I. Committee Composition; Organization; Operation

The Audit Committee (the “Committee”) of the Board of Directors (the “Board”) of Allied World Assurance Company Holdings, Ltd (the “Company”) shall consist of no less than three directors, each of whom shall be “independent” under (i) the rules of the New York Stock Exchange; (ii) Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and (iii) Rule 10A-3 promulgated under the Exchange Act.

The members of the Committee shall be appointed by the Board on the recommendation of the Nominating & Corporate Governance Committee. Each Committee member shall be “financially literate” and the Committee shall have at least one member who shall be an “audit committee financial expert,” as defined by the requirements of the U.S. Securities and Exchange Commission (the “Commission”). Determinations as to whether a director is qualified for membership on the Committee shall be made by the Nominating & Corporate Governance Committee. Each Committee member shall serve until his or her successor is duly appointed by the Board or until such member’s resignation or removal from the Board or the Committee. Committee members shall serve at the pleasure of the Board and for such term or terms as the Board may determine. Committee members may be added, removed or replaced by the Board in its complete discretion.

The Chairman of the Committee shall be designated by the non-employee members of the Board. The Chairman shall be responsible for presiding over Committee meetings, preparing Committee agendas and determining the informational needs of the Committee. The Committee may form and delegate any of its responsibilities, as permitted by applicable laws and regulations, to a subcommittee composed of one or more members of the Committee. Committee members shall not simultaneously serve on the audit committees of more than two other public companies, unless the Board specifically determines that it would not impair the ability of the Committee member to effectively serve the Company. Prospective Committee members shall carefully evaluate existing time demands before accepting Committee membership.

At all times, the Committee shall have the authority and ability to conduct investigations with access to all books, records, facilities and personnel of the Company and its subsidiaries. The Committee shall have the resources and authority appropriate to discharge its responsibilities, including the sole authority to select, retain, terminate and approve the fees and other retention terms of special or independent counsel, accountants or other experts, consultants or advisors, as it deems necessary or appropriate.

The Company shall provide for adequate funding, as determined by the Committee, in its capacity as a committee of the Board, for payment of: (i) compensation to the independent auditors and any other public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for the Company; (ii) compensation of any such advisers retained by the Committee; and (iii) ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties and responsibilities.

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The purposes of the Committee are to:

1. Assist Board oversight of the integrity of (i) the Company’s financial statements and internal controls, (ii) the Company’s compliance with legal and regulatory requirements as well as its ethical standards and policies, (iii) the independent auditors’ qualifications and independence and (iv) the performance of the Company’s internal audit function and independent auditors; and

2. Prepare the report required to be prepared by the Committee pursuant to the rules of the Commission for inclusion in the Company’s annual proxy statement.

The function of the Committee is oversight. The management of the Company is responsible for the preparation, presentation and integrity of the Company’s financial statements. Management is responsible for maintaining appropriate accounting and financial reporting principles and policies and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The independent auditors are responsible for planning and carrying out a proper audit of the Company’s annual financial statements, reviewing the Company’s quarterly financial statements prior to the filing of each quarterly report on Form 10-Q, auditing annually management’s assessment of the effectiveness of internal control over financial reporting (as required by the rules of the Commission) and other procedures.

In fulfilling their responsibilities hereunder, it is recognized that the members of the Committee are not full-time employees of the Company and are not, and do not represent themselves to be, performing the functions of auditors or accountants. As such, it is not the duty or responsibility of the Committee or its members to conduct “field work” or other types of auditing or accounting reviews or procedures. Likewise, it is not the Committee’s responsibility to conduct investigations of or assure compliance with the Company’s Code of Ethics for Chief Executive Officer and Senior Financial Officers and the Code of Business Conduct and Ethics.

The Committee shall obtain from the independent auditors annually a formal written statement (the “Auditors’ Statement”) describing: the auditors’ internal quality-control procedures; any material issues raised by the most recent internal quality-control review or peer review of the auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the auditors, and any steps taken to deal with any such issues; and (to assess the auditors’ independence) all relationships between the independent auditors and the Company, addressing at least the matters set forth in the applicable requirements of the Public Company Accounting Oversight Board.

The Committee shall obtain from the independent auditors annually a formal written statement of the fees billed in each of the last two fiscal years for each of the following categories of services rendered by the independent auditors: (i) the audit of the Company’s annual financial statements and the reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements; (ii) assurance and related services not included in clause (i) of this paragraph that are reasonably related to the performance of the audit or review of the Company’s financial statements, in the aggregate and by each service; (iii) tax compliance, tax advice and tax planning services, in the aggregate and by each service; and (iv) all other products and services rendered by the independent auditors, in the aggregate and by each service.

