A UDITED C ONSOLIDATED F INANCIAL S TATEMENTS

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1 A UDITED C ONSOLIDATED F INANCIAL S TATEMENTS Hamilton Re, Ltd. With Report of Independent Auditors Ernst & Young Ltd.

2 Audited Consolidated Financial Statements For theyear Ended December 31, 2013 and the Contents Report of Independent Auditors...1 Audited Consolidated Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Income...4 Consolidated Statements of Shareholder s Equity...5 Consolidated Statements of Cash Flows...6 Notes to Consolidated Financial Statements...8

3 Ernst & Young Ltd. 3 Bermudiana Road Hamilton HM08, Bermuda P.O. Box HM 463 Hamilton, HM BX, Bermuda Tel: Fax: Report of Independent Auditors The Shareholder Hamilton Re, Ltd. We have audited the accompanying consolidated financial statements of Hamilton Re, Ltd. (the Company), which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, shareholder s equity and cash flows for the year ended December 31, 2013 and the period from June 8, 2012 (date of incorporation) to, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 1 A member firm of Ernst & Young Global Limited

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hamilton Re, Ltd. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for the year ended December 31, 2013 and for the period from June 8, 2012 (date of incorporation) to in conformity with U.S. generally accepted accounting principles. March 7, A member firm of Ernst & Young Global Limited

5 Consolidated Balance Sheets (Expressed in thousands of United States Dollars, except share information) December 31, 2013 and Assets Cash and cash equivalents $ 824,314 $ 44,546 Investments in Affiliated Funds, at fair value 513,168 Premiums receivable 21,396 5,087 Deferred acquisition costs 4, Due from affiliates 2,503 Prepaid expenses 102 1,161 Other assets Total assets $ 851,491 $ 567,864 Liabilities, non-controlling interest, and shareholder s equity Liabilities Reserve for losses and loss adjustment expenses $ 24,520 $ 367 Unearned premiums 25,692 5,691 Incentive fees payable to related party 24,584 Accounts payable and accrued expenses 5,146 2,440 Intercompany payable 4,249 1,244 Total liabilities 59,607 34,326 Non-controlling interest Dedicated Fund 557 Shareholder s equity Common Shares (par value $0.01, authorized, issued and outstanding 100,000,000 common shares) 1,000 1,000 Additional paid-in capital 667, ,000 Retained earnings 123,884 21,981 Total shareholder s equity 791, ,981 Total liabilities, non-controlling interest, and shareholder s equity $ 851,491 $ 567,864 See accompanying notes. 3

6 Consolidated Statements of Income (Expressed in thousands of United States Dollars) Revenues Gross premiums written $ 91,277 $ 6,300 Reinsurance premiums ceded (1,325) Net premiums written 89,952 6,300 Net change in unearned premiums (20,001) (5,691) Net premiums earned 69, Net investment income 104,660 31,011 Net foreign exchange gains (losses) (122) 9 Total revenues 174,489 31,629 Expenses Losses and loss adjustment expenses 39, Acquisition costs 10, General and administrative expenses 16,104 7,583 Financing costs 2,815 1,546 Total expenses 68,440 9,591 Net income 106,049 22,038 Income attributable to non-controlling interest Net income attributable to common shareholder $ 105,903 $ 21,981 See accompanying notes. 4

7 Consolidated Statements of Shareholder s Equity (Expressed in thousands of United States Dollars) Common shares Balance, beginning of period $ 1,000 $ Common shares 1,000 Balance, end of period 1,000 1,000 Additional paid-in capital Balance, beginning of period 510,000 Issuance of common shares 510,000 Capital contribution 157,000 Balance, end of period 667, ,000 Retained earnings Balance, beginning of period 21,981 Net income 106,049 22,038 Dividends declared (4,000) Net income attributable to non-controlling interest (146) (57) Balance, end of period 123,884 21,981 Total shareholder s equity $ 791,884 $ 532,981 See accompanying notes. 5

