Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

OR

 

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

For the transition period from              to             .

Commission file number 1-14536

 

 

PartnerRe Ltd.

(Exact name of registrant as specified in its charter)

 

 

 

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

90 Pitts Bay Road, Pembroke, HM08, Bermuda

(Address of principal executive offices) (Zip Code)

(441) 292-0888

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

 

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

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

The number of the registrant’s common shares (par value $1.00 per share) outstanding, net of treasury shares, as of November 1, 2011 was 67,750,164

 

 

 


Table of Contents

PartnerRe Ltd.

INDEX TO FORM 10-Q

 

     Page  
   PART I—FINANCIAL INFORMATION   
ITEM 1.   

Financial Statements

  
   Report of Independent Registered Public Accounting Firm      3   
  

Unaudited Condensed Consolidated Balance Sheets—September 30, 2011 and December 31, 2010

     4   
  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) —Three Months and Nine Months Ended September 30, 2011 and 2010

     5   
  

Unaudited Condensed Consolidated Statements of Shareholders’ Equity—Nine Months Ended September 30, 2011 and 2010

     6   
  

Unaudited Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2011 and 2010

     7   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     8   
ITEM 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   
ITEM 3.   

Quantitative and Qualitative Disclosures about Market Risk

     72   
ITEM 4.   

Controls and Procedures

     75   
   PART II—OTHER INFORMATION   
ITEM 1.   

Legal Proceedings

     76   
ITEM 1A.   

Risk Factors

     76   
ITEM 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     76   
ITEM 3.   

Defaults upon Senior Securities

     77   
ITEM 4.   

Reserved

     77   
ITEM 5.   

Other Information

     77   
ITEM 6.   

Exhibits

     77   
  

Signatures

     78   
  

Exhibit Index

     79   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PartnerRe Ltd.

We have reviewed the accompanying condensed consolidated balance sheet of PartnerRe Ltd. and subsidiaries (the “Company”) as of September 30, 2011, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2011 and 2010, and of shareholders’ equity, and of cash flows for the nine-month periods ended September 30, 2011 and 2010. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of December 31, 2010 and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and of cash flows for the year then ended (not presented herein); and in our report dated February 28, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche Ltd.

Deloitte & Touche Ltd.

Hamilton, Bermuda

November 3, 2011

 

3


Table of Contents

PartnerRe Ltd.

Unaudited Condensed Consolidated Balance Sheets

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

 

     September 30,
2011
    December 31,
2010
 

Assets

    

Investments:

    

Fixed maturities, trading securities, at fair value (amortized cost: 2011, $13,754,316; 2010, $12,394,797)

   $ 14,356,056     $ 12,824,389  

Short-term investments, trading securities, at fair value (amortized cost: 2011, $97,628; 2010, $49,132)

     97,661       49,397  

Equities, trading securities, at fair value (cost: 2011, $1,031,364; 2010, $942,745)

     1,001,148       1,071,676  

Other invested assets

     334,991       352,405  
  

 

 

   

 

 

 

Total investments

     15,789,856       14,297,867  

Funds held – directly managed (cost: 2011, $1,294,459; 2010, $1,751,276)

     1,322,761       1,772,118  

Cash and cash equivalents, at fair value, which approximates amortized cost

     1,073,432       2,111,084  

Accrued investment income

     198,503       201,928  

Reinsurance balances receivable

     2,313,538       2,076,884  

Reinsurance recoverable on paid and unpaid losses

     447,015       382,878  

Funds held by reinsured companies

     814,950       937,032  

Deferred acquisition costs

     602,275       595,557  

Deposit assets

     235,470       256,702  

Net tax assets

     38,532       14,960  

Goodwill

     455,533       455,533  

Intangible assets

     142,760       178,715  

Other assets

     184,488       83,113  
  

 

 

   

 

 

 

Total assets

   $ 23,619,113     $ 23,364,371  
  

 

 

   

 

 

 

Liabilities

    

Unpaid losses and loss expenses

   $ 11,352,599     $ 10,666,604  

Policy benefits for life and annuity contracts

     1,678,201       1,750,410  

Unearned premiums

     1,787,351       1,599,139  

Other reinsurance balances payable

     493,926       491,194  

Deposit liabilities

     244,775       268,239  

Net tax liabilities

     339,031       316,325  

Accounts payable, accrued expenses and other

     194,558       244,552  

Debt related to senior notes

     750,000       750,000  

Debt related to capital efficient notes

     70,989       70,989  
  

 

 

   

 

 

 

Total liabilities

     16,911,430       16,157,452  
  

 

 

   

 

 

 

Shareholders’ Equity

    

Common shares (par value $1.00; issued: 2011, 84,580,948 shares; 2010, 84,033,089 shares)

     84,581       84,033  

Preferred shares (par value $1.00; issued and outstanding: 2011, 35,750,000 shares; 2010, 20,800,000 shares; aggregate liquidation value: 2011, $893,750; 2010, $520,000)

     35,750       20,800  

Additional paid-in capital

     3,796,410       3,419,864  

Accumulated other comprehensive (loss) income:

    

Currency translation adjustment

     5,227       16,101  

Other accumulated comprehensive loss (net of tax of: 2011, $5,483; 2010, $4,872)

     (13,094     (12,045

Retained earnings

     4,108,524       4,761,178  

Common shares held in treasury, at cost (2011, 16,831,534 shares; 2010, 14,046,895 shares)

     (1,309,715     (1,083,012
  

 

 

   

 

 

 

Total shareholders’ equity

     6,707,683       7,206,919  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 23,619,113     $ 23,364,371  
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

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

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

 

     For the three
months ended
September 30,
2011
    For the three
months ended
September 30,
2010
    For the nine
months ended
September 30,
2011
    For the nine
months ended
September 30,
2010
 

Revenues

        

Gross premiums written

   $ 1,095,326     $ 1,008,464     $ 3,735,091     $ 4,057,965  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 1,079,557     $ 987,612     $ 3,606,444     $ 3,884,511  

Decrease (increase) in unearned premiums

     214,762       325,802       (140,091     (312,687
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     1,294,319       1,313,414       3,466,353       3,571,824  

Net investment income

     163,647       164,402       473,608       511,978  

Net realized and unrealized investment gains (losses)

     26,139       293,164       (7,860     484,683  

Other income

     1,434       3,363       4,843       5,391  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,485,539       1,774,343       3,936,944       4,573,876  

Expenses

        

Losses and loss expenses and life policy benefits

     881,626       748,879       3,303,366       2,465,847  

Acquisition costs

     262,489       261,668       699,589       725,919  

Other operating expenses

     103,822       118,221       321,813       406,506  

Interest expense

     12,216       12,297       36,730       32,232  

Amortization of intangible assets

     9,520       10,003       27,512       22,639  

Net foreign exchange (gains) losses

     (10,587     27,074       (20,020     12,426  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,259,086       1,178,142       4,368,990       3,665,569  

