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, 2012

OR

 

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

For the transition period from              to             .

Commission file number 1-14536

 

 

PartnerRe Ltd.

(Exact name of registrant as specified in its charter)

 

 

 

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

90 Pitts Bay Road, Pembroke, HM08, Bermuda

(Address of principal executive offices) (Zip Code)

(441) 292-0888

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

 

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

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

The number of the registrant’s common shares (par value $1.00 per share) outstanding, net of treasury shares, as of October 31, 2012 was 61,249,448.

 

 

 


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, 2012 and December 31, 2011

     4   
 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) —Three Months and Nine Months Ended September 30, 2012 and 2011

     5   
 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity—Nine Months Ended September 30, 2012 and 2011

     6   
 

Unaudited Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2012 and 2011

     7   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     8   

ITEM 2.

 

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

     27   

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     74   

ITEM 4.

 

Controls and Procedures

     77   
PART II—OTHER INFORMATION   

ITEM 1.

 

Legal Proceedings

     78   

ITEM 1A.

 

Risk Factors

     78   

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     79   

ITEM 3.

 

Defaults upon Senior Securities

     79   

ITEM 4.

 

Mine Safety Disclosures

     79   

ITEM 5.

 

Other Information

     79   

ITEM 6.

 

Exhibits

     79   
 

Signatures

     80   
 

Exhibit Index

     81   


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, 2012, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2012 and 2011, and of shareholders’ equity, and of cash flows for the nine-month periods ended September 30, 2012 and 2011. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

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

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

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

 

/s/ Deloitte & Touche Ltd.

Deloitte & Touche Ltd.

Hamilton, Bermuda

November 2, 2012


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,     December 31,  
     2012     2011  

Assets

    

Investments:

    

Fixed maturities, trading securities, at fair value (amortized cost: 2012, $13,555,701; 2011, $13,394,404)

   $ 14,338,499     $ 13,941,829  

Short-term investments, trading securities, at fair value (amortized cost: 2012, $161,083; 2011, $42,563)

     161,137       42,571  

Equities, trading securities, at fair value (cost: 2012, $975,023; 2011, $917,613)

     1,071,528       944,691  

Other invested assets

     341,555       358,154  
  

 

 

   

 

 

 

Total investments

     15,912,719       15,287,245  

Funds held – directly managed (cost: 2012, $1,142,593; 2011, $1,241,222)

     1,188,186       1,268,010  

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

     1,336,362       1,342,257  

Accrued investment income

     175,066       189,074  

Reinsurance balances receivable

     2,329,907       2,059,976  

Reinsurance recoverable on paid and unpaid losses

     369,960       397,788  

Funds held by reinsured companies

     805,178       796,290  

Deferred acquisition costs

     602,660       547,202  

Deposit assets

     256,587       241,513  

Net tax assets

     34,547       66,574  

Goodwill

     455,533       455,533  

Intangible assets

     107,188       133,867  

Other assets

     66,237       70,044  
  

 

 

   

 

 

 

Total assets

   $ 23,640,130     $ 22,855,373  
  

 

 

   

 

 

 

Liabilities

    

Unpaid losses and loss expenses

   $ 10,761,302     $ 11,273,091  

Policy benefits for life and annuity contracts

     1,703,147       1,645,662  

Unearned premiums

     1,810,881       1,448,841  

Other reinsurance balances payable

     504,820       443,873  

Deposit liabilities

     255,986       249,382  

Net tax liabilities

     356,851       297,153  

Accounts payable, accrued expenses and other

     347,152       208,840  

Debt related to senior notes

     750,000       750,000  

Debt related to capital efficient notes

     70,989       70,989  
  

 

 

   

 

 

 

Total liabilities

     16,561,128       16,387,831  
  

 

 

   

 

 

 

Shareholders’ Equity

    

Common shares (par value $1.00; issued: 2012, 85,204,067 shares; 2011, 84,766,693 shares)

     85,204       84,767  

Preferred shares (par value $1.00; issued and outstanding: 2012 and 2011, 35,750,000 shares; aggregate liquidation value: 2012 and 2011, $893,750)

     35,750       35,750  

Additional paid-in capital

     3,840,641       3,803,796  

Accumulated other comprehensive income (loss):

    

Currency translation adjustment

     35,309       4,267  

Other accumulated comprehensive loss (net of tax of: 2012, $6,605; 2011, $6,590)

     (17,794     (16,911

Retained earnings

     4,893,729       4,035,103  

Common shares held in treasury, at cost (2012, 23,837,410 shares; 2011, 19,444,365 shares)

     (1,793,837     (1,479,230
  

 

 

   

 

 

 

Total shareholders’ equity

     7,079,002       6,467,542  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 23,640,130     $ 22,855,373  
  

 

 

   

 

 

 

