XNYS:RNR RenaissanceRe Holdings Ltd Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 001-14428
RENAISSANCERE HOLDINGS LTD.
(Exact Name Of Registrant As Specified In Its Charter)
Bermuda
98-014-1974
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
Renaissance House, 12 Crow Lane, Pembroke HM 19 Bermuda
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Q  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Q  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Act. Large accelerated filer Q, Accelerated filer o, Non-accelerated filer o, Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o  No Q

The number of Common Shares, par value US $1.00 per share, outstanding at July 30, 2012 was 50,537,049.
 
RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
 
 
 
Page
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.



    


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATMENTS
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except per share amounts)
 
June 30,
2012
 
December 31,
2011
Assets
(Unaudited)
 
(Audited)
Fixed maturity investments trading, at fair value
 
 
 
(Amortized cost $4,890,251 and $4,265,929 at June 30, 2012 and December 31, 2011, respectively)
$
4,948,955

 
$
4,291,465

Fixed maturity investments available for sale, at fair value
 
 
 
(Amortized cost $96,647 and $130,669 at June 30, 2012 and December 31, 2011, respectively)
108,102

 
142,052

Short term investments, at fair value
654,912

 
905,477

Equity investments trading, at fair value
55,381

 
50,560

Other investments, at fair value
743,568

 
748,984

Investments in other ventures, under equity method
79,692

 
70,714

Total investments
6,590,610

 
6,209,252

Cash and cash equivalents
264,232

 
216,984

Premiums receivable
971,546

 
471,878

Prepaid reinsurance premiums
278,242

 
58,522

Reinsurance recoverable
198,777

 
404,029

Accrued investment income
35,938

 
33,523

Deferred acquisition costs
106,027

 
43,721

Receivable for investments sold
311,658

 
117,117

Other assets
193,798

 
180,992

Goodwill and other intangible assets
8,690

 
8,894

Total assets
$
8,959,518

 
$
7,744,912

Liabilities, Noncontrolling Interests and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Reserve for claims and claim expenses
$
1,801,247

 
$
1,992,354

Unearned premiums
964,499

 
347,655

Debt
354,293

 
353,620

Reinsurance balances payable
396,669

 
256,883

Payable for investments purchased
519,619

 
303,264

Other liabilities
173,433

 
211,369

Liabilities of discontinued operations held for sale
1,959

 
13,507

Total liabilities
4,211,719

 
3,478,652

Commitments and Contingencies

 

Redeemable noncontrolling interest – DaVinciRe
900,878

 
657,727

Shareholders’ Equity
 
 
 
Preference Shares: $1.00 par value – 22,000,000 shares issued and outstanding at June 30, 2012 (December 31, 2011 – 22,000,000)
550,000

 
550,000

Common shares: $1.00 par value – 50,608,641 shares issued and outstanding at June 30, 2012 (December 31, 2011 – 51,542,955)
50,609

 
51,543

Accumulated other comprehensive income
12,531

 
11,760

Retained earnings
3,229,870

 
2,991,890

Total shareholders’ equity attributable to RenaissanceRe
3,843,010

 
3,605,193

Noncontrolling interest
3,911

 
3,340

Total shareholders’ equity
3,846,921

 
3,608,533

Total liabilities, noncontrolling interests and shareholders’ equity
$
8,959,518

 
$
7,744,912

See accompanying notes to the consolidated financial statements

2

    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three and six months ended June 30, 2012 and 2011
(in thousands of United States Dollars, except per share amounts) (Unaudited)
 
Three months ended
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
667,336

 
$
641,563

 
$
1,331,487

 
$
1,252,068

Net premiums written
$
427,630

 
$
427,995

 
$
920,205

 
$
880,570

Increase in unearned premiums
(183,214
)
 
(210,820
)
 
(397,124
)
 
(357,854
)
Net premiums earned
244,416

 
217,175

 
523,081

 
522,716

Net investment income
14,743

 
33,328

 
81,714

 
93,609

Net foreign exchange gains (losses)
2,410

 
(4,521
)
 
950

 
(3,861
)
Equity in earnings (losses) of other ventures
6,846

 
5,128

 
12,316

 
(18,625
)
Other income (loss)
11,289

 
(5,167
)
 
(27,805
)
 
44,978

Net realized and unrealized gains on investments
31,003

 
34,979

 
77,116

 
29,765

Total other-than-temporary impairments
(234
)
 

 
(395
)
 

Portion recognized in other comprehensive income, before taxes
25

 

 
52

 

Net other-than-temporary impairments
(209
)
 

 
(343
)
 

Total revenues
310,498

 
280,922

 
667,029

 
668,582

Expenses
 
 
 
 
 
 
 
Net claims and claim expenses incurred
49,551

 
151,261

 
65,103

 
779,798

Acquisition expenses
25,608

 
13,883

 
49,719

 
46,218

Operational expenses
41,407

 
42,299

 
83,790

 
84,129

Corporate expenses
4,067

 
4,011

 
8,878

 
6,075

Interest expense
5,716

 
5,730

 
11,434

 
11,925

Total expenses
126,349

 
217,184

 
218,924

 
928,145

Income (loss) from continuing operations before taxes
184,149

 
63,738

 
448,105

 
(259,563
)
Income tax (expense) benefit
(898
)
 
