XNYS:PRE PartnerRe Ltd. Quarterly Report 10-Q Filing - 6/30/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	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

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            .

Commission file number 1-14536

 

 

PartnerRe Ltd.

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda		Not Applicable
(State of incorporation)		(I.R.S. Employer Identification No.)

90 Pitts Bay Road, Pembroke, HM08, Bermuda

(Address of principal executive offices) (Zip Code)

(441) 292-0888

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  x    No  ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		¨

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

The number of the registrant’s common shares (par value $1.00 per share) outstanding, net of treasury shares, as of July 30, 2012 was 62,192,989.

 

 

 

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Table of Contents

PartnerRe Ltd.

INDEX TO FORM 10-Q

 

				Page
PART I—FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Report of Independent Registered Public Accounting Firm			3
		Unaudited Condensed Consolidated Balance Sheets—June 30, 2012 and December 31, 2011			4
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) —Three Months and Six Months Ended June 30, 2012 and 2011			5
		Unaudited Condensed Consolidated Statements of Shareholders’ Equity—Six Months Ended June 30, 2012 and 2011			6
		Unaudited Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2012 and 2011			7
		Notes to Unaudited Condensed Consolidated Financial Statements			8
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			73
ITEM 4.		Controls and Procedures			76
PART II—OTHER INFORMATION
ITEM 1.		Legal Proceedings			76
ITEM 1A.		Risk Factors			77
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			78
ITEM 3.		Defaults upon Senior Securities			78
ITEM 4.		Mine Safety Disclosures			78
ITEM 5.		Other Information			78
ITEM 6.		Exhibits			78
		Signatures			79
		Exhibit Index			80

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Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PartnerRe Ltd.

We have reviewed the accompanying condensed consolidated balance sheet of PartnerRe Ltd. and subsidiaries (the “Company”) as of June 30, 2012, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2012 and 2011, and of shareholders’ equity, and of cash flows for the six-month periods ended June 30, 2012 and 2011. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of December 31, 2011 and the related consolidated statements of operations and comprehensive (loss) income, shareholders’ equity, and of cash flows for the year then ended (not presented herein); and in our report dated February 24, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche Ltd.

Deloitte & Touche Ltd.

Hamilton, Bermuda

August 2, 2012

 

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PartnerRe Ltd.

Unaudited Condensed Consolidated Balance Sheets

(Expressed in thousands of U.S. dollars, except parenthetical share and per share data)

 

		June 30, 2012				December 31, 2011
Assets
Investments:
Fixed maturities, trading securities, at fair value (amortized cost: 2012, $12,994,604; 2011, $13,394,404)		$	13,619,948			$	13,941,829
Short-term investments, trading securities, at fair value (amortized cost: 2012, $31,943; 2011, $42,563)			31,984				42,571
Equities, trading securities, at fair value (cost: 2012, $1,005,118; 2011, $917,613)			1,050,017				944,691
Other invested assets			329,996				358,154
Total investments			15,031,945				15,287,245
Funds held – directly managed (cost: 2012, $1,197,479; 2011, $1,241,222)			1,233,008				1,268,010
Cash and cash equivalents, at fair value, which approximates amortized cost			1,512,418				1,342,257
Accrued investment income			160,392				189,074
Reinsurance balances receivable			2,358,432				2,059,976
Reinsurance recoverable on paid and unpaid losses			434,083				397,788
Funds held by reinsured companies			783,311				796,290
Deferred acquisition costs			620,277				547,202
Deposit assets			256,607				241,513
Net tax assets			37,711				66,574
Goodwill			455,533				455,533
Intangible assets			116,081				133,867
Other assets			72,165				70,044
Total assets		$	23,071,963			$	22,855,373
Liabilities
Unpaid losses and loss expenses		$	10,661,012			$	11,273,091
Policy benefits for life and annuity contracts			1,635,547				1,645,662
Unearned premiums			2,008,384				1,448,841
Other reinsurance balances payable			496,020				443,873
Deposit liabilities			256,773				249,382
Net tax liabilities			309,630				297,153
Accounts payable, accrued expenses and other			186,015				208,840
Debt related to senior notes			750,000				750,000
Debt related to capital efficient notes			70,989				70,989
Total liabilities			16,374,370				16,387,831
Shareholders’ Equity
Common shares (par value $1.00; issued: 2012, 85,141,999 shares; 2011, 84,766,693 shares)			85,142				84,767
Preferred shares (par value $1.00; issued and outstanding: 2012 and 2011, 35,750,000 shares; aggregate liquidation value: 2012 and 2011, $893,750)			35,750				35,750
Additional paid-in capital			3,831,921				3,803,796
Accumulated other comprehensive loss:
Currency translation adjustment			2,317				4,267
Other accumulated comprehensive loss (net of tax of: 2012, $6,449; 2011, $6,590)			(16,967	)			(16,911	)
Retained earnings			4,460,655				4,035,103
Common shares held in treasury, at cost (2012, 22,584,510 shares; 2011, 19,444,365 shares)			(1,701,225	)			(1,479,230	)
Total shareholders’ equity			6,697,593				6,467,542
Total liabilities and shareholders’ equity		$	23,071,963			$	22,855,373

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Expressed in thousands of U.S. dollars, except share and per share data)

 

		For the three months ended June 30, 2012				For the three months ended June 30, 2011				For the six months ended June 30, 2012				For the six months ended June 30, 2011
Revenues
Gross premiums written		$	1,163,243			$	1,082,205			$	2,730,726			$	2,639,766
Net premiums written		$	1,136,046			$	1,056,467			$	2,609,331			$	2,526,887
(Increase) decrease in unearned premiums			(45,168	)			50,978				(528,623	)			(354,853	)
Net premiums earned			1,090,878				1,107,445				2,080,708				2,172,034
Net investment income			153,506				158,328				300,402				309,962
Net realized and unrealized investment gains (losses)			38,132				78,199				230,867				(34,000	)
Other income			2,654				1,596				5,400				3,408
Total revenues			1,285,170				1,345,568				2,617,377				2,451,404
Expenses
Losses and loss expenses and life policy benefits			706,137				814,523				1,282,623				2,421,740
Acquisition costs			232,723				229,251				444,330				437,100
Other operating expenses			106,184				113,694				204,358				217,991
Interest expense			12,223				12,214				24,443				24,514
Amortization of intangible assets			8,893				9,165				17,786				17,992
Net foreign exchange gains			(7,770	)			(8,737	)			(5,181	)			(9,433	)
Total expenses			1,058,390				1,170,110				1,968,359				3,109,904
Income (loss) before taxes and interest in (losses) earnings of equity investments			226,780				175,458				649,018				(658,500	)
Income tax expense			50,136				50,085				117,310				23,828
Interest in (losses) earnings of equity investments			(498	)			(1,188	)			4,579				(443	)
Net income (loss)			176,146				124,185				536,287				(682,771	)
Preferred dividends			15,405				8,631				30,811				17,263
Net income (loss) available to common shareholders		$	160,741			$	115,554			$	505,476			$	(700,034	)
Comprehensive income (loss)
Net income (loss)		$	176,146			$	124,185			$	536,287			$	(682,771	)
Change in currency translation adjustment			(19,157	)			6,303				(1,950	)			44,084
Change in other accumulated comprehensive income (loss), net of tax			1,055				(1,920	)			(56	)			(2,155	)
Comprehensive income (loss)		$	158,044			$	128,568			$	534,281			$	(640,842	)
Per share data
Net income (loss) per common share:
Basic net income (loss)		$	2.52			$	1.71			$	7.82			$	(10.32	)
Diluted net income (loss)		$	2.50			$	1.69			$	7.76			$	(10.32	)
Weighted average number of common shares outstanding			63,816,027				67,628,052				64,610,127				67,811,366
Weighted average number of common shares and common share equivalents outstanding			64,423,036				68,442,300				65,132,928				67,811,366
Dividends declared per common share		$	0.62			$	0.60			$	1.24			$	1.15