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,
2012
    For the three
months ended
September 30,
2011
    For the nine
months ended
September 30,
2012
    For the nine
months ended
September 30,
2011
 

Revenues

        

Gross premiums written

   $ 1,056,076     $ 1,095,326     $ 3,786,802     $ 3,735,091  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 1,043,240     $ 1,079,557     $ 3,652,571     $ 3,606,444  

Decrease (increase) in unearned premiums

     193,851       214,762       (334,772     (140,091
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     1,237,091       1,294,319       3,317,799       3,466,353  

Net investment income

     135,266       163,647       435,669       473,608  

Net realized and unrealized investment gains (losses)

     257,429       26,139       488,296       (7,860

Other income

     2,744       1,434       8,143       4,843  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,632,530       1,485,539       4,249,907       3,936,944  

Expenses

        

Losses and loss expenses and life policy benefits

     721,137       881,626       2,003,759       3,303,366  

Acquisition costs

     247,058       262,489       691,388       699,589  

Other operating expenses

     94,697       103,822       299,055       321,813  

Interest expense

     12,224       12,216       36,668       36,730  

Amortization of intangible assets

     8,893       9,520       26,679       27,512  

Net foreign exchange losses (gains)

     2,015       (10,587     (3,165     (20,020
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,086,024       1,259,086       3,054,384       4,368,990  

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

     546,506       226,453       1,195,523       (432,046

Income tax expense

     64,149       41,803       181,458       65,632  

Interest in earnings (losses) of equity investments

     4,349       (4,527     8,929       (4,970
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     486,706       180,123       1,022,994       (502,648

Preferred dividends

     15,405       14,352       46,216       31,614  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 471,301     $ 165,771     $ 976,778     $ (534,262
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

        

Net income (loss)

   $ 486,706     $ 180,123     $ 1,022,994     $ (502,648

Change in currency translation adjustment

     32,992       (54,958     31,042       (10,874

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

     (827     1,106       (883     (1,049
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 518,871     $ 126,271     $ 1,053,153     $ (514,571
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data

        

Net income (loss) per common share:

        

Basic net income (loss)

   $ 7.62     $ 2.45     $ 15.34     $ (7.88

Diluted net income (loss)

   $ 7.53     $ 2.43     $ 15.19     $ (7.88

Weighted average number of common shares outstanding

     61,837,328       67,743,296       63,679,114       67,788,427  

Weighted average number of common shares and common share equivalents outstanding

     62,606,761       68,181,982       64,284,125       67,788,427  

Dividends declared per common share

   $ 0.62     $ 0.60     $ 1.86     $ 1.75  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

     For the nine
months ended
September 30,
2012
    For the nine
months ended
September 30,
2011
 

Common shares

    

Balance at beginning of period

   $ 84,767     $ 84,033  

Issuance of common shares

     437       548  
  

 

 

   

 

 

 

Balance at end of period

     85,204       84,581  

Preferred shares

    

Balance at beginning of period

     35,750       20,800  

Issuance of preferred shares

     —          14,950  
  

 

 

   

 

 

 

Balance at end of period

     35,750       35,750  

Additional paid-in capital

    

Balance at beginning of period

     3,803,796       3,419,864  

Issuance of common shares

     36,845       29,774  

Issuance of preferred shares

     —          346,772  
  

 

 

   

 

 

 

Balance at end of period

     3,840,641       3,796,410  

Accumulated other comprehensive income (loss)

    

Balance at beginning of period

     (12,644     4,056  

Change in currency translation adjustment

     31,042       (10,874

Change in other accumulated comprehensive loss

     (883     (1,049
  

 

 

   

 

 

 

Balance at end of period

     17,515       (7,867

Retained earnings

    

Balance at beginning of period

     4,035,103       4,761,178  

Net income (loss)

     1,022,994       (502,648

Dividends on common shares

     (118,152     (118,392

Dividends on preferred shares

     (46,216     (31,614
  

 

 

   

 

 

 

Balance at end of period

     4,893,729       4,108,524  

Common shares held in treasury

    

Balance at beginning of period

     (1,479,230     (1,083,012

Repurchase of common shares

     (314,607     (226,703
  

 

 

   

 

 

 

Balance at end of period

     (1,793,837     (1,309,715
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 7,079,002     $ 6,707,683  
  

 

 

   

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

 

     For the nine
months ended
September 30,
2012
    For the nine
months ended
September 30,
2011
 

Cash flows from operating activities

    

Net income (loss)

   $ 1,022,994     $ (502,648

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

    

Amortization of net premium on investments

     99,722       63,268  

Amortization of intangible assets

     26,679       27,512  

Net realized and unrealized investment (gains) losses

     (488,296     7,860  

Changes in:

    