1,773

 
(861
)
 
1,825

Income (loss) from continuing operations
183,251

 
65,511

 
447,244

 
(257,738
)
Income (loss) from discontinued operations
1,393

 
(10,094
)
 
1,220

 
(11,620
)
Net income (loss)
184,644

 
55,417

 
448,464

 
(269,358
)
Net (income) loss attributable to noncontrolling interests
(33,624
)
 
(21,903
)
 
(87,265
)
 
63,589

Net income (loss) attributable to RenaissanceRe
151,020

 
33,514

 
361,199

 
(205,769
)
Dividends on preference shares
(8,750
)
 
(8,750
)
 
(17,500
)
 
(17,500
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders
$
142,270

 
$
24,764

 
$
343,699

 
$
(223,269
)
Income (loss) from continuing operations available (attributable) to RenaissanceRe common shareholders per common share – basic
$
2.75

 
$
0.68

 
$
6.70

 
$
(4.16
)
Income (loss) from discontinued operations available (attributable) to RenaissanceRe common shareholders per common share – basic
0.03

 
(0.20
)
 
0.02

 
(0.23
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – basic
$
2.78

 
$
0.48

 
$
6.72

 
$
(4.39
)
Income (loss) from continuing operations available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
2.72

 
$
0.68

 
$
6.61

 
$
(4.16
)
Income (loss) from discontinued operations available (attributable) to RenaissanceRe common shareholders per common share – diluted
0.03

 
(0.20
)
 
0.02

 
(0.23
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
2.75

 
$
0.48

 
$
6.63

 
$
(4.39
)
Dividends per common share
$
0.27

 
$
0.26

 
$
0.54

 
$
0.52

See accompanying notes to the consolidated financial statements

3

    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three and six months ended June 30, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
 
Three months ended
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Comprehensive income (loss)
 
 
 
 
 
 
 
Net income (loss)
$
184,644

 
$
55,417

 
$
448,464

 
$
(269,358
)
Change in net unrealized gains on investments
(432
)
 
(1,817
)
 
823

 
(1,798
)
Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(25
)
 

 
(52
)
 

Comprehensive income (loss)
184,187

 
53,600

 
449,235

 
(271,156
)
Net (income) loss attributable to noncontrolling interests
(33,624
)
 
(21,903
)
 
(87,265
)
 
63,589

Change in net unrealized gains on fixed maturity investments available for sale attributable to noncontrolling interests

 
3

 

 
6

Comprehensive (income) loss attributable to noncontrolling interests
(33,624
)
 
(21,900
)
 
(87,265
)
 
63,595

Comprehensive income (loss) attributable to RenaissanceRe
$
150,563

 
$
31,700

 
$
361,970

 
$
(207,561
)
Disclosure regarding net unrealized gains
 
 
 
 
 
 
 
Total realized and net unrealized holding gains on investments and net other-than-temporary impairments
$
105

 
$
1,292

 
$
2,529

 
$
902

Net realized gains on fixed maturity investments available for sale
(746
)
 
(3,106
)
 
(2,049
)
 
(2,694
)
Net other-than-temporary impairments recognized in earnings
209

 

 
343

 

Change in net unrealized gains on investments
$
(432
)
 
$
(1,814
)
 
$
823

 
$
(1,792
)
 





See accompanying notes to the consolidated financial statements

4

    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the six months ended June 30, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
 
Six months ended
 
June 30,
2012
 
June 30,
2011
Preference shares
 
 
 
Balance – January 1
$
550,000

 
$
550,000

Balance – June 30
550,000

 
550,000

Common shares
 
 
 
Balance – January 1
51,543

 
54,110

Repurchase of shares
(1,229
)
 
(2,655
)
Exercise of options and issuance of restricted stock awards
295

 
298

Balance – June 30
50,609

 
51,753

Additional paid-in capital
 
 
 
Balance – January 1

 

Repurchase of shares
(12,350
)
 
546

Change in redeemable noncontrolling interest
7,056

 
(143
)
Exercise of options and issuance of restricted stock awards
5,294

 
5,365

Balance – June 30

 
5,768

Accumulated other comprehensive income
 
 
 
Balance – January 1
11,760

 
19,823

Change in net unrealized gains on investments
823

 
(1,792
)
Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(52
)
 

Balance – June 30
12,531

 
18,031

Retained earnings
 
 
 
Balance – January 1
2,991,890

 
3,312,392

Net income (loss)
448,464

 
(269,358
)
Net (income) loss attributable to noncontrolling interests
(87,265
)
 
63,589

Repurchase of shares
(78,046
)
 
(172,683
)
Dividends on common shares
(27,673
)
 
(26,721
)
Dividends on preference shares
(17,500
)
 
(17,500
)
Balance – June 30
3,229,870

 
2,889,719

Noncontrolling interest
3,911

 
3,430

Total shareholders’ equity
$
3,846,921

 
$
3,518,701

 











See accompanying notes to the consolidated financial statements

5

    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
Six months ended
 
June 30,
2012
 
June 30,
2011
Cash flows provided by operating activities
 
 
 
Net income (loss)
$
448,464

 
$
(269,358
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Amortization, accretion and depreciation
28,785

