AXIS Specialty Limited. Financial Statements and Independent Auditors Report

Transcription

1 AXIS Specialty Limited Financial Statements and Independent Auditors Report 1

2 Pages No. Independent Auditors Report 3 Balance Sheets as at 4 Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2013 and Statements of Changes in Shareholder s Equity for the years ended 6 Statements of Cash Flows for the years ended 7 Notes to Financial Statements

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4 BALANCE SHEETS Assets Investments: Fixed maturities, available for sale, at fair value $ 7,641,054 $ 7,638,985 (Amortized cost 2013: $7,671,087, 2012: $7,446,010) Equity securities, available for sale, at fair value 407, ,636 (Cost 2013: $328,490, 2012: $392,943) Other investments, at fair value 934, ,894 Short-term investments, at fair value and amortized cost 31,187 82,402 Total investments 9,013,939 8,931,917 Cash and cash equivalents 444, ,619 Accrued interest receivable 58,533 60,932 Insurance and reinsurance premium balances receivable 350, ,130 Deferred acquisition costs 327, ,885 Due from affiliates 950, ,689 Prepaid reinsurance premiums 23,232 14,783 Reinsurance recoverable balances 132, ,741 Other assets 29,902 30,495 Total assets $ 11,331,114 $ 11,035,191 Liabilities Reserve for losses and loss expenses $ 5,212,384 $ 4,944,592 Unearned premiums 1,604,956 1,485,738 Insurance and reinsurance balances payable 29,680 35,011 Other liabilities 22,629 33,526 Net payable for investments purchased 8,630 44,714 Total liabilities 6,878,279 6,543,581 Shareholder s Equity Common shares (Authorized 50,000,000 common shares, par value $0.10 Issued and outstanding 2013: 12,000,000; 2012: 12,000,000) 1,200 1,200 Additional paid-in capital 2,114,187 2,114,187 Accumulated other comprehensive income 49, ,668 Retained earnings 2,288,400 2,141,555 Total shareholder s equity 4,452,835 4,491,610 Total liabilities and shareholder s equity $ 11,331,114 $ 11,035,191 See accompanying notes to financial statements. 4

5 STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Years ended Revenues Gross premiums written $ 2,782,599 $ 2,391,435 Premiums ceded (65,521) (50,115) Net premiums written 2,717,078 2,341,320 Change in net unearned premiums (110,768) 73,988 Net premiums earned 2,606,310 2,415,308 Net investment income 303, ,547 Other insurance related income Net realized investment gains Other-than-temporary impairment (OTTI) losses (6,751) (21,054) Other net realized investment gains 62, ,622 Total net realized investment gains 55,756 85,568 Total revenues 2,965,427 2,777,593 Expenses Net losses and loss expenses 1,423,624 1,401,915 Acquisition costs 752, ,717 General and administrative expenses 74,626 91,744 Foreign exchange losses 17,934 21,671 Total expenses 2,268,582 2,206,047 Net income 696, ,546 Other comprehensive income (loss): Available for sale investments: Unrealized investment (losses) gains arising during the period (138,270) 266,264 Adjustment for re-classification of net realized investment gains and OTTI losses recognized in net income (nil tax) (47,350) (86,414) Unrealized investment (losses) gains arising during the period, net of reclassification adjustment (nil tax) (185,620) 179,850 Net change in benefit plan assets and obligations recognized in equity - 1,718 Total other comprehensive (loss) income: (185,620) 181,568 Comprehensive income $ 511,225 $ 753,114 See accompanying notes to financial statements. 5

6 AXIS SPECIALITY LIMITED STATEMENTS OF CHANGES IN SHAREHOLDER S EQUITY Years ended Common shares Balance at beginning and end of year $ 1,200 $ 1,200 Additional paid-in capital Balance at beginning of year 2,114,187 2,114,187 Share-based compensation expense 6,048 29,550 Return of additional paid-in capital (6,048) (29,550) Balance at end of year 2,114,187 2,114,187 Accumulated other comprehensive income Balance at beginning of year 234,668 53,100 Unrealized appreciation on available for sale investments: Balance at beginning of year 234,668 54,818 Unrealized gains (losses) arising during the year, net of reclassification adjustment (185,620) 179,850 Balance at end of year 49, ,668 Supplemental Executive Retirement Plans (SERPs): Balance at beginning of year - (1,718) Net change in benefit plan assets and obligations recognized in equity - 1,718 Balance at end of year - - Balance at end of year 49, ,668 Retained earnings Balance at beginning of year 2,141,555 2,095,009 Net income 696, ,546 Dividends paid to parent (550,000) (525,000) Balance at end of year 2,288,400 2,141,555 Total shareholder s equity $ 4,452,835 $ 4,491,610 See accompanying notes to financial statements. 6

7 STATEMENTS OF CASH FLOWS Years ended Cash flows from operating activities: Net income $ 696,845 $ 571,546 Adjustments to reconcile net income to net cash provided by operating activities: Net realized investment gains (55,756) (85,568) Net realized and unrealized gains of other investments (120,107) (83,590) Amortization of fixed maturities 81,103 83,381 Other amortization and depreciation 3,070 1,662 Share-based compensation expense 6,048 29,550 Changes in: Accrued interest receivable 2,399 3,510 Insurance and reinsurance balances, net (15,682) 47,917 Deferred acquisition costs (44,107) 13,619 Due from affiliates (78,662) (99,595) Prepaid reinsurance premiums (8,449) (3,011) Reinsurance recoverable balances (18,481) (52,969) Reserve for losses and loss expenses 267, ,752 Unearned premiums 119,218 (70,977) Other items (4,431) 44,887 Net cash provided by operating activities 830, ,114 Cash flows from investing activities: Purchases of: Fixed maturities (8,584,044) (9,668,688) Equity securities (177,312) (284,213) Other investments (166,835) (110,084) Short-term investments (119,224) (248,958) Proceeds from the sale of: Fixed maturities 7,242,881 8,263,106 Equity securities 276, ,447 Other investments 128,709 73,208 Short-term investments 133, ,758 Proceeds from the redemption of fixed maturities 1,012,466 1,003,272 Proceeds from the redemption of short-term investments 36,695 40,201 Net cash used in investing activities (216,697) (373,951) Cash flows from financing activities: Advances and payments on behalf of ultimate parent company (491,381) (540,279) Net cash used in financing activities (491,381) (540,279) Effect of exchange rates changes on foreign currency cash and cash equivalents (1,212) (909) Increase (decrease) in cash and cash equivalents 121,510 (195,025) Cash and cash equivalents, beginning of year 322, ,644 Cash and cash equivalents, end of year $ 444,129 $ 322,619 Non-cash operating and financing activities: The Company declared dividends of $550,000 in 2013 (2012: $525,000) and returned additional paid-in capital of $6,048 in 2013 (2012: $29,550). The dividends and returns of additional paid-in capital were net settled against balances due from AXIS Capital Holdings Limited, the Company s ultimate holding company. See accompanying notes to financial statements. 7