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

		For the six months ended June 30, 2012				For the six months ended June 30, 2011
Common shares
Balance at beginning of period		$	84,767			$	84,033
Issuance of common shares			375				536
Balance at end of period			85,142				84,569
Preferred shares
Balance at beginning of period			35,750				20,800
Issuance of preferred shares			—				14,950
Balance at end of period			35,750				35,750
Additional paid-in capital
Balance at beginning of period			3,803,796				3,419,864
Issuance of common shares			28,125				25,421
Issuance of preferred shares			—				346,772
Balance at end of period			3,831,921				3,792,057
Accumulated other comprehensive (loss) income
Balance at beginning of period			(12,644	)			4,056
Change in currency translation adjustment			(1,950	)			44,084
Change in other accumulated comprehensive loss			(56	)			(2,155	)
Balance at end of period			(14,650	)			45,985
Retained earnings
Balance at beginning of period			4,035,103				4,761,178
Net income (loss)			536,287				(682,771	)
Dividends on common shares			(79,924	)			(77,746	)
Dividends on preferred shares			(30,811	)			(17,263	)
Balance at end of period			4,460,655				3,983,398
Common shares held in treasury
Balance at beginning of period			(1,479,230	)			(1,083,012	)
Repurchase of common shares			(221,995	)			(226,703	)
Balance at end of period			(1,701,225	)			(1,309,715	)
Total shareholders’ equity		$	6,697,593			$	6,632,044

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

 

		For the six months ended June 30, 2012				For the six months ended June 30, 2011
Cash flows from operating activities
Net income (loss)		$	536,287			$	(682,771	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of net premium on investments			64,054				37,494
Amortization of intangible assets			17,786				17,992
Net realized and unrealized investment (gains) losses			(230,867	)			34,000
Changes in:
Reinsurance balances, net			(281,652	)			(361,501	)
Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable			33,925				11,481
Funds held by reinsured companies and funds held – directly managed			36,609				552,361
Deferred acquisition costs			(81,990	)			(31,484	)
Net tax assets and liabilities			50,431				(32,493	)
Unpaid losses and loss expenses including life policy benefits			(494,083	)			853,057
Unearned premiums			528,623				354,853
Other net changes in operating assets and liabilities			3,445				(10,651	)
Net cash provided by operating activities			182,568				742,338
Cash flows from investing activities
Sales of fixed maturities			3,624,663				2,713,137
Redemptions of fixed maturities			512,544				801,285
Purchases of fixed maturities			(3,797,073	)			(4,766,381	)
Sales and redemptions of short-term investments			52,804				76,061
Purchases of short-term investments			(42,046	)			(240,207	)
Sales of equities			428,226				457,170
Purchases of equities			(471,158	)			(330,323	)
Other, net			16,116				(17,820	)
Net cash provided by (used in) investing activities			324,076				(1,307,078	)
Cash flows from financing activities
Cash dividends paid to shareholders			(110,735	)			(95,009	)
Net proceeds from issuance of preferred shares			—				361,722
Repurchase of common shares			(221,995	)			(244,222	)
Issuance of common shares			16,036				13,125
Net cash (used in) provided by financing activities			(316,694	)			35,616
Effect of foreign exchange rate changes on cash			(19,789	)			24,882
Increase (decrease) in cash and cash equivalents			170,161				(504,242	)
Cash and cash equivalents—beginning of period			1,342,257				2,111,084
Cash and cash equivalents—end of period		$	1,512,418			$	1,606,842
Supplemental cash flow information:
Taxes paid		$	77,278			$	103,965
Interest paid		$	24,630			$	24,630

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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PartnerRe Ltd.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

PartnerRe Ltd. (the Company) provides reinsurance on a worldwide basis through its principal wholly-owned subsidiaries, including Partner Reinsurance Company Ltd., Partner Reinsurance Europe plc and Partner Reinsurance Company of the U.S. Risks reinsured include, but are not limited to, property, casualty, motor, agriculture, aviation/space, catastrophe, credit/surety, engineering, energy, marine, specialty property, specialty casualty, multiline and other lines, mortality, longevity and health and alternative risk products. The Company’s alternative risk products include weather and credit protection to financial, industrial and service companies on a worldwide basis.

2. Significant Accounting Policies

The Company’s Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The Unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

The preparation of financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While Management believes that the amounts included in the Unaudited Condensed Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:

 

•

Unpaid losses and loss expenses;

 

•

Policy benefits for life and annuity contracts;

 

•

Gross and net premiums written and net premiums earned;

 

•

Recoverability of deferred acquisition costs;

 

•

Recoverability of deferred tax assets;

 

•

Valuation of goodwill and intangible assets; and

 

•

Valuation of certain assets and derivative financial instruments that are measured using significant unobservable inputs.

In the opinion of Management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. As the Company’s reinsurance operations are exposed to low-frequency, high-severity risk events, some of which are seasonal, results for certain interim periods may include unusually low loss experience, while results for other interim periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods are not necessarily indicative of results for the full year. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011.

3. New Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board issued new accounting guidance, which amends the existing guidance, related to impairment testing of indefinite-lived intangible assets. The amendments allow the option of performing a qualitative impairment assessment before calculating the fair value of the intangible assets, which could, depending on the results of the assessment, eliminate the need for further impairment testing. The guidance is effective for interim and annual periods beginning after September 15, 2012 with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on its consolidated shareholders’ equity or net income.

4. Fair Value

(a) Fair Value of Financial Instrument Assets

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement.

 

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The Company determines the appropriate level in the hierarchy for each financial instrument that it measures at fair value. In determining fair value, the Company uses various valuation approaches, including market, income and cost approaches. The hierarchy is broken down into three levels based on the observability of inputs as follows:

 

•

Level 1 inputs—Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

The Company’s financial instruments that it measures at fair value using Level 1 inputs generally include: equities listed on a major exchange, exchange traded funds and exchange traded derivatives, such as futures and weather derivatives that are actively traded.

 

•

Level 2 inputs—Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and significant directly or indirectly observable inputs, other than quoted prices, used in industry accepted models.

The Company’s financial instruments that it measures at fair value using Level 2 inputs generally include: U.S. Government issued bonds; U.S. Government sponsored enterprises bonds; U.S. state, territory and municipal entities bonds; Non-U.S. sovereign government, supranational and government related bonds consisting primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations; investment grade and high yield corporate bonds; catastrophe bonds; mortality bonds; asset-backed securities; mortgage-backed securities; certain equities traded on foreign exchanges; certain fixed income mutual funds; foreign exchange forward contracts; over-the-counter derivatives such as foreign currency option contracts, non-exchange traded futures, credit default swaps, total return swaps, interest rate swaps and to-be-announced mortgage-backed securities (TBAs).

 

•

Level 3 inputs—Unobservable inputs.

The Company’s financial instruments that it measures at fair value using Level 3 inputs generally include: inactively traded fixed maturities including U.S. state, territory and municipal bonds; privately issued corporate securities; special purpose financing asset-backed bonds; unlisted equities; real estate and certain other mutual fund investments; credit-linked notes; inactively traded weather derivatives; notes, annuities, residuals and loans receivable and longevity and other total return swaps.

