in the Allied World Bermuda group will remain unchanged.

 

The completion of the Redomestication will change the governing law that applies to us from Bermuda law to Swiss law. There are differences between Bermuda law and Swiss law and between Allied World Bermuda’s memorandum of association and bye-laws on the one hand, and Allied World Switzerland’s articles of association and organizational regulations on the other hand. See “Comparison of Rights of Shareholders and Powers of the Board of Directors” for a summary of some of these differences.

 

Upon completion of the Redomestication, we will remain subject to SEC reporting requirements, the mandates of the Sarbanes-Oxley Act and the applicable corporate governance rules of the NYSE, and we will continue to report our financial results in U.S. dollars and under U.S. GAAP. Under Swiss corporate and tax law, we will also have to report the statutory annual accounts of Allied World Switzerland in CHF.

 

Assuming that the Scheme of Arrangement is approved by holders of our voting and non-voting common shares and the conditions to the consummation of the Scheme of Arrangement are satisfied, we anticipate that the Scheme of Arrangement will become effective as soon as practicable following approval of the Supreme Court at the Sanction Hearing on or about November 26, 2010, and upon our filing of the court order sanctioning the Scheme of Arrangement with the Bermuda Registrar of Companies, and will settle on the following business day. In the Scheme of Arrangement and this proxy statement, the “Transaction Time” refers to the time at which such settlement occurs.

 

We presently operate out of 16 different offices located in eight different countries and provide insurance and reinsurance coverage worldwide. Our board of directors has determined that it is in the best interests of Allied World Bermuda and its shareholders to change our place of incorporation from Bermuda to Switzerland based in part on Switzerland:

 

 

We believe that the Redomestication will help promote our stature and visibility by becoming a member of an international community that is home to some of Europe’s major multinational organizations. The Redomestication

will help us reduce certain reputational, political, regulatory and financial risks to our company and increase our strategic flexibility while posing no noticeable risks to our operating model, our long-term strategy and our ability to maintain a competitive worldwide effective corporate tax rate.

 

We carefully considered the effects of the Redomestication on our shareholders. Switzerland has a well-developed legal system that encourages a high standard of corporate governance and provides shareholders with substantial rights similar to, and in some cases more favorable to shareholders than, the rights of shareholders under Bermuda law. Following the Redomestication we will remain subject to SEC reporting requirements, the mandates of the Sarbanes-Oxley Act and the corporate governance rules of the NYSE. For more information on our reasons for the Redomestication, please see “The Redomestication — Background and Reasons for the Redomestication.” In addition to the potential benefits described above, the Redomestication will expose Allied World Bermuda and its shareholders to certain risks. Please see the discussion under “Risk Factors.”

 

Under U.S. federal income tax law, holders of shares of Allied World Bermuda generally will not recognize a gain or loss in the Redomestication. Under Swiss tax law, no tax is due for non-Swiss holders of Allied World Bermuda common shares on the receipt of Allied World Switzerland voting shares in the Scheme of Arrangement. Please refer to “Material Tax Considerations” for a description of the material U.S. federal income tax and Swiss tax consequences of the Redomestication to Allied World Bermuda shareholders. Determining the actual tax consequences of the Redomestication to you may be complex and will depend on your specific situation. You are urged to consult your tax adviser for a full understanding of the tax consequences of the Redomestication to you.

 

Many of the principal attributes of Allied World Bermuda’s voting common shares and Allied World Switzerland’s voting shares will be similar. However, there are differences between your rights under Swiss law and under Bermuda law. In addition, there are differences between Allied World Bermuda’s memorandum of association and bye-laws and Allied World Switzerland’s proposed articles of association and organizational regulations. We discuss these differences in detail under “Description of Allied World Switzerland Shares” and “Comparison of Rights of Shareholders and Powers of the Board of Directors.” Copies of forms of Allied World Switzerland’s proposed articles of association and organizational regulations are attached as Annex D and Annex E to this proxy statement, respectively.

 

We intend to apply so that, immediately following the consummation of the Redomestication, the voting shares of Allied World Switzerland will be listed on the NYSE under the symbol “AWH,” the same symbol under which your common shares are currently listed.

 

The Scheme of Arrangement will not be completed unless, among other things, the following conditions are satisfied or, if allowed by law, waived: (i) the Allied World Switzerland voting shares to be issued in connection with the Scheme of Arrangement are authorized for listing on the NYSE, subject to official notice of issuance; and (ii) neither Allied World Bermuda nor Allied World Switzerland is subject to any governmental decree, order or injunction that prohibits the consummation of the Scheme of Arrangement.

 

In addition, Allied World Bermuda must obtain, prior to the consummation of the Scheme of Arrangement, (i) an opinion from Willkie Farr & Gallagher LLP, in form and substance reasonably satisfactory to it, confirming, as of the effective date of the Scheme of Arrangement, the matters of U.S. federal income tax law discussed under “Material Tax Considerations — U.S. Federal Income Tax Considerations;” and (ii) an opinion from PricewaterhouseCoopers AG, in form and substance reasonably satisfactory to it, confirming, as of the effective date of the Scheme of Arrangement, the matters of Swiss tax law discussed under “Material Tax Considerations — Swiss Tax Considerations.”

 

The Scheme of Arrangement cannot be completed without the approval of the Supreme Court of Bermuda. Subject to the holders of common shares of Allied World Bermuda approving the Scheme of Arrangement, a Supreme Court hearing will be required to seek the sanction of the Scheme of Arrangement. At the Sanction Hearing, the Supreme Court may impose such conditions as it deems appropriate in relation to the Scheme of Arrangement but may not impose any material changes without the joint consent of Allied World Bermuda and Allied World Switzerland. In determining whether to exercise its discretion and approve the Scheme of Arrangement, the Supreme Court will determine, among other things, whether the Scheme of Arrangement is fair to the holders of Allied World Bermuda’s shareholders in general.

 

On September 29, 2010, the last trading day before the public announcement of the Redomestication, the closing price of the Allied World Bermuda common shares on the NYSE was $56.60 per share. On October 12, 2010, the most recent practicable date before the date of this proxy statement, the closing price of the Allied World Bermuda common shares on the NYSE was $56.35 per share.

 

Under Bermuda law, the shareholders of Allied World Bermuda do not have any right to an appraisal of the value of their shares or payment for them in connection with the Scheme of Arrangement.

 

Under U.S. GAAP, the Scheme of Arrangement represents a transaction between entities under common control. Assets and liabilities transferred between entities under common control are accounted for at cost. Accordingly, the assets and liabilities of Allied World Switzerland will be reflected at their carrying amounts in the accounts of Allied World Bermuda at the Transaction Time.

 

Time, Place, Date and Purpose.  The Special Meeting of the holders of voting common shares will be held on November 18, 2010 at 10:00 a.m., local time, (and immediately thereafter the Special Meeting of the holders of non-voting common shares will be held) at our offices, located at 27 Richmond Road, Pembroke HM 08, Bermuda. At each meeting, Allied World Bermuda’s board of directors will ask the holders of common shares to vote to approve:

 

 

 

Record Date.  Only holders of record of Allied World Bermuda common shares as of the close of business on October 12, 2010 are entitled to notice of and to vote at the relevant Special Meeting or any adjournment or postponement of the relevant Special Meeting.

 

Quorum.  The presence of two or more persons at each meeting representing in person or by proxy more than 50% of our total outstanding voting common shares or non-voting common shares, as applicable, throughout the meeting will constitute a quorum. Abstentions and “broker non-votes” will be counted toward the presence of a quorum at, but will not be considered votes cast on any of the proposals brought before, the Special Meetings.

 

The Allied World Bermuda board of directors unanimously recommends that Allied World Bermuda’s shareholders vote “FOR” the Scheme of Arrangement. The Allied World Bermuda board of directors also unanimously recommends that Allied World Bermuda’s shareholders vote “FOR” the proposal to adjourn the meeting to a later date if there are insufficient votes at the time of the meeting to approve the Scheme of Arrangement proposal. Approval of the adjournment proposal is not a condition to the Scheme of Arrangement.

 

The Scheme of Arrangement requires (i) the affirmative vote of a majority in number of the holders of the Allied World Bermuda voting common shares present and voting at the meeting of voting common shareholders, whether in person or by proxy, representing 75% or more in value of the voting common shares present and voting at the meeting, whether in person or by proxy, and (ii) the affirmative vote of a majority in number of the holders of the Allied World Bermuda non-voting common shares present and voting at the meeting of non-voting common shareholders, whether in person or by proxy, representing 75% or more in value of the non-voting common shares present and voting at the meeting, whether in person or by proxy. The affirmative vote of holders of at least a majority of the Allied World Bermuda voting common shares present and voting at the meeting, whether in person or by proxy, is required to approve the adjournment proposal with respect to the meeting of voting common shareholders; and the affirmative vote of holders of at least a majority of the Allied World Bermuda non-voting common shares present and voting at the meeting, whether in person or by proxy, is required to approve the adjournment proposal with respect to the meeting of non-voting common shareholders.

 

The following table sets forth our summary historical statement of operations data and summary balance sheet data as of and for the six months ended June 30, 2010 (derived from our unaudited consolidated financial statements) and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 (derived from our audited consolidated financial statements), all of which have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk see Item 1A. “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC on March 1, 2010 which is incorporated by reference in this proxy statement.

 

 

 

 

 

 

 

 

Pro forma financial statements for Allied World Switzerland are not presented in this proxy statement because no significant pro forma adjustments are required to be made to the historical condensed consolidated statement of operations and balance sheet of Allied World Bermuda for the six months ended June 30, 2010 and to the historical consolidated statement of operations of Allied World Bermuda for the year ended December 31, 2009. Those financial statements are included in Allied World Bermuda’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and in its Annual Report on Form 10-K for the year ended December 31, 2009, which are incorporated by reference in this proxy statement.

 

As a result of the Scheme of Arrangement, the par value of the parent company’s shares increase from $0.03 for Allied World Bermuda to $15.00 for Allied World Switzerland and additional paid-in capital will decrease by the same amount. Additional paid-in capital in the consolidated balance sheet prepared in accordance with U.S. GAAP is different from qualifying additional paid-in capital that will be presented in our Swiss statutory parent company financial statements. See “Questions and Answers About the Redomestication — Q: How will qualifying additional paid-in capital for Swiss statutory reporting purposes be determined?” for a discussion of shareholders’ equity under Swiss statutory reporting requirements.

 

The following unaudited summary pro forma financial information presents consolidated shareholders’ equity as of June 30, 2010, actual (Allied World Bermuda) and as adjusted (Allied World Switzerland), assuming the Redomestication had been completed on June 30, 2010. The pro forma adjustment reflects the completion of the Redomestication, including the increase in par value and the corresponding decrease in additional paid-in capital. You should read this table in conjunction with Allied World Bermuda’s unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2010 and the notes thereto, which are incorporated by reference in this proxy statement.

 

 

Before you decide how to vote on the Scheme of Arrangement, you should consider carefully the following risk factors, in addition to the other information contained in this proxy statement and the documents incorporated by reference. In particular, you should consider the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 and such risks discussed in our reports and other filings under the Securities Exchange Act of 1934, as amended.

 

Your rights as a shareholder will change as a result of the Redomestication.

 

Because of differences between Swiss law and Bermuda law and differences between the governing documents of Allied World Switzerland and Allied World Bermuda, your rights as a shareholder will change if the Redomestication is completed. For example, following the Redomestication, the shareholders of Allied World Switzerland will have the right to declare dividends without the approval of the board of directors, whereas prior to the Redomestication the board of directors has the right, subject to statutory limitations, to declare and pay dividends on Allied World Bermuda common shares. As another example, under Swiss law, members of the board of directors of Allied World Switzerland may be removed with or without cause by the shareholders of Allied World Switzerland at a shareholders meeting. In contrast, Allied World Bermuda shareholders may only remove a director for cause. For a description of these and other differences, see “Comparison of Rights of Shareholders and Powers of the Board of Directors” and the other risk factors below.

 

Allied World Switzerland may not be able to make distributions or repurchase shares without subjecting you to Swiss withholding tax.

 

If Allied World Switzerland is not successful in its efforts to make distributions, if any, through a reduction of par value or, after January 1, 2011, subject to regulations still to be promulgated by the applicable Swiss authorities, pay dividends, if any, out of qualifying additional paid-in capital, then any dividends paid by Allied World Switzerland will generally be subject to a Swiss federal withholding tax at a rate of 35%. The withholding tax must be withheld from the gross distribution and paid to the Swiss Federal Tax Administration. Dividends paid on Allied World Bermuda’s shares are not currently subject to withholding tax in Bermuda. A U.S. holder that qualifies for benefits under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, which we refer to as the “U.S.-Swiss Treaty,” may apply for a refund of the tax withheld in excess of the 15% treaty rate (or in excess of the 5% reduced treaty rate for qualifying corporate shareholders with at least 10% participation in the voting stock of Allied World Switzerland, or for a full refund in case of qualified pension funds). Payment of a capital distribution in the form of a par value reduction is not subject to Swiss withholding tax. However, there can be no assurance that Allied World Switzerland’s shareholders will approve a reduction in par value, that Allied World Switzerland will be able to meet the other legal requirements for a reduction in par value, or that Swiss withholding rules will not be changed in the future. In addition, over the long term, the amount of par value available for Allied World Switzerland to use for par value reductions will be limited. If Allied World Switzerland is unable to make a distribution through a reduction in par value or, after January 1, 2011, pay a dividend out of qualifying additional paid-in capital, Allied World Switzerland may not be able to make distributions without subjecting you to Swiss withholding taxes.