8 1. History AXIS Specialty Limited (the Company ) was incorporated on November 8, 2001 under the laws of Bermuda. Pursuant to an exchange offer consummated on December 31, 2003, the Company became a wholly owned subsidiary of AXIS Capital Holdings Limited ( AXIS Capital, the ultimate parent company ). On December 12, 2011, AXIS Capital assigned all of its shares of the Company to AXIS Specialty Holdings Bermuda Limited ( AXIS Specialty Holdings ). AXIS Specialty Holdings was incorporated under the laws of Bermuda on September 22, 2011 and is a wholly owned subsidiary of AXIS Capital. The Company is licensed under the Bermuda Insurance Act 1978, amendments thereto and related regulations, to write general business as a Class 4 insurer and commenced operations on November 20, 2001, providing a broad range of insurance and reinsurance products on a worldwide basis. The Company also provides reinsurance protection to other subsidiaries of AXIS Capital through quota share and stop loss agreements. The Company formed a branch in Singapore (the Branch ) on June 19, 2008 and obtained a license on August 12, 2008 to carry on general insurance business in Singapore. 2. Significant Accounting Policies Basis of Presentation These financial statements have been prepared in accordance with accounting principles generally accepted in the United States ( U.S. GAAP ) and include the results of operations and the financial position of the Branch. All transactions and balances between the Company and the Branch have been eliminated. Use of Estimates The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount 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. While management believes that the amounts included in the financial statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company s principal estimates include: reserve for losses and loss expenses; reinsurance recoverable balances, including the provision for uncollectible amounts; gross and net premiums written and net premiums earned; other-than-temporary impairments ( OTTI ) in the carrying value of available-for-sale investment securities; and fair value measurements for financial assets. 8

9 2. Significant Accounting Policies (continued) Significant accounting policies are as follows: a) Investments Investments available for sale Fixed maturities and equities classified as available for sale are reported at fair value at the balance sheet date. See Note 4 Fair Value Measurements for additional information regarding the determination of fair value. The change in fair value (net unrealized gain or loss) on available for sale investments, net of tax, is included as a separate component of accumulated other comprehensive income (loss) ( AOCI ) in shareholders equity. Net investment income includes interest and dividend income and the amortization of market premiums and discounts and is presented net of investment expenses. Investment income is recognized when earned. Purchases and sales of investments are recorded on a trade-date basis and realized gains/losses on sales of investments are determined based on the specific identification method. The Company recognizes investment income from fixed maturities based on the constant effective yield method, which includes an adjustment for estimated principal repayments, if any. The effective yield used to determine the amortization for fixed maturities subject to prepayment risk (e.g. asset-backed, loan-backed and other structured securities) is recalculated and adjusted periodically based upon actual historical and/or projected future cash flows. The adjustments to the yield for highly-rated prepayable fixed maturities are accounted for using the retrospective method. The adjustments to the yield for other prepayable fixed maturities are accounted for using the prospective method. On a quarterly basis, the Company assesses whether unrealized losses on available for sale investments represent impairments that are other than temporary. Several factors are considered in this assessment including, but not limited to: (i) the extent and duration of the decline, (ii) the reason for the decline (e.g. credit spread widening, credit event, foreign exchange rate movements), (iii) the historical and implied future volatility of the fair value, (iv) the financial condition and near-term prospects of the issuer and (v) the collateral structure and credit support of the security, if applicable. A fixed maturity is impaired when the fair value is below its amortized cost. For an impaired fixed maturity where the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the full amount of the impairment is charged to earnings and is included in net realized investment gains (losses). Where the Company intends to hold the impaired fixed maturity, the Company estimates the anticipated credit loss of the security and recognizes only this portion of the impairment in earnings, with the remaining non-credit related balance of the impairment (i.e. related to interest rates, market conditions, etc.) recognized in AOCI. The Company impairs an equity security in an unrealized loss position when it does not have the ability and intent to hold the security for a reasonable period of time to allow for a full recovery. The full impairment is charged to earnings and is included in net realized investment gains (losses). 9

10 2. Significant Accounting Policies (continued) Upon recognition of an OTTI, the new cost basis for the security is the previous amortized cost for a fixed maturity or cost for an equity security less the OTTI recognized in earnings. The new cost basis is not adjusted for subsequent recoveries in fair value; except for fixed maturities whereby the difference between the new cost basis and the expected cash flows is accreted on a quarterly basis to net investment income over the remaining life of the fixed maturity. Other investments Other investments are recorded at fair value (see Note 4 Fair Value Measurements), with both changes in fair value and realized gains and losses reported in net investment income. Short-term investments Short-term investments primarily comprise highly-liquid debt securities with maturities greater than three months but less than one year from the date of purchase. These investments are carried at amortized cost, which approximates fair value. b) Cash and cash equivalents Cash equivalents include money-market funds and fixed interest deposits placed with a maturity of under 90 days when purchased. Cash and cash equivalents are recorded at amortized cost, which approximates fair value due to the short-term, liquid nature of these securities. At December 31, 2013, cash and cash equivalents included restricted cash of $20 million, primarily used as collateral in trusts securing obligations under reinsurance agreements. c) Premiums and Acquisition Costs Premiums Insurance premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums are recorded at the inception of the contract and are estimated based upon information received from ceding companies. For multi-year policies where re(insurance) premiums are payable in annual installments, premiums are recorded at the inception of the contract based on management s best estimate of total premiums to be received. However, premiums are normally recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the contract. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term. Any subsequent differences arising on insurance and reinsurance premium estimates are recorded in the period they are determined. 10