8 Consolidated Statements of Cash Flows (Expressed in thousands of United States Dollars) Operating activities Net income $ 106,049 $ 22,038 Adjustments to reconcile net income to net cash used in operating activities: Depreciation Net realized and unrealized gains from investments (207,195) (61,408) Other items (16) Change in: Premiums receivable (16,309) (5,087) Deferred acquisition costs (3,853) (933) Prepaid expenses 1,059 (1,161) Due from affiliates 2,503 (2,503) Other assets (208) Reserve for losses and loss adjustment expenses 24, Unearned premiums 20,001 5,691 Accounts payable and accrued expenses 2,706 2,440 Intercompany payable 3,005 1,244 Incentive fee payable to related party (24,584) 24,584 Net cash used in operating activities (92,515) (14,698) Investing activities Capital contributions to Affiliated Funds (80,033) (493,457) Capital withdrawals from Affiliated Funds 740,309 41,697 Payments to purchase investments (5,839,997) Proceeds from sales of investments 5,958,432 Proceeds from investments sold short 5,625,061 Payments for investments sold short (5,683,409) Purchases of fixed assets (393) (496) Net cash provided by (used in) investing activities 719,970 (452,256) 6

9 Consolidated Statements of Cash Flows (continued) (Expressed in thousands of United States Dollars) Financing activities Issuance of common shares 511,000 Non-controlling interest Dedicated Fund (703) 500 Contribution of additional paid-in capital 157,000 Dividends paid (4,000) Net cash provided by financing activities 152, ,500 Effect of exchange rate changes on cash and cash equivalents 16 Net increase in cash and cash equivalents 779,768 44,546 Cash and cash equivalents, beginning of period 44,546 Cash and cash equivalents, end of period $ 824,314 $ 44,546 See accompanying notes. 7

10 Notes to the Consolidated Financial Statements 1. Organization Hamilton Re, Ltd. (Hamilton Re), formerly S.A.C. Re, Ltd., was incorporated in Bermuda on June 8, 2012, and is a wholly-owned subsidiary of Hamilton Insurance Group, Ltd. (Hamilton Group), a Bermuda domiciled holding company. Prior to December 23, 2013, the Company was a wholly-owned subsidiary of S.A.C. Re Holdings, Ltd. (Holdings). Hamilton Re is licensed as a Class 4 (re)insurer in Bermuda and writes property and casualty reinsurance on a global basis. The Company s property portfolio focuses on property catastrophe and other specialty lines of reinsurance written predominantly on an excess of loss basis. The casualty portfolio targets various lines of reinsurance. During 2013 and 2012, the majority of casualty contracts were written on a proportional basis. On December 23, 2013, Holdings sold Hamilton Re to Hamilton Group. In connection with this transaction (the Hamilton Transaction), Hamilton Re terminated its limited partnership interest in S.A.C. Capital Re Fund, L.P. (the Dedicated Fund) and terminated its investment management agreement with S.A.C. Capital Advisors, L.P. (the Former Investment Manager). Prior to the Hamilton Transaction, Hamilton Re had been the sole limited partner of the Dedicated Fund and the Former Investment Manager was a related party. During 2013 and 2012, Hamilton Re s investment portfolio was principally allocated to discretionary long/short equities strategies, and included other strategies such as quantitative and global macro. Two Sigma Hamilton Fund, LLC (TS Hamilton Fund), a Delaware limited liability company, was formed in October On December 23, 2013, Hamilton Re entered into a limited liability company agreement with TS Hamilton Fund and Two Sigma Principals, LLC (the Managing Member) as the managing member of TS Hamilton Fund. With effect from January 1, 2014, Hamilton Re committed to invest all of its investable assets in TS Hamilton Fund, other than a portion thereof that it will hold in cash and cash equivalents as a liquidity buffer. TS Hamilton Fund has engaged Two Sigma Investments, LLC (Two Sigma), a Delaware limited liability company and a related party, to serve as its investment manager for an initial term ending on December 31, Two Sigma is a United States Securities and Exchange Commission (SEC) registered investment adviser specializing in quantitative analysis. Although Two Sigma has broad discretion to allocate the Company s investment portfolio to different opportunities, the current strategy is focused on highly diversified liquid positions in global equities, futures and foreign exchange markets. 8