Income (loss) before taxes and interest in (losses) earnings of equity investments

     226,453       596,201       (432,046     908,307  

Income tax expense

     41,803       72,576       65,632       117,892  

Interest in (losses) earnings of equity investments

     (4,527     1,312       (4,970     5,103  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     180,123       524,937       (502,648     795,518  

Preferred dividends

     14,352       8,631       31,614       25,894  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 165,771     $ 516,306     $ (534,262   $ 769,624  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

        

Net income (loss)

   $ 180,123     $ 524,937     $ (502,648   $ 795,518  

Change in currency translation adjustment

     (54,958     107,572       (10,874     (66,506

Change in other accumulated comprehensive income (loss), net of tax

     1,106       (1,260     (1,049     (6,514
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 126,271     $ 631,249     $ (514,571   $ 722,498  
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data

        

Net income (loss) per common share:

        

Basic net income (loss)

   $ 2.45     $ 6.86     $ (7.88   $ 9.86  

Diluted net income (loss)

   $ 2.43     $ 6.76     $ (7.88   $ 9.68  

Weighted average number of common shares outstanding

     67,743,296       75,238,329       67,788,427       78,076,561  

Weighted average number of common shares and common share equivalents outstanding

     68,181,982       76,428,460       67,788,427       79,494,247  

Dividends declared per common share

   $ 0.60     $ 0.50     $ 1.75     $ 1.50  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

     For the nine
months ended
September 30,
2011
    For the nine
months ended
September 30,
2010
 

Common shares

    

Balance at beginning of period

   $ 84,033     $ 82,586  

Issuance of common shares

     548       953  
  

 

 

   

 

 

 

Balance at end of period

     84,581       83,539  

Preferred shares

    

Balance at beginning of period

     20,800       20,800  

Issuance of preferred shares

     14,950       —     
  

 

 

   

 

 

 

Balance at end of period

     35,750       20,800  

Additional paid-in capital

    

Balance at beginning of period

     3,419,864       3,357,004  

Issuance of preferred shares

     346,772       —     

Issuance of common shares

     29,774       38,563  
  

 

 

   

 

 

 

Balance at end of period

     3,796,410       3,395,567  

Accumulated other comprehensive (loss) income

    

Balance at beginning of period

     4,056       84,927  

Change in currency translation adjustment

     (10,874     (66,506

Change in other accumulated comprehensive loss, net of tax

     (1,049     (6,514
  

 

 

   

 

 

 

Balance at end of period

     (7,867     11,907  

Retained earnings

    

Balance at beginning of period

     4,761,178       4,100,782  

Net (loss) income

     (502,648     795,518  

Dividends on common shares

     (118,392     (117,078

Dividends on preferred shares

     (31,614     (25,894
  

 

 

   

 

 

 

Balance at end of period

     4,108,524       4,753,328  

Common shares held in treasury

    

Balance at beginning of period

     (1,083,012     (372

Repurchase of common shares

     (226,703     (682,476
  

 

 

   

 

 

 

Balance at end of period

     (1,309,715     (682,848
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 6,707,683     $ 7,582,293  
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

 

     For the nine
months ended
September 30,
2011
    For the nine
months ended
September 30,
2010
 

Cash flows from operating activities

    

Net (loss) income

   $ (502,648   $ 795,518  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Amortization of net premium on investments

     63,268       59,766  

Amortization of intangible assets

     27,512       22,639  

Net realized and unrealized investment losses (gains)

     7,860       (484,683

Changes in:

    

Reinsurance balances, net

     (228,133     (165,012

Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable

     (1,923     (2,061

Funds held by reinsured companies and funds held – directly managed

     573,220       225,757  

Deferred acquisition costs

     8,716       (31,300

Net tax assets and liabilities

     (2,893     (50,269

Unpaid losses and loss expenses including life policy benefits

     500,038       172,974  

Unearned premiums

     140,091       312,687  

Other net changes in operating assets and liabilities

     (1,176     56,269  
  

 

 

   

 

 

 

Net cash provided by operating activities

     583,932       912,285  

Cash flows from investing activities

    

Sales of fixed maturities

     5,049,822       5,609,630  

Redemptions of fixed maturities

     967,020       962,540  

Purchases of fixed maturities

     (7,412,275     (5,957,460

Sales and redemptions of short-term investments

     242,234       175,733  

Purchases of short-term investments

     (292,833     (86,252

Sales of equities

     492,491       268,625  

Purchases of equities

     (513,525     (485,455

Other, net

     (131,989     (160,862
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (1,599,055     326,499  

Cash flows from financing activities

    

Cash dividends paid to shareholders

     (150,006     (142,972

Net proceeds from issuance of preferred shares

     361,722       —     

Repurchase of common shares

     (244,222     (682,476

Issuance of common shares

     13,219       17,487  

Proceeds from issuance of senior notes

     —          500,000  

Contract fees on forward sale agreement

     —          (2,638

Repayment of debt

     —          (200,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (19,287     (510,599

Effect of foreign exchange rate changes on cash

     (3,242     (28,772

(Decrease) increase in cash and cash equivalents

     (1,037,652     699,413  

Cash and cash equivalents—beginning of period

     2,111,084       738,309  
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 1,073,432     $ 1,437,722  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Taxes paid

   $ 136,188     $ 182,335  

Interest paid

   $ 24,630     $ 18,365  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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PartnerRe Ltd.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

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

2. Significant Accounting Policies

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

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

 

   

Unpaid losses and loss expenses;

 

   

Policy benefits for life and annuity contracts;

 

   

Gross and net premiums written and net premiums earned;

 

   

Recoverability of deferred acquisition costs;

 

   

Recoverability of deferred tax assets;

 

   

Valuation of goodwill and intangible assets; and

 

   

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

In the opinion of Management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. As the Company’s reinsurance operations are exposed to low-frequency, high-severity risk events, some of which are seasonal, results for certain interim periods may include unusually low loss experience, while results for other interim periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods are not necessarily indicative of results for the full year. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

3. New Accounting Pronouncements

In October 2010, the FASB issued new accounting guidance clarifying that only acquisition costs related directly to the successful acquisition of new or renewal insurance contracts may be capitalized. Those acquisition costs that may be capitalized include incremental direct costs, such as commissions, and a portion of salaries and benefits of certain employees who are involved in underwriting and policy issuance, that are directly related to time spent on an acquired contract. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have an impact on its consolidated shareholders’ equity or net income.

In May 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance, which updates the existing guidance, related to fair value measurement and disclosures. The amendments clarify or change the application of certain existing requirements and also require some additional disclosures. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of the adoption of this guidance on its disclosures.

In September 2011, the FASB issued new accounting guidance, which updates the existing guidance, related to goodwill impairment testing. The amendments revise the application of certain existing requirements to allow the option of performing a qualitative goodwill impairment assessment before calculating the fair value of reporting units, which could, depending on the results of the assessment, eliminate the need for further testing of goodwill for impairment. The guidance is effective for interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on its consolidated shareholders’ equity or net income.