11 2. Significant Accounting Policies (continued) (Re) insurance premiums are earned over the period during which the Company is exposed to the underlying risk, which is generally one to two years with the exception of multi-year contracts. Unearned premiums represent the portion of premiums written which is applicable to the unexpired risks under contracts in force. Reinstatement premiums are recognized and earned at the time a loss event occurs, where the coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The accrual of reinstatement premiums is based on estimates of losses and loss adjustment expenses, which reflect management s judgment, as described in Note 2 (e) Losses and Loss Expenses below. Premiums receivable balances are reviewed for impairment at least quarterly and an allowance is established for amounts considered uncollectible. The need for charge-off of any amounts previously reserved as uncollectible is assessed on a quarterly basis. Acquisition costs Acquisition costs vary with and are directly related to the acquisition of (re)insurance contracts and consist primarily of fees and commissions paid to brokers and premium taxes. Premiums receivable are presented net of applicable acquisition costs when contract terms provide for the right of offset. Acquisition costs are shown net of commissions earned on ceded reinsurance. These net acquisition costs are deferred and charged to expense as the related premium is earned. Anticipated losses and loss expenses, other costs and investment income related to these premiums are considered in assessing the recoverability of deferred acquisition costs. If deferred amounts are estimated to be unrecoverable, they are expensed. Compensation expenses for personnel involved in contract acquisition, as well as advertising costs, are expensed as incurred. d) Ceded Reinsurance In the normal course of business, the Company purchases reinsurance protection to limit its ultimate losses from catastrophic events and to reduce loss aggregation risk. The premiums paid to reinsurers (i.e. premiums ceded) are expensed over the coverage period. Prepaid reinsurance premiums represent the portion of premiums ceded applicable to the unexpired term of the contracts in force. Reinstatement-related premiums ceded are recorded at the time a loss event occurs and coverage limits for the remaining life of a contract are reinstated under pre-defined contract terms; such premiums are expensed over the remaining risk period. Reinsurance recoverable related to case reserves is estimated on a case-by-case basis by applying the terms of any applicable reinsurance coverage to individual case reserve estimates. Estimates of reinsurance recoverable related to IBNR reserves are generally developed as part of the loss reserving process. 11

12 2. Significant Accounting Policies (continued) Reinsurance recoverable balances are presented net of a provision for uncollectible amounts, reflecting the amount believed to be ultimately not recovered due to reinsurer insolvency, contractual disputes and/or some other reason. Case-specific provisions are applied against certain recoveries that are deemed unlikely to be collected in full. In addition, a default analysis is used to estimate a provision for uncollectible amounts on the remainder of the balance. The estimates of reinsurance recoverable and the associated provision require management s judgment and are reviewed in detail on a quarterly basis. Any adjustments to amounts recognized in prior periods are reported in net losses and loss expenses in the Statements of Operations for the period when the adjustments are identified. The charge-off of amounts previously reserved as uncollectible is also considered on a caseby-case basis as part of this quarterly process. e) Losses and Loss Expenses The reserve for losses and loss expenses represents an estimate of the unpaid portion of the ultimate liability for losses and loss expenses for (re)insured events that have occurred at or before the balance sheet date. The balance reflects both claims that have been reported ( case reserves ) and claims that have been incurred but not yet reported ( IBNR ). These amounts are reduced for estimated amounts of salvage and subrogation recoveries. Reserves for losses and loss expenses are reviewed on a quarterly basis. Case reserves are primarily established based on amounts reported from insureds and/or their brokers. Management estimates IBNR after reviewing detailed actuarial analyses and applying informed judgment regarding qualitative factors that may not be fully captured in the actuarial estimates. A variety of actuarial methods are utilized in this process, including the Expected Loss Ratio, Bornhuetter-Ferguson and Chain Ladder methods. The Company s estimate is highly dependent on management s judgment as to which method(s) are most appropriate for a particular accident year and class of business. The Company s historical claims data is often supplemented with industry benchmarks when applying these methodologies. Any adjustments to previous reserves for losses and loss expenses estimates are recognized in the period they are determined. While management believes that reserves for losses and loss expenses are adequate, this estimate requires significant judgment and new information, events or circumstances may result in ultimate losses that are materially greater or less than provided for in the Balance Sheets. f) Foreign Currency Transactions The functional currency of the Company is the U.S. dollar. Transactions in currencies other than the functional currency are measured in U.S. dollars at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re measured at exchange rates in effect at the balance sheet date while non-monetary assets and liabilities are converted at historical rates. Realized and changes in unrealized gains and losses from non-functional currencies are recognized in the Statements of Operations, with the exception of those related to foreign-denominated available for sale 12

13 2. Significant Accounting Policies (continued) investments. For these investments, exchange rate fluctuations represent an unrealized appreciation / depreciation in the value of the securities and are included in the related component of AOCI. g) Share-Based Compensation The fair value of the compensation cost attributable to service-based awards is measured at the grant date, with the associated expense recognized on a straight-line basis over the service period. Forfeiture benefits are estimated at the time of grant and incorporated in the determination of share-based compensation expense. h) Derivative Instruments Derivative Instruments not Designated as Hedging Instruments The Company may enter into derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts as part of its overall foreign currency risk management strategy, to obtain exposure to a particular financial market or for yield enhancement. From time to time, the Company may also enter into (re)insurance contracts that meet the FASB s definition of a derivative contract. All derivative instruments are measured at fair value (see Note 4 - Fair Value Measurements) and recognized as either assets or liabilities in the Balance Sheets. Subsequent changes in fair value and any realized gains or losses are recognized in the Statements of Operations. Derivative Instruments Designated as Hedging Instruments The Company may designate a currency derivative as a hedge of foreign exchange rate-related movements in the fair value of certain investment portfolios. This is referred to as a fair value hedge. Changes in the fair value of the designated fair value hedge, along with the changes in the fair value of the hedged asset attributable to the hedged risk, are recorded in net realized investment gains (losses) in the Statements of Operations, including any hedge ineffectiveness. To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in value of the hedged item. Further, the hedge relationship must be designated and formally documented at the inception, detailing the particular risk management objective and strategy for the hedge, including the item and risk that is being hedged, the derivative that is being used, and how effectiveness will be assessed. The hedge effectiveness is formally measured at inception and on an ongoing basis. The Company evaluates the effectiveness on a retrospective and prospective basis using the period-to-period dollar offset method. Using this method, if the hedge correlation is within the range of 80% to 125%, the hedge is considered effective and hedge accounting is applied. Cash flows from derivative instruments designated as hedging instruments are presented as operating activities in the Statements of Cash Flows. 13