 
17,249

Equity in undistributed (earnings) losses of other ventures
(8,868
)
 
21,355

Net realized and unrealized gains on investments
(77,116
)
 
(29,765
)
Net other-than-temporary impairments
343

 

Net unrealized gains included in net investment income
(23,821
)
 
(22,270
)
Net unrealized gains included in other income (loss)
(2,987
)
 
(63,141
)
Change in:
 
 
 
Premiums receivable
(499,668
)
 
(611,439
)
Prepaid reinsurance premiums
(219,720
)
 
(185,033
)
Reinsurance recoverable
205,252

 
(231,534
)
Deferred acquisition costs
(62,306
)
 
(55,210
)
Reserve for claims and claim expenses
(191,107
)
 
912,885

Unearned premiums
616,844

 
544,756

Reinsurance balances payable
139,786

 
85,128

Other
(50,104
)
 
(82,627
)
Net cash provided by operating activities
303,777

 
30,996

Cash flows (used in) provided by investing activities
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
4,792,702

 
2,879,215

Purchases of fixed maturity investments trading
(5,312,902
)
 
(2,811,678
)
Proceeds from sales and maturities of fixed maturity investments available for sale
37,530

 
48,135

Purchases of fixed maturity investments available for sale

 
(4,078
)
Purchases of equity investments trading

 
(32,676
)
Net sales of short term investments
183,605

 
50,852

Net sales (purchases) of other investments
18,681

 
(23,881
)
Net purchases of investments in other ventures

 
(21,000
)
Net (purchases) sales of other assets
(166
)
 
46,984

Net proceeds from sale of discontinued operations held for sale

 
269,520

Net cash (used in) provided by investing activities
(280,550
)
 
401,393

Cash flows provided by (used in) financing activities
 
 
 
Dividends paid – RenaissanceRe common shares
(27,673
)
 
(26,721
)
Dividends paid – preference shares
(17,500
)
 
(17,500
)
RenaissanceRe common share repurchases
(90,111
)
 
(174,792
)
Net repayment of debt

 
(200,000
)
Net third party DaVinciRe share transactions
160,864

 
(56,708
)
Net cash provided by (used in) financing activities
25,580

 
(475,721
)
Effect of exchange rate changes on foreign currency cash
(1,559
)
 
3,331

Net increase (decrease) in cash and cash equivalents
47,248

 
(40,001
)
Cash and cash equivalents, beginning of period
216,984

 
277,738

Cash and cash equivalents, end of period
$
264,232

 
$
237,737


See accompanying notes to the consolidated financial statements

6

    


RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(unless otherwise noted, amounts in tables expressed in thousands of United States (“U.S.”) dollars, except per share amounts and percentages) (Unaudited)
NOTE 1. ORGANIZATION
This report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
RenaissanceRe Holdings Ltd. (“RenaissanceRe”) was formed under the laws of Bermuda on June 7, 1993. Together with its wholly owned and majority-owned subsidiaries and DaVinciRe (as defined below), which are collectively referred to herein as the “Company”, RenaissanceRe provides reinsurance and insurance coverages and related services to a broad range of customers.
Renaissance Reinsurance Ltd. (“Renaissance Reinsurance”), the Company’s principal reinsurance subsidiary, provides property catastrophe and specialty reinsurance coverages to insurers and reinsurers on a worldwide basis.
The Company also manages property catastrophe and specialty reinsurance business written on behalf of joint ventures, which principally include Top Layer Reinsurance Ltd. (“Top Layer Re”), recorded under the equity method of accounting, and DaVinci Reinsurance Ltd. (“DaVinci”). Because the Company owns a noncontrolling equity interest in, but controls a majority of the outstanding voting power of DaVinci's parent, DaVinciRe Holdings Ltd. (“DaVinciRe”), the results of DaVinci and DaVinciRe are consolidated in the Company’s financial statements. Redeemable noncontrolling interest – DaVinciRe represents the interests of external parties with respect to the net loss (income) and shareholders’ equity of DaVinciRe. Renaissance Underwriting Managers, Ltd. (“RUM”), a wholly owned subsidiary, acts as exclusive underwriting manager for these joint ventures in return for fee-based income and profit participation.
RenaissanceRe Syndicate 1458 (“Syndicate 1458”) is the Company’s Lloyd’s syndicate which was licensed to start writing certain lines of insurance and reinsurance business effective June 1, 2009. RenaissanceRe Corporate Capital (UK) Limited (“RenaissanceRe CCL”), a wholly owned subsidiary of the Company, is Syndicate 1458’s sole corporate member and RenaissanceRe Syndicate Management Ltd. (“RSML”), a wholly owned subsidiary of the Company from November 2, 2009, is the managing agent for Syndicate 1458.
The Company, through Renaissance Trading Ltd. (“Renaissance Trading”) and RenRe Energy Advisors Ltd. (“REAL”), transacts certain derivative-based risk management products primarily to address weather and energy risk and engages in hedging and trading activities related to those transactions.
On November 18, 2010, the Company entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) with QBE Holdings, Inc. (“QBE”) to sell substantially all of its U.S.-based insurance operations including its U.S. property and casualty business underwritten through managing general agents, its crop insurance business underwritten through Agro National Inc. (“Agro National”), its commercial property insurance operations and its claims operations. At December 31, 2010, the Company classified the assets and liabilities associated with this transaction as held for sale. The financial results for these operations have been presented in the Company's consolidated financial statements as “discontinued operations” for all periods presented. On March 4, 2011, the Company and QBE closed the transaction contemplated by the Stock Purchase Agreement. Refer to “Note 3. Discontinued Operations,” for more information.