Reinsurance balances, net

     (202,270     (228,133

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

     59,536       (1,923

Funds held by reinsured companies and funds held – directly managed

     110,096       573,220  

Deferred acquisition costs

     (51,722     8,716  

Net tax assets and liabilities

     89,900       (2,893

Unpaid losses and loss expenses including life policy benefits

     (557,411     500,038  

Unearned premiums

     334,772       140,091  

Other net changes in operating assets and liabilities

     25,355       (1,176
  

 

 

   

 

 

 

Net cash provided by operating activities

     469,355       583,932  

Cash flows from investing activities

    

Sales of fixed maturities

     5,016,192       5,049,822  

Redemptions of fixed maturities

     705,423       967,020  

Purchases of fixed maturities

     (5,649,511     (7,412,275

Sales and redemptions of short-term investments

     61,903       242,234  

Purchases of short-term investments

     (176,068     (292,833

Sales of equities

     574,612       492,491  

Purchases of equities

     (577,652     (513,525

Other, net

     33,891       (131,989
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,210     (1,599,055

Cash flows from financing activities

    

Cash dividends paid to shareholders

     (164,368     (150,006

Repurchase of common shares

     (312,291     (244,222

Issuance of common shares

     19,117       13,219  

Net proceeds from issuance of preferred shares

     —          361,722  
  

 

 

   

 

 

 

Net cash used in financing activities

     (457,542     (19,287

Effect of foreign exchange rate changes on cash

     (6,498     (3,242

Decrease in cash and cash equivalents

     (5,895     (1,037,652

Cash and cash equivalents—beginning of period

     1,342,257       2,111,084  
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 1,336,362     $ 1,073,432  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Taxes paid

   $ 105,059     $ 136,188  

Interest paid

   $ 24,630     $ 24,630  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

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

2. Significant Accounting Policies

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

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

 

   

Unpaid losses and loss expenses;

 

   

Policy benefits for life and annuity contracts;

 

   

Gross and net premiums written and net premiums earned;

 

   

Recoverability of deferred acquisition costs;

 

   

Recoverability of deferred tax assets;

 

   

Valuation of goodwill and intangible assets; and

 

   

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

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

3. New Accounting Pronouncements

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

4. Fair Value

(a) Fair Value of Financial Instrument Assets

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

 

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Table of Contents

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, including futures and weather derivatives that are actively traded.

 

   

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

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

 

   

Level 3 inputs—Unobservable inputs.

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

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, 2012 and December 31, 2011, the Company’s financial instruments measured at fair value were classified between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):

 

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September 30, 2012

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

Fixed maturities

        

U.S. government and government sponsored enterprises

   $ —        $ 982,433     $ —        $ 982,433  

U.S. states, territories and municipalities

     —          10,269       208,820       219,089  

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

     —          2,638,242       —          2,638,242  

Corporate

     —          6,269,298       108,557       6,377,855  

Asset-backed securities

     —          393,499       329,189       722,688  

Residential mortgage-backed securities

     —          3,319,929       —          3,319,929  

Other mortgage-backed securities

     —          78,263       —          78,263  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —        $ 13,691,933     $ 646,566     $ 14,338,499  

Short-term investments

   $ —        $ 161,137     $ —        $ 161,137  

Equities

        

Consumer noncyclical

   $ 127,963     $ —        $ —        $ 127,963  

Energy

     118,502       —          —          118,502  

Finance

     81,100       7,585       13,372       102,057  

Technology

     77,032       —          7,093       84,125  

Communications

     69,182       —          —          69,182  

Insurance

     64,983       —          —          64,983  

Industrials

     56,220       —          —          56,220  

Consumer cyclical

     55,453       —          —          55,453  

Other

     84,492       —          —          84,492  

Mutual funds and exchange traded funds

     42,707       258,773       7,071       308,551  
  

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 777,634     $ 266,358     $ 27,536     $ 1,071,528  

Other invested assets

        

Derivative assets

        

Foreign exchange forward contracts

   $ —        $ 11,229     $ —        $ 11,229  

Foreign currency option contracts

     —          1,061       —          1,061  

Credit default swaps (protection purchased)

     —          16       —          16  

Credit default swaps (assumed risks)

     —          452       —          452  

Insurance-linked securities

     —          —          56       56  

Total return swaps

     —          —          6,214       6,214  

TBAs

     —          1,368       —          1,368  

Other assets

     —          —          72,619       72,619  

Derivative liabilities

        

Foreign exchange forward contracts

     —          (3,744     —          (3,744

Futures contracts

     (11,462     —          —          (11,462

Credit default swaps (protection purchased)

     —          (1,071     —          (1,071

Insurance-linked securities

     —          —          (1,290     (1,290

Total return swaps

     —          —          (621     (621

Interest rate swaps

     —          (8,395     —          (8,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ (11,462   $ 916     $ 76,978     $ 66,432  

Funds held – directly managed

        