14 2. Significant Accounting Policies (continued) i) New Accounting Standards Adopted in 2013 Balance Sheet Offsetting Effective January 1, 2013, the Company adopted Financial Accounting Standards Board ("FASB") guidance requiring additional disclosures about financial instruments and derivative instruments that are either: (1) offset for balance sheet presentation purposes or (2) subject to an enforceable master netting arrangement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. The disclosure requirements of this guidance are limited to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing/lending transactions. As this guidance is disclosure-related only and did not amend existing balance sheet offsetting guidance, adoption did not impact the Company s results of operations, financial condition or liquidity. The additional disclosures are provided in Note 5 - Derivative Instruments. Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI") Effective January 1, 2013, the Company adopted FASB guidance requiring additional disclosures about reclassification adjustments from AOCI. As this guidance is disclosure-related only and did not amend existing guidance on the reporting of net income available to common shareholders or other comprehensive income, adoption did not impact the Company s results of operations, financial condition or liquidity. The additional disclosures are provided in Note 15 - Other Comprehensive Income (Loss). 14

15 3. Investments a) Fixed Maturities and Equities: The amortized cost or cost and fair values of the Company s fixed maturities and equities at December 31, 2013 and 2012 are as follows: 2013 Gross Gross Non-credit Amortized Unrealized Unrealized Fair OTTI Cost or Cost Gains Losses Value in AOCI (5) Fixed maturities: U.S. government and agency $ 1,096,848 $ 233 $ (27,707) $ 1,069,374 $ - Non-U.S. government 801,873 12,399 (49,422) 764,850 - Corporate debt 2,674,994 66,886 (7,305) 2,734,575 - Agency RMBS (1) 1,767,923 14,015 (43,166) 1,738,772 - CMBS (2) 588,688 7,896 (3,059) 593,525 - Non-Agency RMBS 45,434 1,428 (333) 46,529 - ABS (3) 623,465 5,379 (6,283) 622,561 - Municipals (4) 71,862 1,765 (2,759) 70,868 - Total fixed maturities $ 7,671,087 $ 110,001 $ (140,034) $ 7,641,054 $ - Equity securities: Common stocks $ 287,606 $ 74,680 $ (5,315) $ 356,971 Exchange-traded funds 40,884 9,716-50,600 Total equity securities $ 328,490 $ 84,396 $ (5,315) $ 407, Gross Gross Non-credit Amortized Unrealized Unrealized Fair OTTI Cost or Cost Gains Losses Value in AOCI (5) Fixed maturities: U.S. government and agency $ 1,029,806 $ 5,899 $ (89) $ 1,035,616 $ - Non-U.S. government 647,153 22,089 (1,153) 668,089 - Corporate debt 2,925, ,776 (4,076) 3,026,684 - Agency RMBS (1) 1,744,863 42,653 (1,306) 1,786,210 - CMBS (2) 550,275 18,014 (76) 568,213 - Non-Agency RMBS 68,911 1,725 (469) 70,167 - ABS (3) 435,979 8,577 (6,978) 437,578 - Municipals (4) 43,039 3,393 (4) 46,428 - Total fixed maturities $ 7,446,010 $ 207,126 $ (14,151) $ 7,638,985 $ - Equity securities: Common stocks $ 347,564 $ 43,735 $ (6,463) $ 384,836 Exchange-traded funds 45,379 4,421-49,800 Total equity securities $ 392,943 $ 48,156 $ (6,463) $ 434,636 (1) Residential mortgage-backed securities (RMBS) originated by U.S. agencies. (2) Commercial mortgage-backed securities (CMBS). (3) Asset-backed securities (ABS) include debt tranched securities collateralized primarily by auto loans, student loans, credit cards, and other asset types. This asset class also includes collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs). (4) Municipals include bonds issued by states, municipalities, and political subdivisions. (5) Represents the non-credit component of the other-than-temporary impairment (OTTI) losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date. 15

16 3. Investments (continued) In the normal course of investing activities, the Company actively manages allocations to non-controlling tranches of structured securities (variable interests) issued by variable interest entities ( VIEs ). These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within its other investments portfolio, the Company also invests in limited partnerships (hedge funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 3(b)). For these variable interests, the Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly is not the primary beneficiary for any of these VIEs. The maximum exposure to loss on these interests is limited to the amount of the investment. The Company has not provided financial or other support with respect to these structured securities other than its original investment. The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 448,023 $ 453,555 $ 408,804 $ 413,366 Due after one year through five years 3,144,706 3,196,638 3,155,309 3,221,905 Due after five years through ten years 986, ,066 1,035,771 1,091,627 Due after ten years 66,602 63,408 46,098 49,919 4,645,577 4,639,667 4,645,982 4,776,817 Agency RMBS 1,767,923 1,738,772 1,744,863 1,786,210 CMBS 588, , , ,213 Non-Agency RMBS 45,434 46,529 68,911 70,167 ABS 623, , , ,578 Total $ 7,671,087 $ 7,641,054 $ 7,446,010 $ 7,638,985 16