 

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Table of Contents

4. Fair Value

(a) Fair Value of Financial Instrument Assets

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

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

 

   

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

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

 

   

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

The Company’s financial instruments that it measures at fair value using Level 2 inputs generally include: U.S. Treasury bonds; U.S. Government Sponsored Entities bonds; Organization for Economic Co-operation and Development Sovereign Treasury bonds; U.S. state and municipal entities bonds; investment grade and high yield corporate bonds; catastrophe bonds; mortality bonds; mortgage-backed securities; asset-backed securities; certain fixed income mutual funds; foreign exchange forward contracts and over-the-counter derivatives such as foreign currency option contracts, equity put and call options, credit default swaps, non-exchange traded futures and interest rate swaps.

 

   

Level 3 inputs—Unobservable inputs.

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

 

9


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The Company’s financial instruments measured at fair value include investments classified as trading securities, certain other invested assets and the segregated investment portfolio underlying the funds held – directly managed account. At September 30, 2011 and December 31, 2010, the Company’s financial instruments measured at fair value were categorized between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):

 

September 30, 2011

   Quoted prices in
active markets for
identical assets

(Level 1)
    Significant other
observable inputs

(Level 2)
    Significant
unobservable
inputs

(Level 3)
    Total  

Fixed maturities

        

U.S. government and government sponsored entities

   $ —        $ 1,188,082     $ —        $ 1,188,082  

U.S. municipals

     —          12,321       88,845       101,166  

Non-U.S. sovereign government, supranational and government related

     —          3,229,597       —          3,229,597  

Corporate

     —          6,008,083       112,047       6,120,130  

Asset-backed securities

     —          381,089       249,719       630,808  

Residential mortgage-backed securities

     —          2,999,911       —          2,999,911  

Other mortgage-backed securities

     —          86,362       —          86,362  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —        $ 13,905,445     $ 450,611     $ 14,356,056  

Short-term investments

   $ —        $ 97,661     $ —        $ 97,661  

Equities

        

Consumer noncyclical

   $ 145,223     $ 222     $ —        $ 145,445  

Energy

     89,395       1,214       —          90,609  

Technology

     90,119       —          —          90,119  

Finance

     80,072       747       153       80,972  

Communications

     75,365       39       —          75,404  

Industrials

     64,275       —          —          64,275  

Consumer cyclical

     58,789       128       —          58,917  

Insurance

     35,328       356       —          35,684  

Other

     70,878       4,983       —          75,861  

Mutual funds and exchange traded funds

     41,867       235,482       6,513       283,862  
  

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 751,311     $ 243,171     $ 6,666     $ 1,001,148  

Other invested assets

        

Derivative assets

        

Foreign exchange forward contracts

   $ —        $ 3,110     $ —        $ 3,110  

Futures contracts

     —          52       —          52  

Credit default swaps (protection purchased)

     —          158       —          158  

Credit default swaps (assumed risks)

     —          181       —          181  

Insurance-linked securities

     23       —          189       212  

Total return swaps

     —          —          6,467       6,467  

Other assets

     —          —          92,043       92,043  

Derivative liabilities

        

Foreign exchange forward contracts

     —          (11,361     —          (11,361

Foreign currency option contracts

     —          (13,091     —          (13,091

Futures contracts

     (9,102     (2,296     —          (11,398

Credit default swaps (protection purchased)

     —          (1,163     —          (1,163

Credit default swaps (assumed risks)

     —          (1,356     —          (1,356

Insurance-linked securities

     (8     —          (2,209     (2,217

Total return swaps

     —          (478     (12,017     (12,495

Interest rate swaps

     —          (8,064     —          (8,064

Other liabilities

     —          (2,314     —          (2,314
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ (9,087   $ (36,622   $ 84,473     $ 38,764  

Funds held – directly managed

        

U.S. government and government sponsored entities

   $ —        $ 267,046     $ —        $ 267,046  

U.S. municipals

     —          —          334       334  

Non-U.S. sovereign government, supranational and government related

     —          303,041       —          303,041  

Corporate

     —          530,899       —          530,899  

Short-term investments

     —          34,828       —          34,828  

Other invested assets

     —          —          17,838       17,838  
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ —        $ 1,135,814     $ 18,172     $ 1,153,986  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 742,224     $ 15,345,469     $ 559,922     $ 16,647,615  

 

10


Table of Contents

December 31, 2010

   Quoted prices in
active  markets for
identical assets
(Level 1)
    Significant other
observable  inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
    Total  

Fixed maturities

        

U.S. government and government sponsored entities

   $ —        $ 906,032     $ —        $ 906,032  

U.S. municipals

     —          11,568       55,124       66,692  

Non-U.S. sovereign government, supranational and government related

     —          2,819,193       —          2,819,193  

Corporate

     —          6,066,865       76,982       6,143,847  

Asset-backed securities

     —          343,518       213,139       556,657  

Residential mortgage-backed securities

     —          2,305,525       —          2,305,525  

Other mortgage-backed securities

     —          26,153       290       26,443  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —        $ 12,478,854     $ 345,535     $ 12,824,389  

Short-term investments

   $ —        $ 49,397     $ —        $ 49,397  

Equities

        

Consumer noncyclical

   $ 186,016     $ —        $ —        $ 186,016  

Technology

     119,214       —          —          119,214  

Energy

     118,372       —          —          118,372  

Finance

     112,309       —          2,486       114,795  

Communications

     110,982       —          —          110,982  

Industrials

     100,572       —          —          100,572  

Consumer cyclical

     81,595       —          —          81,595  

Insurance

     48,611       —          —          48,611  

Other

     90,220       —          —          90,220  

Mutual funds and exchange traded funds

     60,372       —          40,927       101,299  
  

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 1,028,263     $ —        $ 43,413     $ 1,071,676  

Other invested assets

        

Derivative assets

        

Foreign exchange forward contracts

   $ —        $ 27,880     $ —        $ 27,880  

Foreign currency option contracts

     —          3,516       —          3,516  

Futures contracts

     30,593       —          —          30,593  

Credit default swaps (protection purchased)

     —          93       —          93  

Credit default swaps (assumed risks)

     —          533       —          533  

Insurance-linked securities

     1,320       —          —          1,320  

Total return swaps

     —          449       5,592       6,041  

Interest rate swaps

     —          246       —          246  

Other assets

     —          —          86,278       86,278  

Derivative liabilities

        

Foreign exchange forward contracts

     —          (13,647     —          (13,647

Futures contracts

     (7,956     —          —          (7,956

Credit default swaps (protection purchased)

     —          (2,407     —          (2,407

Credit default swaps (assumed risks)

     —          (401     —          (401

Insurance-linked securities

     (695     —          (698     (1,393

Total return swaps

     —          —          (12,848     (12,848

Interest rate swaps

     —          (6,033     —          (6,033

Other liabilities

     —          (441     —          (441
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 23,262     $ 9,788     $ 78,324     $ 111,374  