11 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and include the accounts of Hamilton Re, TS Hamilton Fund and the Dedicated Fund (collectively the Company). The Dedicated Fund accounts are not included after the closing of the Hamilton Transaction on December 23, 2013, (see Note 1). All significant intercompany transactions and balances have been eliminated on consolidation. Certain prior period comparatives have been reclassified to conform to the current year presentation. Premiums and Related Expenses Premiums written and ceded on a loss occurring basis are earned pro-rata over the terms of the related contracts and policies. For contracts written on a risks attaching basis, premiums written and ceded are earned over the terms of the underlying contracts and policies. Premiums written and ceded include estimates based on information received from brokers and ceding companies, and any subsequent differences arising on such estimates are recorded in the periods in which they are determined. The portion of the premiums written and ceded applicable to the unexpired terms of the underlying contracts and policies are recorded as unearned premiums and prepaid reinsurance premiums, respectively. Amounts are computed by pro-rata methods based on statistical data or reports received from ceding companies. Reinstatement premiums are estimated after the occurrence of a significant loss and are recorded in accordance with the contract terms based upon paid losses and case reserves. Reinstatement premiums are earned when written. Acquisition expenses are costs that vary with and are directly related to the successful acquisition of new or renewal business, and consist principally of commissions, brokerage and premium tax expenses. These costs are deferred and amortized over the periods in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums. Anticipated losses and loss expenses, based on historical and current experience, and anticipated net investment income related to the premiums are considered in determining the recoverability of deferred acquisition costs. 9

12 2. Summary of Significant Accounting Policies (continued) Investments Investments are recorded at fair value, with interest and dividend income, income distributions and realized and unrealized gains and losses and investment expenses included in net investment income. Fair value is the price that would be expected to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques that are used to measure the fair value. The three levels of the fair value hierarchy are as follows: Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and Level 3 Inputs that are both significant to the fair value measurement and unobservable. Investments in affiliated funds in which the Dedicated Fund invested (Affiliated Funds) are stated at their estimated fair values, which generally represent the Company s proportionate share of the net assets of the Affiliated Funds as reported by the respective funds based on GAAP. All investments in investment funds made by the Company will initially be recorded at the net asset value (NAV) as reported by the investment fund or its agent (the practical expedient), in accordance with ASC 820, Fair Value Measurement and Disclosures. Notwithstanding the foregoing, the Company considers all relevant information available at the time the Company values its portfolio to determine the appropriateness of utilizing the practical expedient. 10

13 2. Summary of Significant Accounting Policies (continued) Situations may arise where the Company determines that NAV, as issued by the investment fund, does not represent the fair value of the investment in such investment fund held by the Company. In these situations, the Company will determine if a discount (or premium) is appropriate based on the facts and circumstances of the given situation. Affiliated Funds typically offered subscription and redemption options to investors. The reported NAV represented fair value based on observable data such as ongoing redemption and/or subscription activity. In these cases, the Affiliated Funds were considered Level 2. Certain investment funds may have lock-up restrictions or may provide the manager with the ability to suspend or postpone redemptions, or hold back from the payment of redemption proceeds a portion of the redemption until the annual audited financial statements are distributed. In the case of lock-ups or suspensions of redemptions, the Company s ability to validate the NAV through redemptions is impaired and the interest is generally classified as Level 3. Realized gains (losses) and change in unrealized appreciation (depreciation) on investments are calculated on an average cost basis. Reserve for Losses and Loss Adjustment Expenses The reserve for losses and loss expenses includes reserves for unpaid reported losses and for losses incurred but not reported. The reserve for unpaid reported losses and loss expenses is established by management based on reports from brokers and ceding companies and consultations with external legal counsel, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. The reserve for incurred but not reported losses and loss expenses is established by management with the assistance of an external actuarial firm based on estimates of ultimate losses and loss expenses. Inherent in the estimates of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors, which may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts recorded in the financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are recorded in earnings in the period in which they become known. 11

14 2. Summary of Significant Accounting Policies (continued) Reinsurance Recoverable Amounts recoverable from reinsurers are estimated based on the terms and conditions of the reinsurance contracts, in a manner consistent with the underlying liabilities reinsured. Amounts recoverable from reinsurers are recorded net of a valuation allowance for estimated uncollectible recoveries. Cash Equivalents Cash equivalents include money market accounts and highly liquid short-term deposits and securities with maturities of ninety days or less at the time of purchase. Foreign Exchange The Company s functional currency is the U.S. dollar. Monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date. Stock-Based Compensation Holdings issued warrants and restricted stock awards to certain employees of Hamilton Re, and Hamilton Group may issue warrants, restricted stock and other equity-based awards to employees of Hamilton Re. The fair value of the compensation cost is measured at the grant date and expensed over the period for which the employee is required to provide services in exchange for the award. For awards subject to graded vesting, the awards are separated into vesting tranches, which are amortized over their respective vesting periods. Forfeiture rates are estimated and incorporated in the determination of stock-based compensation. 12