7

    


NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to our significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2011.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company's financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated from these statements. Except as discussed in “Note 3. Discontinued Operations,” and unless otherwise noted, the notes to the consolidated financial statements reflect the Company's continuing operations.
Certain comparative information has been reclassified to conform to the current presentation. Because of the seasonality of the Company's business, the results of operations and cash flows for any interim period will not necessarily be indicative of the results of operations and cash flows for the full fiscal year or subsequent quarters.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The major estimates reflected in the Company’s consolidated financial statements include, but are not limited to, the reserve for claims and claim expenses, reinsurance recoverables, including allowances for reinsurance recoverables deemed uncollectible, estimates of written and earned premiums, fair value, including the fair value of investments, financial instruments and derivatives, impairment charges and the Company’s deferred tax valuation allowance.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”), which amends FASB ASC Topic Financial Services - Insurance. ASU 2010-26 modifies the definition of the types of costs that can be capitalized in relation to the acquisition of new and renewal insurance contracts. The amended guidance requires costs to be incremental or directly related to the successful acquisition of new or renewal contracts in order to be capitalized as a deferred acquisition cost. Capitalized costs would include incremental direct costs, such as commissions paid to brokers. Additionally, the portion of employee salaries and benefits directly related to time spent for acquired contracts would be capitalized. Costs that fall outside the revised definition must be expensed when incurred. ASU 2010-26 became effective for fiscal periods beginning on or after December 15, 2011, and as a result, the Company adopted ASU 2010-26 effective January 1, 2012. The adoption of ASU 2010-26 did not have a material impact on the Company's consolidated statements of operations and financial condition.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends FASB ASC Topic Fair Value Measurement. ASU 2011-04 was issued to provide largely identical guidance about fair value measurement and disclosure requirements with the International Accounting Standards Board's new International Financial Reporting Standards (“IFRS”) 13, Fair Value Measurement. ASU

8

    


2011-04 does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under GAAP and requires enhanced disclosures covering all transfers between Levels 1 and 2 of the fair value hierarchy. Additional disclosures covering Level 3 assets are also required. ASU 2011-04 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and as a result, the Company adopted ASU 2011-04 effective January 1, 2012. The adoption of ASU 2011-04 did not have a material impact on the Company's consolidated statements of operations and financial condition. The additional disclosures required by ASU 2011-04 have been provided in "Note 5. Fair Value Measurements" of the Company's Notes to Consolidated Financial Statements.
Presentation of Comprehensive Income
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends FASB ASC Topic Comprehensive Income. ASU 2011-05 increases the prominence of items reported in other comprehensive income and eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity. ASU 2011-05 requires that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retroactive application required. The Company adopted ASU 2010-26 effective January 1, 2012 and it did not have a material impact on the Company's consolidated statements of operations and financial condition.
NOTE 3. DISCONTINUED OPERATIONS
U.S.-Based Insurance Operations
On November 18, 2010, the Company entered into a Stock Purchase Agreement with QBE to sell substantially all of its U.S.-based insurance operations, including its U.S. property and casualty business underwritten through managing general agents, its crop insurance business underwritten through Agro National, its commercial property insurance operations and its claims operations.  At December 31, 2010, the Company classified the assets and liabilities associated with this transaction as held for sale and the assets and liabilities were recorded at the lower of the carrying value or fair value less costs to sell. The financial results for these operations have been presented as discontinued operations in the Company's consolidated statements of operations for all periods presented.
Consideration for the transaction was book value at December 31, 2010, for the aforementioned businesses, payable in cash at closing and subject to adjustment for certain tax and other items. The transaction closed on March 4, 2011 and net consideration of $269.5 million was received by the Company.
Pursuant to the Stock Purchase Agreement, the Company was subject to a post-closing review following December 31, 2011 of the net reserve for claims and claim expenses for loss events occurring on or prior to December 31, 2010 (the “Reserve Collar”). Subsequent to the post-closing review, the Company was liable to pay, or otherwise reimburse QBE amounts up to $10.0 million for net adverse development on prior accident years net claims and claim expenses. Conversely, if prior accident years net claims and claim expenses experienced net favorable development, QBE was liable to pay, or otherwise reimburse the Company amounts up to $10.0 million.
During 2011, the Company recognized a $10.0 million liability and corresponding expense in liabilities of discontinued operations held for sale and (loss) income from discontinued operations, respectively, due to purported net adverse development on prior accident years net claims and claim expenses associated with the Reserve Collar.  Effective May 23, 2012, the Company and QBE reached an agreement in respect of the Reserve Collar, and the Company paid QBE the sum of $9.0 million on June 1, 2012, representing full and final settlement of the Reserve Collar and recorded a gain of $1.0 million in income from discontinued operations during the second quarter of 2012.