Funds held – directly managed

        

U.S. government and government sponsored entities

   $ —        $ 288,164     $ —        $ 288,164  

U.S. municipals

     —          —          368       368  

Non-U.S. sovereign government, supranational and government related

     —          384,553       —          384,553  

Corporate

     —          798,587       —          798,587  

Mortgage/asset-backed securities

     —          —          12,118       12,118  

Short-term investments

     —          38,613       —          38,613  

Other invested assets

     —          —          20,528       20,528  
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ —        $ 1,509,917     $ 33,014     $ 1,542,931  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,051,525     $ 14,047,956     $ 500,286     $ 15,599,767  

 

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Table of Contents

At September 30, 2011 and December 31, 2010, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $296.2 million and $241.0 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting, equity method of accounting or investment company accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $1,154.0 million and $1,542.9 million at September 30, 2011 and December 31, 2010, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $135.2 million and $129.2 million, respectively, and accrued investment income of $17.2 million and $19.9 million, respectively. At September 30, 2011 and December 31, 2010, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $16.4 million and $80.1 million, respectively, which primarily related to other assets and liabilities held by Colisée Re related to the underlying business, which are carried at cost (see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010).

At September 30, 2011 and December 31, 2010, substantially all of the accrued investment income in the Unaudited Condensed Consolidated Balance Sheets related to the Company’s investments and the investments underlying the funds held – directly managed account for which the fair value option was elected.

During the three months and nine months ended September 30, 2011, there were no significant transfers between Level 1 and Level 2.

Disclosures about the fair value of financial instruments that the Company does not measure at fair value exclude insurance contracts and certain other financial instruments. At September 30, 2011 and December 31, 2010, the fair values of financial instrument assets recorded in the Unaudited Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

 

12


Table of Contents

The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended September 30, 2011 and 2010 (in thousands of U.S. dollars):

 

For the three months ended September 30, 2011

   Balance at
beginning
of period
    Realized  and
unrealized

investment
gains (losses)

included in
net income
    Purchases
and
issuances(a)
     Sales
and
settlements(a)
    Net
transfers
(out of)/into
Level 3 (b)
     Balance
at end
of period
    Change in
unrealized
investment
gains (losses)
relating to
assets held at
end of period
 

Fixed maturities

                

U.S. municipals

   $ 86,782      $ 2,100      $ —         $ (37   $ —         $ 88,845      $ 2,100   

Corporate

     116,428        969        195         (5,545     —           112,047        582   

Asset-backed securities

     261,843        2,005        39,159         (53,288     —           249,719        4,627   

Other mortgage-backed securities

     1        (1     —           —          —           —          —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturities

   $ 465,054      $ 5,073      $ 39,354       $ (58,870   $ —         $ 450,611      $ 7,309   

Short-term investments

   $ 2,923      $ —        $ —         $ (2,923   $ —         $ —        $ —     

Equities

                

Finance

   $ 163      $ (10   $ —         $ —        $ —         $ 153      $ (10

Mutual funds and exchange traded funds

     6,542        (29     —           —          —           6,513        (29
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equities

   $ 6,705      $ (39   $ —         $ —        $ —         $ 6,666      $ (39

Other invested assets

                

Derivatives, net

   $ (21,535   $ 3,290      $ 675       $ 10,000      $ —         $ (7,570   $ 3,290   

Other

     74,018        (9,391     32,808         (5,392     —           92,043        (11,988
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Other invested assets

   $ 52,483      $ (6,101   $ 33,483       $ 4,608      $ —         $ 84,473      $ (8,698

Funds held – directly managed

                

U.S. municipals

   $ 355      $ (21   $ —         $ —        $ —         $ 334      $ (21

Other invested assets

     21,720        (3,882     —           —          —           17,838        (2,954
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Funds held – directly managed

   $ 22,075      $ (3,903   $ —         $ —        $ —         $ 18,172      $ (2,975
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 549,240      $ (4,970   $ 72,837       $ (57,185   $ —         $ 559,922      $ (4,403

 

(a) Purchases and issuances of derivatives includes issuances of $nil. Sales and settlements of derivatives includes settlements of $10.0 million.
(b) The Company’s policy is to recognize the transfers between the hierarchy levels at the beginning of the period.

 

For the three months ended September 30, 2010

   Balance at
beginning
of period
    Realized and
unrealized
investment
gains (losses)

included in
net income
    Net
purchases,
sales and
settlements
    Net
transfers
into
Level 3 (b)
     Balance
at end of

period
    Change in
unrealized
investment gains
(losses) relating
to assets held
at end of period
 

Fixed maturities

             

U.S. municipals

   $ 9,999     $ 533     $ —        $ —         $ 10,532     $ 533  

Corporate

     15,437       109       856       175        16,577       109  

Asset-backed securities

     225,958       (1,066     (22,668     —           202,224       (3,677

Other mortgage-backed securities

     854       (25     (275     —           554       (25
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturities

   $ 252,248     $ (449   $ (22,087   $ 175      $ 229,887     $ (3,060

Equities

             

Finance

   $ 2,115     $ 313     $ —        $ —         $ 2,428     $ 313  

Mutual funds and exchange traded funds

     39,612       643       —          —           40,255       643  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equities

   $ 41,727     $ 956     $ —        $ —         $ 42,683     $ 956  

Other invested assets

             

Derivatives, net

   $ (14,579   $ 10,011     $ (2,000   $ —         $ (6,568   $ 9,023  

Other

     50,289       (1,580     30,162       —           78,871       (1,580
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other invested assets

   $ 35,710     $ 8,431     $ 28,162     $ —         $ 72,303     $ 7,443  

Funds held – directly managed

             

U.S. municipals

   $ 357     $ 12     $ —        $ —         $ 369     $ 12  

Mortgage/asset-backed securities

     12,577       (319     —          —           12,258       (319

Other invested assets

     26,825       4,063       —          —           30,888       4,063  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Funds held – directly managed

   $ 39,759     $ 3,756     $ —        $ —         $ 43,515     $ 3,756  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 369,444     $ 12,694     $ 6,075     $ 175      $ 388,388     $ 9,095  

 

13


Table of Contents

The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the nine months ended September 30, 2011 and 2010 (in thousands of U.S. dollars):

 

For the nine months ended September 30, 2011

   Balance at
beginning
of period
    Realized  and
unrealized

investment
gains (losses)
included in
net loss
    Purchases
and
issuances(a)
    Sales
and
settlements(a)
    Net
transfers
into
Level 3 (b)
     Balance
at end
of period
    Change in
unrealized
investment

gains (losses)
relating to
assets held at
end of period
 

Fixed maturities

               

U.S. municipals

   $ 55,124     $ 3,724     $ 30,064     $ (67   $ —         $ 88,845     $ 3,724  

Corporate

     76,982       (36,097     41,073       (10,091     40,180        112,047       2,949  