15 2. Summary of Significant Accounting Policies (continued) Non-controlling Interest Prior to the Hamilton Transaction, the Company accounted for the general partner s interest in the Dedicated Fund in the mezzanine section of the Company s consolidated balance sheet in accordance with SEC guidance. The SEC guidance requires interests, not required to be accounted for in accordance with FASB ASC Topic Distinguishing Liabilities from Equity, and having redemption features that are not solely within the control of the issuer, to be classified outside of permanent equity in the mezzanine section of the balance sheet. The general partner s interest in the Dedicated Fund is not considered to be a liability in accordance with FASB ASC Topic Distinguishing Liabilities from Equity, and has redemption features that are not solely within the control of the Dedicated Fund. Earnings attributable to non-controlling interests are presented separately in the Company s consolidated statement of income. Refer to Note 7 Variable Interest Entity for more information. Variable Interest Entities The Company accounts for variable interest entities (VIE) in accordance with FASB ASC Topic Consolidation, which requires the consolidation of all VIEs by the primary beneficiary, that being the investor that has the power to direct the activities of the VIE and will absorb a majority of the VIE s expected losses or residual returns. The Company determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers: (i) the VIE s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (ii) the VIE s capital structure; (iii) the terms between the VIE and its variable interest holders and other parties involved with the VIE; (iv) which variable interest holders have the power to direct the activities of the VIE that most significantly impact the VIE s economic performance; (v) which variable interest holders have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE; and (vi) related party relationships. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events. The Company also reassesses its determination of whether the Company is the primary beneficiary of a VIE upon changes in facts and circumstances that could potentially alter the Company s assessment. 13

16 2. Summary of Significant Accounting Policies (continued) Use of Estimates 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 from those estimates. The major estimates recorded in the Company s financial statements include, but are not limited to, premiums written, the reserve for losses and loss expenses and the fair value of investments. 3. Investments The Company s investments at, are comprised as follows: As at Cost Fair Value S.A.C. Global Management, LLC $ 422,048 $ 476,192 S.A.C. Global Investments, L.P. 32,814 36,113 S.A.C. Velocity Fund, LLC $ 455,570 $ 513,168 All of the Company s investments in Affiliated Funds were redeemed on or before October 1, Prior to the Hamilton Transaction, the Company paid to the Former Investment Manager monthly management fees of approximately 3% per annum and annual incentive fees based upon rates ranging from 10% to 50%. For the periods ended December 31, 2013 and 2012, these management fees incurred amounted to $15.1 million and $5.6 million, respectively, and these incentive fees incurred amounted to $80.6 million and $24.6 million, respectively. Management and incentive fees were charged to earnings as a component of net investment income. 14

17 3. Investments (continued) The components of net investment income are as follows: Net realized gains from investments $ 60,086 $ Net realized gains from investments in Affiliated Funds 204,707 3,810 Net unrealized (losses) gains from investments in Affiliated Funds (57,598) 57,598 Dividend income (net of withholding tax) 2,593 Dividend expense (5,792) Cash and cash equivalents ,998 61,412 Investment expenses: Management fees (15,121) (5,650) Incentive fees (80,626) (24,584) Other (3,591) (167) (99,338) (30,401) Net investment income $ 104,660 $ 31, Reserve for Losses and Loss Expenses The Company uses statistical and actuarial methods to reasonably estimate ultimate expected losses and loss expenses. The period of time from the occurrence of a loss, the reporting of the loss to the Company, and the settlement of the Company s liability may be several years. During this period, additional facts and trends will be revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed regularly, and such adjustments, if any, are recorded in earnings in the period in which they become known. While management believes it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other reinsurance operations, and there can be no assurance that losses and loss expenses will not exceed the total reserves. 15

18 4. Reserve for Losses and Loss Expenses (continued) The following table presents a reconciliation of the beginning and ending gross reserve for losses and loss expenses: Gross reserve for losses and loss expenses, beginning of period $ 367 $ Less reinsurance recoverable, beginning of period Net reserve for unpaid losses and loss expenses, beginning of period 367 Net incurred losses and loss expenses related to: Current year 39, Prior year , Net paid losses and loss expenses related to: Current year (14,964) Prior year (460) (15,424) Foreign exchange 91 Net reserve for unpaid losses and loss expenses, end of period 24, Reinsurance recoverable on unpaid losses, end of period Gross reserve for losses and loss expenses, end of period $ 24,520 $