 

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The Company’s financial instruments measured at fair value include investments classified as trading securities, certain other invested assets and the segregated investment portfolio underlying the funds held – directly managed account. At June 30, 2012 and December 31, 2011, the Company’s financial instruments measured at fair value were classified between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):

 

June 30, 2012		Quoted prices  in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Fixed maturities
U.S. government and government sponsored enterprises		$	—			$	944,080			$	—			$	944,080
U.S. states, territories and municipalities			—				10,235				117,235				127,470
Non-U.S. sovereign government, supranational and government related			—				2,650,832				—				2,650,832
Corporate			—				5,701,490				111,070				5,812,560
Asset-backed securities			—				382,618				290,371				672,989
Residential mortgage-backed securities			—				3,337,721				—				3,337,721
Other mortgage-backed securities			—				74,296				—				74,296
Fixed maturities		$	—			$	13,101,272			$	518,676			$	13,619,948
Short-term investments		$	—			$	31,984			$	—			$	31,984
Equities
Consumer noncyclical		$	130,545			$	—			$	—			$	130,545
Finance			78,442				—				19,422				97,864
Technology			79,379				—				7,192				86,571
Energy			76,620				—				—				76,620
Communications			62,599				—				—				62,599
Insurance			61,521				—				—				61,521
Industrials			59,565				—				—				59,565
Consumer cyclical			54,851				—				—				54,851
Other			82,687				—				—				82,687
Mutual funds and exchange traded funds			85,473				244,961				6,760				337,194
Equities		$	771,682			$	244,961			$	33,374			$	1,050,017
Other invested assets
Derivative assets
Foreign exchange forward contracts		$	—			$	2,483			$	—			$	2,483
Foreign currency option contracts			—				182				—				182
Futures contracts			71				1,748				—				1,819
Credit default swaps (protection purchased)			—				22				—				22
Credit default swaps (assumed risks)			—				324				—				324
Insurance-linked securities			—				—				261				261
Total return swaps			—				—				7,115				7,115
TBAs			—				674				—				674
Other assets			—				—				72,529				72,529
Derivative liabilities
Foreign exchange forward contracts			—				(5,683	)			—				(5,683	)
Foreign currency option contracts			—				(2,021	)			—				(2,021	)
Futures contracts			(8,149	)			—				—				(8,149	)
Credit default swaps (protection purchased)			—				(1,142	)			—				(1,142	)
Credit default swaps (assumed risks)			—				(79	)			—				(79	)
Insurance-linked securities			—				—				(5,423	)			(5,423	)
Total return swaps			—				—				(746	)			(746	)
Interest rate swaps			—				(8,194	)			—				(8,194	)
Other invested assets		$	(8,078	)		$	(11,686	)		$	73,736			$	53,972
Funds held – directly managed
U.S. government and government sponsored enterprises		$	—			$	367,515			$	—			$	367,515
U.S. states, territories and municipalities			—				—				321				321
Non-U.S. sovereign government, supranational and government related			—				276,288				—				276,288
Corporate			—				419,054				—				419,054
Short-term investments			—				10,546				—				10,546
Other invested assets			—				—				15,076				15,076
Funds held – directly managed		$	—			$	1,073,403			$	15,397			$	1,088,800
Total		$	763,604			$	14,439,934			$	641,183			$	15,844,721

 

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December 31, 2011		Quoted prices in active  markets for identical assets (Level 1)				Significant other observable  inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Fixed maturities
U.S. government and government sponsored enterprises		$	—			$	1,115,777			$	—			$	1,115,777
U.S. states, territories and municipalities			—				12,269				111,415				123,684
Non-U.S. sovereign government, supranational and government related			—				2,964,091				—				2,964,091
Corporate			—				5,635,297				111,700				5,746,997
Asset-backed securities			—				376,384				257,415				633,799
Residential mortgage-backed securities			—				3,282,901				—				3,282,901
Other mortgage-backed securities			—				74,580				—				74,580
Fixed maturities		$	—			$	13,461,299			$	480,530			$	13,941,829
Short-term investments		$	—			$	42,571			$	—			$	42,571
Equities
Consumer noncyclical		$	124,697			$	154			$	—			$	124,851
Energy			83,403				858				—				84,261
Finance			69,722				191				9,670				79,583
Technology			74,729				—				—				74,729
Communications			64,036				44				—				64,080
Industrials			58,254				—				—				58,254
Insurance			58,017				—				—				58,017
Consumer cyclical			52,305				108				—				52,413
Other			69,457				239				—				69,696
Mutual funds and exchange traded funds			35,285				237,027				6,495				278,807
Equities		$	689,905			$	238,621			$	16,165			$	944,691
Other invested assets
Derivative assets
Foreign exchange forward contracts		$	—			$	7,865			$	—			$	7,865
Foreign currency option contracts			—				1,074				—				1,074
Futures contracts			13,524				48				—				13,572
Credit default swaps (protection purchased)			—				92				—				92
Credit default swaps (assumed risks)			—				246				—				246
Total return swaps			—				443				7,230				7,673
TBAs			—				747				—				747
Other assets			—				—				91,405				91,405
Derivative liabilities
Foreign exchange forward contracts			—				(5,816	)			—				(5,816	)
Foreign currency option contracts			—				(321	)			—				(321	)
Futures contracts			(12,905	)			(1,268	)			—				(14,173	)
Credit default swaps (protection purchased)			—				(1,285	)			—				(1,285	)
Credit default swaps (assumed risks)			—				(772	)			—				(772	)
Insurance-linked securities			—				—				(968	)			(968	)
Total return swaps			—				—				(640	)			(640	)
Interest rate swaps			—				(7,992	)			—				(7,992	)
TBAs			—				(58	)			—				(58	)
Other liabilities			—				(137	)			—				(137	)
Other invested assets		$	619			$	(7,134	)		$	97,027			$	90,512
Funds held – directly managed
U.S. government and government sponsored enterprises		$	—			$	268,539			$	—			$	268,539
U.S. states, territories and municipalities			—				—				334				334
Non-U.S. sovereign government, supranational and government related			—				274,665				—				274,665
Corporate			—				480,485				—				480,485
Short-term investments			—				18,097				—				18,097
Other invested assets			—				—				15,433				15,433
Funds held – directly managed		$	—			$	1,041,786			$	15,767			$	1,057,553
Total		$	690,524			$	14,777,143			$	609,489			$	16,077,156

 

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At June 30, 2012 and December 31, 2011, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $276.0 million and $267.6 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting, equity method of accounting or investment company accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $1,088.8 million and $1,057.6 million at June 30, 2012 and December 31, 2011, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $64.5 million and $176.3 million, respectively, and accrued investment income of $12.6 million and $13.7 million, respectively. At June 30, 2012 and December 31, 2011, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $67.1 million and $20.4 million, respectively, which primarily related to other assets and liabilities held by Colisée Re related to the underlying business, which are carried at cost (see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011).

At June 30, 2012 and December 31, 2011, substantially all of the accrued investment income in the Unaudited Condensed Consolidated Balance Sheets related to the Company’s investments and the investments underlying the funds held – directly managed account for which the fair value option was elected.

During the three months and six months ended June 30, 2012, certain equities traded on foreign exchanges with a fair value of $1.1 million were transferred from Level 2 to Level 1 given they are trading in an active market at June 30, 2012. During the three months and six months ended June 30, 2011, there were no significant transfers between Level 1 and Level 2.

The Company’s policy is to recognize transfers between the hierarchy levels at the beginning of the period.