Asset-backed securities

     213,139       12,683       140,803       (116,906     —           249,719       12,885  

Residential mortgage-backed securities

     —          1,385       4,212       (5,597     —           —          —     

Other mortgage-backed securities

     290       (225     408       (473     —           —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturities

   $ 345,535     $ (18,530   $ 216,560     $ (133,134   $ 40,180      $ 450,611     $ 19,558  

Short-term investments

   $ —        $ (1,069   $ 3,992     $ (2,923   $ —         $ —        $ —     

Equities

               

Finance

   $ 2,486     $ 229     $ —        $ (2,562   $ —         $ 153     $ 3  

Mutual funds and exchange traded funds

     40,927       1,213       —          (35,627     —           6,513       (411
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equities

   $ 43,413     $ 1,442     $ —        $ (38,189   $ —         $ 6,666     $ (408

Other invested assets

               

Derivatives, net

   $ (7,954   $ (5,513   $ (4,103   $ 10,000     $ —         $ (7,570   $ 3,790  

Other

     86,278       (12,598     39,356       (20,993     —           92,043       (14,485
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other invested assets

   $ 78,324     $ (18,111   $ 35,253     $ (10,993   $ —         $ 84,473     $ (10,695

Funds held – directly managed

               

U.S. municipals

   $ 368     $ (34   $ —        $ —        $ —         $ 334     $ (34

Mortgage/asset-backed securities

     12,118       (150     —          (11,968     —           —          —     

Other invested assets

     20,528       (2,690     —          —          —           17,838       (2,030
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Funds held – directly managed

   $ 33,014     $ (2,874   $ —        $ (11,968   $ —         $ 18,172     $ (2,064
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 500,286     $ (39,142   $ 255,805     $ (197,207   $ 40,180      $ 559,922     $ 6,391  

 

(a) Purchases and issuances of derivatives includes issuances of $5.1 million. Sales and settlements of derivatives includes settlements of $10.0 million.
(b) The Company’s policy is to recognize the transfers between the hierarchy levels at the beginning of the period.

 

14


Table of Contents

For the nine months ended September 30, 2010

   Balance at
beginning
of period
    Realized and
unrealized
investment
gains (losses)
included in
net income
    Net
purchases,
sales and
settlements
    Net
transfers
(out of)/into
Level 3 (b)
    Balance
at end of
period
    Change in
unrealized
investment gains
(losses) relating
to assets held

at end of period
 

Fixed maturities

            

U.S. municipals

   $ 4,286     $ 806     $ 9,726     $ (4,286   $ 10,532     $ 806  

Corporate

     15,041       532       11,754       (10,750     16,577       532  

Asset-backed securities

     99,952       3,536       101,636       (2,900     202,224       1,167  

Residential mortgage-backed securities

     77,440       191       (77,631     —          —          —     

Other mortgage-backed securities

     874       129       (449     —          554       129  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ 197,593     $ 5,194     $ 45,036     $ (17,936   $ 229,887     $ 2,634  

Equities

            

Finance

   $ 2,488     $ (754   $ 694     $ —        $ 2,428     $ (60

Industrials

     805       (84     (721     —          —          —     

Mutual funds and exchange traded funds

     34,810       445       5,000       —          40,255       445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 38,103     $ (393   $ 4,973     $ —        $ 42,683     $ 385  

Other invested assets

            

Derivatives, net

   $ (9,361   $ 14,326     $ (19,699   $ 8,166      $ (6,568   $ 10,501  

Other

     25,815       (1,749     54,805       —          78,871       (1,749
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 16,454     $ 12,577     $ 35,106     $ 8,166      $ 72,303     $ 8,752  

Funds held – directly managed

            

U.S. municipals

   $ 375     $ (6   $ —        $ —        $ 369     $ (6

Non-U.S. sovereign government, supranational and government related

     3,417       (13     (3,404     —          —          —     

Mortgage/asset-backed securities

     142       (4,750     —          16,866        12,258       (4,744

Other invested assets

     35,685       (4,797     —          —          30,888       (4,797
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ 39,619     $ (9,566   $ (3,404   $ 16,866      $ 43,515     $ (9,547
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 291,769     $ 7,812     $ 81,711     $ 7,096      $ 388,388     $ 2,224  

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

During the nine months ended September 30, 2010, certain fixed maturities with a fair value of $17.9 million were transferred from Level 3 into Level 2. The reclassifications to Level 2 consisted of U.S. municipals, corporate and student loans (included within asset-backed securities) fixed maturities. The transfers into Level 2 were due to the availability of quoted prices for similar assets in active markets used for valuation as of September 30, 2010, resulting from the continued recovery of the financial markets. In addition, during the nine months ended September 30, 2010, certain derivatives with a fair value in a net liability position of $8.2 million were transferred out of Level 3 into Level 2 due to the availability of observable inputs.

During the nine months ended September 30, 2010, certain fixed maturities within the investments underlying the funds held – directly managed account with a fair value of $16.9 million were transferred from Level 2 into Level 3. The reclassification into Level 3 consisted of asset-backed securities and residential and commercial mortgage-backed securities. The transfers into Level 3 were the result of the lack of observable market inputs, leading the Company to apply inputs that were not directly observable.

Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months and nine months ended September 30, 2011 and 2010, respectively, were as follows (in thousands of U.S. dollars):

 

     For the three
months ended
September 30, 2011
    For the three
months ended
September 30, 2010
     For the nine
months ended
September 30, 2011
    For the nine
months ended
September 30, 2010
 

Fixed maturities

   $ 188,716     $ 134,467      $ 179,395     $ 399,229  

Short-term investments

     1,240       324        794       (2,093

Equities

     (145,095     79,650        (159,174     (21,549

Other invested assets

     (10,347     486        (13,680     344  

Funds held – directly managed

     11,921       24,570        8,025       53,809  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 46,435     $ 239,497      $ 15,360     $ 429,740  

 

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

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

Fixed maturities

 

   

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

 

   

U.S. municipals — U.S. municipal securities consist primarily of bonds issued by U.S. state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored entities above. The Company generally classifies these securities in Level 2. Certain of the U.S. municipals that are issued by municipal housing authorities are not actively traded and are priced based on internal models using unobservable inputs. Accordingly, the Company classifies these securities in Level 3.

 

   

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

 

   

Corporate — Corporate securities consist primarily of bonds issued by U.S. and foreign corporations covering a variety of industries. These securities are generally priced by independent pricing services and brokers. The pricing provider incorporates information including credit spreads, interest rate data and market news into the valuation of each security. The Company generally classifies these securities in Level 2. When a corporate security is inactively traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3.

 

   

Asset-backed securities — Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are backed by student loans, automobile loans, credit card receivables, equipment leases, and special purpose financing. With the exception of special purpose financing, these asset-backed securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. Special purpose financing securities are generally inactively traded and are priced based on valuation models using unobservable inputs, including cash flow assumptions and credit spreads. The Company generally classifies these securities in Level 3.