9

    


NOTE 4. INVESTMENTS
Fixed Maturity Investments Trading
The following table summarizes the fair value of fixed maturity investments trading:
 
 
 
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
 
U.S. treasuries
$
1,126,759

 
$
885,152

 
 
Agencies
436,691

 
158,561

 
 
Non-U.S. government (Sovereign debt)
172,008

 
216,916

 
 
FDIC guaranteed corporate
29,386

 
423,630

 
 
Non-U.S. government-backed corporate
393,875

 
640,757

 
 
Corporate
1,652,007

 
1,187,437

 
 
Agency mortgage-backed
580,971

 
428,042

 
 
Non-agency mortgage-backed
135,268

 
82,096

 
 
Commercial mortgage-backed
414,524

 
255,885

 
 
Asset-backed
7,466

 
12,989

 
 
Total fixed maturity investments trading
$
4,948,955

 
$
4,291,465

 
 
 
 
 
 
 
Fixed Maturity Investments Available For Sale
The following table summarizes the amortized cost, fair value and related unrealized gains and losses and non-credit other-than-temporary impairments of fixed maturity investments available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
 
At June 30, 2012
Amortized 
Cost
 
Gross
Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments 
(1)  
 
 
Non-U.S. government (Sovereign debt)
$
5,000

 
$
223

 
$

 
$
5,223

 
$

 
 
Corporate
11,815

 
1,010

 
(110
)
 
12,715

 
75

 
 
Agency mortgage-backed
10,478

 
906

 

 
11,384

 

 
 
Non-agency mortgage-backed
15,929

 
2,496

 
(19
)
 
18,406

 
891

 
 
Commercial mortgage-backed
48,926

 
6,717

 

 
55,643

 

 
 
Asset-backed
4,499

 
232

 

 
4,731

 

 
 
Total fixed maturity investments available for sale
$
96,647

 
$
11,584

 
$
(129
)
 
$
108,102

 
$
966

 
 
 
 
 
 
 
 
 
 
 
 
 

10

    


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
 
At December 31, 2011
Amortized Cost
 
Gross
Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments
 (1)  
 
 
Non-U.S. government (Sovereign debt)
$
10,087

 
$
921

 
$
(12
)
 
$
10,996

 
$

 
 
Non-U.S. government-backed corporate
312

 
13

 

 
325

 

 
 
Corporate
18,449

 
1,535

 
(517
)
 
19,467

 
(176
)
 
 
Agency mortgage-backed
12,636

 
1,071

 

 
13,707

 

 
 
Non-agency mortgage-backed
21,097

 
1,862

 
(284
)
 
22,675

 
(1,837
)
 
 
Commercial mortgage-backed
63,269

 
6,576

 
(1
)
 
69,844

 

 
 
Asset-backed
4,819

 
219

 

 
5,038

 

 
 
Total fixed maturity investments available for sale
$
130,669

 
$
12,197

 
$
(814
)
 
$
142,052

 
$
(2,013
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents the non-credit component of other-than-temporary impairments recognized in accumulated other comprehensive income since the adoption of guidance related to the recognition and presentation of other-than-temporary impairments under FASB ASC Topic Financial Instruments – Debt and Equity Securities, during the second quarter of 2009, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
Contractual maturities of fixed maturity investments are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading
 
Available for Sale
 
Total Fixed Maturity Investments
 
 
At June 30, 2012
Amortized 
Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
Due in less than one year
$
405,210

 
$
405,547

 
$
112

 
$
89

 
$
405,322

 
$
405,636

 
 
Due after one through five years
2,606,528

 
2,615,915

 
8,358

 
8,761

 
2,614,886

 
2,624,676

 
 
Due after five through ten years
625,279

 
646,130

 
6,200

 
6,779

 
631,479

 
652,909

 
 
Due after ten years
130,574

 
143,134

 
2,145

 
2,309

 
132,719

 
145,443

 
 
Mortgage-backed
1,115,304

 
1,130,763

 
75,333

 
85,433

 
1,190,637

 
1,216,196

 
 
Asset-backed
7,356

 
7,466

 
4,499

 
4,731

 
11,855

 
12,197

 
 
Total
$
4,890,251

 
$
4,948,955

 
$
96,647

 
$
108,102

 
$
4,986,898

 
$
5,057,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Investments Trading
The following table summarizes the fair value of equity investments trading:
 
 
 
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
 
Financial institution securities
$
55,381

 
$
50,560

 
 
 
 
 
 
 

11

    


Pledged Investments
At June 30, 2012, $1,330.9 million of cash and investments at fair value were on deposit with, or in trust accounts for the benefit of various counterparties, including with respect to the Company's principal letter of credit facility. Of this amount, $522.6 million is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities.
Net Investment Income, Net Realized and Unrealized Gains on Investments and Net Other-Than-Temporary Impairments
The components of net investment income are as follows:
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
 
Fixed maturity investments
$
22,436

 
$
24,426

 
 
Short term investments
234

 
433

 
 
Equity investments
181

 
112

 
 
Other investments
 
 
 
 
 
Hedge funds and private equity investments
(10,413
)
 
8,230

 
 
Other
4,975

 
2,838

 
 
Cash and cash equivalents
54

 
45

 
 