 

Under present Swiss tax law, repurchases of voting shares or non-voting participation certificates for the purposes of capital reduction are treated as a partial liquidation subject to 35% Swiss withholding tax on the difference between the par value and the repurchase price. Allied World Switzerland may follow a share/participation certificate repurchase process for future repurchases, if any, similar to a “second trading line” on the SIX in which Swiss institutional investors sell shares to us and are generally able to receive a refund of the Swiss withholding tax. However, if Allied World Switzerland is unable to use this process successfully, Allied World Switzerland may not be able to repurchase voting shares or non-voting participation certificates for the purposes of capital reduction without subjecting you to Swiss withholding taxes. Please see “Material Tax Considerations — Swiss Tax Considerations — Consequences to Shareholders of Allied World Switzerland Subsequent to the Redomestication — Repurchases of Shares for Cancellation.”

We may not achieve a competitive worldwide effective corporate tax rate following the Redomestication.

 

We believe that the Redomestication should improve our ability to maintain a competitive worldwide effective corporate tax rate. However, we cannot give any assurance as to what our effective tax rate will be after the Redomestication because of, among other things, uncertainty regarding the tax policies of the jurisdictions where we operate. Our actual effective tax rate may vary from the foregoing expectation and that variance may be material. Additionally, the tax laws of Switzerland and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate.

 

We are required to declare dividends in Swiss francs and any currency fluctuations between the U.S. dollar and Swiss francs will affect the dollar value of the dividends we pay.

 

Under Swiss corporate law, we are required to declare dividends, including distributions through a reduction in par value, in Swiss francs. Dividend payments will be made by our transfer agent in U.S. dollars converted at the applicable exchange rate shortly before the payment date. As a result, shareholders will be exposed to fluctuations in the exchange rate between the date used for purposes of calculating the CHF amount of any proposed dividend or par value reduction and the relevant payment date, which will not be shorter than two months and could be as long as a year.

 

As a result of the higher par value of the Allied World Switzerland shares and participation certificates, Allied World Switzerland will have less flexibility than Allied World Bermuda with respect to certain aspects of capital management.

 

Upon the completion of the Redomestication, the par value of Allied World Switzerland’s shares and participation certificates will be $15.00 per share. The par value of Allied World Bermuda’s common shares is $0.03 per share. Under Swiss law, Allied World Switzerland may not issue its shares below par value. As of June 30, 2010, the closing price of Allied World Bermuda’s common shares on the NYSE was $45.38. In the event Allied World Switzerland needs to raise common equity capital at a time when the trading price of its shares is below the par value of the shares and participation certificates, Allied World Switzerland will be unable to issue shares or participation certificates. We currently issue stock options under our Second Amended and Restated Stock Option Plan with an exercise price equal to the closing price of our common shares on the date of issuance. Upon the Redomestication, we will not be able to issue stock options with an exercise price below the par value, which may limit the flexibility of our compensation arrangements. As a consequence we would have to consider reducing the par value of the Allied World Switzerland voting shares which in turn would reduce our ability to make Swiss withholding tax-free distributions to our shareholders.

 

As a result of increased shareholder approval powers, Allied World Switzerland will have less flexibility than Allied World Bermuda with respect to certain aspects of capital management.

 

Under Bermuda law, Allied World Bermuda’s directors may issue, without shareholder approval, any common shares authorized in Allied World Bermuda’s memorandum of association that are not issued or reserved. Bermuda law also provides the board of directors with substantial flexibility in establishing the terms of preferred shares. In addition, Allied World Bermuda’s board of directors has the right, subject to statutory limitations, to declare and pay dividends on Allied World Bermuda’s common shares without a shareholder vote. Swiss law affords shareholders more powers and allows Allied World Switzerland’s shareholders to authorize share and participation capital that can be issued by the board of directors without shareholder approval, but this authorization is limited to 50% of the existing registered share and participation capital and must be renewed by the shareholders every two years. Additionally, subject to specified exceptions described in Allied World Switzerland’s articles of association, Swiss law grants preemptive rights to existing shareholders and holders of non-voting participation certificates to subscribe for new issuances of voting shares, non-voting participation certificates and other securities. Swiss law also does not provide as much flexibility in the various terms that can attach to different classes of shares. For example, while the board of directors of Allied World Bermuda can authorize the issuance of preferred stock without shareholder approval, Allied World Switzerland will not be able to issue preferred stock (Vorzugsaktien) without the approval of a majority of the votes cast at a general meeting. Swiss law also reserves for approval

by shareholders many corporate actions over which Allied World Bermuda’s board of directors currently has authority. For example, dividends must be approved by shareholders. While we do not believe that the differences between Bermuda law and Swiss law relating to our capital management will have a material adverse effect on us, we cannot assure you that situations will not arise where such flexibility would have provided substantial benefits to us and our shareholders.

 

We may become subject to additional regulation.

 

Assuming that our newly formed Swiss operating company, Allied World Assurance Company, AG, is approved as a licensed insurance company in Switzerland by the Swiss Financial Markets Supervisory Authority, which we refer to as “FINMA,” we may become subject to regulatory oversight by an additional financial regulatory body.

 

FINMA also has the discretion to supervise our group activities. Allied World Bermuda is currently not subject to regulation in Bermuda. Under so-called “group supervision,” FINMA would have the right to supervise Allied World Switzerland on a group-wide basis. The regulatory power of FINMA covers in particular the following areas:

 

 

 

On December 11, 2009, we received non-binding written confirmation from FINMA that it will not subject us to group supervision based primarily on the fact that most of our senior management will not reside in Switzerland. Factors which can cause FINMA to subject us to group supervision include the location of our top management and corresponding requests by foreign regulators. We cannot assure you that our future business needs may not require us to have a greater management presence in Switzerland or that FINMA will not otherwise determine to exercise group supervision over us. If subjected to group supervision we may incur additional costs and administrative obligations. These additional costs and administrative obligations may have a substantial impact on our organizational and operational flexibility. See “The Redomestication — Regulatory Matters.”

 

The anticipated benefits of moving our principal executive office to Switzerland may not be realized, and difficulties in connection with moving our principal executive office could have an adverse effect on us.

 

In connection with the Redomestication, we plan to relocate our principal executive office from Pembroke, Bermuda to Switzerland. We expect that some of our executive officers and other key decision makers will relocate to Switzerland. We may face significant challenges in relocating our principal executive office to a different country, including difficulties in retaining and attracting officers, key personnel and other employees and challenges in maintaining a principal executive office in a country different from the country where other employees, including other executive officers and corporate support staff, are located. Employees may be uncertain about their future roles within our organization pending or following the completion of the Redomestication. Management may also be required to devote substantial time to the Redomestication and related matters, which could otherwise be devoted to focusing on ongoing business operations and other initiatives and opportunities. Any such difficulties could have an adverse effect on our business, results of operations or financial condition.

 

The Redomestication will result in additional costs to us, some of which will be incurred whether or not the Redomestication is completed.

 

The completion of the Redomestication will result in an increase in some of our ongoing expenses and require us to incur some new expenses including, among other things, the addition of professional fees to comply with Swiss corporate and tax laws. In addition, we will incur certain transaction costs in connection with the

Redomestication whether or not the Redomestication is completed. The Redomestication may also result in indirect costs by diverting attention of management and employees from our business.

 

The market for the Allied World Switzerland shares may differ from the market for the Allied World Bermuda shares, and Allied World Switzerland’s shares may be removed as a component of the Russell 1000 Index and other indices or certain other funds.

 

We intend to list the voting shares of Allied World Switzerland on the NYSE under the symbol “AWH” the same symbol under which the Allied World Bermuda common shares are currently listed. The market price, trading volume or volatility of the Allied World Switzerland voting shares could be different than those of the Allied World Bermuda shares.

 

Allied World Bermuda’s voting common shares are currently a component of the Russell 1000 Index and other indices. Russell has considered Allied World Bermuda and a number of other “offshore registered companies” as U.S. domestic companies for purposes of inclusion in the Russell 1000. Russell may decide to remove Allied World Switzerland’s voting shares as a component of the Russell 1000, and, while we are uncertain as to when Russell will make its determination, this determination may not be made until after the Special Meetings. Other index funds have removed the shares of other offshore registered companies that have recently redomesticated to Switzerland. Similar issues could arise with respect to whether Allied World Switzerland’s voting shares will continue to be included as a component in other indices or funds that may impose a variety of qualifications that could be affected by the Redomestication. If Allied World Switzerland’s voting shares are removed as a component of the Russell 1000 or other indices or no longer meet the qualifications of such funds, institutional investors attempting to track the performance of the Russell 1000 or such other indices or the funds that impose those qualifications would likely sell their voting shares, which could adversely affect the price of the Allied World Switzerland voting shares. Any such adverse impact on the price of the Allied World Switzerland voting shares could be magnified by the current heightened volatility in the financial markets.

 

Certain information included or incorporated by reference in this proxy statement include forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 that involve inherent risks and uncertainties. These statements include in general forward-looking statements both with respect to us and the insurance industry. Statements that are not historical facts, including statements that use terms such as “anticipates,” “believes,” “expects,” “intends,” “plans,” “projects,” “seeks” and “will” and that relate to our plans and objectives for future operations, are forward-looking statements. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this proxy statement should not be considered as a representation by us or any other person that our objectives or plans will be achieved. These statements are based on current plans, estimates and expectations. Forward-looking statements include information concerning possible or assumed future results of operations of Allied World Bermuda and, following the Redomestication, Allied World Switzerland. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. Forward-looking statements include information about the following subjects:

 

 

 

The following factors could cause business conditions and our results to differ materially from those expressed in the forward-looking statements included or incorporated by reference in this proxy statement:

 

 

 

Additional important factors that could cause actual results to differ materially from those in such forward-looking statements are set forth under “Risk Factors” and the “The Redomestication — Background and Reasons for the Redomestication” and elsewhere in this proxy statement; and in Item 1A. “Risk Factors” in our Form 10-K for the fiscal year ending December 31, 2009, filed with the SEC on March 1, 2010 and incorporated by reference herein, and risks contained in our other filings with the SEC. We undertake no obligation (and expressly disclaim any such obligation) to update or revise any forward-looking statement that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

The Scheme of Arrangement will effectively change our place of incorporation from Bermuda to Switzerland.

 

The Scheme of Arrangement involves several steps. Allied World Bermuda, the Bermuda company whose common shares you currently own, formed Allied World Switzerland, as a direct, wholly-owned subsidiary. On October 1, 2010, we made application to the Supreme Court in Bermuda to order the calling of meetings of Allied World Bermuda common shareholders to approve the Scheme of Arrangement. On October 7, 2010, the Supreme Court ordered us to seek your approval of the Scheme of Arrangement. We will hold the special court-ordered meetings to approve the Scheme of Arrangement on November 18, 2010. If we obtain the necessary shareholder approval, the Supreme Court will have the Sanction Hearing on or about November 26, 2010 to approve the Scheme of Arrangement. Assuming we receive the necessary approvals from the shareholders and the Supreme Court and the conditions to consummation of the Scheme of Arrangement are satisfied, we will file the court order sanctioning the Scheme of Arrangement with the Bermuda Registrar of Companies, at which time the Scheme of Arrangement will be effective. See also “Summary — The Redomestication” above.

 

As Allied World has grown, we have regularly assessed our organizational structure. As a provider of worldwide insurance and reinsurance coverage, we presently operate out of 16 different offices located in eight different countries. After considerable thought and study, extending well over a year, our board of directors has

determined that it is in the best interests of Allied World Bermuda and its shareholders to change our place of incorporation from Bermuda to Switzerland. This decision was based in part on the following determinations:

 

 

We also carefully considered the effects of the Redomestication on our shareholders. Accordingly, our voting shares will continue to trade on the NYSE under the symbol “AWH.” We will remain subject to SEC reporting requirements, the mandates of the Sarbanes-Oxley Act and the corporate governance rules of the NYSE. Finally, we will continue to report our financial results in U.S. dollars and under U.S. GAAP.

 

We also considered a redomestication to other jurisdictions such as the United States and elsewhere but believe that a redomestication to Switzerland provides the greatest potential benefits with the least potential disadvantages. Our board of directors has considered both the potential advantages and risks of the Redomestication and has unanimously approved the Scheme of Arrangement and recommended that the shareholders vote for the Scheme of Arrangement. We cannot assure you, however, that the anticipated benefits of the Redomestication will be realized. In addition to the potential benefits described above, the Redomestication will expose Allied World Bermuda and its shareholders to certain risks. Please see the discussion under “Risk Factors.”

 

The Scheme of Arrangement may be amended, modified or supplemented by Allied World Bermuda and the Supreme Court. However, after approval by the shareholders, no amendment, modification or supplement may be made or effected that requires further approval by the holders of Allied World Bermuda’s common shares without obtaining that approval.

 

Under Bermuda law, the board of directors of Allied World Bermuda may terminate and abandon the Scheme of Arrangement at any time prior to the Sanction Hearing. However, Allied World Bermuda has determined that, subject to satisfaction of the conditions to the Scheme of Arrangement, it will not terminate and abandon the Scheme of Arrangement following the approval of the Scheme of Arrangement by the holders of common shares. The board of directors may also terminate or abandon the Scheme of Arrangement if the conditions to the Scheme of Arrangement are not satisfied or waived, and if such conditions are not satisfied or waived on or before 5:00 p.m. (Bermuda time) on the date nine months after the date on which the Scheme of Arrangement becomes effective, or such later date as agreed by Allied World Bermuda and sanctioned by the Supreme Court, the Scheme of Arrangement will lapse by its terms.

 

The Scheme of Arrangement will not be completed unless, among other things, the following conditions are satisfied or, if allowed by law, waived:

 

 

In addition, Allied World Bermuda must obtain, prior to the consummation of the Scheme of Arrangement, (i) an opinion from Willkie Farr & Gallagher LLP, in form and substance reasonably satisfactory to it, confirming, as of the effective date of the Scheme of Arrangement, the matters of U.S. federal income tax law discussed under “Material Tax Considerations — U.S. Federal Income Tax Considerations”; and (ii) an opinion from PricewaterhouseCoopers AG, in form and substance reasonably satisfactory to it, confirming, as of the effective date of the Scheme of Arrangement, the matters of Swiss tax law discussed under “Material Tax Considerations — Swiss Tax Considerations.”