 

   

Residential mortgage-backed securities — Residential mortgage-backed securities primarily consist of bonds issued by the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, as well as private, non-agency issuers. With the exception of private, non-agency issuers, these residential mortgage-backed securities are generally priced by independent pricing services and brokers. When current market trades are not available, the pricing provider will employ proprietary models with observable inputs including other trade information, prepayment speeds, yield curves and credit spreads. The Company generally classifies these securities in Level 2. Bonds issued by private, non-agency issuers are generally inactively traded and are priced based on valuation models using unobservable inputs, including cash flow assumptions and credit spreads. The Company generally classifies these securities in Level 3.

 

   

Other mortgage-backed securities — Other mortgage-backed securities primarily consist of commercial mortgage-backed securities. These securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. When a commercial mortgage-backed security is inactively traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3.

In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not actively traded involve the use of “matrix pricing” in which the independent pricing source applies the credit spread for a comparable security that has traded recently to the current yield curve to determine a reasonable fair value. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security.

 

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When fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Most of the Company’s fixed maturities are priced from the pricing services or dealer quotes. The Company will typically not make adjustments to prices received from pricing services or dealer quotes; however, in instances where the quoted external price for a security uses significant unobservable inputs, the Company will categorize that security as Level 3. The Company’s inactively traded fixed maturities are classified as Level 3. For all fixed maturity investments, the bid price is used for estimating fair value.

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

Short term investments

Short term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2. Special purpose financing securities purchased with less than 12 months to maturity are generally inactively traded and are priced based on valuation models using unobservable inputs, including cash flow assumptions and credit spreads. The Company generally classifies these securities in Level 3.

Equities

Equity securities include U.S. and foreign common and preferred stocks, exchange traded funds and mutual funds. Equities and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted prices in active markets. Equities categorized as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on a daily basis and common stocks traded in inactive markets. Equities categorized as Level 3 are generally mutual funds invested in securities other than the common stock of publicly traded companies, where the net asset value is not provided on a daily basis.

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

Other invested assets

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

Included in the Company’s Level 3 categorization, in general, are credit linked notes, certain inactively traded weather derivatives, notes and loans receivable and longevity and other total return swaps. For Level 3 instruments, the Company will generally either (i) receive a price based on a manager’s or trustee’s valuation for the asset; or (ii) develop an internal discounted cash flow model to measure fair value. Where the Company receives prices from the manager or trustee, these prices are based on the manager’s or trustee’s estimate of fair value for the assets and are generally audited on an annual basis. Where the Company develops its own discounted cash flow models, the inputs will be specific to the asset in question, based on appropriate historical information, adjusted as necessary, and using appropriate discount rates. As part of the Company’s modeling to determine the fair value of an investment, the Company considers counterparty credit risk as an input to the model, however, the majority of the Company’s counterparties are highly rated institutions and the failure of any one counterparty would not have a significant impact on the Company’s consolidated financial statements.

To validate prices, the Company will compare them to benchmarks, where appropriate, or to the business results generally within that asset class and specifically to those particular assets. In addition, the fair value measurements of all Level 3 investments are presented to, and peer reviewed by, an internal valuation committee that the Company has established.

Funds held – directly managed

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

The other invested assets within the segregated investment portfolio underlying the funds held – directly managed account, which are categorized as Level 3 investments, are primarily real estate mutual fund investments carried at fair value. For the real estate mutual fund investments, the Company receives a price based on the real estate fund manager’s valuation for the asset and further adjusts the price, if necessary, based on appropriate current information on the real estate market.

 

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Table of Contents

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

(b) Fair Value of Financial Instrument Liabilities

Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments. At September 30, 2011 and December 31, 2010, the fair values of financial instrument liabilities recorded in the Unaudited Condensed Consolidated Balance Sheets approximate their carrying values, with the exception of the debt related to senior notes (Senior Notes) and the debt related to capital efficient notes (CENts). The methods and assumptions used by the Company in estimating the fair value of the Senior Notes and CENts did not change from December 31, 2010.

The carrying values and fair values of the Senior Notes and CENts as of September 30, 2011 and December 31, 2010 were as follows (in thousands of U.S. dollars):

 

      September 30, 2011      December 31, 2010  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Debt related to senior notes (1)

     750,000        780,028        750,000        781,950  

Debt related to capital efficient notes (2)

     63,384        56,669        63,384        59,261  

 

(1) PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the Senior Notes, do not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $750 million in its Unaudited Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010.
(2) PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Unaudited Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010.

5. Derivatives

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

Foreign Exchange Forward Contracts

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

Foreign Currency Option Contracts and Futures Contracts

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

Credit Default Swaps

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

The Company also assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the underlying issuer, no issuer was in default at September 30, 2011. The counterparties on the Company’s assumed credit default swaps are all highly rated financial institutions.

Insurance-Linked Securities

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

 

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Table of Contents

Total Return and Interest Rate Swaps and Interest Rate Derivatives

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

The fair values and the related notional values of derivatives included in the Company’s Unaudited Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010 were as follows (in thousands of U.S. dollars):

 

September 30, 2011

   Asset
derivatives
at fair value
     Liability
derivatives
at fair value
    Net derivatives  
        Net notional
exposure
     Fair value  

Derivatives not designated as hedges

          

Foreign exchange forward contracts

   $ 3,110      $ (11,361   $ 2,832,373      $ (8,251

Foreign currency option contracts

     —           (13,091     160,268        (13,091

Futures contracts

     52        (11,398     2,626,637        (11,346

Credit default swaps (protection purchased)

     158        (1,163     100,387        (1,005

Credit default swaps (assumed risks)

     181        (1,356     17,500        (1,175

Insurance-linked securities (1)

     212        (2,217     154,375        (2,005

Total return swaps

     6,467        (12,495     151,777        (6,028

Interest rate swaps(2)

     —           (8,064     —           (8,064
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 10,180      $ (61,145      $ (50,965
      Asset
derivatives
at fair value
     Liability
derivatives
at fair value
    Net derivatives  

December 31, 2010

        Net notional
exposure
     Fair value  

Derivatives designated as hedges

          

Foreign exchange forward contracts (net investment hedge)

   $ —         $ (1,160   $ 198,448      $ (1,160
  

 

 

    

 

 

      

 

 

 

Total derivatives designated as hedges

   $ —         $ (1,160      $ (1,160

Derivatives not designated as hedges

          

Foreign exchange forward contracts

   $ 27,880      $ (12,487   $ 1,770,448      $ 15,393  

Foreign currency option contracts

     3,516        —          104,386        3,516  

Futures contracts

     30,593        (7,956     1,756,811        22,637  

Credit default swaps (protection purchased)

     93        (2,407     113,752        (2,314

Credit default swaps (assumed risks)

     533        (401     27,500        132  

Insurance-linked securities

     1,320        (1,393     88,765        (73

Total return swaps

     6,041        (12,848     161,408        (6,807

Interest rate swaps(2)

     246        (6,033     —           (5,787
  

 

 

    

 

 

      

 

 

 

Total derivatives not designated as hedges

   $ 70,222      $ (43,525      $ 26,697  
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 70,222      $ (44,685      $ 25,537  

 

(1) Insurance-linked securities includes a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an estimate of the notional amount.
(2) The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps. Accordingly, the notional value of interest rate swaps is not presented separately in the table.