Disclosures about the fair value of financial instruments that the Company does not measure at fair value exclude insurance contracts and certain other financial instruments. At June 30, 2012 and December 31, 2011, the fair values of financial instrument assets recorded in the Unaudited Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended June 30, 2012 and 2011 (in thousands of U.S. dollars):

 

For the three months ended June 30, 2012		Balance at beginning of period				Realized  and unrealized investment gains (losses) included in net income				Purchases and issuances  (1)				Sales and settlements				Net transfers (out of)/  into Level 3				Balance at end of period				Change in unrealized investment gains (losses) relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities		$	115,580			$	1,744			$	—			$	(89	)		$	—			$	117,235			$	1,744
Corporate			111,951				(897	)			16				—				—				111,070				(897	)
Asset-backed securities			264,456				9,512				32,470				(16,067	)			—				290,371				9,296
Fixed maturities		$	491,987			$	10,359			$	32,486			$	(16,156	)		$	—			$	518,676			$	10,143
Equities
Finance		$	12,730			$	(108	)		$	6,800			$	—			$	—			$	19,422			$	(108	)
Technology			—				—				7,192				—				—				7,192				—
Mutual funds and exchange traded funds			6,649				111				—				—				—				6,760				111
Equities		$	19,379			$	3			$	13,992			$	—			$	—			$	33,374			$	3
Other invested assets
Derivatives, net		$	2,585			$	742			$	(2,120	)		$	—			$	—			$	1,207			$	(99	)
Other assets			86,535				4,989				8,319				(27,314	)			—				72,529				(2,617	)
Other invested assets		$	89,120				5,731			$	6,199			$	(27,314	)		$	—			$	73,736			$	(2,716	)
Funds held – directly managed
U.S. states, territories and municipalities		$	329			$	(8	)		$	—			$	—			$	—			$	321			$	(8	)
Other invested assets			17,683				(2,607	)			—				—				—				15,076				(2,607	)
Funds held – directly managed		$	18,012			$	(2,615	)		$	—			$	—			$	—			$	15,397			$	(2,615	)
Total		$	618,498			$	13,478			$	52,677			$	(43,470	)		$	—			$	641,183			$	4,815

 

(1)	Purchases and issuances of derivatives includes issuances of $2.4 million.

 

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For the three months ended June 30, 2011		Balance at beginning of period				Realized  and unrealized investment gains  (losses) included in net income				Purchases and issuances (1)				Sales and settlements				Net transfers (out of)/ into Level 3				Balance at end of period				Change  in unrealized investment gains  (losses) relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities		$	55,929			$	819			$	30,064			$	(30	)		$	—			$	86,782			$	819
Corporate			115,107				2,049				84				(812	)			—				116,428				2,049
Asset-backed securities			262,408				7,707				47,130				(55,402	)			—				261,843				(2,660	)
Residential mortgage-backed securities			4,301				846				—				(5,147	)			—				—				—
Other mortgage-backed securities			576				(191	)			—				(384	)			—				1				(166	)
Fixed maturities		$	438,321			$	11,230			$	77,278			$	(61,775	)		$	—			$	465,054			$	42
Short-term investments		$	1,204			$	(730	)		$	2,449			$	—			$	—			$	2,923			$	(730	)
Equities
Finance		$	161			$	2			$	—			$	—			$	—			$	163			$	2
Mutual funds and exchange traded funds			41,451				594				—				(35,503	)			—				6,542				(804	)
Equities		$	41,612			$	596			$	—			$	(35,503	)		$	—			$	6,705			$	(802	)
Other invested assets
Derivatives, net		$	(17,042	)		$	322			$	(4,815	)		$	—			$	—			$	(21,535	)		$	234
Other assets			84,662				(1,303	)			3,568				(12,909	)			—				74,018				(1,016	)
Other invested assets		$	67,620			$	(981	)		$	(1,247	)		$	(12,909	)		$	—			$	52,483			$	(782	)
Funds held – directly managed
U.S. states, territories and municipalities		$	366			$	(11	)		$	—			$	—			$	—			$	355			$	(11	)
Other invested assets			22,456				(736	)			—				—				—				21,720				(736	)
Funds held – directly managed		$	22,822			$	(747	)		$	—			$	—			$	—			$	22,075			$	(747	)
Total		$	571,579			$	9,368			$	78,480			$	(110,187	)		$	—			$	549,240			$	(3,019	)

 

(1)	Purchases and issuances of derivatives includes issuances of $5.1 million.

 

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The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the six months ended June 30, 2012 and 2011 (in thousands of U.S. dollars):

 

For the six months ended June 30, 2012		Balance at beginning of period				Realized and unrealized investment gains (losses) included in net income				Purchases and issuances  (1)				Sales and settlements				Net transfers (out of)/into Level 3				Balance  at end of period				Change in unrealized investment gains (losses) relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities		$	111,415			$	1,282			$	4,700			$	(162	)		$	—			$	117,235			$	1,282
Corporate			111,700				(570	)			64				(124	)			—				111,070				(570	)
Asset-backed securities			257,415				8,193				82,590				(57,827	)			—				290,371				8,032
Fixed maturities		$	480,530			$	8,905			$	87,354			$	(58,113	)		$	—			$	518,676			$	8,744
Equities
Finance		$	9,670			$	2,952			$	6,800			$	—			$	—			$	19,422			$	2,952
Technology			—				—				7,192				—				—				7,192				—
Mutual funds and exchange traded funds			6,495				265				—				—				—				6,760				265
Equities		$	16,165			$	3,217			$	13,992			$	—			$	—			$	33,374			$	3,217
Other invested assets
Derivatives, net		$	5,622			$	1,005			$	(5,420	)		$	—			$	—			$	1,207			$	164
Other assets			91,405				8,818				38,048				(65,742	)			—				72,529				3,107
Other invested assets		$	97,027			$	9,823			$	32,628			$	(65,742	)		$	—			$	73,736			$	3,271
Funds held – directly managed
U.S. states, territories and municipalities		$	334			$	(13	)		$	—			$	—			$	—			$	321			$	(13	)
Other invested assets			15,433				(357	)			—				—				—				15,076				(357	)
Funds held – directly managed		$	15,767			$	(370	)		$	—			$	—			$	—			$	15,397			$	(370	)
Total		$	609,489			$	21,575			$	133,974			$	(123,855	)		$	—			$	641,183			$	14,862
(1)    Purchases and issuances of derivatives includes issuances of $5.7 million.
For the six months ended June 30, 2011		Balance at beginning of period				Realized and unrealized investment gains (losses) included in net loss				Purchases and issuances  (1)				Sales and settlements				Net transfers into Level 3				Balance  at end of period				Change in unrealized investment gains (losses) relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities		$	55,124			$	1,624			$	30,064			$	(30	)		$	—			$	86,782			$	1,624
Corporate			76,982				(37,066	)			40,878				(4,546	)			40,180				116,428				2,368
Asset-backed securities			213,139				10,678				101,644				(63,618	)			—				261,843				4,257
Residential mortgage-backed securities			—				1,385				4,212				(5,597	)			—				—				—
Other mortgage-backed securities			290				(224	)			408				(473	)			—				1				(203	)
Fixed maturities		$	345,535			$	(23,603	)		$	177,206			$	(74,264	)		$	40,180			$	465,054			$	8,046
Short-term investments		$	—			$	(1,069	)		$	3,992			$	—			$	—			$	2,923			$	(1,069	)
Equities
Finance		$	2,486			$	239			$	—			$	(2,562	)		$	—			$	163			$	13
Mutual funds and exchange traded funds			40,927				1,242				—				(35,627	)			—				6,542				(382	)
Equities		$	43,413			$	1,481			$	—			$	(38,189	)		$	—			$	6,705			$	(369	)
Other invested assets
Derivatives, net		$	(7,954	)		$	(8,803	)		$	(4,778	)		$	—			$	—			$	(21,535	)		$	(8,893	)
Other assets			86,278				(3,207	)			6,548				(15,601	)			—				74,018				(2,497	)
Other invested assets		$	78,324			$	(12,010	)		$	1,770			$	(15,601	)		$	—			$	52,483			$	(11,390	)
Funds held – directly managed
U.S. states, territories and municipalities		$	368			$	(13	)		$	—			$	—			$	—			$	355			$	(13	)
Mortgage/asset-backed securities			12,118				(150	)			—				(11,968	)			—				—				—
Other invested assets			20,528				1,192				—				—				—				21,720				1,192
Funds held – directly managed		$	33,014			$	1,029			$	—			$	(11,968	)		$	—			$	22,075			$	1,179
Total		$	500,286			$	(34,172	)		$	182,968			$	(140,022	)		$	40,180			$	549,240			$	(3,603	)

 

(1)	Purchases and issuances of derivatives includes issuances of $5.1 million.