 

Pursuant to Section 99 of the Bermuda Companies Act 1991 (the “Companies Act”), the Scheme of Arrangement requires court approval in Bermuda. This requires Allied World Bermuda to file an application for the sanction of the Scheme of Arrangement with the Supreme Court of Bermuda. Prior to the mailing of this proxy statement, Allied World Bermuda obtained directions from the Supreme Court providing for the convening of an Allied World Bermuda meeting of voting common shareholders (and immediately thereafter a meeting of Allied World Bermuda non-voting common shareholders) and other procedural matters regarding the meetings. A copy of the Supreme Court’s directions is attached as Annex B.

 

At the Special Meetings, Allied World Bermuda shareholders will be asked to approve the Scheme of Arrangement. If the shareholders approve the Scheme of Arrangement, then Allied World Bermuda will apply for sanction of the Scheme of Arrangement at the Sanction Hearing. We encourage you to read the Scheme of Arrangement attached as Annex A in its entirety for a complete description of its terms and conditions.

 

At the Sanction Hearing, the Supreme Court may impose such conditions as it deems appropriate in relation to the Scheme of Arrangement but may not impose any material changes without the joint consent of Allied World Bermuda and Allied World Switzerland. In determining whether to exercise its discretion and approve the Scheme of Arrangement, the Supreme Court will determine, among other things, whether the Scheme of Arrangement is fair to Allied World Bermuda’s common shareholders in general. If you are a common shareholder who wishes to appear or be represented and present evidence or arguments at the Sanction Hearing, you may do so. Holders of Allied World Bermuda common shares at the Record Date are entitled to appear before the Supreme Court, at the time and date set for the hearing of the petition to sanction the Scheme of Arrangement, in order to voice your objection to the Scheme of Arrangement. Allied World Bermuda will not object to your appearance or participation at the hearing.

Should you wish to appear before the Supreme Court, Allied World Bermuda encourages you to adopt one of the below noted procedures:

 

 

 

 

In addition, the Supreme Court has wide discretion to hear from interested parties. See “Summary — Special Court-Ordered Meetings” for more information.

 

The Scheme of Arrangement will become effective as soon as a copy of the Order of the Supreme Court sanctioning the Scheme of Arrangement has been delivered to the Registrar of Companies in Bermuda as required by Section 99 of the Companies Act. See “Summary — Conditions to Consummation of the Scheme of Arrangement” for more information on these conditions.

 

Once the Scheme of Arrangement is effective, the Supreme Court will have exclusive jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute which arises out of or is connected with the terms of the Scheme of Arrangement or its implementation or out of any action taken or omitted to be taken under the Scheme of Arrangement or in connection with the administration of the Scheme of Arrangement. A shareholder who wishes to enforce any rights under the Scheme of Arrangement after such time must notify Allied World Bermuda in writing of its intention at least five business days prior to commencing a new proceeding. After the effective time of the Scheme of Arrangement, no shareholder may commence a proceeding against Allied World Switzerland or Allied World Bermuda with respect to or arising from the Scheme of Arrangement except to enforce its rights under the scheme where a party has failed to perform its obligations under the scheme.

 

When under any provision of the Scheme of Arrangement after the effective time of the Scheme of Arrangement a matter is to be determined by Allied World Bermuda, then Allied World Bermuda will have discretion to interpret those matters under the Scheme of Arrangement in a manner that it considers fair and reasonable, and its decisions will be binding on all concerned.

 

Allied World Bermuda may, subject to U.S. securities law constraints, consent to any modification of the Scheme of Arrangement on behalf of the shareholders that the Supreme Court determines to approve or impose.

 

The issuance of Allied World Switzerland voting shares to the holders of Allied World Bermuda’s voting common shares (and the issuance of non-voting participation certificates to the holders of Allied World Bermuda’s non-voting common shares) in connection with the Scheme of Arrangement will not be registered under the Securities Act. Section 3(a)(10) of the Securities Act exempts securities issued in exchange for one or more outstanding securities from the general requirement of registration where the terms and conditions of the issuance and exchange of such securities have been approved by any court of competent jurisdiction, after a hearing upon the fairness of the terms and conditions of the issuance and exchange at which all persons to whom such securities will be issued have a right to appear and to whom adequate notice of the hearing has been given. In determining whether it is appropriate to sanction the Scheme of Arrangement, the Supreme Court will consider at the Sanction Hearing whether the terms and conditions of the Scheme of Arrangement are fair to the holders of Allied World Bermuda’s shareholders in general.

The Allied World Switzerland voting shares issued to Allied World Bermuda shareholders in connection with the Redomestication will continue to be freely transferable, except for restrictions applicable to certain “affiliates” of Allied World Bermuda under the Securities Act, as follows:

 

 

Persons who may be deemed to be affiliates of Allied World Bermuda and Allied World Switzerland for these purposes generally include individuals or entities that control, are controlled by, or are under common control with, Allied World Bermuda and Allied World Switzerland, and would not include shareholders who are not executive officers, directors or significant shareholders of Allied World Bermuda and Allied World Switzerland.

 

Allied World Bermuda has not filed a registration statement with the SEC covering any resales of the Allied World Switzerland voting shares to be received by Allied World Bermuda’s shareholders in connection with the Scheme of Arrangement.

 

If the Scheme of Arrangement is approved by the requisite shareholder vote and the conditions to the consummation of the Scheme of Arrangement are satisfied, we anticipate that the Scheme of Arrangement will become effective as soon as practicable following approval of the Supreme Court at the Sanction Hearing scheduled for November 26, 2010, upon our filing of the court order sanctioning the Scheme of Arrangement with the Bermuda Registrar of Companies. We expect the issuance of Allied World Switzerland voting shares and non-voting participation certificates to occur prior to the opening of trading on the trading day immediately following effectiveness of the Scheme of Arrangement. We currently expect to complete the Scheme of Arrangement as soon as practicable after the Sanction Hearing.

 

In the event the conditions to the Scheme of Arrangement are not satisfied, the Scheme of Arrangement may be abandoned or delayed, even after approval by our shareholders and the Supreme Court at the Sanction Hearing. If conditions to the Scheme of Arrangement are not satisfied or waived on or before 5:00 p.m. (Bermuda time) on the date nine months after the date on which the Scheme of Arrangement becomes effective, or such later date as agreed by Allied World Bermuda and sanctioned by the Supreme Court, the Scheme of Arrangement will lapse by its terms. In addition, under Bermuda law, the Scheme of Arrangement may be abandoned or delayed for any reason by our board of directors at any time prior to the Sanction Hearing. However, Allied World Bermuda has determined that, subject to satisfaction of the conditions to the Scheme of Arrangement, it will not terminate and abandon the Scheme of Arrangement following the approval of the Scheme of Arrangement by the holders of common shares.

 

When the Redomestication is completed, the executive officers and directors of Allied World Bermuda immediately prior to the completion of the Redomestication are expected to be the executive officers and directors of Allied World Switzerland. Following the Redomestication, the executive officers of Allied World Switzerland not residing in Switzerland will periodically hold meetings in Switzerland in order to operate Allied World Switzerland. Allied World Switzerland’s articles of association provide for the same classified board of directors as Allied World Bermuda currently has, and Allied World Bermuda’s directors will carry their terms of office over to the Allied World Switzerland board of directors.

 

The Special Meetings will be conducted in accordance with the directions of the Supreme Court. The presence of two or more persons at each meeting representing in person or by proxy more than 50% of our total outstanding voting common shares or non-voting common shares, as appropriate, throughout the relevant meeting will constitute a quorum. Abstentions and “broker non-votes” will be counted toward the presence of a quorum at, but will not be considered votes cast on any of the proposals brought before, the Special Meetings.

 

Assuming the presence of a quorum at the meetings, the Scheme of Arrangement requires the affirmative vote of a majority in number of the holders of the Allied World Bermuda voting common shares present and voting on the proposal at the meeting, whether in person or by proxy, representing 75% or more in value of the voting common shares present and voting on the proposal at the meeting, whether in person or by proxy. The Scheme of Arrangement also requires the affirmative vote of a majority in number of the holders of Allied World Bermuda non-voting common shares present and voting on the proposal at the meeting, whether in person or by proxy, representing 75% or more in value of the non-voting common shares present and voting on the proposal at the meeting, whether in person or by proxy. The adjournment proposal requires the affirmative vote of holders of at least a majority of the Allied World Bermuda voting common shares present and voting at the meeting, whether in person or by proxy, with respect to the meeting of voting common shareholders, and the affirmative vote of holders of at least a majority of the Allied World Bermuda non-voting common shares present and voting at the meeting, whether in person or by proxy, with respect to the meeting of non-voting common shareholders. Our board of directors has unanimously approved the Scheme of Arrangement and recommends that shareholders vote “FOR” approval of both of the proposals.

 

We are not aware of any other governmental approvals or actions that are required to complete the Redomestication other than compliance with U.S. federal and state securities laws and Bermuda and Swiss corporate law, including the registration of the capital increase relating to the issue of Allied World Switzerland voting shares and non-voting participation certificates to our shareholders in the commercial register.

 

Under Bermuda law, none of the shareholders of Allied World Bermuda has any right to an appraisal of the value of their shares or payment for them in connection with the Scheme of Arrangement.

 

Assuming the Scheme of Arrangement becomes effective, your Allied World Bermuda voting common shares will be cancelled and Allied World Switzerland voting shares will be issued without any action on your part. All of Allied World Switzerland’s voting shares will be issued in uncertificated book-entry form. Consequently, if you currently hold Allied World Bermuda shares in certificated form, following the Redomestication, your Allied World Bermuda share certificates will cease to have effect as documents or evidence of title. The transfer agent will make an electronic book-entry in your name and will mail you a statement evidencing your ownership of Allied World Switzerland voting shares.

 

During the year ended December 31, 2009, Allied World Bermuda declared a regular quarterly dividend of $0.18 per common share during the first, second and third quarters, which was increased to a regular quarterly dividend of $0.20 per common share for the fourth quarter of 2009 and the first and second quarters of 2010. Allied World Bermuda expects to declare and pay a regular quarterly dividend to its shareholders in the fourth quarter of 2010. Allied World Bermuda also expects the Redomestication to be effective by the end of the calendar year 2010. Under Swiss law, any dividends declared and paid after the Redomestication are subject to Allied World Switzerland shareholder approval, which approval will not be sought until the next annual meeting of Allied

World Switzerland in early May 2011. In order to provide for a dividend to holders of Allied World Switzerland’s voting shares and non-voting participation certificates in the interim period, Allied World Bermuda expects that its board of directors will declare a special dividend approximately equal to its normal quarterly dividend to be payable in December 2010 along with the anticipated regularly scheduled fourth quarter 2010 dividend.

 

Any future declaration and payment of any cash dividends by Allied World Switzerland following the completion of the Redomestication will:

 

 

However, Allied World Switzerland shareholders will have the power to declare dividends without the agreement of the board of directors. Consequently, dividends may be declared by resolution of the shareholders even if the board of directors and management of Allied World Switzerland do not believe it is in the best interest of shareholders.

 

For a description of restrictions on dividends imposed by Swiss law, see “Description of Allied World Switzerland Shares — Dividends,” “Description of Allied World Switzerland Shares — Repurchases of Shares” and “Material Tax Considerations — Swiss Tax Considerations — Consequences to Shareholders of Allied World Switzerland Subsequent to the Redomestication.”

 

If the Redomestication is completed, Allied World Switzerland will adopt and assume Allied World Bermuda’s equity-based incentive plans, awards and arrangements, and those plans, awards, and arrangements will be amended as necessary to give effect to the Scheme of Arrangement, including to provide (1) that shares of Allied World Switzerland will be issued, held, made available, or used to measure benefits as appropriate under the plans, awards and arrangements in lieu of shares of Allied World Bermuda, including upon exercise of any options or share appreciation rights, and upon settlement of restricted stock unit awards, issued under those plans, awards, and arrangements; and (2) for the appropriate substitution of Allied World Switzerland for Allied World Bermuda in those plans, awards and arrangements. Similarly, Allied World Switzerland voting shares will be substituted for Allied World Bermuda voting shares under any long-term incentive plans and awards and other equity-based incentive plans, awards and arrangements maintained by subsidiaries of Allied World Bermuda that presently provide for the issuance of Allied World Bermuda voting shares.

 

Allied World Bermuda’s common shares are currently listed on the NYSE. There is currently no established public trading market for the voting shares of Allied World Switzerland. We intend to apply so that, immediately following the consummation of the Scheme of Arrangement, the voting shares of Allied World Switzerland will be listed on the NYSE under the symbol “AWH” the same symbol under which the Allied World Bermuda common shares are currently listed.

 

Under U.S. GAAP, the Scheme of Arrangement represents a transaction between entities under common control. Assets and liabilities transferred between entities under common control are accounted for at cost. Accordingly, the assets and liabilities of Allied World Switzerland will be reflected at their carrying amounts in the accounts of Allied World Bermuda at the Transaction Time.

 

The GSCP Funds hold 91.6% of the outstanding non-voting common shares of Allied World Bermuda as of October 12, 2010. In light of the requirement that the holders of the Allied World Bermuda non-voting common shares approve the Scheme of Arrangement, prior to submitting the Scheme of Arrangement and related transactions to our shareholders, we inquired of the GSCP Funds whether they would support the proposed Redomestication transactions. The GSCP Funds have communicated to us that they have determined, on a preliminary basis, to support the transactions. You should note, however, that the GSCP Funds continue to evaluate the transactions and have not committed or in any way obligated themselves to vote for the Scheme of Arrangement, and there is no assurance that the GSCP Funds will not ultimately determine against supporting the Redomestication and to withhold their votes from or cast their votes against the Scheme of Arrangement.