17 3. Investments (continued) The following tables summarize fixed maturities and equities in an unrealized loss position at December 31, 2013 and 2012, and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position: months or greater Less than 12 months Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Fixed maturities: U.S. government and agency $ - $ - $ 806,751 $ (27,707) $ 806,751 $ (27,707) Non-U.S. government 23,871 (3,221) 345,026 (46,201) 368,897 (49,422) Corporate debt 20,056 (588) 433,627 (6,717) 453,683 (7,305) Agency RMBS 118,403 (4,198) 1,079,156 (38,968) 1,197,559 (43,166) CMBS 7,780 (87) 225,982 (2,972) 233,762 (3,059) Non-Agency RMBS 3,943 (302) 3,386 (31) 7,329 (333) ABS 37,506 (2,935) 329,645 (3,348) 367,151 (6,283) Municipals ,761 (2,759) 45,761 (2,759) Total fixed maturities $ 211,559 $ (11,331) $ 3,269,334 $ (128,703) $ 3,480,893 $ (140,034) Equity securities: Common stocks $ 2,529 $ (270) $ 44,946 $ (5,045) $ 47,475 $ (5,315) Exchange-traded funds Total equity securities $ 2,529 $ (270) $ 44,946 $ (5,045) $ 47,475 $ (5,315) months or greater Less than 12 months Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Fixed maturities: U.S. government and agency $ - $ - $ 84,456 $ (89) $ 84,456 $ (89) Non-U.S. government 26,523 (868) 44,920 (285) 71,443 (1,153) Corporate debt 72,502 (2,133) 359,428 (1,943) 431,930 (4,076) Agency RMBS 8,234 (127) 405,562 (1,179) 413,796 (1,306) CMBS 57-33,183 (76) 33,240 (76) Non-Agency RMBS 7,053 (435) 115 (34) 7,168 (469) ABS 94,797 (6,847) 14,644 (131) 109,441 (6,978) Municipals - - 1,996 (4) 1,996 (4) Total fixed maturities $ 209,166 $ (10,410) $ 944,304 $ (3,741) $ 1,153,470 $ (14,151) Equity securities: Common stocks $ 9,612 $ (1,367) $ 87,853 $ (5,096) $ 97,465 $ (6,463) Exchange-traded funds Total equity securities $ 9,612 $ (1,367) $ 87,853 $ (5,096) $ 97,465 $ (6,463) 17

18 3. Investments (continued) Fixed Maturities At December 31, 2013, 701 fixed maturities (2012: 288) were in an unrealized loss position of $140,034 (2012: $14,151) of which $1,335 (2012: $3,261) was related to securities below investment grade or not rated. At December 31, 2013, 83 (2012: 111) securities have been in a continuous unrealized loss position for 12 months or greater and have a fair value of $211,559 (2012: $209,166). Following a credit impairment review, the Company concluded that these securities as well as the remaining securities in an unrealized loss position in the above table were temporarily depressed at December 31, 2013, and are expected to recover in value as the securities approach maturity. Further, at December 31, 2013, the Company did not intend to sell these securities in an unrealized loss position and it is more likely than not that it will not be required to sell these securities before the anticipated recovery of their amortized costs. Equity Securities At December 31, 2013, 53 securities (2012: 93) were in an unrealized loss position of $5,315 (2012: $6,463). At December 31, 2013, 7 (2012: 14) securities have been in a continuous unrealized loss position for 12 months or greater and have a fair value of $2,529 (2012: $9,612). Based on the Company s impairment review process and its ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, the Company concluded that the above equities in an unrealized loss position were temporarily impaired at. 18

19 3. Investments (continued) b) Other Investments The following tables provide a breakdown of the Company s investments in hedge funds, direct lending funds and CLO Equities, together with additional information relating to the liquidity of each category: At December 31, 2013 Redemption Frequency Redemption Fair Value (if currently eligible) Notice Period Long/short equity funds $ 424,996 46% Monthly, Quarterly, Semi-annually days Event-driven funds 190,458 20% Quarterly, Annually days Multi-strategy funds 173,921 19% Quarterly, Semi-annually days Leveraged bank loan funds 48,753 5% Quarterly 65 days Direct lending funds 22,133 2% N/A N/A CLO Equities 73,866 8% N/A N/A Total other investments $ 934, % At December 31, 2012 Long/short equity funds $ 301,294 38% Monthly, Quarterly, Semi-annually days Multi-strategy funds 177,918 23% Quarterly, Semi-annually days Event-driven funds 171,479 23% Quarterly, Annually days Leveraged bank loan funds 62,768 8% Quarterly 65 days Direct lending funds - - % N/A N/A CLO Equities 62,435 8% N/A N/A Total other investments $ 775, % The investment strategies for the above funds are as follows: Long/short equity funds: Seek to achieve attractive returns by executing an equity trading strategy involving both long and short investments in publicly-traded equities. Multi-strategy funds: Seek to achieve above-market returns by pursuing multiple investment strategies to diversify risks and reduce volatility. This category includes funds of hedge funds which invest in a large pool of hedge funds across a diversified range of hedge fund strategies. Event-driven funds: Seek to achieve attractive returns by exploiting situations where announced or anticipated events create opportunities. Leveraged bank loan funds: Seek to achieve attractive returns by investing primarily in bank loan collateral that has limited interest rate risk exposure. 19

20 3. Investments (continued) Direct lending funds: Seek to achieve attractive risk-adjusted returns, including current income generation, by investing in funds which provide financing directly to borrowers. Two common redemption restrictions which may impact the Company s ability to redeem its hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund s net assets which may otherwise hinder the general partner or investment manager s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2013 and 2012, neither of these restrictions impacted the Company s redemption requests. At December 31, 2013, $98,933 (2012: $37,738), representing 12% (2012: 5%) of the Company s total hedge funds, relate to holdings where they are still within the lockup period. The expiry of this lockup periods range from April, 2014 to April, At December 31, 2013, $10,175 (2012: $27,958) was invested in hedge funds that are not accepting redemption requests. Of this amount, substantially all relates to a leveraged bank loan fund in a period of planned principal distributions. Based on market conditions and payments made to date, the Company expects that the distribution process will be completed in The remainder primarily relates to funds that entered liquidation or had their assets side pocketed as a result of the global financial crisis which began in late For these funds, the Company is currently unable to estimate when those funds will be distributed. At December 31, 2013, the Company has $87,742 (2012: $40,000) of unfunded commitments within the other investments portfolio relating to future investments in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to three years. During 2013, the Company made a $60,000 commitment as a limited partner in a multi-strategy hedge fund. Once the full amount of committed capital has been called by the General Partner, the assets will not be fully returned until the completion of the fund's investment term which ends in December, The General Partner then has the option to extend the term by up to three years. At December 31, 2013, $54,000 of the Company s commitment remains unfunded and the current fair value of the funds called to date are included in the multi-strategy funds line of the table above. During 2013, the Company made a $60,000 commitment as a limited partner in a fund that invests primarily in CLO equities ("CLO fund"). The Company will not be eligible to redeem the investment until December, 2017 but expects to receive interest distributions on a quarterly basis. At December 31, 2013, $26,562 of the Company s commitment remains unfunded and the current fair value of the funds called to date are included in the CLO - Equities line of the table above. The CLO - Equities line also includes direct investment in the equity tranches of CLOs. 20