The fair value of all derivatives at September 30, 2011 and December 31, 2010 is recorded in Other invested assets in the Company’s Unaudited Condensed Consolidated Balance Sheets. At September 30, 2011, none of the Company’s derivatives were designated as hedges.

 

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Table of Contents

The gains and losses in the Unaudited Condensed Consolidated Statements of Operations for derivatives not designated as hedges for the three months and nine months ended September 30, 2011 and 2010 were as follows (in thousands of U.S. dollars):

 

     Amount of gain
(loss) on derivatives
recognized in
income for the
three months ended
September 30, 2011
    Amount of gain
(loss) on derivatives
recognized in
income for the
three months ended
September 30, 2010
    Amount of gain
(loss) on derivatives
recognized in
income for the

nine months ended
September 30, 2011
    Amount of gain
(loss) on derivatives
recognized in
income for the

nine months ended
September 30, 2010
 

Foreign exchange forward contracts

   $ 21,221     $ 33,284     $ 69,455     $ 43,825  

Foreign currency option contracts

     (13,140     4,774       (10,759     5,908  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in net foreign exchange gains and losses

   $ 8,081     $ 38,058     $ 58,696     $ 49,733  

Futures contracts

   $ (82,227   $ (39,092   $ (168,741   $ (115,207

Credit default swaps (protection purchased)

     736       (944     185       (1,285

Credit default swaps (assumed risks)

     (1,670     1,528       (63     149  

Insurance-linked securities

     (3,970     5,020       (13,590     8,834  

Total return swaps

     308       4,400       992       6,809  

Interest rate swaps

     (2,913     (857     (2,272     (464

Interest rate derivatives

     —          —          —          (3,848

Other

     —          (88     —          (154
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in net realized and unrealized investment gains and losses

   $ (89,736   $ (30,033   $ (183,489   $ (105,166

Total derivatives

   $ (81,655   $ 8,025     $ (124,793   $ (55,433

6. Shareholders’ Equity

Series E Cumulative Redeemable Preferred Shares

In June 2011, the Company issued 14,950,000 of 7.25% Series E cumulative redeemable preferred shares (Series E preferred shares) for a total consideration of $362 million after underwriting discounts, commissions and other related expenses totaling $12 million. The net proceeds were used for general corporate purposes. On or after June 1, 2016, the Company may redeem the Series E preferred shares, in whole at any time or in part from time to time, at $25.00 per share plus accrued and unpaid dividends, if any, without interest. The Series E preferred shares are also redeemable at any time upon certain changes in tax law. Dividends on the Series E preferred shares are cumulative from the date of issuance and are payable quarterly in arrears, commencing September 1, 2011. In the event of liquidation of the Company, the holders of outstanding Series E preferred shares would have preference over the common shareholders and would receive a distribution of $25.00 per share, or an aggregate value of $374 million, plus accrued and unpaid dividends, if any.

7. Net Income (Loss) per Share

The reconciliation of basic and diluted net income (loss) per share for the three months and nine months ended September 30, 2011 and 2010 is as follows (in thousands of U.S. dollars or shares, except per share amounts):

 

      For the three
months ended
September 30,
2011
    For the three
months ended
September 30,
2010
    For the nine
months ended
September 30,
2011
    For the nine
months ended
September 30,
2010
 

Numerator:

        

Net income (loss)

   $ 180,123     $ 524,937     $ (502,648   $ 795,518  

Less: preferred dividends

     (14,352     (8,631     (31,614     (25,894
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 165,771     $ 516,306     $ (534,262   $ 769,624  

Denominator:

        

Weighted number of common shares outstanding - basic

     67,743.3       75,238.3       67,788.4       78,076.6  

Share options and other (1)

     438.7       1,190.2       —          1,417.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares and common share equivalents outstanding - diluted

     68,182.0       76,428.5       67,788.4       79,494.2  

Basic net income (loss) per share

   $ 2.45     $ 6.86     $ (7.88   $ 9.86  

Diluted net income (loss) per share(1)

   $ 2.43     $ 6.76     $ (7.88   $ 9.68  

 

(1)

Dilutive securities, in the form of share options and other, that could potentially dilute basic net loss per share were not included in the computation of diluted net loss per share because to do so would have been anti-dilutive for the nine months

 

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Table of Contents
  ended September 30, 2011. The weighted average number of common and common share equivalents outstanding would have amounted to 68,573.6 thousand shares if these securities had been included for the nine months ended September 30, 2011. In addition, at September 30, 2011 and 2010, share based awards to purchase 2,996.1 and 897.3 thousand common shares, respectively, were excluded from the calculation of diluted weighted average number of common shares and common share equivalents outstanding because their exercise prices were greater than the average market price of the common shares.

8. Commitments and Contingencies

(a) Concentration of Credit Risk

Financing receivables

Included in the Company’s Other invested assets are certain notes receivable which meet the definition of financing receivables and are accounted for using the cost method of accounting. Performance of these notes receivable to date has been within expectations. At September 30, 2011 and December 31, 2010, none of the Company’s notes receivable are past due or in default and, accordingly, the Company believes that an allowance for credit losses related to these notes receivable is not required.

The Company monitors the performance of the notes receivable based on the type of underlying collateral and by assigning a “performing” or a “non-performing” indicator of credit quality to each individual receivable. At September 30, 2011, the Company’s notes receivable of $100.2 million were all performing and were collateralized by residential property and commercial property of $56.9 million and $43.3 million, respectively.

The Company purchased financing receivables of $18.5 million and $84.5 million during the three months and nine months ended September 30, 2011, respectively. There were no sales of financing receivables during the three months and nine months ended September 30, 2011, however, the outstanding balance has been reduced by settlements of the underlying debt.

(b) Legal Proceedings

There has been no significant change in legal proceedings at September 30, 2011 compared to December 31, 2010. See Note 18(e) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

9. Segment Information

The Company monitors the performance of its operations in three segments, Non-life, Life and Corporate and Other as described in Note 22 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Non-life segment is further divided into four sub-segments: North America, Global (Non-U.S.) Property and Casualty (Global (Non-U.S.) P&C), Global (Non-U.S.) Specialty and Catastrophe. Following the completion of the Company’s integration of PARIS RE Holdings Limited into its other Non-life sub-segments, and to reflect other changes in management responsibilities for certain lines of business and treaties, the Company redefined its financial reporting segments. The comparative data that was previously presented in the Company’s Form 10-Q for the three months and nine months ended September 30, 2010 has been recast to conform to the current period presentation.