 

If the Scheme of Arrangement is consummated, pursuant to the Transaction Agreement and the terms of Allied World Bermuda’s warrants outstanding on the date of the consummation of the Scheme of Arrangement, Allied World Switzerland will assume Allied World Bermuda’s obligations under the terms of the warrants and will agree to issue voting shares (or non-voting participation certificates in the case of the warrants held by the GSCP Funds) of Allied World Switzerland (rather than Allied World Bermuda voting common shares) or Allied World Switzerland non-voting participation certificates (rather than Allied World Bermuda non-voting common shares) upon exercise of such warrants in accordance with their terms.

 

The credit agreements governing Allied World Bermuda’s existing syndicated credit facilities will require the lenders to consent to the Redomestication. We expect to receive the consent of these lenders prior to the consummation of the Redomestication and any amendments to these credit agreements will be subject to, and only be effective upon, the consummation of the Redomestication.

 

Following the Redomestication, our Senior Notes will remain outstanding at Allied World Bermuda. Subsequent to the solicitation of votes pursuant to this proxy statement, Allied World Bermuda will seek the consent of the noteholders solely for the purpose of removing the contractual requirement in the notes indenture that would require Allied World Bermuda to continue to file periodic reports with the SEC following the Redomestication (in addition to the SEC reports of Allied World Switzerland). The consent of the noteholders is not a condition to the completion of the Scheme of Arrangement. Following the Redomestication, Allied World Switzerland will fully and unconditionally guarantee the Senior Notes.

 

You should be aware that some of our executive officers and directors have interests in the Redomestication that are different from, or in addition to, the interests of our other shareholders. Our executive officers and directors as a group beneficially own 1.5% of our outstanding voting common shares. See “Principal Shareholders.”

 

Allied World Switzerland plans to enter into indemnification agreements with each of its directors and executive officers, substantially similar to those currently in place with Allied World Bermuda, upon the completion of the Redomestication that will provide for indemnification and expense advancement and include related provisions meant to facilitate the indemnitee’s receipt of such benefits.

 

In connection with our request that the GSCP Funds consider the Redomestication transactions prior to their final approval by our board of directors and proposal to our shareholders, we agreed to reimburse the GSCP Funds for all reasonable costs and expenses they incur in connection with their consideration and evaluation of the Redomestication transactions.

 

The table below sets forth information as of September 20, 2010 regarding the beneficial ownership of our common shares by:

 

 

 

 

 

 

 

 

Allied World Bermuda began publicly trading on the NYSE under the symbol “AWH” as of July 12, 2006.

 

The following table sets forth the high and low sales prices per share of Allied World Bermuda common shares for the periods indicated, as reported on the NYSE Composite Tape.

 

 

On September 29, 2010, the last full trading day before we announced the Scheme of Arrangement, Allied World Bermuda common shares closed at $56.60 per share. Shareholders are encouraged to obtain recent stock quotes for Allied World Bermuda common shares. As of October 12, 2010, the record date for determining holders of Allied World Bermuda common shares, there were 38 holders of record of Allied World Bermuda outstanding voting common shares and 14 holders of record of Allied World Bermuda outstanding non-voting common shares.

 

We declared a regular quarterly dividend of $0.20 per common share during each of the first two quarters of 2010. During the year ended December 31, 2009, we declared a regular quarterly dividend of $0.18 per common share for the first, second and third quarters, and a regular quarterly dividend of $0.20 per common share for the fourth quarter. During the year ended December 31, 2008, we declared a regular quarterly dividend of $0.18 per common share during each quarter. The continued declaration and payment of dividends to holders of common shares is expected but will be at the discretion of our board of directors and subject to specified legal, regulatory, financial and other restrictions. Following the Redomestication, future declaration and payment of dividends by Allied World Switzerland will be subject to shareholder approval.

 

As a holding company, Allied World Bermuda’s principal source of income is dividends or other statutorily permissible payments from its subsidiaries. The ability of its subsidiaries to pay dividends is limited by the applicable laws and regulations of the various countries in which Allied World Bermuda operates, including Bermuda, the United States and Ireland.

 

We intend to list the voting shares of Allied World Switzerland on the NYSE under the symbol “AWH” the same symbol under which the Allied World Bermuda common shares are currently listed.

 

The information presented under the caption “— U.S. Federal Income Tax Considerations” below is a discussion of the material U.S. federal income tax consequences to U.S. holders and non-U.S. holders (as defined below) of the Redomestication and owning and disposing of Allied World Switzerland voting shares received pursuant to the Redomestication. The information presented under the caption “— Swiss Tax Considerations” is a discussion of the material Swiss tax consequences (1) to shareholders resident for tax purposes in a country other than Switzerland of the Redomestication and of ownership and disposition of the Allied World Switzerland voting shares and (2) to Allied World Switzerland of the Redomestication and subsequent operations. The information presented under the caption “— Bermuda Tax Considerations” is a discussion of the material Bermuda tax consequences of the Redomestication.

 

You should consult your own tax advisor regarding the applicable tax consequences to you of the Redomestication and of ownership and disposition of the Allied World Switzerland voting shares under the laws of the United States (federal, state and local), Switzerland, Bermuda and any other applicable foreign jurisdiction.

 

Scope of Discussion

 

This discussion does not generally address any aspects of U.S. taxation other than U.S. federal income taxation, is not a complete analysis or description of all of the possible tax consequences of the Redomestication or of holding and disposing of Allied World Switzerland voting shares and does not address all tax considerations that may be relevant to you. Special rules that are not discussed in the general descriptions below may also apply to you. In particular, this discussion deals only with holders that hold their Allied World Bermuda shares and will hold their Allied World Switzerland voting shares as capital assets and does not address the tax treatment of special classes of holders, such as:

 

 

 

This discussion is based on the laws of the United States, including the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the “U.S. Code,” its legislative history, existing and proposed Treasury regulations promulgated thereunder, judicial decisions, published rulings, administrative pronouncements and income tax treaties to which the United States is a party, each as in effect on the date of this proxy statement. These laws may change, possibly with retroactive effect. There can be no assurance that the United States Internal Revenue Service, which we refer to as the “IRS,” will not disagree with or will not successfully challenge any of the conclusions reached and described in this discussion.

 

For purposes of this discussion, a “U.S. holder” is any beneficial owner of Allied World Bermuda shares, or, after the completion of the Redomestication, Allied World Switzerland voting shares, that for U.S. federal income tax purposes is:

 

 

A “non-U.S. holder” is any beneficial owner of Allied World Bermuda shares, or, after the completion of the Redomestication, Allied World Switzerland voting shares, other than an entity or arrangement treated as a partnership for U.S. federal income tax purposes, that is not a U.S. holder. For purposes of this summary, “holder” or “shareholder” means either a U.S. holder or a non-U.S. holder or both, as the context may require.

 

If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of Allied World Bermuda shares or Allied World Switzerland voting shares, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Holders of Allied World Bermuda shares or Allied World Switzerland voting shares that are partnerships and partners in these partnerships are urged to consult their tax advisers regarding the U.S. federal income tax consequences to them of the Redomestication and the ownership and disposition of the Allied World Switzerland voting shares.

 

In the discussion that follows, except as otherwise indicated, it is assumed, as Allied World Bermuda believes to be the case, that Allied World Bermuda has not been and will not be a passive foreign investment company before the Redomestication and that Allied World Switzerland will not be a passive foreign investment company after the Redomestication. See “— Passive Foreign Investment Company Considerations.” It is also assumed, as Allied World Bermuda expects to be the case, that Allied World Switzerland will continue to be a foreign corporation in the future.

 

Taxation of Allied World Switzerland Subsequent to the Redomestication

 

We do not anticipate any material changes to the taxation of Allied World Switzerland as a result of the Redomestication. For further discussion, please refer to “U.S. Taxation of our Non-U.S. Companies” and “U.S. Taxation of our U.S. Subsidiaries” in Allied World Bermuda’s Form S-3 filed with the SEC on December 31, 2007.

 

U.S. Holders

 

Consequences of the Redomestication.  The Redomestication, together with the subsequent election by Allied World Bermuda to be treated as an entity disregarded from its owner for U.S. federal tax purposes, will

constitute a reorganization within the meaning of Section 368(a)(1)(F) of the U.S. Code. The material U.S. federal income tax consequences of the Redomestication to U.S. holders are as follows:

 

 

Shareholders who hold their Allied World Bermuda shares with differing bases or holding periods are urged to consult their tax advisors with regard to identifying the bases and holding periods of the particular Allied World Switzerland voting shares received in the Scheme of Arrangement.

 

Consequences to Shareholders of Allied World Switzerland Subsequent to the Redomestication

 

Taxation of Distributions.  Subject to the discussions below relating to the potential application of the controlled foreign corporation, which we refer to as “CFC,” related person insurance income, which we refer to as “RPII”, and passive foreign investment company, which we refer to as “PFIC,” rules, the gross amount of a distribution paid with respect to Allied World Switzerland, including the full amount of any Swiss withholding tax thereon, will be a dividend for U.S. federal income tax purposes to the extent of current or accumulated earnings and profits of Allied World Switzerland (as determined for U.S. tax purposes). With respect to non-corporate U.S. holders, certain dividends received in taxable years beginning before January 1, 2011 from a “qualified foreign corporation” will be subject to U.S. federal income tax at a maximum rate of 15%. In general, Allied World Switzerland will be treated as a qualified foreign corporation if the Allied World Switzerland voting shares are listed on the NYSE or certain other exchanges or Allied World Switzerland qualifies for benefits under the income tax treaty between the United States and Switzerland. This reduced rate is subject to a U.S. holder’s satisfaction of certain significant holding period and other applicable requirements, including that Allied World Switzerland cannot be a passive foreign investment company (as described below), and will not be available in all situations. Accordingly, U.S. holders are urged to consult their own tax advisors regarding the application of the relevant rules to their particular circumstances. As a Swiss corporation, if Allied World Switzerland is treated as a qualified foreign corporation such dividends will constitute qualified dividend income taxed as net capital gain.

 

To the extent that a distribution exceeds Allied World Switzerland’s current or accumulated earnings and profits (as determined for U.S tax purposes), it will be treated as a nontaxable return of capital to the extent of the taxpayer’s basis in the stock, and thereafter as a capital gain. While dividends paid by Allied World Switzerland generally will be treated as foreign source income, if U.S. holders own a majority of our voting shares as we expect to continue to be the case, a portion of the dividends may be treated as U.S. source income. Allied World Switzerland dividends will not be eligible for the dividends received deduction allowed to corporate shareholders under the U.S. Code.

 

Subject to complex limitations, Swiss withholding tax will be treated for U.S. tax purposes as a foreign tax that may be claimed as a foreign tax credit against the U.S. federal income tax liability of a U.S. holder. Dividends distributed by Allied World Switzerland will generally be categorized as “passive income” or, in the case of some holders, as “financial services income,” for purposes of computing allowable foreign tax credits for U.S. tax purposes. Certain taxpayers may be able to treat financial services income as general category income. The rules relating to the determination of the foreign tax credit are complex, and you should consult your own tax advisors to determine whether and to what extent a credit would be available. In lieu of claiming a credit, U.S. holders may claim a deduction of foreign taxes paid in the taxable year. Unlike a tax credit, a deduction generally does not reduce U.S. tax on a dollar-for-dollar basis.

Classification of Allied World Switzerland or its Non-U.S. Subsidiaries as Controlled Foreign Corporation.  Each 10% U.S. Shareholder (as defined below) of a non-U.S. corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year, and who owns shares in the CFC, directly or indirectly through non-U.S. entities, on the last day of the CFC’s taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s “subpart F income,” even if the subpart F income is not distributed. A non-U.S. corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of section 958(b) of the U.S. Code (i.e., “constructively”)) more than 50% of the total combined voting power of all classes of voting stock of such non-U.S. corporation, or more than 50% of the total value of all stock of such corporation on any day during the taxable year of such corporation. For purposes of taking into account insurance income, a CFC also includes a non-U.S. insurance company in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of the total value of the stock) is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation. A “10% U.S. Shareholder” is a U.S. Person who owns (directly, indirectly through non-U.S. entities or constructively) at least 10% of the total combined voting power of all classes of stock entitled to vote of the non-U.S. corporation. We believe that because of the dispersion of our share ownership, provisions in our organizational documents that limit voting power (these provisions are described in “Description of Allied World Switzerland Shares — Voting”), provisions in the bye-laws of our non- U.S. subsidiaries and other factors, no U.S. Person who owns shares of Allied World Switzerland directly or indirectly through one or more non-U.S. entities should be treated as owning (directly, indirectly through non-U.S. entities, or constructively), 10% or more of the total voting power of all classes of shares of Allied World Switzerland or any of its non-U.S. subsidiaries and, therefore, we believe that Allied World Switzerland and its non-U.S. subsidiaries should not be CFCs. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge.

 

The RPII CFC Provisions.  The following discussion generally is applicable only if the RPII of any of the non-U.S. insurance subsidiaries, determined on a gross basis, is 20% or more of a Non-U.S. Insurance Subsidiary’s gross insurance income for the taxable year and the 20% Ownership Exception (as defined below) is not met. The following discussion generally would not apply for any fiscal year in which a Non-U.S. Insurance Subsidiary’s gross RPII falls below the 20% threshold or the 20% Ownership Exception is met. Although we cannot be certain, we believe that each of our Non-U.S. Insurance Subsidiaries was in prior years of operations and will be for the foreseeable future below either the 20% threshold or 20% Ownership Exception for each tax year.