U.S. government and government sponsored enterprises

   $ —        $ 356,444     $ —        $ 356,444  

U.S. states, territories and municipalities

     —          —          329       329  

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

     —          272,585       —          272,585  

Corporate

     —          414,455       —          414,455  

Other invested assets

     —          —          17,536       17,536  
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ —        $ 1,043,484     $ 17,865     $ 1,061,349  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 766,172     $ 15,163,828     $ 768,945     $ 16,698,945  

 

10


Table of Contents

December 31, 2011

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

Fixed maturities

        

U.S. government and government sponsored enterprises

   $ —        $ 1,115,777     $ —        $ 1,115,777  

U.S. states, territories and municipalities

     —          12,269       111,415       123,684  

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

     —          2,964,091       —          2,964,091  

Corporate

     —          5,635,297       111,700       5,746,997  

Asset-backed securities

     —          376,384       257,415       633,799  

Residential mortgage-backed securities

     —          3,282,901       —          3,282,901  

Other mortgage-backed securities

     —          74,580       —          74,580  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —        $ 13,461,299     $ 480,530     $ 13,941,829  

Short-term investments

   $ —        $ 42,571     $ —        $ 42,571  

Equities

        

Consumer noncyclical

   $ 124,697     $ 154     $ —        $ 124,851  

Energy

     83,403       858       —          84,261  

Finance

     69,722       191       9,670       79,583  

Technology

     74,729       —          —          74,729  

Communications

     64,036       44       —          64,080  

Industrials

     58,254       —          —          58,254  

Insurance

     58,017       —          —          58,017  

Consumer cyclical

     52,305       108       —          52,413  

Other

     69,457       239       —          69,696  

Mutual funds and exchange traded funds

     35,285       237,027       6,495       278,807  
  

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 689,905     $ 238,621     $ 16,165     $ 944,691  

Other invested assets

        

Derivative assets

        

Foreign exchange forward contracts

   $ —        $ 7,865     $ —        $ 7,865  

Foreign currency option contracts

     —          1,074       —          1,074  

Futures contracts

     13,524       48       —          13,572  

Credit default swaps (protection purchased)

     —          92       —          92  

Credit default swaps (assumed risks)

     —          246       —          246  

Total return swaps

     —          443       7,230       7,673  

TBAs

     —          747       —          747  

Other assets

     —          —          91,405       91,405  

Derivative liabilities

        

Foreign exchange forward contracts

     —          (5,816     —          (5,816

Foreign currency option contracts

     —          (321     —          (321

Futures contracts

     (12,905     (1,268     —          (14,173

Credit default swaps (protection purchased)

     —          (1,285     —          (1,285

Credit default swaps (assumed risks)

     —          (772     —          (772

Insurance-linked securities

     —          —          (968     (968

Total return swaps

     —          —          (640     (640

Interest rate swaps

     —          (7,992     —          (7,992

TBAs

     —          (58     —          (58

Other liabilities

     —          (137     —          (137
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 619     $ (7,134   $ 97,027     $ 90,512  

Funds held – directly managed

        

U.S. government and government sponsored enterprises

   $ —        $ 268,539     $ —        $ 268,539  

U.S. states, territories and municipalities

     —          —          334       334  

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

     —          274,665       —          274,665  

Corporate

     —          480,485       —          480,485  

Short-term investments

     —          18,097       —          18,097  

 

11


Table of Contents

Other invested assets

     —             —             15,433          15,433  
  

 

 

      

 

 

      

 

 

      

 

 

 

Funds held – directly managed

   $ —           $ 1,041,786        $ 15,767        $ 1,057,553  
  

 

 

      

 

 

      

 

 

      

 

 

 

Total

   $         690,524        $ 14,777,143        $ 609,489        $ 16,077,156  

At September 30, 2012 and December 31, 2011, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $275.1 million and $267.6 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting, equity method of accounting or investment company accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $1,061.3 million and $1,057.6 million at September 30, 2012 and December 31, 2011, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $89.6 million and $176.3 million, respectively, and accrued investment income of $15.4 million and $13.7 million, respectively. At September 30, 2012 and December 31, 2011, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $21.9 million and $20.4 million, respectively, which primarily related to other assets and liabilities held by Colisée Re related to the underlying business, which are carried at cost (see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011).