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

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

 

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The following tables provide a summary of the segment revenues and results for the three months and nine months ended September 30, 2011 and 2010 (in millions of U.S. dollars, except ratios):

Segment Information

For the three months ended September 30, 2011

 

      North
America
    Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 288     $ 144      $ 368      $ 95      $ 895     $ 194     $ 6     $ 1,095  

Net premiums written

   $ 287     $ 144      $ 360      $ 89      $ 880     $ 194     $ 6     $ 1,080  

Decrease in unearned premiums

     42       49        2        110        203       9       2       214  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 329     $ 193      $ 362      $ 199      $ 1,083     $ 203     $ 8     $ 1,294  

Losses and loss expenses and life policy benefits

     (192     (102     (247     (169     (710     (168     (4     (882

Acquisition costs

     (80     (52     (82     (15     (229     (33     —          (262
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 57     $ 39      $ 33      $ 15      $ 144     $ 2     $ 4     $ 150  

Other income

             1       —          —          1  

Other operating expenses

             (69     (12     (23     (104
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 76     $ (10     n/a      $ 47  

Net investment income

               19       145       164  
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result (1)

             $ 9       n/a        n/a   

Net realized and unrealized investment gains

                 26       26  

Interest expense

                 (12     (12

Amortization of intangible assets

                 (9     (9

Net foreign exchange gains

                 11       11  

Income tax expense

                 (42     (42

Interest in losses of equity investments

                 (5     (5
              

 

 

   

 

 

 

Net income

                 n/a      $ 180  
              

 

 

   

 

 

 

Loss ratio (2)

     58.4     52.9     68.3     85.0     65.6      

Acquisition ratio (3)

     24.3       26.9        22.7        7.4        21.1        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio (4)

     82.7     79.8     91.0     92.4     86.7      

Other operating expense ratio (5)

             6.4        
          

 

 

       

Combined ratio (6)

             93.1      
          

 

 

       

 

(1) Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs and other operating expenses.
(2) Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.
(3) Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.
(4) Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.
(5) Other operating expense ratio is obtained by dividing other operating expenses by net premiums earned.
(6) Combined ratio is defined as the sum of the technical ratio and the other operating expense ratio.

 

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Segment Information

For the three months ended September 30, 2010

 

     North
America
    Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 267     $ 158      $ 303      $ 96      $ 824      $ 183     $ 1     $ 1,008  

Net premiums written

   $ 267     $ 158      $ 292      $ 87      $ 804      $ 183     $ 1     $ 988  

Decrease in unearned premiums

     21       67        72        164        324        1       —          325  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 288     $ 225      $ 364      $ 251      $ 1,128      $ 184     $ 1     $ 1,313  

Losses and loss expenses and life policy benefits

     (137     (174     (199     (91     (601     (147     (1     (749

Acquisition costs

     (80     (56     (74     (18     (228     (33     —          (261
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 71     $ (5   $ 91      $ 142      $ 299      $ 4     $ —        $ 303  

Other income

             2        —          1       3  

Other operating expenses

             (81     (11     (26     (118
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 220      $ (7     n/a      $ 188  

Net investment income

               17       147       164  
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result

             $ 10       n/a        n/a   

Net realized and unrealized investment gains

                 293       293  

Interest expense

                 (12     (12

Amortization of intangible assets

                 (10     (10

Net foreign exchange losses

                 (27     (27

Income tax expense

                 (72     (72

Interest in earnings of equity investments

                 1       1  
              

 

 

   

 

 

 

Net income

                 n/a      $ 525  
              

 

 

   

 

 

 

Loss ratio

     47.5     77.1     54.8     36.4     53.3      

Acquisition ratio

     27.8       25.2        20.2        7.2        20.2         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio

     75.3     102.3     75.0     43.6     73.5      

Other operating expense ratio

             7.2         
          

 

 

       

Combined ratio

             80.7      
          

 

 

       

 

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Table of Contents

Segment Information

For the nine months ended September 30, 2011

 

     North
America
    Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 868     $ 585      $ 1,092      $ 581      $ 3,126     $ 597     $ 12     $ 3,735  

Net premiums written

   $ 868     $ 581      $ 1,007      $ 542      $ 2,998     $ 596     $ 12     $ 3,606  

(Increase) decrease in unearned premiums

     (18     (14     14        (110     (128     (8     (4     (140
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 850     $ 567      $ 1,021      $ 432      $ 2,870     $ 588     $ 8     $ 3,466  

Losses and loss expenses and life policy benefits

     (556     (379     (675     (1,209     (2,819     (479     (5     (3,303

Acquisition costs

     (210     (145     (240     (16     (611     (89     —          (700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 84     $ 43      $ 106      $ (793   $ (560   $ 20     $ 3     $ (537

Other income

             4       —          1       5  

Other operating expenses

             (206     (38     (78     (322
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ (762   $ (18     n/a      $ (854

Net investment income

               50       424       474  
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result

             $ 32       n/a        n/a   

Net realized and unrealized investment losses

                 (8     (8

Interest expense

                 (37     (37

Amortization of intangible assets

                 (27     (27

Net foreign exchange gains

                 20       20  

Income tax expense

                 (66     (66

Interest in losses of equity investments

                 (5     (5
              

 

 

   

 

 

 

Net loss

                 n/a      $ (503
              

 

 

   

 

 

 

Loss ratio

     65.5     66.8     66.1     279.9     98.2      

Acquisition ratio

     24.6       25.7        23.5        3.5        21.3        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio

     90.1     92.5     89.6     283.4     119.5      

Other operating expense ratio

             7.2        
          

 

 

       

Combined ratio

             126.7      
          

 

 

       

 

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Table of Contents

Segment Information

For the nine months ended September 30, 2010

 

     North
America
    Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 831     $ 792      $ 1,183      $ 711      $ 3,517      $ 537     $ 4     $ 4,058  

Net premiums written

   $ 830     $ 780      $ 1,103      $ 636      $ 3,349      $ 533     $ 3     $ 3,885  

Increase in unearned premiums

     (51     (94     (27     (129     (301     (12     —          (313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 779     $ 686      $ 1,076      $ 507      $ 3,048      $ 521     $ 3     $ 3,572  

Losses and loss expenses and

life policy benefits

     (432     (561     (794     (231     (2,018     (447     (1     (2,466

Acquisition costs

     (218     (170     (219     (37     (644     (82     —          (726
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 129     $ (45   $ 63      $ 239      $ 386      $ (8   $ 2     $ 380  

Other income

             3        2       —          5  

Other operating expenses

             (241     (38     (127     (406
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 148      $ (44     n/a      $ (21

Net investment income

               54       458       512  
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result

             $ 10       n/a        n/a   

Net realized and unrealized investment gains

                 485       485  

Interest expense

                 (32     (32

Amortization of intangible assets

                 (23     (23

Net foreign exchange losses

                 (12     (12

Income tax expense

                 (118     (118

Interest in earnings of equity investments

                 5       5  
              

 

 

   

 

 

 

Net income