 

RPII is any “insurance income” (as defined below) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a “RPII shareholder” (as defined below) or a “related person” (as defined below) to such RPII shareholder. In general, and subject to certain limitations, “insurance income” is income (including premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed under the portions of the U.S. Code relating to insurance companies if the income were the income of a domestic insurance company. For purposes of inclusion of the RPII of a Non-U.S Insurance Subsidiary in the income of RPII shareholders, unless an exception applies, the term “RPII shareholder” would mean any U.S. Person who owns (directly or indirectly through non-U.S. entities) any amount of Allied World Switzerland voting shares. Generally, the term “related person” for this purpose means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock applying certain constructive ownership principles. A Non-U.S Insurance Subsidiary will be treated as a CFC under the RPII provisions if RPII shareholders are treated as owning (directly, indirectly through non-U.S. entities or constructively) 25% or more of the shares of Allied World Switzerland by vote or value.

 

RPII Exceptions.  The special RPII rules would not apply if (i) at all times during the taxable year less than 20% of the voting power and less than 20% of the value of the stock of Allied World Switzerland, which we refer to as the “20% Ownership Exception,” is owned (directly or indirectly) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by a Non-U.S Insurance Subsidiary or related persons to any such person, (ii) RPII, determined on a gross basis, is less than 20% of a Non-U.S Insurance Subsidiary gross insurance income for the taxable year (the “20% Gross Income Exception”), (iii) a Non-U.S Insurance Subsidiary elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of a U.S. trade or business,

and to waive all treaty benefits with respect to RPII and meet certain other requirements or (iv) a Non-U.S Insurance Subsidiary elects to be treated as a U.S. corporation and waive all treaty benefits and meet certain other requirements. Where none of these exceptions applies, each U.S. Person owning or treated as owning any voting shares Allied World Switzerland (and therefore, indirectly, in a Non-U.S Insurance Subsidiary) on the last day of Allied World Switzerland’s taxable year will be required to include in its gross income for U.S. federal income tax purposes its share of the RPII for the portion of the taxable year during which a Non-U.S Insurance Subsidiary was a CFC under the RPII provisions, determined as if all such RPII were distributed proportionately only to such U.S. Persons at that date, but limited by each such U.S. Person’s share of a Non-U.S Insurance Subsidiary’s current-year earnings and profits as reduced by the U.S. Person’s share, if any, of certain prior-year deficits in earnings and profits. The Non-U.S Insurance Subsidiaries intend to operate in a manner that is intended to ensure that each qualifies for either the 20% Gross Income Exception or 20% Ownership Exception.

 

Computation of RPII.  For any year in which a Non-U.S Insurance Subsidiary’s gross RPII is 20% or more of its gross insurance income for the year and the Non-U.S Insurance Subsidiary does not meet the 20% Ownership Exception, Allied World Switzerland may also seek information from its shareholders as to whether beneficial owners of voting shares at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such persons; to the extent Allied World Switzerland is unable to determine whether a beneficial owner of voting shares is a U.S. Person, we may assume that such owner is not a U.S. Person, thereby increasing the per share RPII amount for all known RPII shareholders. The amount of RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related expenses such as losses, loss reserves and operating expenses.

 

If gross RPII is less than 20% of gross insurance income or the Non-U.S Insurance Subsidiary meets the 20% Ownership Exception, RPII shareholders will not be required to include RPII in their taxable income. The amount of RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related expenses such as losses, loss reserves and operating expenses.

 

Apportionment of RPII to U.S. Holders.  Every RPII shareholder who owns voting shares on the last day of any taxable year of Allied World Switzerland in which a Non-U.S Insurance Subsidiary’s gross insurance income constituting RPII for that year equals or exceeds 20% of the Non-U.S Insurance Subsidiary’s gross insurance income and the Non-U.S Insurance Subsidiary does not meet the 20% Ownership Exception should expect that for such year it will be required to include in gross income its share of the a Non-U.S Insurance Subsidiary’s RPII for the portion of the taxable year during which the Non-U.S Insurance Subsidiary was a CFC under the RPII provisions, whether or not distributed, even though it may not have owned the shares throughout such period. A RPII shareholder who owns voting shares during such taxable year but not on the last day of the taxable year is not required to include in gross income any part of a Non-U.S Insurance Subsidiary’s RPII.

 

Uncertainty as to Application of RPII.  The RPII provisions are complex, have never been interpreted by the courts or the Treasury Department of the United States (the “Treasury”) in final Treasury regulations, and Treasury regulations interpreting the RPII provisions of the U.S. Code exist only in proposed form. It is not certain whether these Treasury regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. These provisions include the grant of authority to the Treasury Department to prescribe “such Treasury regulations as may be necessary to carry out the purpose of this subsection including Treasury regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise.” Accordingly, the meaning of the RPII provisions and the application thereof to a Non-U.S Insurance Subsidiary is uncertain. In addition, we cannot be certain that the amount of RPII or the amounts of the RPII inclusions for any particular RPII shareholder, if any, will not be subject to adjustment based upon subsequent IRS examination. Any prospective investor which does business with a Non-U.S Insurance Subsidiary and is considering an investment in voting shares should consult his or her tax advisor as to the effects of these uncertainties.

 

Tax-Exempt Shareholders.  Tax-exempt entities will be required to treat certain subpart F insurance income, including RPII, that is includible in income by the tax-exempt entity as unrelated business taxable income. Prospective investors that are tax exempt entities are urged to consult their tax advisors as to the potential impact of

the unrelated business taxable income provisions of the U.S. Code. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must file IRS Form 5471 in certain circumstances.

 

Dispositions of Allied World Switzerland Shares.  Subject to the discussions below relating to the potential application of U.S. Code section 1248 and the PFIC rules, a U.S. holder of Allied World Switzerland voting shares generally should recognize capital gain or loss for U.S. federal income tax purposes on the sale, exchange or other disposition of Allied World Switzerland voting shares in an amount equal to the difference between the amount realized (i.e., the amount of cash plus the fair market value of any property received) on such sale, exchange or other disposition and the holder’s adjusted tax basis in Allied World Switzerland voting shares. Such capital gain or loss will be long-term capital gain or loss if the holder’s holding period for Allied World Switzerland voting shares exceeds one year at the time of the sale, exchange or other disposition. Under current law, long-term capital gain of non-corporate U.S. shareholders is subject to tax at a maximum rate of 15%. However, this reduced rate is scheduled to expire effective for taxable years beginning after December 31, 2010. The deductibility of capital losses is subject to limitations. Moreover, gain, if any, generally will be a U.S. source gain and generally will constitute “passive income” for foreign tax credit limitation purposes.

 

U.S. Code section 1248 provides that if a U.S. Person sells or exchanges stock in a non-U.S. corporation and such person owned, directly, indirectly through certain non-U.S. entities or constructively, 10% or more of the voting power of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares will be treated as a dividend to the extent of the CFC’s earnings and profits (determined under U.S. federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with certain adjustments). We believe that because of the dispersion of our share ownership, provisions in our organizational documents that limit voting power, provisions in the bye-laws of our non- U.S. subsidiaries and other factors that no U.S. Holder of Allied World Switzerland should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% of more of the total voting power of Allied World Switzerland or its non-U.S. subsidiaries; to the extent this is the case, this application of U.S. Code section 1248 under the regular CFC rules should not apply to dispositions of our voting shares. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge. A 10% U.S. Shareholder may in certain circumstances be required to report a disposition of voting shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would normally file for the taxable year in which the disposition occurs. In the event this is determined necessary, Allied World Switzerland will provide a completed IRS Form 5471 or the relevant information necessary to complete the Form. U.S. Code section 1248 also applies to the sale or exchange of shares in a non-U.S. corporation if the non-U.S. corporation would be treated as a CFC for RPII purposes regardless of whether the shareholder is a 10% U.S. Shareholder or whether RPII constitutes 20% or more of the corporation’s gross insurance income or the 20% Ownership Exception applies. Proposed Treasury regulations do not address whether U.S. Code section 1248 would apply if a non-U.S. corporation is not a CFC but the non-U.S. corporation has a subsidiary that is a CFC and that would be taxed as an insurance company if it were a domestic corporation. We believe, however, that this application of U.S. Code section 1248 under the RPII rules should not apply to dispositions of voting shares because Allied World Switzerland will not be directly engaged in the insurance business. We cannot be certain, however, that the IRS will not interpret the proposed Treasury regulations in a contrary manner or that the Treasury Department will not amend the proposed Treasury regulations to provide that these rules will apply to dispositions of voting shares. Prospective investors should consult their tax advisors regarding the effects of these rules on a disposition of voting shares.

 

Passive Foreign Investment Company Considerations.  The treatment of U.S. holders could be materially different from that described above if, at any time during the U.S. holder’s holding period, Allied World Bermuda or Allied World Switzerland were a passive foreign investment company. For U.S. tax purposes, a foreign corporation, such as Allied World Bermuda or Allied World Switzerland, is classified as a PFIC for any taxable year in which either (1) 75% or more of its gross income is passive income (as defined for U.S. tax purposes) or (2) the average percentage of its assets which produce passive income or which are held for the production of passive income is at least 50%. For purposes of applying the tests in the preceding sentence, the foreign corporation is deemed to own its proportionate share of the assets, and to receive directly its proportionate share of the income, of any other corporation of which the foreign corporation owns, directly or indirectly, at least 25% by value of the stock.

For the above purposes, passive income generally includes interest, dividends, annuities and other investment income. The PFIC rules provide that income “derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business... is not treated as passive income.” The PFIC provisions also contain a look-through rule under which a non-U.S. corporation shall be treated as if it “received directly its proportionate share of the income...” and as if it “held its proportionate share of the assets...” of any other corporation in which it owns at least 25% of the value of the stock.

 

The insurance income exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. We expect, for purposes of the PFIC rules, that each of our insurance subsidiaries will be predominantly engaged in an insurance business and is unlikely to have financial reserves in excess of the reasonable needs of its insurance business in each year of operations. Accordingly, none of the income or assets of our insurance subsidiaries should be treated as passive. Additionally, we expect that the passive income and assets of our non-insurance subsidiaries will be de minimis in each year of operations with respect to the overall income and assets of Allied World Switzerland and its subsidiaries. Under the look-through rule, Allied World Switzerland should be deemed to own its proportionate share of the assets and to have received its proportionate share of the income of its direct and indirect subsidiaries for purposes of the 75% test and the 50% test. As a result, we believe that Allied World Switzerland should not be treated as a PFIC. We cannot be certain, however, as there are currently no Treasury regulations regarding the application of the PFIC provisions to an insurance company and new Treasury regulations or pronouncements interpreting or clarifying these rules may be forthcoming, that the IRS will not successfully challenge this position. Prospective investors are urged to consult their tax advisors as to the effects of the PFIC rules.

 

We believe that Allied World Bermuda has not been a PFIC in any prior taxable year and will not be a PFIC for the taxable year that includes the Redomestication. In addition, we do not expect Allied World Switzerland to be or become a PFIC following the Redomestication. This conclusion, however, is a factual determination that is made annually and thus is uncertain and may be subject to change. If Allied World Switzerland were characterized as a PFIC during a given year, each U.S. Person holding voting shares would be subject to a penalty tax at the time of the sale at a gain of, or receipt of an “excess distribution” with respect to, their voting shares, unless such person is a 10% U.S. Shareholder (and Allied World Switzerland is a CFC) or made a “qualified electing fund election” or “mark-to-market” election. It is uncertain that Allied World Switzerland would be able to provide its shareholders with the information necessary for a U.S. holder to make a “qualified electing fund election.” In addition, if Allied World Switzerland were considered a PFIC, upon the death of any U.S. individual owning voting shares, such individual’s heirs or estate would not be entitled to a “step-up” in the basis of the voting shares that might otherwise be available under U.S. federal income tax laws. In general, a shareholder receives an “excess distribution” if the amount of the distribution is more than 125% of the average distribution with respect to the voting shares during the three preceding taxable years (or shorter period during which the taxpayer held voting shares). In general, the penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the voting shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the voting shares was taken in equal portion at the highest applicable tax rate on ordinary income throughout the shareholder’s period of ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such period. In addition, a distribution paid by Allied World Switzerland to U.S. holders that is characterized as a dividend and is not characterized as an excess distribution would not be eligible for reduced rates of tax as qualified dividend income with respect to dividends paid before 2011.

 

Foreign Tax Credit.  If U.S. holders own a majority of our voting shares, only a portion of the current income inclusions, if any, under the CFC, RPII and PFIC rules and of dividends paid by us (including any gain from the sale of shares that is treated as a dividend under section 1248 of the U.S. Code) may be treated as foreign source income for purposes of computing a shareholder’s U.S. foreign tax credit limitations. We will consider providing shareholders with information regarding the portion of such amounts constituting foreign source income to the extent such information is reasonably available. It is also likely that substantially all of the “subpart F income,” RPII and dividends that are foreign source income will constitute either “passive” or “general” income. Thus, it may not be possible for most shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income.

Information Reporting and Backup Withholding.  Dividends on Allied World Switzerland voting shares paid within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding (currently at a 28% rate) unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and satisfies certain certification requirements. Information reporting requirements and backup withholding may also apply to the cash proceeds of a sale of the Allied World Switzerland voting shares.

 

In addition to being subject to backup withholding, if a U.S. holder of Allied World Switzerland voting shares does not provide us (or our paying agent) with the holder’s correct taxpayer identification number or other required information, the holder may be subject to penalties imposed by the IRS. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the holder’s U.S. federal income tax liability, provided that the holder timely furnishes certain required information to the IRS.

 

Non-U.S. Holders

 

Consequences of the Redomestication and Subsequent Disposition of the Allied World Switzerland Shares.  In general, a non-U.S. holder of Allied World Bermuda shares will not be subject to U.S. federal income or withholding tax on any gain with respect to the Redomestication and will not be subject to U.S. federal income or withholding tax on any gain recognized on a subsequent disposition of the Allied World Switzerland voting shares received in the Redomestication, unless: (1) such gain is effectively connected with the conduct by the holder of a trade or business within the United States and, if a tax treaty applies, is attributable to a permanent establishment or fixed place of business maintained by such holder in the United States, (2) in the case of a holder who is an individual, such holder is present in the United States for 183 days or more during the taxable year in which the gain is recognized and certain other conditions are met, or (3) such holder is subject to backup withholding tax (as described below).