 

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During the six months ended June 30, 2011, a catastrophe bond (included within corporate fixed maturities) with a fair value of $40.2 million was transferred from Level 2 into Level 3. The transfer into Level 3 was due to the lack of observable market inputs at March 31, 2011, leading the Company to apply inputs that were not directly observable. The catastrophe bond matured during the three months ended June 30, 2011.

The following table shows the significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at June 30, 2012 (in thousands of U.S. dollars):

 

June 30, 2012

Fair Value

Valuation Techniques

Unobservable Inputs

Range (Weighted average)

Fixed maturities

U.S. states, territories and municipalities

$

117,235

Discounted cash flow

Credit spreads

3.1% - 4.7% (3.6%)

Corporate

9,838

Discounted cash flow

Discount rate

8.8% - 15.0% (13.0%)

Asset-backed securities – interest only

13,483

Discounted cash flow

Credit spreads

7.5% - 12.3% (9.8%)

Prepayment speed

20.0% (20.0%)

Asset-backed securities – other

276,888

Discounted cash flow

Credit spreads

4.0% - 12.7% (6.8%)

Equities

Finance

19,422

Market comparable companies

Comparable return

-0.8% - 0.0% (-0.5%)

Technology

7,192

Market comparable companies

Comparable return

0.0% (0.0%)

Other invested assets

Total return swaps

6,369

Discounted cash flow

Credit spreads

2.9% - 4.6% (3.7%)

Notes and loan receivables

44,303

Discounted cash flow

Credit spreads

13.4% -19.5% (16.1%)

Gross revenue/fair value

1.5 - 2.0 (1.9)

Annuities and residuals

27,226

Discounted cash flow

Credit spreads

5.4% - 11.0% (8.7%)

Prepayment speed

0.0% - 5.0% (3.0%)

Constant default rate

2.3% - 40.0% (17.4%)

Funds held – directly managed

Other invested assets

15,076

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

-52.4% - 0.0% (-16.5%)

The table above does not include financial instruments that are measured using unobservable inputs (Level 3) where the unobservable inputs were obtained from external sources and used without adjustment. These financial instruments include mortality bonds (included within corporate fixed maturities), certain mutual fund investments (included within equities), and certain insurance-linked securities and private equity investments (included within other invested assets).

The Company has established a Valuation Committee which is responsible for determining the Company’s invested asset valuation policy and related procedures, for reviewing significant changes in the fair value measurements of securities classified as Level 3 from period to period, and for reviewing in accordance with the invested asset valuation policy an independent internal peer analysis that is performed on the fair value measurements of all securities that are classified as Level 3. The Valuation Committee is comprised of members of the Company’s senior management team and meets on a quarterly basis. The Company’s invested asset valuation policy is monitored by the Company’s Audit Committee of the Board of Directors (Board) and approved annually by the Company’s Risk and Finance Committee of the Board.

 

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Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months and six months ended June 30, 2012 and 2011, respectively, were as follows (in thousands of U.S. dollars):

 

		For the three months ended June 30, 2012				For the three months ended June 30, 2011				For the six months ended June 30, 2012				For the six months ended June 30, 2011
Fixed maturities and short-term investments		$	32,995			$	131,101			$	80,815			$	(9,767	)
Equities			(32,963	)			(30,197	)			17,808				(14,079	)
Other invested assets			13,610				(3,689	)			18,160				(3,333	)
Funds held – directly managed			1,675				8,082				8,791				(3,896	)
Total		$	15,317			$	105,297			$	125,574			$	(31,075	)

All of the above changes in fair value are included in the Unaudited Condensed Consolidated Statements of Operations under the caption Net realized and unrealized investment gains (losses).

The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument recorded in the Unaudited Condensed Consolidated Balance Sheets. There have been no material changes in the Company’s valuation techniques during the periods presented.

Fixed maturities

 

•

U.S. government and government sponsored enterprises—U.S. government and government sponsored enterprises securities consist primarily of bonds issued by the U.S. Treasury, corporate debt securities issued by the Federal National Mortgage Association, the Federal Home Loan Bank and the Private Export Funding Corporation. These securities are generally priced by independent pricing services. The independent pricing services may use actual transaction prices for securities that have been actively traded. For securities that have not been actively traded, each pricing source has its own proprietary method to determine the fair value, which may incorporate option adjusted spreads (OAS), interest rate data and market news. The Company generally classifies these securities in Level 2.

 

•

U.S. states, territories and municipalities—U.S. states, territories and municipalities securities consist primarily of bonds issued by U.S. states, territories and municipalities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2. Certain of the bonds that are issued by municipal housing authorities are not actively traded and are priced based on internal models using unobservable inputs. Accordingly, the Company classifies these securities in Level 3. The significant unobservable input used in the fair value measurement of these U.S. states, territories and municipalities securities classified as Level 3 is credit spreads. A significant increase (decrease) in credit spreads in isolation could result in a significantly lower (higher) fair value measurement.

 

•

Non-U.S. sovereign government, supranational and government related—Non-U.S. sovereign government, supranational and government related securities consist primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2.

 

•

Corporate—Corporate securities consist primarily of bonds issued by U.S. and foreign corporations covering a variety of industries and issuing countries. These securities are generally priced by independent pricing services and brokers. The pricing provider incorporates information including credit spreads, interest rate data and market news into the valuation of each security. The Company generally classifies these securities in Level 2. When a corporate security is inactively traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3. The significant unobservable input used in the fair value measurement of corporate securities classified as Level 3 is discount rates. A significant increase (decrease) in discount rates in isolation could result in a significantly lower (higher) fair value measurement.

 

•

Asset-backed securities—Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are backed by student loans, automobile loans, credit card receivables, equipment leases, and special purpose financing. With the exception of special purpose financing, these asset-backed securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. Special purpose financing securities are generally inactively traded and are priced based on valuation models using unobservable inputs. The Company generally classifies these securities in Level 3. The significant unobservable inputs used in the fair value measurement of these asset-backed securities classified as Level 3 are prepayment speeds and credit spreads. Significant increases (decreases) in these prepayment speeds and credit spreads in isolation could result in a significantly lower (higher) fair value measurement.

 

•

Residential mortgage-backed securities—Residential mortgage-backed securities primarily consist of bonds issued by the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, as well as private, non-agency issuers. With the exception of private, non-agency issuers, these residential mortgage-backed securities are generally priced by independent pricing services and brokers. When current market trades are not available, the pricing provider will employ proprietary models with observable inputs including other trade information, prepayment speeds, yield curves and credit spreads. The Company generally classifies these securities in Level 2.