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

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

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

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

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

 

12


Table of Contents

For the three months ended

September 30, 2012

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

Fixed maturities

               

U.S. states, territories and municipalities

   $ 117,235     $ 1,618     $ 90,050      $ (83   $ —        $ 208,820     $ 1,618  

Corporate

     111,070       681       56        (3,250     —          108,557       582  

Asset-backed securities

     290,371       699       59,724        (21,605     —          329,189       739  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ 518,676     $ 2,998     $ 149,830      $ (24,938   $ —        $ 646,566     $ 2,939  

Equities

               

Finance

   $ 19,422     $ 750     $ —         $ —        $ (6,800   $ 13,372     $ 750  

Technology

     7,192       (99     —           —          —          7,093       (99

Mutual funds and exchange traded funds

     6,760       311       —           —          —          7,071       311  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 33,374     $ 962     $ —         $ —        $ (6,800   $ 27,536     $ 962  

Other invested assets

               

Derivatives, net

   $ 1,207     $ 3,152     $ —         $ —        $ —        $ 4,359     $ 4,168  

Other assets

     72,529       9,646       25,301        (34,857     —          72,619       4,154  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 73,736     $ 12,798     $ 25,301      $ (34,857   $ —        $ 76,978     $ 8,322  

Funds held – directly managed

               

U.S. states, territories and municipalities

   $ 321     $ 8     $ —         $ —        $ —        $ 329     $ 8  

Other invested assets

     15,076       2,460       —           —          —          17,536       2,460  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ 15,397     $ 2,468     $ —         $ —        $ —        $ 17,865     $ 2,468  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 641,183     $ 19,226     $ 175,131      $ (59,795   $ (6,800   $ 768,945     $ 14,691  

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
     Sales and
settlements(1)
    Net
transfers
(out of)/into
Level 3
    Balance
at end of
period
    Change in
unrealized
investment gains
(losses) relating
to assets held
at end of period
 

Fixed maturities

               

U.S. states, territories and municipalities

   $ 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 assets

     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. states, territories and municipalities

   $ 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

 

(1) Sales and settlements of derivatives includes settlements of $10.0 million.

 

13


Table of Contents

During the three months ended September 30, 2012, a certain equity traded on a foreign exchange with a fair value of $6.8 million was transferred from Level 3 into Level 2 given it is valued using observable inputs at September 30, 2012.

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, 2012 and 2011 (in thousands of U.S. dollars):

 

For the nine months ended

September 30, 2012

   Balance at
beginning
of period
     Realized  and
unrealized
investment
gains (losses)
included in
net income
    Purchases
and
issuances  (1)
    Sales and
settlements
    Net
transfers
(out of)/into
Level 3
    Balance
at end
of period
     Change in
unrealized
investment
gains (losses)
relating to
assets held at
end of period
 

Fixed maturities

                

U.S. states, territories and municipalities

   $ 111,415      $ 2,900     $ 94,750     $ (245   $ —        $ 208,820      $ 2,900  

Corporate

     111,700        111       120       (3,374     —          108,557        (2

Asset-backed securities

     257,415        8,892       142,314       (79,432     —          329,189        8,771  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fixed maturities

   $ 480,530      $ 11,903     $ 237,184     $ (83,051   $ —        $ 646,566      $ 11,669  

Equities

                

Finance

   $ 9,670      $ 3,702     $ 6,800     $ —        $ (6,800   $ 13,372      $ 3,702  

Technology

     —           (99     7,192       —          —          7,093        (99

Mutual funds and exchange traded funds

     6,495        576       —          —          —          7,071        576  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Equities

   $ 16,165      $ 4,179     $ 13,992     $ —        $ (6,800   $ 27,536      $ 4,179  

Other invested assets

                

Derivatives, net

   $ 5,622      $ 4,157     $ (5,420   $ —        $ —        $ 4,359      $ 4,874  

Other assets

     91,405        18,464       63,349       (100,599     —          72,619        5,804  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other invested assets

   $ 97,027      $ 22,621     $ 57,929     $ (100,599   $ —        $ 76,978      $ 10,678  

Funds held – directly managed

                

U.S. states, territories and municipalities

   $ 334      $ (5   $ —        $ —        $ —        $ 329      $ (5

Other invested assets

     15,433        2,103       —          —          —          17,536        2,103  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Funds held – directly managed

   $ 15,767      $ 2,098     $ —        $ —        $ —        $ 17,865      $ 2,098  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 609,489      $ 40,801     $ 309,105     $ (183,650   $ (6,800   $ 768,945      $ 28,624  

 

(1) Purchases and issuances of derivatives includes issuances of $5.7 million.

 

14


Table of Contents

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  (1)
    Sales
and
settlements (1)
    Net
transfers
into
Level 3
     Balance
at end
of period
    Change in
unrealized
investment
gains (losses)
relating to
assets held at
end of period
 

Fixed maturities

               

U.S. states, territories

    and municipalities

   $ 55,124     $ 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 assets

     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. states, territories

    and municipalities

   $ 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  

 

(1) Purchases and issuances of derivatives includes issuances of $5.1 million. Sales and settlements of derivatives includes settlements of $10.0 million.

During the nine months ended September 30, 2012, a certain equity traded on a foreign exchange with a fair value of $6.8 million was transferred from Level 3 into Level 2 given it is valued using observable inputs at September 30, 2012.