19 5. Letters of Credit Facilities Hamilton Re is party to a Letter of Credit Facility Agreement with Macquarie Bank Limited (Macquarie) under which Macquarie and certain of its affiliates agreed to make available to Hamilton Re a revolving letter of credit facility of $50 million for a term of one year. The facility was initially established in July 2012 and was renewed for a further one year term in July Prior to August 2013, the facility required that the letters of credit issued thereunder be secured by either cash or Hamilton Re s interests in the Dedicated Fund. Effective September 3, 2013, the agreement was amended to require cash collateral. In September 2012, Hamilton Re executed an Insurance Letters of Credit - Master Agreement with Citibank, N.A. (Citibank) under which Citibank agreed to make available to Hamilton Re a committed letter of credit facility of $50 million for a term of one year. The facility required that the letters of credit issued thereunder be secured by either cash or Hamilton Re s interests in the Dedicated Fund. In September 2013, the facility was amended to require cash collateral. The facility with Citibank was terminated effective December 31, These letters of credit facilities are for the sole purpose of providing collateral to Hamilton Re s reinsureds to the extent required under reinsurance agreements. The facilities require Hamilton Re to comply with various customary covenants. Outstanding letters of credit amounting to $14.7 million were issued under the Macquarie facility as at December 31, 2013 and secured by cash balances of a similar amount. For the year ended December 31, 2013, financing costs include $1.7 million of letters of credit facility fees and $1.1 million of related legal fees. For the period ended, financing costs include $0.9 million of letters of credit facility fees and $0.6 million of related legal fees. 6. Related-Party Transactions Prior to the Hamilton Transaction, the general partner of the Dedicated Fund and the Former Investment Manager were both related parties to the Company. 17

20 6. Related-Party Transactions (continued) During the period ended, the Company reimbursed affiliates of the Former Investment Manager for $1.5 million of expenses associated with the Company s formation and other start-up activities. Upon completion of the Hamilton Transaction on December 23, 2013, Two Sigma and the Managing Member became related parties to the Company (see Note 1). The investment management agreement with Two Sigma requires TS Hamilton Fund to incur a monthly management fee of 3% per annum. Under the terms of the limited liability company agreement between Hamilton Re and the Managing Member, the net profits of TS Hamilton Fund are subject to an incentive fee allocation of 30% of net profits (50% for net profits in excess of 15%). 7. Variable Interest Entity TS Hamilton Fund and the Dedicated Fund meet the definition of a VIE principally because the Managing Member and general partner, respectively, do not hold substantive equity at risk in the entities and control all of the decision making authority over each respective entity. Therefore, Hamilton Re assessed its ownership in each VIE to determine if it is the primary beneficiary. A quantitative assessment of each VIE s expected losses and expected residual returns was not applied because the Managing Member and general partner in each circumstance are or were related parties to Hamilton Re and collectively hold all of the variable interests. The Company performed a qualitative assessment of all relevant facts and circumstances and determined that Hamilton Re is the entity within the related party group that is most closely related to each VIE. As a result, the Company concluded that Hamilton Re is the primary beneficiary of TS Hamilton Fund and the Dedicated Fund. All of the Company s Investments in Affiliated Funds were held by the Dedicated Fund. The general partner s interest in the Dedicated Fund is recorded as a noncontrolling interest until December 23, 2013, when, as part of the Hamilton Transaction (see Note 1), Hamilton Re s interest in the Dedicated Fund was terminated. 18

21 7. Variable Interest Entity (continued) Activity in the non-controlling interest Dedicated Fund for the periods ended December 31, 2013 and 2012, is as follows: Opening Balance $ 557 $ Purchase of general partner interest 500 Net income attributable to non-controlling interest Deconsolidation upon termination (703) Balance as at December 31 $ $ Stock Incentive Compensation Hamilton Group has a stock incentive plan under which employees, directors, and consultants of Hamilton Group and Hamilton Re may be granted warrants, options, stock appreciation rights, restricted stock, restricted stock units, and stock bonus awards. There were no amounts recharged to the Company by Hamilton Group during the year ended December 31, Prior to the Hamilton Transaction, the Company was recharged by Holdings for amounts related its stock incentive plan. During the periods ended December 31, 2013 and 2012, such recharges amounted to $1.9 million and $0.5 million, respectively. 9. Intercompany Payable The intercompany payable at December 31, 2013, represents a balance due to Hamilton Group that is unsecured, non-interest bearing and payable on demand. The intercompany payable at, represents a balance due to Holdings that was non-interest bearing and was settled in