 

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•

Other mortgage-backed securities—Other mortgage-backed securities primarily consist of commercial mortgage-backed securities. These securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2.

In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not been actively traded involve the use of “matrix pricing” in which the independent pricing source applies the credit spread for a comparable security that has traded recently to the current yield curve to determine a reasonable fair value. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. When fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Most of the Company’s fixed maturities are priced from the pricing services or dealer quotes. The Company will typically not make adjustments to prices received from pricing services or dealer quotes; however, in instances where the quoted external price for a security uses significant unobservable inputs, the Company will classify that security as Level 3. The methods used to develop and substantiate the unobservable inputs used are based on the Company’s valuation policy and are dependent upon the facts and circumstances surrounding the individual investments which are generally transaction specific. The Company’s inactively traded fixed maturities are classified as Level 3. For all fixed maturity investments, the bid price is used for estimating fair value.

To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. The Company also reviews an internally generated fixed maturity price validation report which converts prices received for fixed maturity investments from the independent pricing sources and from broker-dealers quotes and plots OAS and duration on a sector and rating basis. The OAS is calculated using established algorithms developed by an independent risk analytics platform vendor. The OAS on the fixed maturity price validation report are compared for securities in a similar sector and having a similar rating, and outliers are identified and investigated for price reasonableness. In addition, the Company completes quantitative analyses to compare the performance of each fixed maturity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.

Short term investments

Short term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2.

Equities

Equity securities include U.S. and foreign common and preferred stocks, mutual funds and exchange traded funds. Equities and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted prices in active markets. Equities classified as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on a daily basis, and common stocks traded in inactive markets. Equities classified as Level 3 are generally mutual funds invested in securities other than the common stock of publicly traded companies, where the net asset value is not provided on a daily basis, and inactively traded common stocks. The significant unobservable input used in the fair value measurement of inactively traded common stocks classified as Level 3 is market return information from comparable publicly traded companies in the same industry, in a similar region and of a similar size. Significant increases (decreases) in the market return information could result in a significantly higher (lower) fair value measurement.

To validate prices, the Company completes quantitative analyses to compare the performance of each equity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.

Other invested assets

The Company’s exchange traded derivatives, such as futures and certain weather derivatives, are generally classified as Level 1 as their fair values are quoted prices in active markets. The Company’s foreign exchange forward contracts, foreign currency option contracts, non-exchange traded futures, credit default swaps, total return swaps, interest rate swaps and TBAs are generally classified as Level 2 within the fair value hierarchy and are priced by independent pricing services.

Included in the Company’s Level 3 classification, in general, are credit-linked notes, certain inactively traded weather derivatives, notes, annuities, residuals and loans receivable and longevity and other total return swaps. For Level 3 instruments, the Company will generally either (i) receive a price based on a manager’s or trustee’s valuation for the asset; or (ii) develop an internal discounted cash flow model to measure fair value. Where the Company receives prices from the manager or trustee, these prices are based on the manager’s or trustee’s estimate of fair value for the assets and are generally audited on an annual basis. Where the Company develops its own discounted cash flow models, the inputs will be specific to the asset in question, based on appropriate

 

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historical information, adjusted as necessary, and using appropriate discount rates. The significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 include credit spreads, prepayment speeds, constant default rates and gross revenue to fair value ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) fair value measurement. As part of the Company’s modeling to determine the fair value of an investment, the Company considers counterparty credit risk as an input to the model, however, the majority of the Company’s counterparties are investment grade rated institutions and the failure of any one counterparty would not have a significant impact on the Company’s consolidated financial statements.

To validate prices, the Company will compare them to benchmarks, where appropriate, or to the business results generally within that asset class and specifically to those particular assets.

Funds held – directly managed

The segregated investment portfolio underlying the funds held – directly managed account is comprised of fixed maturities, short-term investments and other invested assets which are fair valued on a basis consistent with the methods described above. Substantially all fixed maturities and short-term investments within the funds held – directly managed account are classified as Level 2 within the fair value hierarchy.

The other invested assets within the segregated investment portfolio underlying the funds held – directly managed account, which are classified as Level 3 investments, are primarily real estate mutual fund investments carried at fair value. For the real estate mutual fund investments, the Company receives a price based on the real estate fund manager’s valuation for the asset and further adjusts the price, if necessary, based on appropriate current information on the real estate market. Significant increases (decreases) to the adjustment to the real estate fund manager’s valuation could result in a significantly lower (higher) fair value measurement.

To validate prices within the segregated investment portfolio underlying the funds held – directly managed account, the Company utilizes the methods described above.

(b) Fair Value of Financial Instrument Liabilities

At June 30, 2012 and December 31, 2011, the fair values of financial instrument liabilities recorded in the Unaudited Condensed Consolidated Balance Sheets approximate their carrying values, with the exception of the debt related to senior notes (Senior Notes) and the debt related to capital efficient notes (CENts).

The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument liability recorded in the Unaudited Condensed Consolidated Balance Sheets for which the Company does not measure that instrument at fair value:

 

•

the fair value of the Senior Notes was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $250 million from PartnerRe Finance A LLC and $500 million from PartnerRe Finance B LLC at June 30, 2012 and December 31, 2011; and

 

•

the fair value of the CENts was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding from PartnerRe Finance II Inc. of $63 million at June 30, 2012 and December 31, 2011.

The carrying values and fair values of the Senior Notes and CENts at June 30, 2012 and December 31, 2011 were as follows (in thousands of U.S. dollars):

 

		June 30, 2012								December 31, 2011
		Carrying Value				Fair Value				Carrying Value				Fair Value
Debt related to senior notes (1)		$	750,000			$	823,229			$	750,000			$	781,449
Debt related to capital efficient notes (2)			63,384				59,898				63,384				55,678

 

(1)

PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the Senior Notes, do not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $750 million in its Unaudited Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011.

(2)	PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Unaudited Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011.

At June 30, 2012, the Company’s debt related to the Senior Notes and CENts was classified as Level 2 in the fair value hierarchy.

Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments.

 

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5. Derivatives

The Company’s derivative instruments are recorded in the Unaudited Condensed Consolidated Balance Sheets at fair value, with changes in fair value mainly recognized in either net foreign exchange gains and losses or net realized and unrealized investment gains and losses in the Unaudited Condensed Consolidated Statements of Operations or accumulated other comprehensive income or loss in the Unaudited Condensed Consolidated Balance Sheets, depending on the nature of the derivative instrument. The Company’s objectives for holding or issuing these derivatives are as follows:

Foreign Exchange Forward Contracts

The Company utilizes foreign exchange forward contracts as part of its overall currency risk management and investment strategies. From time to time, the Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and branches whose functional currency is other than the U.S. dollar.

Foreign Currency Option Contracts and Futures Contracts

The Company utilizes foreign currency option contracts to mitigate foreign currency risk. The Company uses exchange traded treasury note futures contracts to manage portfolio duration and commodity and equity futures to hedge certain investments. The Company also uses commodities futures to replicate the investment return on certain benchmarked commodities.

Credit Default Swaps

The Company purchases protection through credit default swaps to mitigate the risk associated with its underwriting operations, most notably in the credit/surety line, and to manage market exposures.

The Company also assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the underlying issuer, no issuer was in default at June 30, 2012. The counterparties on the Company’s assumed credit default swaps are all investment grade rated financial institutions.

Insurance-Linked Securities

The Company has entered into various weather derivatives, weather futures and longevity total return swaps for which the underlying risks reference parametric weather risks for the weather derivatives, weather futures and longevity risk for the longevity total return swaps.