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The Committee shall meet at every quarterly meeting of the Board, and at such times as the Committee or its Chairman shall determine to be appropriate to carry out its responsibilities. The Committee shall meet, as appropriate, to discuss with management, the internal auditors (or other persons responsible for the internal audit function) and the independent auditors the Company’s annual audited financial statements, the Company’s quarterly unaudited financial results, the audited financial statements and statutory financial returns of Allied World Assurance Company, Ltd and any other matter set forth in Article IV of this charter. The Committee shall meet separately, at least annually, or more frequently in the Committee’s sole discretion, with management, the internal auditors (or other persons responsible for the internal audit function), the independent auditors and other employees of the Company or its subsidiaries it deems appropriate to discuss any matters that the Committee or any of these persons or firms believes should be discussed privately. The Committee shall maintain minutes of its meetings and activities. The Committee may request any other director, officer or employee of the Company or its subsidiaries or any of the Company’s or its subsidiaries’ outside advisors to attend any meeting of the Committee or to meet independently with any of the foregoing.

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To carry out its purposes, the Committee shall have the following duties and responsibilities:

1. With respect to the independent auditors,

(i) to be directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditors (including the resolution of disagreements between management and the independent auditors regarding financial reporting), who shall report directly to the Committee, and shall have ultimate accountability to the Committee; provided that the auditor appointment shall be subject to shareholder approval;

(ii) to be directly responsible for the appointment, compensation, retention and oversight of the work of any other registered public accounting firm engaged for the purpose of preparing or issuing an audit report or to perform audit, review or attestation services, which firm shall also report directly to the Committee, and shall have ultimate accountability to the Committee;

(iii) to pre-approve, or to adopt appropriate procedures to pre-approve, all audit and non-audit services to be provided by the independent auditors, including services with respect to the Company’s annual audited financial statements and the annual audited financial statements and statutory financial returns of Allied World Assurance Company, Ltd;

(iv) to ensure that the independent auditors prepare and deliver annually an Auditors’ Statement (it being understood that the independent auditors are responsible for the accuracy and completeness of this Auditors’ Statement), and to discuss with the independent auditors any relationships or services disclosed in this Auditors’ Statement that may impact the quality of audit services or the objectivity and independence of the Company’s independent auditors;

(v) to obtain from the independent auditors in connection with any audit a timely report relating to the Company’s annual audited financial statements describing all critical accounting policies and practices used, any significant changes in the selection or application of accounting principles, all alternative treatments of financial information within U.S. generally accepted accounting principles (“GAAP”) that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditors and management, and any material written communications between the independent auditors and management, such as any “management” letter, summary of uncorrected financial statement misstatements or summary of disclosure items past;

(vi) to ensure the rotation of the lead audit partner every five years and the concurring partner and any other active audit engagement team partner every seven years and consider whether there should be a regular rotation of the audit firm itself in order to ensure continuing auditor independence;

(vii) to evaluate the independent auditors’ qualifications, performance and independence, including a review and evaluation of the lead partner, taking into account the opinions of management and the internal auditors (or such persons responsible for the internal audit function) in assessing the independent auditors’ qualifications, performance and independence; and

(viii) to set clear hiring policies for employees or former employees of the independent auditors.

2. With respect to accounting principles and policies, financial reporting and internal control over financial reporting,

(i) to advise management, the internal auditors (or other persons responsible for the internal audit function) and the independent auditors that they are expected to provide to the Committee a timely analysis of significant issues and practices relating to accounting principles and policies, financial reporting and internal control over financial reporting;

(ii) to consider and, as appropriate, further discuss with management, the internal auditors (or other persons responsible for the internal audit function) and the independent auditors any reports or communications (and management’s responses thereto) submitted to the Committee by the independent auditors required by or referred to in SAS 61 (as codified by AU Section 380), as modified or supplemented, or other professional standards, including reports and communications related to:

• deficiencies, including significant deficiencies or material weaknesses, noted in the audit of the design or operation of internal controls or other matters relating to internal control over financial reporting;
• consideration of fraud in a financial statement audit;
• detection of illegal acts;
• the independent auditors’ responsibility under GAAP;
• any restriction on audit scope;
• significant accounting policies;
• significant issues discussed with the national office respecting auditing or accounting issues presented by the engagement;
• management judgments and accounting estimates;
• any accounting adjustments arising from the audit that were noted or proposed by the auditors but were passed (as immaterial or otherwise);
• the responsibility of the independent auditors for other information in documents containing audited financial statements;
• disagreements with management;
• consultation by management with other accountants;
• major issues discussed with management prior to retention of the independent auditors;
• difficulties encountered with management in performing the audit;
• the independent auditors’ judgments about the quality of the Company’s accounting principles; and
• reviews of interim financial information conducted by the independent auditors;

(iii) to meet with management, the internal auditors (or other persons responsible for the internal audit function) and the independent auditors, as appropriate, to review and discuss:

• the scope of the annual external audit;
• the annual audited financial statements and quarterly unaudited financial statements, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
• the annual audited financial statements and statutory financial returns of Allied World Assurance Company, Ltd;
• any significant matters arising from any audit, including any audit problems or difficulties, whether raised by management, the internal auditors (or other persons responsible for the internal audit function) or the independent auditors, relating to the Company’s financial statements;
• any difficulties the independent auditors encountered in the course of the audit, including any restrictions on the scope of their activities or access to requested information, and any significant disagreements with management;
• any “management” or “internal control” letter issued, or proposed to be issued, by the independent auditors to the Company;
• the form of opinion the independent auditors propose to render to the Board and shareholders; and
• as appropriate: (a) any major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; (b) analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; and (c) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company;

(iv) to review disclosures made by the Company’s Chief Executive Officer and Chief Financial Officer during their certification process for the Company’s annual report on Form 10-K and quarterly reports on Form 10- Q about the results of their evaluation of the effectiveness of disclosure controls and any significant deficiencies in the design or operation of the Company’s internal controls over financial reporting and any fraud involving management or other employees who have a significant role in the Company’s internal controls over financial reporting;

(v) to review and discuss the Company’s earnings press releases, including the use of “pro forma” or “adjusted” non-GAAP information, as well as financial information and earnings guidance provided to analysts and rating agencies;

(vi) to review and discuss guidelines and policies governing the process by which senior management of the Company assess and manage the Company’s exposure to risk, and to discuss the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures

(vii) to obtain from the independent auditors assurance that the audit was conducted in a manner consistent with Section 10A of the Exchange Act, which sets forth certain procedures to be followed in any audit of financial statements required under the Exchange Act;

(viii) to discuss with the Company’s legal counsel any significant legal, compliance or regulatory matters that may have a material effect on the financial statements or the Company’s business, financial statements or compliance policies, including material notices to or inquiries received from governmental agencies;

(ix) to review and approve all related party transactions of the Company, defined as those transactions required to be disclosed under Item 404 of Regulation S-K as promulgated by the Commission;

(x) to establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and for the confidential, anonymous submission by employees of the Company or its subsidiaries of concerns regarding questionable accounting or auditing matters;

(xi) to ensure the Company maintains an effective internal audit function to provide management and the Committee with ongoing assessments of the Company’s internal control, risk management and related processes;

(xii) to review the activities, budget, charter and staffing of the internal audit function, evaluate the performance of the internal auditors (who shall be accountable to, and report directly to, the Committee); and

(xiii) to review with the Head of Internal Audit (or person performing a similar function) the scope and plan for conducting internal audits, and discuss with the Head of Internal Audit (or person performing a similar function) February 2009 summaries of significant issues raised during the performance of internal audits (and the related responses from management).

3. With respect to reporting and recommendations,

(i) to prepare any report or other disclosures, including any recommendation of the Committee, required by the rules of the Commission to be included in the Company’s annual proxy statement or annual report on Form 10-K;

(ii) to conduct an annual self-evaluation of the performance of the Committee, including its effectiveness and compliance with the Committee’s charter;

(iii) to review and reassess the adequacy of the Committee’s charter at least annually and recommend any proposed changes to the full Board for approval; and

(iv) to report regularly to the full Board any issues that arise with respect to the quality and integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the performance and independence of the independent auditors, the performance of the internal audit function or any other matters the Committee deems appropriate or the Board requests. The Committee’s report to the Board may take the form of an oral report by the Chairman or by any other member of the Committee designated by the Committee to make this report.

ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD PROCEDURES FOR HIRING EMPLOYEES OR FORMER EMPLOYEES OF INDEPENDENT AUDITORS

The Audit Committee (the “Committee”) of the Board of Directors of Allied World Assurance Company Holdings, Ltd (the “Company”) has implemented procedures for hiring certain employees that have an employment relationship with the Company’s independent auditor. The hiring procedure is outlined below.

The Committee shall be responsible for approving the hiring of all employees in an accounting role or “financial reporting oversight role” (as defined below) that were employed, or whose “close family member” (as defined below) is employed, as a partner, principal, shareholder or professional employee of the Company’s independent auditor. “Close family member” includes the individual’s spouse, spousal equivalent, dependents, parents, nondependent children and siblings. The Committee shall ensure that the hiring of an employee does not violate Regulation S-X Rule 2-01(c)(2) promulgated by the U.S. Securities and Exchange Commission. Any hire of such an employee without the prior approval of the Committee would be unauthorized. A “financial reporting oversight role” is defined as a role in which a person is in a position to or does exercise influence over the contents of the financial statements or anyone who prepared them, such as when the person is a member of the board of directors or similar management or governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer or any equivalent position.

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