 

Taxation of Distributions on the Allied World Switzerland Shares.  A non-U.S. holder generally will not be subject to U.S. federal income tax on dividends received on its Allied World Switzerland voting shares, unless the dividends are effectively connected with the holder’s conduct of a trade or business in the United States and, if a tax treaty applies, the dividends are attributable to a permanent establishment or fixed place of business maintained by the holder in the United States, or such holder is subject to backup withholding tax (as described below).

 

Except to the extent otherwise provided under an applicable tax treaty, a non-U.S. holder generally will be taxed in the same manner as a U.S. holder on dividends paid and gains recognized that are effectively connected with the holder’s conduct of a trade or business in the United States. Effectively connected dividends received and gains recognized by a corporate non-U.S. holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or, if applicable, a lower treaty rate), subject to certain adjustments.

 

Information Reporting and Backup Withholding.  In order not to be subject to backup withholding tax on distributions and disposition proceeds with respect to Allied World Switzerland voting shares, a non-U.S. holder may be required to provide a taxpayer identification number, certify the holder’s foreign status, or otherwise establish an exemption. Non-U.S. holders of Allied World Switzerland voting shares are urged to consult their tax advisers regarding the application of information reporting and backup withholding in their particular situations, the availability of exemptions, and the procedure for obtaining such an exemption, if available. Any amount withheld from a payment to a non-U.S. holder under the backup withholding rules will be allowable as a credit against the holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.

 

Scope of Discussion

 

This discussion does not generally address any aspects of Swiss taxation other than federal, cantonal and communal income taxation, federal withholding taxation, and federal issuance stamp tax and transfer stamp tax. This discussion is not a complete analysis or listing of all of the possible tax consequences of the Redomestication or of holding and disposing of Allied World Switzerland voting shares and non-voting participation certificates and

does not address all tax considerations that may be relevant to you. Special rules that are not discussed in the general descriptions below may also apply to you.

 

This discussion is based on the laws of the Confederation of Switzerland, including the Federal Income Tax Act of 1990, the Federal Harmonization of Cantonal and Communal Income Tax Act of 1990, The Federal Withholding Tax Act of 1965, the Federal Stamp Duty Act of 1973, as amended, which we refer to as the “Swiss tax law,” existing and proposed regulations promulgated thereunder, published judicial decisions and administrative pronouncements, each as in effect on the date of this proxy statement or with a known future effective date. These laws may change, possibly with retroactive effect.

 

For purposes of this discussion, a “Swiss holder” is any beneficial owner of Allied World Bermuda shares, or, after the completion of the Scheme of Arrangement, Allied World Switzerland voting shares and non-voting participation certificates, that for Swiss federal income tax purposes is:

 

 

A “non-Swiss holder” of Allied World Bermuda shares, or, after the completion of the Scheme of Arrangement, Allied World Switzerland voting shares or non-voting participation certificates, is a holder that is not a Swiss holder. For purposes of this summary, “holder” or “shareholder” means either a Swiss holder or a non-Swiss holder or both, as the context may require.

 

Consequences of the Redomestication

 

Tax Consequences

 

No Swiss tax is due for non-Swiss holders upon the receipt of Allied World Switzerland voting shares or non-voting participation certificates pursuant to the Scheme of Arrangement.

 

If Swiss holders are beneficial owners of Allied World Bermuda shares or Allied World Switzerland voting shares or non-voting participation certificates, they are urged to consult their tax advisers regarding the Swiss tax consequences to them of the Redomestication.

 

Swiss Corporate Tax Consequences

 

Under Swiss tax law as it applies to corporations, the Redomestication is considered to be a tax neutral restructuring for Allied World Bermuda and Allied World Switzerland. Therefore, no Swiss income taxes will be due with respect to these companies as a result of the Redomestication. As a tax neutral restructuring, the Redomestication is also exempt from the Swiss withholding tax and issuance stamp tax and transfer stamp tax.

 

Taxation of Allied World Switzerland Subsequent to the Redomestication

 

Income Tax

 

A Swiss resident company is subject to income tax at federal, cantonal and communal levels on its worldwide income. However, a holding company, such as Allied World Switzerland, is generally exempt from cantonal and communal income tax (with the exception of income generated in relation to Swiss real estate and/or income for which taxation is a condition to rely on a withholding tax relief provided under the applicable double tax treaty or the applicable bilateral agreement with the respective source country) and therefore is only subject to Swiss federal income tax. At the federal level, qualifying net dividend income and qualifying net capital gains on the sale of qualifying investments in subsidiaries is exempt from federal income tax. Consequently, Allied World Switzerland expects dividends from its subsidiaries and capital gains from sales of investments in its subsidiaries to be exempt from federal income tax.

Issuance Stamp Tax

 

Swiss issuance stamp tax is a federal tax levied on the issuance of shares/participation certificates and increases in the equity of Swiss corporations. The applicable tax rate is 1% of the fair market value of the assets contributed to equity. Exemptions are available in tax neutral restructuring transactions, such as the Scheme of Arrangement. As a result, any future issuance of voting shares or non-voting participation certificates by Allied World Switzerland may be subject to the issuance stamp tax unless the voting shares or non-voting participation certificates are issued in the context of the Redomestication or other qualifying restructuring transaction.

 

The issuance stamp tax is also levied on the issuance of certain debt instruments. In such case, the rate would amount to 0.06% to 0.12% of the par value of the debt issued per year of duration of the instrument (the rate depending on the type of debt instrument). No Swiss issuance stamp tax (at the rate described above) would be due on debt instruments issued by non-Swiss subsidiaries of Allied World Switzerland, if Allied World Switzerland (or any of its Swiss resident group entities) does not guarantee the debt instruments, or if such a guarantee is provided, the proceeds from the issuance by the non-Swiss subsidiary are not used for financing activities in Switzerland. Although Allied World Switzerland (or any of its Swiss resident group entities) intends to guarantee debt of its direct or indirect subsidiaries, none of the proceeds has been or is expected to be used for financing activities in Switzerland. Consequently, no issuance stamp tax should be due.

 

Swiss Transfer Stamp Tax

 

The transfer of taxable Swiss and foreign securities (e.g., voting shares or non-voting participation certificates) in which a Swiss bank or other Swiss securities dealers (as defined in the Swiss Federal Stamp Tax Act) participate as contracting parties or as intermediaries is typically subject to Swiss transfer tax at the rate of 0.15% (for securities issued by a resident of Switzerland) and 0.3% (for securities issued by a resident of a foreign country). However, the transfer of taxable securities, which is based on a merger or a transaction similar to a merger (“quasi-merger”) is exempt from transfer stamp tax. This exemption is applicable to current Allied World Bermuda shareholders who receive Allied World Switzerland voting shares or non-voting participation certificates as a result of the Redomestication, should one of the contracting parties be regarded as a Swiss securities dealer according to Swiss stamp tax law. Based on the above, no Swiss transfer stamp tax is due in connection with the Redomestication.

 

Swiss Withholding Tax on Certain Interest Payments

 

A federal withholding tax is levied on the interest payments of certain debt instruments. In such case, the rate would amount to 35% of the gross interest payment to the debtholders. No Swiss withholding tax would be due on interest payments on debt instruments issued by non-Swiss subsidiaries of Allied World Switzerland, provided that Allied World Switzerland (or any of its Swiss resident group entities) does not guarantee the debt instruments, or if such a guarantee is provided, the proceeds from the issuance by the non-Swiss subsidiary are not used for financing activities in Switzerland. Any such withholding tax may be fully or partially refundable to qualified debtholders either based on Swiss domestic tax law or based on existing double taxation treaties. Although Allied World Switzerland (or any of its Swiss resident group entities) intends to guarantee certain debt of its direct or indirect subsidiaries, none of the proceeds has been or is expected to be used for financing activities in Switzerland. Consequently, no Swiss withholding tax should be due with respect to such obligations. In the event of the imposition of any such withholding tax, the respective subsidiary would be required under some of its debt obligations to gross up the interest payments to cover the tax.

 

Consequences to Shareholders of Allied World Switzerland Subsequent to the Redomestication

 

The tax consequences discussed below are not a complete analysis or listing of all the possible tax consequences that may be relevant to you. You should consult your own tax advisor in respect of the tax consequences related to receipt, ownership, purchase or sale or other disposition of Allied World Switzerland voting shares or non-voting participation certificates and the procedures for claiming a refund of withholding tax.

Swiss Income Tax on Dividends and Similar Distributions

 

A non-Swiss holder will not be subject to Swiss income taxes on dividend income and similar distributions in respect of Allied World Switzerland voting shares or non-voting participation certificates, unless the voting shares or non-voting participation certificates are attributable to a permanent establishment or a fixed place of business maintained in Switzerland by such non-Swiss holder. However, dividends and similar distributions are subject to Swiss withholding tax. See “— Swiss Withholding Tax — Distributions to Shareholders.”

 

Swiss Wealth Tax

 

A non-Swiss holder will not be subject to Swiss wealth taxes unless the holder’s Allied World Switzerland voting shares or non-voting participation certificates are attributable to a permanent establishment or a fixed place of business maintained in Switzerland by such non-Swiss holder.

 

Swiss Capital Gains Tax upon Disposal of Allied World Switzerland Shares

 

A non-Swiss holder will not be subject to Swiss income taxes for capital gains unless the holder’s voting shares or non-voting participation certificates are attributable to a permanent establishment or a fixed place of business maintained in Switzerland by such non-Swiss holder. In such case, the non-Swiss holder is required to recognize capital gains or losses on the sale of such voting shares or non-voting participation certificates, which will be subject to cantonal, communal and federal income tax as required under the relevant tax laws.

 

Swiss Withholding Tax — Distributions to Shareholders

 

A Swiss withholding tax of 35% is due on dividends and similar distributions to Allied World Switzerland shareholders and holders of non-voting participation certificates from Allied World Switzerland, regardless of the place of residency of the shareholder (subject to the exceptions discussed under “— Exemption from Swiss Withholding Tax — Distributions to Shareholders” below). Allied World Switzerland will be required to withhold at such rate and remit on a net basis any payments made to a holder of Allied World Switzerland voting shares or non-voting participation certificates and pay such withheld amounts to the Swiss federal tax authorities. Please see “— Refund of Swiss Withholding Tax on Dividends and Other Distributions.”

 

Exemption from Swiss Withholding Tax — Distributions to Shareholders

 

Under present Swiss tax law, distributions to shareholders or holders of non-voting participation certificates in relation to a reduction of par value are exempt from Swiss withholding tax. Beginning on January 1, 2011, distributions to shareholders or holders of non-voting participation certificates out of qualifying additional paid-in capital for Swiss statutory purposes are as a matter of principle exempt from the Swiss withholding tax. The particulars of this general principle are, however, subject to regulations still to be promulgated by the applicable Swiss authorities; it will further require that the current draft corporate law bill, which proposes an overhaul of certain aspects of Swiss corporate law, be modified in the upcoming legislative process to reflect the recent change in the tax law. Allied World Switzerland expects that its statutory qualifying additional paid in capital will be sufficient to allow a substantial amount of any potential future distributions to be exempt from Swiss withholding tax. For a description of how qualifying additional paid-in capital can be distributed under the Swiss Code of Obligations (the “Swiss Code”), as in effect as of the date of this proxy statement, see “Description of Allied World Switzerland Shares — Dividends.”

 

Repurchases of Shares for Cancellation

 

Under present Swiss tax law, repurchases of voting shares or non-voting participation certificates for the purposes of capital reduction are treated as a partial liquidation subject to the 35% Swiss withholding tax. However, for voting shares or non-voting participation certificates repurchased for capital reduction, the portion of the repurchase price attributable to the par value of the voting shares or non-voting participation certificates repurchased will not be subject to the Swiss withholding tax. Beginning on January 1, 2011, subject to the adoption of implementing regulations by the applicable Swiss authorities, the portion of the repurchase price attributable to the qualifying additional paid-in capital for Swiss statutory reporting purposes of the voting shares or non-voting

participation certificates repurchased will also not be subject to the Swiss withholding tax. Allied World Switzerland would be required to withhold at such rate the tax from the difference between the repurchase price and the related amount of par value and, beginning on January 1, 2011, subject to the adoption of implementing regulations by the applicable Swiss authorities and amendments to Swiss corporate law, the related amount of qualifying additional paid-in capital. Allied World Switzerland would be required to remit on a net basis the purchase price with the Swiss withholding tax deducted to a holder of Allied World Switzerland voting shares or non-voting participation certificates and pay the withholding tax to the Swiss federal tax authorities.

 

With respect to the refund of Swiss withholding tax from the repurchase of voting shares or non-voting participation certificates, see “— Refund of Swiss Withholding Tax on Dividends and Other Distributions” below.

 

In most instances, Swiss companies listed on the SIX carry out share repurchase programs through a “second trading line” on the SIX. Swiss institutional investors typically purchase shares from shareholders on the open market and then sell the shares on the second trading line back to the company. The Swiss institutional investors are generally able to receive a full refund of the withholding tax. Due to, among other things, the time delay between the sale to the company and the institutional investors’ receipt of the refund, the price companies pay to repurchase their shares has historically been slightly higher than the price of such companies’ shares in ordinary trading on the SIX first trading line.

 

We will not be able to use the SIX second trading line process to repurchase our shares because we do not intend to list our shares on the SIX. We do, however, intend to follow an alternative process whereby we expect to be able to repurchase our shares in a manner that should allow Swiss institutional market participants selling the shares to us to receive a refund of the Swiss withholding tax and, therefore, accomplish the same purpose as share repurchases on the second trading line at substantially the same cost to us and such market participants as share repurchases on a second trading line.