21 3. Investments (continued) c) Net Investment Income Net investment income for the years ended was derived from the following sources: Fixed maturities $ 197,600 $ 203,947 Other investments 120,107 83,628 Equity securities 7,402 8,961 Short-term investments Cash and cash equivalents Gross investment income 326, ,413 Investment expenses (23,346) (20,866) Net investment income $ 303,168 $ 276,547 d) Net Realized Investment Gains The following table provides an analysis of net realized investment gains for the years ended December 31, 2013 and 2012: Gross realized gains Fixed maturities and short-term investments (1) $ 80,202 $ 183,210 Equities 46,897 30,585 Gross realized gains 127, ,795 Gross realized losses Fixed maturities and short-term investments (63,024) (85,178) Equities (9,299) (20,147) Gross realized losses (72,323) (105,325) Net OTTI recognized in earnings (6,751) (21,054) Changes in fair value of investment derivatives (2) 7,731 (9,602) Fair value hedges (2) - 7,754 Net realized investment gains $ 55,756 $ 85,568 (1) Includes $37 million of gains in 2012 related to previously unrealized foreign exchange currency amounts on the hedged fixed maturity investment portfolios. The hedged portfolio was sold and all associated foreign exchange contracts were fully settled during 2012 so there is no impact on the 2013 figures. (2) Refer to Note 5 Derivative Instruments 21

22 3. Investments (continued) The following table summarizes the OTTI recognized in earnings by asset class for the years ended : Fixed maturities: Non-U.S. government $ 120 $ 2,036 Corporate debt 4,352 1,366 Non-Agency RMBS 57 1,327 ABS Fixed maturities 4,658 5,524 Equity securities: Common stocks 2,092 7,270 Exchange-traded funds 1 8,260 Equity securities 2,093 15,530 Total OTTI recognized in earnings $ 6,751 $ 21,054 Fixed maturities The following table provides a roll forward of the credit losses ( credit loss table ), before income taxes, for which a portion of the OTTI was recognized in AOCI for the years ended : Balance at beginning of year $ 993 $ 993 Credit impairments recognized on securities not previously impaired - - Additional credit impairments recognized on securities previously impaired - - Change in timing of future cash flows on securities previously impaired - - Intent to sell of securities previously impaired - - Securities sold/redeemed/matured - - Balance at end of year $ 993 $

23 3. Investments (continued) Credit losses are calculated based on the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to the impairment. The following provides a summary of the credit loss activities by asset class for the above table as well as the significant inputs and the methodology used to estimate these credit losses. U.S. Government, U.S. Agency and U.S. Agency RMBS: Unrealized losses on securities issued or backed (either explicitly or implicitly) by the U.S. government are generally not analyzed for OTTI. The Company has concluded that the possibility of any credit losses on these securities is highly unlikely due to the explicit U.S. government guarantee on certain securities (e.g. Government National Mortgage Association ( GNMA ) issuances) and, on others, the implicit guarantee that has been validated by past actions (e.g. U.S. government bailout of Federal National Mortgage Association ( FNMA ) and Federal Home Loan Mortgage Corporation ( FHLMC ) during the 2008 credit crisis). Although not generally analyzed for credit losses, the securities are still evaluated for intention to sell at a loss. Non-U.S. Government: Non-U.S. government obligations are evaluated for credit loss primarily through qualitative assessments of the likelihood of credit loss using information such as duration and severity of unrealized losses, as well as credit ratings and price volatility. At December 31, 2013, the Company s holdings in sovereign debt, including $107,972 (2012: $119,679) relating to the eurozone countries, were substantially all investmentgrade securities. The gross unrealized losses of $49,422 at December 31, 2013 were due mainly to pricing and foreign exchange losses on emerging market debt. The Company concluded there were no credit losses anticipated for these securities at December 31, Corporate Debt: To estimate credit losses for corporate debt securities, projected cash flows are primarily driven by assumptions regarding the probability of default and the severity associated with those defaults. The default and loss severity rates are based on credit rating, credit analysis, industry analyst reports and forecasts, Moody s historical default data and any other data relevant to the recoverability of the security. In 2013, the OTTI charges on corporate debt securities were related to the Company s intent to sell, as well as unrealized foreign exchange losses on certain securities where forecasted recovery was uncertain. 23