 
17,467

 
36,084

 
 
Investment expenses
(2,724
)
 
(2,756
)
 
 
Net investment income
$
14,743

 
$
33,328

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Fixed maturity investments
$
48,769

 
$
52,339

 
 
Short term investments
734

 
1,028

 
 
Equity investments
351

 
126

 
 
Other investments
 
 
 
 
 
Hedge funds and private equity investments
18,060

 
31,737

 
 
Other
19,145

 
13,665

 
 
Cash and cash equivalents
80

 
86

 
 
 
87,139

 
98,981

 
 
Investment expenses
(5,425
)
 
(5,372
)
 
 
Net investment income
$
81,714

 
$
93,609

 
 
 
 
 
 
 
Net realized and unrealized gains on investments and net other-than-temporary impairments are as follows:
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
 
Gross realized gains
$
19,458

 
$
15,430

 
 
Gross realized losses
(3,294
)
 
(4,156
)
 
 
Net realized gains on fixed maturity investments
16,164

 
11,274

 
 
Net unrealized gains on fixed maturity investments trading
12,538

 
24,728

 
 
Net unrealized gains (losses) on equity investments trading
2,301

 
(1,023
)
 
 
Net realized and unrealized gains on investments
$
31,003

 
$
34,979

 
 
Total other-than-temporary impairments
$
(234
)
 
$

 
 
Portion recognized in other comprehensive income, before taxes
25

 

 
 
Net other-than-temporary impairments
$
(209
)
 
$

 
 
 
 
 
 
 

12

    


 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Gross realized gains
$
55,744

 
$
25,992

 
 
Gross realized losses
(10,244
)
 
(16,773
)
 
 
Net realized gains on fixed maturity investments
45,500

 
9,219

 
 
Net unrealized gains on fixed maturity investments trading
26,795

 
20,970

 
 
Net unrealized gains on equity investments trading
4,821

 
(424
)
 
 
Net realized and unrealized gains on investments
$
77,116

 
$
29,765

 
 
Total other-than-temporary impairments
$
(395
)
 
$

 
 
Portion recognized in other comprehensive income, before taxes
52

 

 
 
Net other-than-temporary impairments
$
(343
)
 
$

 
 
 
 
 
 
 
The following table provides an analysis of the length of time the Company’s fixed maturity investments available for sale in an unrealized loss have been in a continual unrealized loss position.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
At June 30, 2012
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Corporate
$
1,424

 
$
(49
)
 
$
513

 
$
(61
)
 
$
1,937

 
$
(110
)
 
 
Non-agency mortgage-backed

 

 
98

 
(19
)
 
98

 
(19
)
 
 
Total
$
1,424

 
$
(49
)
 
$
611

 
$
(80
)
 
$
2,035

 
$
(129
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
At December 31, 2011
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Non-U.S. government (Sovereign debt)
$
915

 
$
(9
)
 
$
42

 
$
(3
)
 
$
957

 
$
(12
)
 
 
Corporate
3,935

 
(385
)
 
412

 
(132
)
 
4,347

 
(517
)
 
 
Non-agency mortgage-backed
8,024

 
(224
)
 
798

 
(60
)
 
8,822

 
(284
)
 
 
Commercial mortgage-backed

 

 
455

 
(1
)
 
455

 
(1
)
 
 
Total
$
12,874

 
$
(618
)
 
$
1,707

 
$
(196
)
 
$
14,581

 
$
(814
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012, the Company held 44 fixed maturity investments available for sale securities that were in an unrealized loss position, including 13 fixed maturity investments available for sale securities that were in an unrealized loss position for twelve months or greater. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. The Company performed reviews of its fixed maturity investments available for sale for the six months ended June 30, 2012 and 2011, respectively, in order to determine whether declines in the fair value below the amortized cost basis were considered other-than-temporary in accordance with the applicable guidance, as discussed below.
Other-Than-Temporary Impairment Process
The Company's process for assessing whether declines in the fair value of its fixed maturity investments available for sale represent impairments that are other-than-temporary includes reviewing each fixed maturity investment available for sale that is impaired and determining: (i) if the Company has the intent to sell the debt security or (ii) if it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery; and (iii) whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the security are less than the amortized cost basis of the security.

13

    