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.

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

 

September 30, 2012

   Fair Value     

Valuation Techniques

  

Unobservable Inputs

   Range
(Weighted average)
 

Fixed maturities

           

U.S. states, territories and municipalities

   $ 208,820      Discounted cash flow    Credit spreads      3.0% - 4.7% (3.8%)   

Corporate

     6,877      Discounted cash flow    Discount rate      13.5% (13.5%)   

Asset-backed securities – interest only

     13,051      Discounted cash flow    Credit spreads Prepayment speed     
 
6.9% -11.6% (9.1%)
20.0% (20.0%)
  
  

Asset-backed securities – other

     316,138      Discounted cash flow    Credit spreads      3.9% -12.4% (7.0%)   

Equities

           

Finance

     13,372      Weighted market comparables    Comparable return      6.0% (6.0%)   

Technology

     7,093      Weighted market comparables    Comparable return      -1.4% (-1.4%)   

Other invested assets

           

Total return swaps

     5,593      Discounted cash flow    Credit spreads      2.8% - 4.6% (3.5%)   

 

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Notes and loan receivables

     28,877      Discounted cash flow    Credit spreads      17.5% (17.5%
         Gross revenue/fair value      1.6 - 1.8 (1.8

Annuities and residuals

     27,409      Discounted cash flow    Credit spreads      5.0% - 10.1% (7.6%
         Prepayment speed      0.0% - 4.0% (2.7%
         Constant default rate      2.3% - 40.0% (17.6%

Private equity fund

     1,309      Lag reported market value    Net asset value, as reported      100.0% (100.0%
         Market adjustments      5.6% (5.6%

Notes securitization

     14,874      Discounted cash flow    Credit spreads      4.6% (4.6%

Funds held – directly managed

           

Other invested assets

     17,536      Lag reported market value    Net asset value, as reported      100.0% (100.0%
         Market adjustments      -39.9% - 0.0% (-12.2%

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

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

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, 2012 and 2011, respectively, were as follows (in thousands of U.S. dollars):

 

     For the three
months ended
September 30,
2012
     For the three
months ended
September 30,
2011
    For the nine
months ended
September 30,
2012
     For the nine
months ended
September 30,
2011
 

Fixed maturities and short-term investments

   $ 150,046      $ 189,956     $ 230,862      $ 180,189  

Equities

     51,260        (145,095     69,068        (159,174

Other invested assets

     1,574        (10,347     19,734        (13,680

Funds held – directly managed

     9,425        11,921       18,216        8,025  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 212,305      $ 46,435     $ 337,880      $ 15,360  

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

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

Fixed maturities

 

   

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

 

   

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

 

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Table of Contents

Short term investments

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

Equities

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

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

Other invested assets

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

Included in the Company’s Level 3 classification, in general, are credit-linked notes, certain inactively traded weather derivatives, notes, annuities, residuals and loans receivable, longevity and other total return swaps and certain private equity funds. For Level 3 instruments, the Company will generally (i) receive a price based on a manager’s or trustee’s valuation for the asset; (ii) develop an internal discounted cash flow model to measure fair value; or (iii) use market return information, weighted using management’s judgment, from comparable selected publicly traded equity funds, in a similar region and of a similar size. 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. The significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 include credit spreads, prepayment speeds, constant default rates and gross revenue to fair value ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) fair value measurement. As part of the Company’s modeling to determine the fair value of an investment, the Company considers counterparty credit risk as an input to the model, however, the majority of the Company’s counterparties are investment grade rated institutions and the failure of any one counterparty would not have a significant impact on the Company’s consolidated financial statements.

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

Funds held – directly managed

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

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

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

 

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Table of Contents

(b) Fair Value of Financial Instrument Liabilities

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

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

 

   

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

 

   

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

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

 

     September 30, 2012      December 31, 2011  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Debt related to senior notes (1)

   $ 750,000      $ 866,128      $ 750,000      $ 781,449  

Debt related to capital efficient notes (2)

     63,384        63,518        63,384        55,678  

 

(1) PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the Senior Notes, do not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $750 million in its Unaudited Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011.
(2) PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Unaudited Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011.

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

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

5. Derivatives

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

Foreign Exchange Forward Contracts

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

Foreign Currency Option Contracts and Futures Contracts

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

Credit Default Swaps

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

The Company also assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the

 

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Table of Contents

underlying issuer, no issuer was in default at September 30, 2012. The counterparties on the Company’s assumed credit default swaps are all investment grade rated financial institutions.