 

The repurchase of voting shares or non-voting participation certificates for purposes other than capital reduction, such as to retain as Treasury Shares for use in connection with stock incentive plans, convertible debt or other instruments within certain periods, will generally not be subject to Swiss withholding tax provided the threshold of 10% of the aggregate share and participation capital as required by the Swiss Code is satisfied (see “Description of Allied World Switzerland Shares — Repurchases of Shares” below) and the shares are resold within certain periods prescribed by Swiss law (either six years or, in certain cases, up to twelve years). In addition, see “Comparison of Rights of Shareholders and Powers of the Board of Directors” for a discussion on the limitations on the amount of repurchased shares that can be held as Treasury Shares.

 

Refund of Swiss Withholding Tax on Dividends and Other Distributions

 

Swiss Holders.  A Swiss tax resident, corporate or individual, can recover the withholding tax in full if such resident is the beneficial owner of the Allied World Switzerland voting shares or non-voting participation certificates at the time the dividend or other distribution becomes due and provided that such resident reports the gross distribution received on such resident’s income tax return, or in the case of an entity, includes the taxable income in such resident’s income statement. The claim for a refund must be filed with the Swiss federal tax authorities (Eigerstrasse 65, 3003 Berne, Switzerland) not later than December 31 of the third year following the year in which the dividend payments became due.

 

Non-Swiss Holders.  If the shareholder or holder of non-voting participation certificates that receives a distribution from Allied World Switzerland is not a Swiss tax resident, does not hold the Allied World Switzerland voting shares or non-voting participation certificates in connection with a permanent establishment or a fixed place of business maintained in Switzerland, and resides in a country that has concluded a treaty for the avoidance of double taxation with Switzerland for which the conditions for the application and protection of and by the treaty are met (including residents of members of the European Union), then the shareholder or holder of non-voting participation certificates may be entitled to a full or partial refund of the withholding tax described above. You should note that the procedures for claiming treaty refunds (and the time frame required for obtaining a refund) may differ from country to country.

Switzerland has entered into bilateral treaties for the avoidance of double taxation with respect to income taxes with numerous countries, including the United States, whereby under certain circumstances all or part of the withholding tax may be refunded.

 

The claim for a refund must be filed with the Swiss federal tax authorities (Eigerstrasse 65, 3003, Berne, Switzerland) no later than December 31^st of the third year following the year in which the dividend payments became due.

 

U.S. Residents.  The Swiss-U.S. tax treaty provides that U.S. residents eligible for benefits under the treaty can seek a refund of the Swiss withholding tax on dividends for the portion exceeding 15% (leading to a refund of 20%), for the portion exceeding 5% (leading to a refund of 30% for qualifying corporate shareholders holding at least 10% of the voting stock of the dividend paying corporation) or a full refund in the case of qualified pension funds. Please refer to the discussion under “— U.S. Federal Income Tax Considerations, Consequences to Shareholders of Allied World Switzerland Subsequent to the Redomestication — Taxation of Distributions in the Form of a Repayment of Par Value, Repayment of Qualifying Paid in Capital or Dividend” for applicability of U.S. foreign tax credits for any net withholding taxes paid.

 

As a general rule, the refund will be granted under the treaty if the U.S. resident can show evidence of:

 

 

The claim for refund must be filed with the Swiss federal tax authorities (Eigerstrasse 65, 3003 Berne, Switzerland), not later than December 31 of the third year following the year in which the dividend payments became due. The relevant Swiss tax form is Form 82C for companies, 82E for other entities and 82I for individuals. These forms can be obtained from any Swiss Consulate General in the United States or from the Swiss federal tax authorities at the address mentioned above. Each form needs to be filled out in triplicate, with each copy duly completed and signed before a notary public in the United States. You must also include evidence that the withholding tax was withheld at the source.

 

Transfer Stamp Tax.  The purchase or sale of Allied World Switzerland voting shares or non-voting participation certificates may be subject to Swiss federal transfer stamp taxes on the transfer of taxable securities irrespective of the place of residency of the purchaser or seller if the transaction takes place through or with a Swiss bank or other Swiss securities dealer, as those terms are defined in the Swiss Federal Stamp Tax Act, and no exemption applies in the specific case. If a purchase or sale is not entered into through or with a Swiss bank or other Swiss securities dealer, then no stamp tax will be due. The applicable stamp tax rate is 0.075% (for securities issued by a resident in Switzerland) or 0.15% (for securities issued by a resident in a foreign country) for each of the two parties to the transaction and is calculated on the purchase price or sales proceeds. If the transaction does not involve cash consideration, the transfer stamp duty is computed on the basis of the market value of the consideration.

 

The Redomestication will not result in any income tax consequences under Bermuda law to Allied World Bermuda or Allied World Switzerland or their respective shareholders.

 

The following description of Allied World Switzerland’s share capital is a summary. This summary is not complete and is subject to the complete text of Allied World Switzerland’s form of proposed articles of association and organizational regulations attached as Annex D and Annex E, respectively, to this proxy statement as well as Swiss corporate law. Except where otherwise indicated, the description below reflects Allied World Switzerland’s articles of association and organizational regulations as those documents will be in effect upon completion of the Redomestication. We encourage you to read those documents carefully.

 

Immediately after the consummation of the Scheme of Arrangement, Allied World Switzerland will only have one class of voting shares and one class of non-voting participation certificates (the latter, the Swiss equivalent of the former Allied World Bermuda non-voting common shares). All references to “voting rights” in this “Description of Allied World Switzerland Shares” will mean the voting rights of Allied World Switzerland’s voting shares with a par value CHF 16.28 ($15.00) per share. Allied World Switzerland’s voting shares do not include the non-voting participation certificates as described below under “— Issued Participation Capital.”

 

Issued Share Capital.  Immediately prior to the consummation of the Scheme of Arrangement, the share capital of Allied World Switzerland will amount to CHF 100,000, composed of 10,000,000 voting shares with a par value of CHF 0.01 per share. Pursuant to the Scheme of Arrangement, Allied World Switzerland will issue one voting share for each Allied World Bermuda voting common share. In exchange for voting common shares held by Allied World Bermuda in treasury, Allied World Switzerland will issue a corresponding number of voting shares to be held in treasury in order to satisfy share delivery obligations under our equity-based incentive plans and the put agreements that we may enter into with the holders of the non-voting participation certificates and warrants with respect to non-voting participation certificates in order to replicate the conversion feature to voting shares previously available to the holders of the Allied World Bermuda non-voting shares. To effect this, Allied World Bermuda, acting on behalf of its shareholders, will enter into the Contribution-in-Kind Agreement with Allied World Switzerland under which it will contribute all of its outstanding voting common shares to Allied World Switzerland against the issuance of new voting shares in Allied World Switzerland to the holders of voting common shares of Allied World Bermuda, and Allied World Switzerland will amend its articles of association to reflect this increase of its share capital. If the Redomestication had been completed on September 30, 2010, the share capital of Allied World Switzerland would have been approximately CHF 634,020,090 ($584,170,845), composed of approximately 38,944,723 voting shares with a par value of CHF 16.28 ($15.00) per share, with the share capital as of the actual effective time to be determined based on the number of Allied World Bermuda voting shares outstanding as of the effectiveness of the Scheme of Arrangement.

 

Issued Participation Capital.  Immediately prior to the Redomestication, Allied World Switzerland will not have any participation capital. In connection with the Redomestication, Allied World Switzerland will issue one non-voting participation certificate for each Allied World Bermuda non-voting common share. To effect this, Allied World Bermuda, acting on behalf of its shareholders, will enter into the Contribution-in-Kind Agreement with Allied World Switzerland under which it will contribute all of its outstanding non-voting common shares (i.e., the non-voting common shares issued after cancelation in the course of the Scheme of Arrangement) to Allied World Switzerland against the issuance of new non-voting participation certificates in Allied World Switzerland to the holders of non-voting common shares of Allied World Bermuda, and Allied World Switzerland will amend its articles of association to reflect this increase of its participation capital. If the Redomestication had been completed on September 30, 2010, the participation capital of Allied World Switzerland would have been approximately CHF 56,163,607 ($51,747,795), composed of approximately 3,449,853 non-voting participation certificates with a par value of CHF 16.28 ($15.00) per certificate, with the participation capital as of the actual effective time to be determined based on the number of Allied World Bermuda non-voting shares outstanding as of the effectiveness of the Scheme of Arrangement.

 

Increases of Share Capital.  Under Swiss law, Allied World Switzerland may increase its share capital and issue new shares through an ordinary capital increase, an authorized capital increase or a conditional capital increase. In each case the issue price for each share may not be less than the par value of the newly issued share. The

ordinary capital increase is resolved by the general meeting. The required majority is as a general rule the approval by a majority of the votes cast at the general meeting. A qualified majority of at least 662/3% of the votes and the majority of the par value of the voting shares, each as represented at the general meeting, is required for capital increases against contributions-in-kind or capital increases where the preemptive rights of shareholders are limited or excluded. The amount by which the capital can be increased in an ordinary capital increase is unlimited, under the condition that sufficient funds can be provided to cover the capital increase. An ordinary capital increase that has been approved by the shareholders must be executed within three months of shareholder approval.

 

The shareholders can further authorize the board of directors by way of an amendment of the articles of association to increase the share capital in an amount not to exceed 50% of the share capital registered in the commercial register for a period of two years without further shareholder approval. To create authorized capital, a resolution of the general meeting passed by a qualified majority of at least 662/3% of the votes and a majority of the par value of the voting shares represented at a general meeting is required. Additional information regarding authorized share capital increases is set forth below under “— Authorized Share Capital.”

 

Under Swiss law, conditional share capital is used to issue new shares in the context of employee benefit and incentive plans, debt instruments with conversion rights or warrants granted to shareholders. To create conditional capital, a resolution of the general meeting passed by a qualified majority of at least 662/3% of the votes and a majority of the par value of the voting shares represented at a general meeting is required. The requirements for a conditional capital increase are set forth below under “— Conditional Share Capital.”

 

Authorized Share Capital.  Immediately prior to completion of the Redomestication, Allied World Switzerland will not have any share capital authorized for future issuance. Upon completion of the Redomestication, Allied World Switzerland’s articles of association will authorize our board of directors to issue new voting shares at any time during a two-year period and thereby increase the share capital, without further shareholder approval, by a maximum amount of 20% of the share capital registered in the commercial register, which, if the Redomestication had been completed on September 30, 2010, would have been approximately CHF 126,804,008 ($116,834,160) (assuming a par value of CHF 16.28 ($15.00) per voting share), or approximately 7,788,944 voting shares. After the expiration of the initial two-year period, and each subsequent two-year period, authorized share capital will be available to the board of directors for issuance of additional voting shares only if the authorization is reapproved by shareholders.

 

The board of directors determines the time of the issuance, the issuance price, the manner in which the new voting shares have to be paid in, the date from which the new voting shares carry the right to dividends and, subject to the provisions of Allied World Switzerland’s articles of association, the conditions for the exercise of the preemptive rights with respect to the issuance as well as the allotment of preemptive rights that are not exercised. The board of directors may allow preemptive rights that are not exercised to expire, or it may place such rights or voting shares, the preemptive rights of which have not been exercised, at market conditions or use them otherwise in the interest of Allied World Switzerland.

 

In an authorized capital increase, holders of Allied World Switzerland voting shares would have preemptive rights to obtain newly issued voting shares in an amount proportional to the par value of the voting shares they already hold. However, the board of directors may withdraw or limit these preemptive rights in certain circumstances as set forth in Allied World Switzerland’s articles of association. For further details on these circumstances, see “— Preemptive Rights and Advance Subscription Rights.”

 

Conditional Share Capital.  Immediately prior to completion of the Redomestication, Allied World Switzerland will not have any conditional share capital. Upon completion of the Redomestication, Allied World Switzerland’s articles of association will provide for conditional capital that, following the effectiveness of the Redomestication, will allow the board of directors to authorize the issuance of up to 7,200,000 of additional voting shares without obtaining additional shareholder approval as follows:

 

 

 

 

Shareholders’ preemptive rights are excluded with respect to new shares issued out of conditional share capital in connection with our equity-based incentive plans and the warrants granted to AIG at the time of our formation.

 

In connection with the issuance of bonds, notes or other similar instruments convertible into or exercisable or exchangeable for Allied World Switzerland voting shares to be issued out of conditional share capital, the board of directors is authorized to withdraw or limit the advance subscription rights of shareholders in certain circumstances. See “— Preemptive Rights and Advance Subscription Rights” below.

 

Conditional Participation Capital.  Immediately prior to completion of the Redomestication, Allied World Switzerland will not have any conditional participation capital. Upon completion of the Redomestication, Allied World Switzerland’s articles of association will provide for conditional participation capital that, following the effectiveness of the Redomestication, will allow the board of directors to authorize the issuance of additional non-voting participation certificates without obtaining additional shareholder approval as follows:

 

 

Shareholders’ preemptive rights are excluded with respect to new non-voting participation certificates issued out of conditional participation capital in connection with the warrants granted to the GSCP Funds at the time of our formation.

 

Other Classes or Series of Shares.  The board of directors may not create shares with increased voting powers (i.e., super voting shares) or preferred stock (Vorzugsaktien). To create super-voting shares or preferred stock (Vorzugsaktien), a resolution of the general meeting passed by a qualified majority of at least 662/3% of the votes and a majority of the par value of the voting shares represented at the general meeting is required. To create preferred stock, a resolution of the general meeting passed by a majority of the votes cast at the general meeting is required.