Total Return and Interest Rate Swaps and Interest Rate Derivatives

The Company has entered into total return swaps referencing various project, investments and principal finance obligations. The Company has also entered into interest rate swaps to mitigate the interest rate risk on certain of the total return swaps. The Company also uses other interest rate derivatives to mitigate exposure to interest rate volatility.

To-Be-Announced Mortgage-Backed Securities

The Company utilizes TBAs as part of its overall investment strategy and to enhance investment performance.

 

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The fair values and the related notional values of derivatives included in the Company’s Unaudited Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 were as follows (in thousands of U.S. dollars):

 

		Asset				Liability				Net derivatives
June 30, 2012		derivatives at fair value				derivatives at fair value				Net notional exposure				Fair value
Foreign exchange forward contracts		$	2,483			$	(5,683	)		$	2,199,422			$	(3,200	)
Foreign currency option contracts			182				(2,021	)			128,000				(1,839	)
Futures contracts			1,819				(8,149	)			2,285,316				(6,330	)
Credit default swaps (protection purchased)			22				(1,142	)			77,459				(1,120	)
Credit default swaps (assumed risks)			324				(79	)			17,500				245
Insurance-linked securities (1)			261				(5,423	)			155,964				(5,162	)
Total return swaps			7,115				(746	)			99,212				6,369
Interest rate swaps (2)			—				(8,194	)			—				(8,194	)
TBAs			674				—				101,000				674
Total derivatives		$	12,880			$	(31,437	)						$	(18,557	)
		Asset				Liability				Net derivatives
December 31, 2011		derivatives at fair value				derivatives at fair value				Net notional exposure				Fair value
Foreign exchange forward contracts		$	7,865			$	(5,816	)		$	2,555,230			$	2,049
Foreign currency option contracts			1,074				(321	)			110,079				753
Futures contracts			13,572				(14,173	)			2,534,995				(601	)
Credit default swaps (protection purchased)			92				(1,285	)			94,961				(1,193	)
Credit default swaps (assumed risks)			246				(772	)			17,500				(526	)
Insurance-linked securities (1)			—				(968	)			136,375				(968	)
Total return swaps			7,673				(640	)			122,230				7,033
Interest rate swaps (2)			—				(7,992	)			—				(7,992	)
TBAs			747				(58	)			104,315				689
Total derivatives		$	31,269			$	(32,025	)						$	(756	)

 

(1)

At June 30, 2012 and December 31, 2011, insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional amount.

(2)	The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps. Accordingly, the notional value of interest rate swaps is not presented separately in the table.

The fair value of all derivatives at June 30, 2012 and December 31, 2011 is recorded in Other invested assets in the Company’s Unaudited Condensed Consolidated Balance Sheets. At June 30, 2012 and December 31, 2011, none of the Company’s derivatives were designated as hedges.

The gains and losses in the Unaudited Condensed Consolidated Statements of Operations for derivatives not designated as hedges for the three months and six months ended June 30, 2012 and 2011 were as follows (in thousands of U.S. dollars):

 

		For the three months ended June 30, 2012				For the three months ended June 30, 2011				For the six months ended June 30, 2012				For the six months ended June 30, 2011
Foreign exchange forward contracts		$	15,829			$	65,250			$	19,710			$	48,234
Foreign currency option contracts			(1,829	)			2,457				1,498				2,381
Total included in net foreign exchange gains and losses		$	14,000			$	67,707			$	21,208			$	50,615
Futures contracts		$	(41,624	)		$	(66,231	)		$	(19,779	)		$	(86,514	)
Credit default swaps (protection purchased)			(14	)			(306	)			(611	)			(551	)
Credit default swaps (assumed risks)			235				770				1,311				1,607
Insurance-linked securities			4,685				(2,546	)			1,226				(9,620	)
Total return swaps			(546	)			(115	)			(469	)			684
Interest rate swaps			(1,165	)			(182	)			(202	)			641
TBAs			3,808				5,625				4,878				6,928
Total included in net realized and unrealized investment gains and losses		$	(34,621	)		$	(62,985	)		$	(13,646	)		$	(86,825	)
Total derivatives		$	(20,621	)		$	4,722			$	7,562			$	(36,210	)

 

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6. Net Income (Loss) per Share

The reconciliation of basic and diluted net income (loss) per share for the three months and six months ended June 30, 2012 and 2011 is as follows (in thousands of U.S. dollars or shares, except per share amounts):

 

		For the three months ended June 30, 2012				For the three months ended June 30, 2011				For the six months ended June 30, 2012				For the six months ended June 30, 2011
Numerator:
Net income (loss)		$	176,146			$	124,185			$	536,287			$	(682,771	)
Less: preferred dividends			(15,405	)			(8,631	)			(30,811	)			(17,263	)
Net income (loss) available to common shareholders		$	160,741			$	115,554			$	505,476			$	(700,034	)
Denominator:
Weighted number of common shares outstanding - basic			63,816.0				67,628.1				64,610.1				67,811.4
Share options and other (1)			607.0				814.2				522.8				—
Weighted average number of common shares and common share equivalents outstanding - diluted			64,423.0				68,442.3				65,132.9				67,811.4
Basic net income (loss) per share		$	2.52			$	1.71			$	7.82			$	(10.32	)
Diluted net income (loss) per share (1)		$	2.50			$	1.69			$	7.76			$	(10.32	)

 

(1)

At June 30, 2012 and 2011, share based awards to purchase 1,512.6 thousand and 1,253.6 thousand common shares, respectively, were excluded from the calculation of diluted weighted average number of common shares and common share equivalents outstanding because their exercise prices were greater than the average market price of the common shares. In addition, dilutive securities, in the form of share options and other, of 958.5 thousand shares were not included in the weighted average number of common shares and common share equivalents outstanding for the purpose of computing the diluted net loss per share because to do so would have been anti-dilutive for the six months ended June 30, 2011.

7. Commitments and Contingencies

(a) Concentration of Credit Risk

Financing receivables

Included in the Company’s Other invested assets are certain notes receivable which meet the definition of financing receivables and are accounted for using the cost method of accounting. These notes receivable are collateralized by commercial or residential property. The Company utilizes a third party consultant to determine the initial investment criteria and to monitor the subsequent performance of the notes receivable. The process undertaken prior to the investment in these notes receivable includes an examination of the underlying collateral. The Company reviews its receivable positions on at least a quarterly basis using actual redemption experience. At June 30, 2012, based on the latest available information, the Company recorded an allowance for credit losses related to these notes receivable of $3.4 million.

The Company monitors the performance of the notes receivable based on the type of underlying collateral and by assigning a “performing” or a “non-performing” indicator of credit quality to each individual receivable. At June 30, 2012, the Company’s notes receivable of $78.5 million were all performing and were collateralized by residential property and commercial property of $51.1 million and $27.4 million, respectively. At December 31, 2011, the Company’s notes receivable of $80.4 million were all performing and were collateralized by residential property and commercial property of $45.9 million and $34.5 million, respectively.

The Company purchased $37.4 million of financing receivables during the three months and six months ended June 30, 2012. The Company purchased financing receivables of $66.0 million during the three months and six months ended June 30, 2011. There were no sales of financing receivables during the three months and six months ended June 30, 2012 and 2011. However, the outstanding balances were reduced by settlements of the underlying debt in all the periods above.

(b) Legal Proceedings

There has been no significant change in legal proceedings at June 30, 2012 compared to December 31, 2011. See Note 18(e) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011.