Insurance-Linked Securities

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

Total Return and Interest Rate Swaps and Interest Rate Derivatives

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

To-Be-Announced Mortgage-Backed Securities

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

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

 

     Asset      Liability     Net derivatives  

September 30, 2012

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

Foreign exchange forward contracts

   $ 11,229      $ (3,744   $ 2,411,819      $ 7,485  

Foreign currency option contracts

     1,061        —          116,893        1,061  

Futures contracts

     —           (11,462     1,995,581        (11,462

Credit default swaps (protection purchased)

     16        (1,071     60,000        (1,055

Credit default swaps (assumed risks)

     452        —          17,500        452  

Insurance-linked securities (1)

     56        (1,290     155,964        (1,234

Total return swaps

     6,214        (621     68,880        5,593  

Interest rate swaps (2)

     —           (8,395     —           (8,395

TBAs

     1,368        —          123,400        1,368  
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 20,396      $ (26,583      $ (6,187
     Asset      Liability     Net derivatives  

December 31, 2011

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

Foreign exchange forward contracts

   $ 7,865      $ (5,816   $ 2,555,230      $ 2,049  

Foreign currency option contracts

     1,074        (321     110,079        753  

Futures contracts

     13,572        (14,173     2,534,995        (601

Credit default swaps (protection purchased)

     92        (1,285     94,961        (1,193

Credit default swaps (assumed risks)

     246        (772     17,500        (526

Insurance-linked securities (1)

     —           (968     136,375        (968

Total return swaps

     7,673        (640     122,230        7,033  

Interest rate swaps (2)

     —           (7,992     —           (7,992

TBAs

     747        (58     104,315        689  
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 31,269      $ (32,025      $ (756

 

(1) At September 30, 2012 and December 31, 2011, insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional amount.
(2) The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps. Accordingly, the notional value of interest rate swaps is not presented separately in the table.

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

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

 

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     For the three
months ended
September 30, 2012
    For the three
months ended
September 30, 2011
    For the nine
months ended
September 30, 2012
    For the nine
months ended
September 30, 2011
 

Foreign exchange forward contracts

   $ 21,976     $ 21,221     $ 41,686     $ 69,455  

Foreign currency option contracts

     1,061       (13,140     2,559       (10,759
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in net foreign exchange gains and losses

   $ 23,037     $ 8,081     $ 44,245     $ 58,696  

Futures contracts

   $ (14,979   $ (82,227   $ (34,758   $ (168,741

Credit default swaps (protection purchased)

     (250     736       (861     185  

Credit default swaps (assumed risks)

     398       (1,670     1,709       (63

Insurance-linked securities

     3,934       (3,970     5,160       (13,590

Total return swaps

     (773     308       (1,242     992  

Interest rate swaps

     (200     (2,913     (402     (2,272

TBAs

     2,568       4,955       7,446       11,883  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in net realized and unrealized investment gains and losses

   $ (9,302   $ (84,781   $ (22,948   $ (171,606

Total derivatives

   $ 13,735     $ (76,700   $ 21,297     $ (112,910

6. 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, 2012 and 2011 is as follows (in thousands of U.S. dollars or shares, except per share amounts):

 

     For the three
months ended
September 30, 2012
    For the three
months ended
September 30, 2011
    For the nine
months ended
September 30, 2012
    For the nine
months ended
September 30, 2011
 

Numerator:

        

Net income (loss)

   $ 486,706     $ 180,123     $ 1,022,994     $ (502,648

Less: preferred dividends

     (15,405     (14,352     (46,216     (31,614
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 471,301     $ 165,771     $ 976,778     $ (534,262
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted number of common shares outstanding - basic

     61,837.3       67,743.3       63,679.1       67,788.4  

Share options and other (1)

     769.5       438.7       605.0       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     62,606.8       68,182.0       64,284.1       67,788.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ 7.62     $ 2.45     $ 15.34     $ (7.88

Diluted net income (loss) per share(1)

   $ 7.53     $ 2.43     $ 15.19     $ (7.88

 

(1) At September 30, 2012 and 2011, share based awards to purchase 1,233.3 thousand and 2,996.1 thousand common shares, respectively, were excluded from the calculation of diluted weighted average number of common shares and common share equivalents outstanding because their exercise prices were greater than the average market price of the common shares. In addition, dilutive securities, in the form of share options and other, of 785.2 thousand shares were not included in the weighted average number of common shares and common share equivalents outstanding for the purpose of computing the diluted net loss per share because to do so would have been anti-dilutive for the nine months ended September 30, 2011.

7. Commitments and Contingencies

(a) Concentration of Credit Risk

Financing receivables

Included in the Company’s Other invested assets are certain notes receivable which meet the definition of financing receivables and are accounted for using the cost method of accounting. These notes receivable are collateralized by commercial or residential property. The Company utilizes a third party consultant to determine the initial investment criteria and to monitor the subsequent performance of the notes receivable. The process undertaken prior to the investment in these notes receivable includes an examination of the underlying collateral. The Company reviews its receivable positions on at least a quarterly basis using actual redemption experience. At September 30, 2012, based on the latest available information, the Company recorded an allowance for credit losses related to these notes receivable of $3.0 million.