 

Treasury Shares.  Treasury Shares held by Allied World Switzerland or any of its subsidiaries will be available for future issuances of shares, such as pursuant to our equity-based incentive plans and under the put agreements we may enter into with the holders of the Allied World Switzerland non-voting participation certificates and warrants with respect to non-voting participation certificates. These Treasury Shares will not have any voting or other rights while held by Allied World Switzerland or any of its subsidiaries.

 

Under the Swiss Code, if new voting shares or non-voting participation certificates are being issued, the existing shareholders or holders of non-voting participation certificates will have preemptive rights in relation to such voting shares or non-voting participation certificates or rights in proportion to the respective par values of their holdings. In the context of an ordinary capital increase resolved by the general meeting, the shareholders may by a qualified majority of at least 662/3% of the votes and a majority of the par value of the voting shares represented at a general meeting resolve to withdraw or limit the preemptive rights for valid reasons (such as a merger, an acquisition or any of the reasons authorizing the board of directors to withdraw or limit the preemptive rights of shareholders in the context of an authorized capital increase as described below).

 

If the general meeting of shareholders approves the creation of authorized or conditional capital, it can thereby also delegate the decision whether to withdraw or limit the preemptive and advance subscription rights for valid reasons to the board of directors. Allied World Switzerland’s articles of association provide for this delegation with respect to Allied World Switzerland’s authorized and conditional share capital in the circumstances described below under “— Authorized Share Capital” and “— Conditional Share Capital.”

 

Allied World Switzerland’s articles of association provide that if the share capital and the participation capital are increased at the same time and in the same proportion, shareholders may subscribe only to voting shares and participants only to non-voting participation certificates. Pre-emptive and advance subscription rights of participants are excluded, if and to the extent such rights of the shareholders are excluded.

 

Authorized Share Capital.  Under the articles of association, the board of directors is authorized to withdraw or limit the preemptive rights of shareholders (and to allocate them to third parties) with respect to the issuance of voting shares from authorized capital if the issuances are made for the purpose of:

 

 

 

 

 

 

Conditional Share Capital.  In connection with the issuance of bonds, notes, or similar instruments convertible into or exercisable or exchangeable for Allied World Switzerland voting shares, the preemptive rights of shareholders are excluded and the board of directors is authorized to withdraw or limit the advance subscription rights of shareholders with respect to such bonds, notes, or similar instruments convertible into or exercisable or exchangeable for Allied World Switzerland voting shares if their issuance is made in order to (1) finance or re-finance the acquisition of companies, parts of companies or holdings, or new investments planned by Allied World Switzerland, or (2) issue convertible bonds and warrants on the international capital markets or through private placement.

 

If the advance subscription rights are to be excluded then:

 

 

The preemptive rights of shareholders are excluded with respect to issuances of new voting shares out of conditional share capital under an equity-based incentive plan to directors, employees, contractors or other persons providing services to Allied World Switzerland or one of its subsidiaries or affiliates.

 

Upon completion of the Redomestication, Allied World Switzerland’s articles of association will provide for participation capital (which if the Redomestication had been completed on September 30, 2010 would have amounted to CHF 56,163,607 ($51,747,795) or approximately 3,449,853 non-voting participation certificates, assuming a par value of CHF 16.28 ($15.00) per participation certificate) that, upon the effectiveness of the Redomestication, will be issued to the holders of non-voting shares in exchange for the cancellation of their Allied World Bermuda non-voting shares.

 

The non-voting participation certificates have the same entitlement to dividends and liquidation distributions as the voting shares of Allied World Switzerland. Allied World Switzerland’s articles of association further provide that if the share capital and the participation capital are increased at the same time and in the same proportion, shareholders may subscribe only to voting shares and participants only to non-voting participation certificates. The Swiss Code states that if only the participation capital or only the share capital is increased or if one is increased more than the other, preemptive rights are to be allocated in such a way that both shareholders and participants maintain their participation in the same proportion as before. Preemptive rights of the participants (be it on non-voting participation certificates or voting shares) can be limited or withdrawn in accordance with the same criteria and conditions as are applicable to the voting shares.

 

Holders of non-voting participation certificates are not entitled to attend and vote at the general meeting and may not exercise the shareholder rights associated therewith (e.g. right to request the convocation of a shareholders meeting, right to speak and/or make a motion at the shareholders meeting). As a matter of law, however, holders of non-voting participation certificates have the following rights:

 

 

 

 

 

 

Allied World Switzerland’s articles of association provide that upon resolution of the general meeting and with the approval of the holders of non-voting participation certificates, all or any portion of such holders’ non-voting participation certificates may be converted into voting shares, at any time.

 

The holders of non-voting participation certificates may also hold a put right that enables them to require Allied World Switzerland to issue voting shares of Allied World Switzerland (to them or their third party designees) on a one-for-one basis in exchange for their non-voting participation certificates. Allied World Switzerland would hold Treasury Shares for this purpose. The put right would replicate the conversion feature of the Allied World Bermuda non-voting common shares. There can be no assurance that Allied World Switzerland will enter into put agreements with the holder of non-voting participation certificates.

 

According to the Swiss Code, resolutions limiting the rights of the holders of non-voting participation certificates afforded by law or the articles of association require an affirmative resolution by a special meeting of the participants.

 

Under Swiss law, dividends may be paid out only if the corporation has sufficient distributable profits from previous fiscal years, or if the corporation has freely distributable reserves, each as will be presented on the audited annual stand-alone statutory balance sheet. Payments out of the share and participation capital (in other words, the aggregate par value of Allied World Switzerland’s share and participation capital) in the form of dividends are not allowed; however, payments out of share and participation capital may be made by way of a capital reduction to achieve a similar result as the payment of dividends. See “— Reduction of Share Capital” for more information. Qualifying additional paid-in capital may only be paid out as dividends to shareholders and holders of non-voting participation certificates following approval by the shareholders of a reclassification of such qualifying additional paid-in capital as freely distributable reserves (to the extent permissible under the Swiss Code). The affirmative vote of shareholders holding a majority of the votes cast at a general meeting must approve reserve reclassifications and distributions of dividends. The board of directors may propose to shareholders that a dividend be paid but cannot itself authorize the dividend. In addition, an Allied World Switzerland shareholder may propose dividends without any dividend proposal by the board. To the extent that dividends are approved by the shareholders, they must be paid.

 

Under the Swiss Code, if Allied World Switzerland’s general capital reserves amount to less than 20% of the share and participation capital recorded in the commercial register (i.e., 20% of the aggregate par value of Allied World Switzerland’s capital), then at least 5% of Allied World Switzerland’s annual profit must be retained as general reserves. The Swiss Code permits Allied World Switzerland to accrue additional general reserves. In addition, Allied World Switzerland is required to create a special reserve on its stand-alone annual statutory balance sheet in the amount of the purchase price of voting shares and non-voting participation certificates it or any of its subsidiaries repurchases, which amount may not be used for dividends or subsequent repurchases.

 

Swiss companies generally must maintain a separate company, stand-alone statutory balance sheet for the purpose of, among other things, determining the amounts available for the return of capital to shareholders and holders of non-voting participation certificates, including by way of a distribution of dividends. Amounts available for the return of capital as indicated on Allied World Switzerland’s statutory balance sheet may be materially different from amounts reflected in the consolidated U.S. GAAP financial statements of Allied World Switzerland. Allied World Switzerland’s auditor must confirm that a dividend proposal made to shareholders conforms with the requirements of the Swiss Code and Allied World Switzerland’s articles of association. For information about deduction of the withholding tax from dividend payments, see “Material Tax Considerations — Swiss Tax Considerations.”

 

Allied World Switzerland will be required under Swiss law to declare any dividends and other capital distributions in Swiss francs. Allied World Switzerland intends to make any dividend payments to holders of Allied World Switzerland voting shares and non-voting participation certificates in U.S. dollars. Continental Stock Transfer & Trust Company will be responsible for paying the U.S. dollars to registered holders of voting shares and non-voting participation certificates, less amounts subject to withholding for taxes.

 

The Swiss Code limits a company’s ability to hold or repurchase its own voting shares and non-voting participation certificates. Allied World Switzerland and its subsidiaries may only repurchase voting shares and non-voting participation certificates if and to the extent that sufficient freely distributable equity (including nominal share and participation capital, legal reserves, reserves for Allied World Switzerland’s own voting shares and non-voting participation certificates and special reserves) is available, as described above under “— Dividends.” The aggregate par value of all Allied World Switzerland voting shares and non-voting participation certificates held by Allied World Switzerland and its subsidiaries may not exceed 10% of the aggregate share and participation capital. However, Allied World Switzerland may, according to legal doctrine, repurchase its own voting shares and non-voting participation certificates beyond the statutory limit of 10%, and the requirement for sufficient freely distributable equity will not apply, if the shareholders have passed a resolution at a general meeting of shareholders authorizing the board of directors to repurchase voting shares and non-voting participation certificates in an amount in excess of 10% and the repurchased voting shares and non-voting participation certificates are dedicated for cancellation. Any voting

shares or non-voting participation certificates repurchased pursuant to such an authorization will then be cancelled at the next general meeting upon the approval of shareholders holding a majority of the votes cast at the general meeting.

 

Repurchased voting shares held by Allied World Switzerland or its subsidiaries do not carry any rights to vote at a general meeting of shareholders but are entitled to the economic benefits generally associated with the voting shares. Repurchased non-voting participation certificates held by Allied World Switzerland or its subsidiaries are entitled to the economic benefits generally associated with the non-voting participation certificates. For information about Swiss withholding tax and share repurchases, see “Material Tax Considerations — Swiss Tax Considerations.”

 

Capital distributions may also take the form of a distribution of cash or property that is based upon a reduction of Allied World Switzerland’s share and participation capital recorded in the commercial register. Such a capital reduction requires the approval of shareholders holding a majority of the votes cast at the general meeting. A special audit report must confirm that creditors’ claims remain fully covered despite the reduction in the share and participation capital recorded in the commercial register. Upon approval by the general meeting of shareholders of the capital reduction, the board of directors must give public notice of the capital reduction resolution in the Swiss Official Gazette of Commerce three times and notify creditors that they may request, within two months of the third publication, satisfaction of or security for their claims. Reduction of share and participation capital requires that the company’s net assets still exceed the share and participation capital and statutory reserves after a par value reduction payment to the shareholders has been made.

 

The general meeting of shareholders is Allied World Switzerland’s supreme corporate body. Ordinary and extraordinary shareholders meetings may be held. The following powers will be vested exclusively in the shareholders meeting:

 

 

Under the Swiss Code and Allied World Switzerland’s articles of association, Allied World Switzerland must hold an annual, ordinary general meeting of shareholders within six months after the end of its fiscal year for the purpose, among other things, of approving the annual financial statements and the annual report, the annual election of directors for the class whose term has expired and the annual election of auditors. The invitation to general meetings must be published in the Swiss Official Gazette of Commerce at least 20 days prior to the relevant general meeting of shareholders. The notice of a meeting must state the items on the agenda and the proposals of the board of directors and of the shareholders who demanded that a shareholders meeting be held or that an item be included on the agenda and, in case of elections, the names of the nominated candidates. No resolutions may be passed at a shareholders meeting concerning agenda items for which proper notice was not given. This does not apply, however, to proposals made during a shareholders meeting to convene an extraordinary shareholders meeting or to initiate a special investigation. No previous notification will be required for proposals concerning items included on the agenda or for debates as to which no vote is taken. Pursuant to the Swiss Code, any shareholder may make proposals for any item included on the agenda of a general meeting at any time before the taking of the resolution including the nomination of a director if the election of the board of directors is an item on the agenda. A shareholder registered in

the share register with voting rights may participate in such meeting either in person or by a third party appointed by way of a written proxy. Beneficial owners of voting shares held through a nominee exercise shareholders’ rights through such nominee.

 

Annual general meetings of shareholders may be convened by the board of directors or, under certain circumstances, by the auditor. A general meeting of shareholders can be held anywhere in Switzerland, provided that the selection of the meeting location does not impair shareholders’ participation rights.

 

An extraordinary general meeting of Allied World Switzerland may be called upon the resolution of the board of directors or, under certain circumstances, by the auditor. In addition, the board of directors is required to convene an extraordinary general meeting of shareholders if so requested by the shareholders registered in the share register as holding an aggregate of at least 10% of the voting shares, specifying the items for the agenda and their proposals, or if it appears from the stand-alone annual statutory balance sheet that half of the company’s share capital and reserves are not covered by the company’s assets. In the latter case, the board of directors must immediately convene an extraordinary general meeting of shareholders and propose financial restructuring measures.

 

Under Swiss law and Allied World Switzerland’s articles of association, a shareholder or group of shareholders registered in Allied World Switzerland’s share register representing voting shares with a par value of at least CHF 1 million may submit a proposal for consideration by the shareholders at any annual meeting by giving written notice of such intent in writing and received by Allied World Switzerland not less than 60 calendar days in advance of the date of the meeting.

 

The board of directors or chairman of the board of directors may postpone a shareholders meeting with sufficient factual reason, provided that notice of postponement is given to the shareholders in the same form as the invitation before the time for such meeting. A new notice is then required to hold the postponed meeting. According to legal doctrine, a general meeting of shareholders for which a notice of meeting has been duly published may not be adjourned without publishing a new notice of meeting.

 

Shareholders registered with voting rights in the share register may, at a general meeting, raise new proposals or counterproposals related to any existing proposal or item already on the agenda. Except as required by law, no resolution of the shareholders may be passed on items proposed without notice at a general meeting and having no bearing on any of the proposed items of the agenda.

 

Allied World Switzerland’s annual report and auditor’s report must be made available for inspection by the shareholders at Allied World Switzerland’s place of incorporation no later than 20 days prior to the meeting. The annual report will include Allied World Switzerland’s financial statements (statutory and consolidated) and a description of its business and economic situation. Each shareholder is entitled to request immediate delivery of a copy of these documents free of charge. Shareholders of record will be notified of this in writing.