In assessing the Company’s intent to sell securities, the Company’s procedures may include actions such as discussing planned sales with its third party investment managers, reviewing sales that have occurred shortly after the balance sheet date, and consideration of other qualitative factors that may be indicative of the Company’s intent to sell or hold the relevant securities. For the six months ended June 30, 2012, the Company recognized $Nil other-than-temporary impairments due to the Company’s intent to sell these securities as of June 30, 2012 (2011 – $Nil).
In assessing whether it is more likely than not that the Company will be required to sell a security before its anticipated recovery, the Company considers various factors including its future cash flow forecasts and requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short term investments, fixed maturity investments trading and fixed maturity investments available for sale in an unrealized gain position, and other relevant factors. For the six months ended June 30, 2012, the Company recognized $Nil of other-than-temporary impairments due to required sales (2011 – $Nil).
In evaluating credit losses, the Company considers a variety of factors in the assessment of a security including: (i) the time period during which there has been a significant decline below cost; (ii) the extent of the decline below cost and par; (iii) the potential for the security to recover in value; (iv) an analysis of the financial condition of the issuer; (v) the rating of the issuer; (vi) the implied rating of the issuer based on an analysis of option adjusted spreads; (vii) the absolute level of the option adjusted spread for the issuer; and (viii) an analysis of the collateral structure and credit support of the security, if applicable.
Once the Company determines that it is possible that a credit loss may exist for a security, the Company performs a detailed review of the cash flows expected to be collected from the issuer. The Company estimates expected cash flows by applying estimated default probabilities and recovery rates to the contractual cash flows of the issuer, with such default and recovery rates reflecting long-term historical averages adjusted to reflect current credit, economic and market conditions, giving due consideration to collateral and credit support, if applicable, and discounting the expected cash flows at the purchase yield on the security. In instances in which a determination is made that an impairment exists but the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, the impairment is separated into: (i) the amount of the total other-than-temporary impairment related to the credit loss; and (ii) the amount of the total other-than-temporary impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income. For the six months ended June 30, 2012, the Company recognized $0.3 million of other-than-temporary impairments which were recognized in earnings and $52 thousand related to other factors which were recognized in other comprehensive income (2011 – $Nil and $Nil, respectively).

14

    


The following table provides a rollforward of the amount of other-than-temporary impairments related to credit losses recognized in earnings for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income:
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – April 1
$
520

 
$
2,875

 
 
Additions:
 
 
 
 
 
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized
11

 

 
 
Amount related to credit loss for which an other-than-temporary impairment was previously recognized
41

 

 
 
Reductions:
 
 
 
 
 
Securities sold during the period
(396
)
 
(246
)
 
 
Securities for which the amount previously recognized in other comprehensive income was recognized in earnings, because the Company intends to sell the security or is more likely than not the Company will be required to sell the security

 

 
 
Increases in cash flows expected to be collected that are recognized over the remaining life of the security

 

 
 
Balance – June 30
$
176

 
$
2,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – January 1
$
564

 
$
3,098

 
 
Additions:
 
 
 
 
 
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized
11

 

 
 
Amount related to credit loss for which an other-than-temporary impairment was previously recognized
50

 

 
 
Reductions:
 
 
 
 
 
Securities sold during the period
(449
)
 
(469
)
 
 
Securities for which the amount previously recognized in other comprehensive income was recognized in earnings, because the Company intends to sell the security or is more likely than not the Company will be required to sell the security

 

 
 
Increases in cash flows expected to be collected that are recognized over the remaining life of the security

 

 
 
Balance – June 30
$
176

 
$
2,629

 
 
 
 
 
 
 


15

    


NOTE 5. FAIR VALUE MEASUREMENTS
The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within the Company's financial statements. Fair value is defined under accounting guidance currently applicable to the Company to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. The Company recognizes the change in unrealized gains and losses arising from changes in fair value in its consolidated statements of operations, with the exception of changes in unrealized gains and losses on its fixed maturity investments available for sale, which are recognized as a component of accumulated other comprehensive income in shareholders' equity.
FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Fair values determined by Level 1 inputs utilize unadjusted quoted prices obtained from active markets for identical assets or liabilities for which the Company has access. The fair value is determined by multiplying the quoted price by the quantity held by the Company;
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals, broker quotes and certain pricing indices; and
Level 3 inputs are based on unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management's best estimate of the assumptions used by other market participants in determining the fair value of the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability.
In order to determine if a market is active or inactive for a security, the Company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity. 
There have been no material changes in the Company's valuation techniques, nor have there been any transfers between Level 1 and Level 2, or Level 2 and Level 3, respectively, during the period represented by these consolidated financial statements.
 

16

    


Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis and also represents the carrying amount on the Company’s consolidated balance sheet:
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012
Total
 
Quoted
Prices in Active
Markets for
Identical 
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
1,126,759

 
$
1,126,759

 
$

 
$

 
 
Agencies
436,691

 

 
436,691

 

 
 
Non-U.S. government (Sovereign debt)
177,231

 

 
177,231

 

 
 
FDIC guaranteed corporate
29,386

 

 
29,386

 

 
 
Non-U.S. government-backed corporate
393,875

 

 
393,875

 

 
 
Corporate
1,664,722

 

 
1,636,947

 
27,775

 
 
Agency mortgage-backed
592,355

 

 
592,355

 

 
 
Non-agency mortgage-backed
153,674

 

 
153,674

 

 
 
Commercial mortgage-backed
470,167

 

 
470,167

 

 
 
Asset-backed
12,197

 

 
12,197

 

 
 
Total fixed maturity investments
5,057,057

 
1,126,759

 
3,902,523

 
27,775

 
 
Short term investments
654,912

 

 
654,912

 

 
 
Equity investments trading
55,381

 
55,381

 

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity partnerships
360,268

 

 

 
360,268

 
 
Senior secured bank loan funds
269,317

 

 
246,593

 
22,724

 
 
Catastrophe bonds
106,470

 

 
106,470

 

 
 
Hedge funds
6,243

 

 

 
6,243

 
 
Miscellaneous other investments
1,270

 

 

 
1,270

 
 
Total other investments
743,568

 

 
353,063

 
390,505

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
9,689

 

 

 
9,689

 
 
Derivatives (1)
14,752

 
2,011

 
3,660

 
9,081

 
 
Other
10,811

 
(4,604
)
 

 
15,415

 
 
Total other assets and (liabilities)
35,252

 
(2,593
)
 
3,660

 
34,185

 
 
 
$
6,546,170

 
$
1,179,547

 
$
4,914,158

 
$
452,465

 
 
 
 
 
 
 
 
 
 
 
(1) See "Note 12. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.