 

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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, 2012, the Company’s notes receivable of $59.1 million were all performing and were collateralized by residential property and commercial property of $38.0 million and $21.1 million, respectively. At December 31, 2011, the Company’s notes receivable of $80.4 million were all performing and were collateralized by residential property and commercial property of $45.9 million and $34.5 million, respectively.

The Company purchased $0.2 million and $37.6 million of financing receivables during the three months and nine months ended September 30, 2012, 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, 2012 and 2011. However, the outstanding balances were reduced by settlements of the underlying debt in all the periods above.

(b) Legal Proceedings

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

8. Credit Agreements

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

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

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

9. Segment Information

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

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

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

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

 

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Segment Information

For the three months ended September 30, 2012

 

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

Gross premiums written

   $ 311     $ 123     $ 360     $ 75      $ 869     $ 187     $ —        $ 1,056  

Net premiums written

   $ 311     $ 122     $ 354     $ 69      $ 856     $ 187     $ —        $ 1,043  

Decrease in unearned premiums

     24       50       9       99        182       8       4       194  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 335     $ 172     $ 363     $ 168      $ 1,038     $ 195     $ 4     $ 1,237  

Losses and loss expenses and life policy benefits

     (251     (110     (161     (39     (561     (157     (3     (721

Acquisition costs

     (83     (42     (79     (15     (219     (27     (1     (247
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 1     $ 20     $ 123     $ 114      $ 258     $ 11     $ —        $ 269  

Other income

             1       1       1       3  

Other operating expenses

             (58     (12     (25     (95
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 201     $ —          n/a      $ 177  

Net investment income

               15       120       135  
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result (1)

             $ 15       n/a        n/a   

Net realized and unrealized investment gains

                 257       257  

Interest expense

                 (12     (12

Amortization of intangible assets

                 (9     (9

Net foreign exchange losses

                 (2     (2

Income tax expense

                 (64     (64

Interest in earnings of equity investments

                 5       5  
              

 

 

   

 

 

 

Net income

                 n/a      $ 487  
              

 

 

   

 

 

 

Loss ratio (2)

     74.9     63.9 %     44.4 %     23.3     54.1      

Acquisition ratio (3)

     24.8       24.9       21.7       8.8        21.1        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical ratio (4)

     99.7     88.8 %     66.1 %     32.1     75.2      

Other operating expense ratio (5)

             5.5        
          

 

 

       

Combined ratio (6)

             80.7      
          

 

 

       

 

(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, 2011

 

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

             $ 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

     58.4     52.9 %     68.3 %     85.0 %     65.6      

Acquisition ratio

     24.3       26.9       22.7       7.4       21.1         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio

     82.7     79.8 %     91.0 %     92.4 %     86.7      

Other operating expense ratio

             6.4         
          

 

 

       

Combined ratio

             93.1      
          

 

 

       

 

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Segment Information

For the nine months ended September 30, 2012

 

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

Gross premiums written

   $ 924     $ 600     $ 1,178     $ 475      $ 3,177     $ 604     $ 6     $ 3,787  

Net premiums written

   $ 922     $ 596     $ 1,098     $ 429      $ 3,045     $ 601     $ 6     $ 3,652  

Increase in unearned premiums

     (59     (100     (64     (98     (321     (12     (1     (334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 863     $ 496     $ 1,034     $ 331      $ 2,724     $ 589     $ 5     $ 3,318  

Losses and loss expenses and life policy benefits

     (568     (327     (569     (58     (1,522     (479     (3     (2,004

Acquisition costs

     (218     (120     (241     (30     (609     (82     —          (691
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 77     $ 49     $ 224     $ 243      $ 593     $ 28     $ 2     $ 623  

Other income

             2       3       3       8  

Other operating expenses

             (187     (38     (74     (299
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 408     $ (7     n/a      $ 332  

Net investment income

               49       387       436  
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result

             $ 42       n/a        n/a   

Net realized and unrealized investment gains

                 488       488  

Interest expense

                 (37     (37

Amortization of intangible assets

                 (27     (27

Net foreign exchange gains

                 3       3  

Income tax expense

                 (181     (181

Interest in earnings of equity investments

                 9       9  
              

 

 

   

 

 

 

Net income

                 n/a      $ 1,023  
              

 

 

   

 

 

 

Loss ratio

     65.9     65.9 %     55.1 %     17.4     55.9      

Acquisition ratio

     25.2       24.3       23.3       9.1        22.3        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio

     91.1     90.2 %     78.4 %     26.5     78.2      

Other operating expense ratio

             6.9        
          

 

 

       

Combined ratio

             85.1       
          

 

 

       

 

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Segment Information

For the nine months ended September 30, 2011

 

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