22 10. Reinsurance The Company enters into reinsurance and retrocession agreements to reduce its net exposure to losses. The Company remains liable to the extent that reinsurers do not meet their obligations under these agreements. The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. As at December 31, 2013 and 2012, there were no reinsurance balances recoverable. During the year ended December 31, 2013, ceded premiums earned and ceded incurred losses amounted to $1.3 million and nil, respectively. The Company had no ceded reinsurance in Statutory Requirements Under the Insurance Act 1978, amendments thereto and Related Regulations of Bermuda (the Insurance Act), Hamilton Re is required to prepare statutory financial statements and to file with the Bermuda Monetary Authority (BMA) a statutory financial return. The Insurance Act also requires Hamilton Re to maintain certain measures of solvency and liquidity. At December 31, 2013, the statutory capital and surplus of Hamilton Re was $787.0 million and the minimum amount required to be maintained, the Minimum Solvency Margin, was $100.0 million. Hamilton Re received approval from the BMA to treat its investment in TS Hamilton Fund as a Relevant Asset for the purpose of computing its Liquidity Ratio in respect of the financial years ending December 31, 2014 and Hamilton Re is in compliance with the Liquidity Ratio at December 31, As a Class 4 (re)insurer, Hamilton Re must maintain capital at a level equal to its enhanced capital requirement (ECR), which is established by reference to the Bermuda Solvency Capital Requirement (BSCR) model. The BSCR model is a risk-based capital model that provides a method for determining a (re)insurer s capital requirements (statutory capital and surplus) by taking into account the risk characteristics of different aspects of the (re)insurer s business. While not specifically referred to in the Insurance Act, the BMA has also established a target capital level (TCL) for Hamilton Re equal to 120% of its ECR. While Hamilton Re is not required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA and failure to maintain statutory capital at least equal to the TCL will likely result in increased BMA regulatory oversight. Hamilton Re s capital and surplus levels exceeded the TCL at December 31,

23 11. Statutory Requirements (continued) Under the Insurance Act, Hamilton Re is restricted as to the payment of dividends and/or distributions for amounts greater than 25% of the prior year s statutory capital and surplus. 12. Commitments and Contingencies (a) Concentrations of Credit Risks. Credit risk arises out of the failure of a counterparty to perform according to the terms of the contract. The Company underwrites all of its reinsurance business through brokers and credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of reinsurance balances to the Company. The Company believes that the brokers will meet all of their obligations. The Company s credit risk may be further reduced by the contractual right to offset loss obligations against premiums receivable. The following table shows the percentage of gross premiums written by broker for the year ended December 31, 2013: 2013 Aon Benfield Inc. 39% JLT Towers Re 25% Guy Carpenter & Company, LLC 20% Willis Re Inc. 11% (b) Employment agreements. The Company entered into employment agreements with certain officers that provide for warrants, restricted stock awards and other executive benefits under certain circumstances. 21

24 12. Commitments and Contingencies (continued) (c) Operating lease. The Company leases office space under an operating lease that expires August 31, Future minimum lease payments under the lease are expected to be as follows: Year Ending December 31 Minimum Lease Payments 2014 $ $ 1,020 (d) Indemnifications. In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications. Future events could occur that lead to the execution of these provisions against the Company. Management currently believes that the likelihood of such an event is remote. 13. Taxes At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the Company. Hamilton Re has obtained assurances from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966 of Bermuda, as amended, that in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not be applicable to Hamilton Re until March 31, 2035, provided that the assurance is subject to the condition that it will not prevent the application of any taxes payable by Hamilton Re in respect of real property or leasehold interests in Bermuda held by it. 22

25 13. Taxes (continued) The Company intends to conduct its business so that its activities do not constitute a United States trade or business and do not create a taxable presence in the United Kingdom. While the Company may be subject to examinations in various taxable jurisdictions, the Company does not believe it has any material exposure. The Company is not aware of any tax positions for which it is more likely than not that the total amounts of unrecognized tax benefits or losses will materially change in the next twelve months. However, the Company s conclusions may be subject to future review based on changes in, or the interpretation of, the accounting standards or tax laws and regulations. 14. Subsequent Events Effective January 2, 2014, the Company deployed substantially all of its investable assets, other than a portion thereof which it holds in cash and cash equivalents, into trading strategies managed by Two Sigma (see Note 1). The Company has evaluated subsequent events through March 7, 2014, the date these financial statements were available to be issued, and concluded that, other than the deployment of cash balances as described in the preceding paragraph, there are no subsequent events requiring recognition or disclosure. 23

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