17

    


 
 
 
 
 
 
 
 
 
 
 
At December 31, 2011
Total
 
Quoted
Prices in Active
Markets for
Identical
 Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
885,152

 
$
885,152

 
$

 
$

 
 
Agencies
158,561

 

 
158,561

 

 
 
Non-U.S. government (Sovereign debt)
227,912

 

 
227,912

 

 
 
FDIC guaranteed corporate
423,630

 

 
423,630

 

 
 
Non-U.S. government-backed corporate
641,082

 

 
641,082

 

 
 
Corporate
1,206,904

 

 
1,179,143

 
27,761

 
 
Agency mortgage-backed
441,749

 

 
441,749

 

 
 
Non-agency mortgage-backed
104,771

 

 
104,771

 

 
 
Commercial mortgage-backed
325,729

 

 
325,729

 

 
 
Asset-backed
18,027

 

 
18,027

 

 
 
Total fixed maturity investments
4,433,517

 
885,152

 
3,520,604

 
27,761

 
 
Short term investments
905,477

 

 
905,477

 

 
 
Equity investments trading
50,560

 
50,560

 

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity partnerships
367,909

 

 

 
367,909

 
 
Senior secured bank loan funds
257,870

 

 
237,815

 
20,055

 
 
Catastrophe bonds
70,999

 

 
70,999

 

 
 
Non-U.S. fixed income funds
28,862

 

 
28,862

 

 
 
Hedge funds
21,344

 

 
14,782

 
6,562

 
 
Miscellaneous other investments
2,000

 

 

 
2,000

 
 
Total other investments
748,984

 

 
352,458

 
396,526

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
2,115

 

 

 
2,115

 
 
Derivatives (1)
3,312

 
707

 
(6,293
)
 
8,898

 
 
Other
10,644

 
(6,869
)
 

 
17,513

 
 
Total other assets and (liabilities)
16,071

 
(6,162
)
 
(6,293
)
 
28,526

 
 
 
$
6,154,609

 
$
929,550

 
$
4,772,246

 
$
452,813

 
 
 
 
 
 
 
 
 
 
 
(1) See "Note 12. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.
Level 1 and Level 2 Assets and Liabilities Measured at Fair Value
Fixed Maturity Investments
Fixed maturity investments included in Level 1 consist of the Company's investments in U.S. treasuries. Fixed maturity investments included in Level 2 are agencies, non-U.S. government, Federal Deposit Insurance Company ("FDIC") guaranteed corporate, non-U.S. government-backed corporate, corporate, agency mortgage-backed, non-agency mortgage-backed, commercial mortgage-backed and asset-backed fixed maturity investments.

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The Company’s fixed maturity investments portfolios are primarily priced using pricing services, such as index providers and pricing vendors, as well as broker quotations. In general, the pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers, reference data and industry and economic events. Index pricing generally relies on market traders as the primary source for pricing, however models are also utilized to provide prices for all index eligible securities. The models use a variety of observable inputs such as benchmark yields, transactional data, dealer runs, broker-dealer quotes and corporate actions. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.
The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of our fixed maturity investments are detailed below by asset class.
U.S. treasuries
Level 1 - At June 30, 2012, the Company’s U.S. treasuries fixed maturity investments are primarily priced by pricing services and had a weighted average effective yield of 0.5% and a weighted average credit quality of AA (December 31, 2011 - 0.6% and AA, respectively). When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers. Certain data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue and maturity date.
Agencies
Level 2 - At June 30, 2012, the Company’s agency fixed maturity investments had a weighted average effective yield of 0.7% and a weighted average credit quality of AA (December 31, 2011 - 0.5% and AA, respectively). The issuers of the Company’s agency fixed maturity investments primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Fixed maturity investments included in agencies are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrates other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.
Non-U.S. government (Sovereign debt)
Level 2 - Non-U.S. government fixed maturity investments held by the Company at June 30, 2012, had a weighted average effective yield of 2.2% and a weighted average credit quality of AA (December 31, 2011 - 2.3% and AA, respectively). The issuers of securities in this sector are non-U.S. governments and their respective agencies as well as supranational organizations. Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

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FDIC guaranteed corporate
Level 2 - The Company’s FDIC guaranteed corporate fixed maturity investments had a weighted average effective yield of 0.3% and a weighted average credit quality of AA at June 30, 2012 (December 31, 2011 - 0.3% and AA, respectively). The issuers consist of well known corporate issuers who participate in the FDIC program. The Company’s FDIC guaranteed corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve.
Non-U.S. government-backed corporate
Level 2 - Non-U.S. government-backed corporate fixed maturity investments had a weighted average effective yield of 1.2% and a weighted average credit quality of AAA at June 30, 2012 (December 31, 2011 -