24 3. Investments (continued) CMBS: The Company s investments in CMBS are diversified and highly rated. Based on discounted cash flows at December 31, 2013, the current level of subordination is sufficient to cover the estimated loan losses on the underlying collateral of the CMBS. Non-agency RMBS: For non-agency RMBS, the Company s projected cash flows incorporated underlying data from widely accepted third-party data sources along with certain internal assumptions and judgments regarding the future performance of the security. These assumptions included the following: default, delinquency, loss severity and prepayment rates. The assumptions used to calculate the credit losses in 2013 have not changed significantly since December 31, At December 31, 2013, the fair value of the Company s non-agency RMBS was $46,529 (2012: $70,167), consisting primarily of $35,118 (2012: $57,628) of Prime and $9,454 (2012: $10,342) of Alt-A MBS. The Company concluded there are no credit losses anticipated for any of its non-agency RMBS at December 31, 2013, other than those already recorded. ABS: A significant portion of the unrealized losses on ABS at December 31, 2013, and 2012, were related to CLO debt tranched securities ( CLO Debt ) purchased prior to the credit crisis with a current carrying value of $29,944 (2012: $52,574). The following significant inputs were used as at to estimate the credit loss for these securities: Default rate 4.0% 4.0% Loss severity rate 53.5% 53.5% Collateral spreads 2.7% - 3.5% 2.5% - 3.7% The assumptions on default and loss severity rates are established based on an assessment of actual experience to date for each CLO Debt and review of recent credit rating agencies default and loss severity forecasts. Based on the underlying collateral values and projected cash flows at December 31, 2013, the Company does not expect any credit losses on CLO Debt as the current unrealized loss is reflective of the securities low coupon relative to the higher market yields available for similar securities. Equity Securities The OTTI losses on common stocks in 2013 and 2012 are primarily due to the severity and duration of their unrealized loss positions, for which the Company concluded the forecasted recovery period was uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned. During 2013, the Company recorded $1 (2012: $8,260) of OTTI losses on its exchange-traded funds as it no longer had the intent to hold these underwater securities through full recovery of cost. At December 31, 2013, the fair value of the Company s equities was $407,571 (2012: $434,636), which included $5,315 (2012: $6,463) of gross unrealized losses. 24

25 3. Investments (continued) e) Restricted Investments In order to support the Company s obligations in regulatory jurisdictions where it operates as a nonadmitted carrier, the Company provides collateral in the form of assets held in trust and, to a lesser extent, letters of credit. Refer to Note 8 for further information on collateral requirements upon issuance of certain letters of credit. Restricted investments primarily consist of high-quality fixed maturity and shortterm investment securities. The fair value of the Company s restricted investments primarily relates to the items, as noted in the table below Collateral in Trust for inter-company agreements $ 2,261,081 $ 2,134,931 Collateral for secured letter of credit facilities 777, ,062 Collateral in Trust for third party agreements 152, ,550 Total restricted investments $ 3,190,926 $ 2,746,543 f) Reverse Repurchase Agreements At December 31, 2013, the Company held $11,400 (2012: $39,000) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents on the Company s Balance Sheets. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, the Company receives principal and interest income. 25

26 4. Fair Value Measurements Fair Value Hierarchy Fair value is defined as the price to sell an asset or transfer a liability (i.e. the exit price ) in an orderly transaction between market participants. The Company uses a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows: Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company s own judgments about assumptions that market participants might use. The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of its valuation technique (from market to cash flow approach) or may cause it to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy. The following valuation techniques and assumptions were used in estimating the fair value of financial instruments as well as the general classification of such financial instruments pursuant to the above fair value hierarchy. 26

27 4. Fair Value Measurements (continued) Fixed Maturities At each valuation date, the market approach valuation technique is used to estimate the fair value of fixed maturities portfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of pricing matrix models using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services are sourced from multiple vendors, when available, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, non-binding quotes are obtained from broker-dealers who are active in the corresponding markets. The following describes the significant inputs generally used to determine the fair value of fixed maturities by asset class. U.S. government and agency U.S. government and agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the FNMA, FHLMC and GNMA. As the fair values of U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2. Non-U.S. government Non-U.S. government securities comprise debt securities issued by non-u.s. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair value of these securities is based on prices obtained from international indices or a valuation model that includes the following inputs: interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign debt security held in terms of issuer, maturity and seniority. As the significant inputs are observable market inputs, the fair value of non-u.s. government securities are classified within Level 2. Corporate debt Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the riskfree yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of corporate debt securities are classified within Level 2. Where pricing is unavailable from pricing services, non-binding quotes are obtained from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3. 27

28 4. Fair Value Measurements (continued) MBS The portfolio of RMBS and CMBS are originated by both agencies and non-agencies. The fair values of these securities are determined through the use of a pricing model (including Option Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the MBS. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the significant inputs used to price MBS are observable market inputs, the fair values of the MBS are classified within Level 2. Where pricing is unavailable from pricing services, non-binding quotes are obtained from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3. ABS ABS include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO debt originated by a variety of financial institutions. Similarly to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, non-binding quotes are obtained from broker-dealers or a discounted cash flow model is used to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3. Municipals The municipal portfolio comprises revenue and general obligation bonds issued by U.S. domiciled state and municipality entities. The fair value of these securities is determined using spreads obtained from brokerdealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2. Equity Securities Equity securities include U.S. and non-u.s. common stocks and exchange-traded funds. Common stocks and exchange-traded funds are classified within Level 1 as their fair values are based on unadjusted market prices in active markets. Other Investments As a practical expedient, fair values for hedge funds, direct lending funds and the CLO fund are estimated using the net asset value ( NAV ) of the fund as advised by external fund managers or third party administrators. For each of these funds, the NAV is based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund s governing documents and in accordance with U.S. GAAP. For any funds for which the Company has not yet received a NAV concurrent with its period end date, an estimate of the change in fair value for the period subsequent to the most recent NAV is recorded. Such estimates are based on return estimates for the period between the most recently issued NAV and the period end date; these estimates are obtained from the relevant fund managers. Accordingly, there is typically no reporting lag in fair value measurements for these funds. Historically, valuation estimates incorporating these return estimates have not significantly diverged from the subsequent NAVs. 28

29 4. Fair Value Measurements (continued) Within the hedge fund, direct lending fund and CLO fund industries; there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, the Company performs a number of monitoring procedures designed to assist in the assessment of the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager, regular evaluation of fund performance against applicable benchmarks and the back testing of fair value estimates against subsequently received NAVs. Back testing involves comparing previously reported values for each individual fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values). Hedge fund investments with liquidity terms allowing the Company to fully redeem its holdings at the applicable NAV in the near term are classified as Level 2. Certain investments in hedge funds, all direct lending funds and the CLO fund have redemption restrictions (see Note 3 for further details) preventing the Company from redeeming in the near term and therefore are classified as Level 3. At December 31, 2013, the direct investment in CLO Equities were classified within Level 3 as the fair value for these securities were estimated using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in the secondary markets. Short-Term Investments Short-term investments primarily comprise highly liquid securities with maturities greater than three months but less than one year from the date of purchase. These securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value. Derivative Instruments Foreign currency forward contracts and interest rate swaps are customized to the Company s hedging strategies and trade in the over-the-counter derivative market. The market approach valuation technique is used to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly, these derivatives are classified within Level 2. 29