 

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8. Credit Agreements

In the normal course of its operations, the Company enters into agreements with financial institutions to obtain unsecured and secured credit facilities. These facilities are used primarily for the issuance of letters of credit, although a portion of these facilities may also be used for liquidity purposes.

On March 20, 2012, the Company modified its existing three-year syndicated unsecured credit facility to reduce the available facility from $750 million to $500 million. All other terms, and the access to a revolving line of credit, remained unchanged.

See Note 20 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011 for further information related to the credit facilities available to the Company.

9. Segment Information

The Company monitors the performance of its operations in three segments, Non-life, Life and Corporate and Other as described in Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011. The Non-life segment is further divided into four sub-segments: North America, Global (Non-U.S.) Property and Casualty (Global (Non-U.S.) P&C), Global (Non-U.S.) Specialty and Catastrophe.

Because the Company does not manage its assets by segment, net investment income is not allocated to the Non-life segment. However, because of the interest-sensitive nature of some of the Company’s Life products, net investment income is considered in Management’s assessment of the profitability of the Life segment. The following items are not considered in evaluating the results of the Non-life and Life segments: net realized and unrealized investment gains and losses, interest expense, amortization of intangible assets, net foreign exchange gains and losses, income tax expense or benefit and interest in earnings and losses of equity investments. Segment results are shown before consideration of intercompany transactions.

Management measures results for the Non-life segment on the basis of the loss ratio, acquisition ratio, technical ratio, other operating expense ratio and combined ratio (all defined below). Management measures results for the Non-life sub-segments on the basis of the loss ratio, acquisition ratio and technical ratio. Management measures results for the Life segment on the basis of the allocated underwriting result, which includes revenues from net premiums earned, other income or loss and allocated net investment income for Life, and expenses from life policy benefits, acquisition costs and other operating expenses.

 

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The following tables provide a summary of the segment results for the three months and six months ended June 30, 2012 and 2011 (in millions of U.S. dollars, except ratios):

Segment Information

For the three months ended June 30, 2012

 

		North America				Global (Non-U.S.) P&C				Global (Non-U.S.) Specialty				Catastrophe				Total Non-life segment				Life segment				Corporate and Other				Total
Gross premiums written		$	271			$	130			$	400			$	159			$	960			$	200			$	3			$	1,163
Net premiums written		$	270			$	128			$	391			$	145			$	934			$	199			$	3			$	1,136
Decrease (increase) in unearned premiums			20				36				(28	)			(72	)			(44	)			1				(2	)			(45	)
Net premiums earned		$	290			$	164			$	363			$	73			$	890			$	200			$	1			$	1,091
Losses and loss expenses and life policy benefits			(185	)			(119	)			(213	)			(16	)			(533	)			(173	)			—				(706	)
Acquisition costs			(69	)			(39	)			(93	)			(6	)			(207	)			(26	)			—				(233	)
Technical result		$	36			$	6			$	57			$	51			$	150			$	1			$	1			$	152
Other income																			—				1				2				3
Other operating expenses																			(66	)			(13	)			(27	)			(106	)
Underwriting result																		$	84			$	(11	)			n/a			$	49
Net investment income																							17				136				153
Allocated underwriting result (1)																						$	6				n/a				n/a
Net realized and unrealized investment gains																											38				38
Interest expense																											(12	)			(12	)
Amortization of intangible assets																											(9	)			(9	)
Net foreign exchange gains																											8				8
Income tax expense																											(50	)			(50	)
Interest in losses of equity investments																											(1	)			(1	)
Net income																											n/a			$	176
Loss ratio (2)			63.7	%			72.3	%			58.8	%			22.5	%			59.9	%
Acquisition ratio (3)			23.8				23.9				25.5				8.3				23.2
Technical ratio (4)			87.5	%			96.2	%			84.3	%			30.8	%			83.1	%
Other operating expense ratio (5)																			7.5
Combined ratio (6)																			90.6	%

 

(1)	Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs and other operating expenses.

(2)	Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.

(3)	Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.

(4)	Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.

(5)	Other operating expense ratio is obtained by dividing other operating expenses by net premiums earned.

(6)	Combined ratio is defined as the sum of the technical ratio and the other operating expense ratio.

 

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Segment Information

For the three months ended June 30, 2011

 

		North America				Global (Non-U.S.) P&C				Global (Non-U.S.) Specialty				Catastrophe				Total Non-life segment				Life segment				Corporate and Other				Total
Gross premiums written		$	242			$	122			$	350			$	169			$	883			$	195			$	4			$	1,082
Net premiums written		$	242			$	121			$	333			$	161			$	857			$	195			$	4			$	1,056
Decrease (increase) in unearned premiums			19				72				8				(51	)			48				6				(3	)			51
Net premiums earned		$	261			$	193			$	341			$	110			$	905			$	201			$	1			$	1,107
Losses and loss expenses and life policy benefits			(190	)			(127	)			(206	)			(123	)			(646	)			(166	)			(2	)			(814	)
Acquisition costs			(63	)			(53	)			(78	)			(9	)			(203	)			(26	)			—				(229	)
Technical result		$	8			$	13			$	57			$	(22	)		$	56			$	9			$	(1	)		$	64
Other income																			—				—				1				1
Other operating expenses																			(71	)			(13	)			(30	)			(114	)
Underwriting result																		$	(15	)		$	(4	)			n/a			$	(49	)
Net investment income																							16				142				158
Allocated underwriting result																						$	12				n/a				n/a
Net realized and unrealized investment gains																											78				78
Interest expense																											(12	)			(12	)
Amortization of intangible assets																											(9	)			(9	)
Net foreign exchange gains																											9				9
Income tax expense																											(50	)			(50	)
Interest in losses of equity investments																											(1	)			(1	)
Net income																											n/a			$	124
Loss ratio			72.8	%			65.9	%			60.3	%			111.7	%			71.4	%
Acquisition ratio			24.1				27.6				22.9				8.1				22.4
Technical ratio			96.9	%			93.5	%			83.2	%			119.8	%			93.8	%
Other operating expense ratio																			7.9
Combined ratio																			101.7	%

 

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Segment Information

For the six months ended June 30, 2012

 

		North America				Global (Non-U.S.) P&C				Global (Non-U.S.) Specialty				Catastrophe				Total Non-life segment				Life segment				Corporate and Other				Total
Gross premiums written		$	613			$	477			$	817			$	401			$	2,308			$	417			$	6			$	2,731
Net premiums written		$	611			$	474			$	744			$	360			$	2,189			$	414			$	6			$	2,609
Increase in unearned premiums			(84	)			(150	)			(73	)			(197	)			(504	)			(20	)			(4	)			(528	)
Net premiums earned		$	527			$	324			$	671			$	163			$	1,685			$	394			$	2			$	2,081
Losses and loss expenses and life policy benefits			(317	)			(217	)			(408	)			(19	)			(961	)			(322	)			—				(1,283	)
Acquisition costs			(134	)			(78	)			(162	)			(15	)			(389	)			(55	)			—				(444	)
Technical result		$	76			$	29			$	101			$	129			$	335			$	17			$	2			$	354
Other income																			1				2				2				5
Other operating expenses																			(129	)			(26	)			(49	)			(204	)
Underwriting result																		$	207			$	(7	)			n/a			$	155
Net investment income																							33				267				300
Allocated underwriting result																						$	26				n/a				n/a
Net realized and unrealized investment gains																											231				231
Interest expense																											(24	)			(24	)
Amortization of intangible assets																											(18	)			(18	)
Net foreign exchange gains																											5				5
Income tax expense																											(117	)			(117	)
Interest in earnings of equity investments																											4				4
Net income																											n/a			$	536