30 4. Fair Value Measurements (continued) The tables below present the financial instruments measured at fair value on a recurring basis at : Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Total Assets Inputs Inputs Fair December 31, 2013 (Level 1) (Level 2) (Level 3) Value Assets Fixed maturities U.S Government and agency $ 845,838 $ 223,536 $ - $ 1,069,374 Non U.S. Government - 764, ,850 Corporate debt - 2,734,575-2,734,575 Agency MBS - 1,738,772-1,738,772 CMBS - 589,507 4, ,525 Non-Agency RMBS - 46,529-46,529 ABS - 591,762 30, ,561 Municipals - 70,868-70, ,838 6,760,399 34,817 7,641,054 Equity securities Common stocks 356, ,971 Exchange-traded funds 50, , , ,571 Other investments Hedge funds - 465, , ,128 Direct lending funds ,133 22,133 CLO-Equities ,866 73, , , ,127 Short-term investments - 31,187-31,187 Derivative instruments (see Note 5) - 6,824-6,824 Total $ 1,253,409 $ 7,263,474 $ 503,880 $ 9,020,763 Liabilities Derivative instruments (see Note 5) $ - $ 1,152 $ - $ 1,152 30

31 4. Fair Value Measurements (continued) Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Total Assets Inputs Inputs Fair December 31, 2012 (Level 1) (Level 2) (Level 3) Value Assets Fixed maturities U.S Government and agency $ 838,558 $ 197,058 $ - $ 1,035,616 Non U.S. Government - 668, ,089 Corporate debt - 3,026,684-3,026,684 Agency MBS - 1,786,210-1,786,210 CMBS - 563,917 4, ,213 Non-Agency RMBS - 69,057 1,110 70,167 ABS - 383,794 53, ,578 Municipals - 46,428-46, ,558 6,741,237 59,190 7,638,985 Equity securities Common stocks 384, ,836 Exchange-traded funds 49, , , ,636 Other investments Hedge funds - 399, , ,459 Direct lending funds CLO-Equities ,435 62, , , ,894 Short-term investments - 82,402-82,402 Other assets (see Note 5) - 5,838-5,838 Total $ 1,273,194 $ 7,228,807 $ 435,754 $ 8,937,755 Liabilities Other liabilities (see Note 5) $ - $ 3,737 $ - $ 3,737 During 2013 and 2012, there were no transfers between levels 1 and 2. 31

32 4. Fair Value Measurements (continued) Level 3 Fair Value Measurements Except for hedge funds, direct lending funds and the CLO fund priced using NAV as a practical expedient and certain fixed maturities priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs used by the Company in estimating the fair value at December 31, 2013 for its investments classified as Level 3 in the fair value hierarchy. These significant unobservable inputs have not changed significantly from December 31, Where appropriate, this table has been reconciled back to the asset class total Level 3 holdings. Valuation Unobservable Weighted Fair Value Technique Input Range Average ABS CLO Debt $ 29,944 Discounted cash flow Credit spreads 3.3%-4.6% 3.7% Illiquidity discount (1) 5% 5% 855 Broker-dealer quote n/a n/a n/a $ 30,799 Other investments $ 39,706 Discounted cash flow Default rates 4.0%-5.0% 4.4% - CLO Equities Loss severity rate 53.5% 53.5% Collateral spreads 2.6%-3.4% 3.3% Estimated maturity years 4.2 years 34,160 n/a n/a n/a $ 73,866 (1) Judgmentally determined based on limited trades of similar securities observed in the secondary markets. The Company s CLO Debt represent holdings of investment-grade debt tranches within collateralized loan obligations with underlying collateral of loans originated primarily by U.S. corporations. The CLO Debt in the table represent securities where broker-dealer quotes are unavailable so the Company estimates fair value through the use of a discounted cash flow model (income approach). This model estimates fair values by discounting the estimated cash flows based on current credit spreads for similar securities, derived from observable offer prices. As these securities are thinly traded in the secondary market, the Company applies an illiquidity discount to these discounted cash flows in developing the estimate of fair value. Significant increases (decreases) in either of the significant unobservable inputs (credit spread, illiquidity discount) in isolation would result in lower (higher) fair value estimates for CLO Debt. The interrelationship between these inputs is insignificant. These inputs are updated on a quarterly basis and the reasonableness of the resulting prices is assessed through a comparison to observable offer prices for similar securities. 32

33 4. Fair Value Measurements (continued) The CLO - Equities market continues to be mostly inactive with only a small number of transactions being observed in the market and fewer still involving transactions in the Company s CLO - Equities. Accordingly, the Company continues to rely on the use of its internal discounted cash flow model (income approach) to estimate the fair value of CLO - Equities. Of the significant inputs into this model, the default and loss severity rates are the most judgmental unobservable market inputs to which the valuation of CLO - Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in lower (higher) fair value estimates for the Company s CLO - Equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs as they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (decrease) in either of these significant inputs in isolation would result in higher (lower) fair value estimates for the Company s CLO - Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates. On a quarterly basis, the Company s valuation processes for both CLO Debt and CLO - Equities include a review of the underlying cash flows and key assumptions used in the discounted cash flow models. The Company reviews and updates the above significant unobservable inputs based on information obtained from secondary markets, including from the managers of the CLOs the Company holds. These inputs are the responsibility of management and, in order to ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, the Company updates the assumptions through regular communication with industry participants and ongoing monitoring of the deals in which the Company participates (e.g. default and loss severity rate trends), the Company maintains a current understanding of the market conditions, historical results, as well as emerging trends that may impact future cash flows. By maintaining this current understanding, the Company is able to assess the reasonableness of the inputs ultimately used in the models. 33

34 December 31, 2013 andd Fair Value Measurements (continued) The following table presents changes in Level 3 for financial instruments measured at fair value on a recurring basis for the years ended December 31, 2013 and 2012: 34