RNR Q1 2012 10-Q
    


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 001-14428
RENAISSANCERE HOLDINGS LTD.
(Exact Name Of Registrant As Specified In Its Charter)
Bermuda
98-014-1974
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
Renaissance House, 12 Crow Lane, Pembroke HM 19 Bermuda
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant’s telephone number)

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 Q  No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Q  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Act. Large accelerated filer Q, Accelerated filer o, Non-accelerated filer o, Smaller reporting company o

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

The number of Common Shares, par value US $1.00 per share, outstanding at April 26, 2012 was 51,763,738.
 


RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
 
 
 
Page
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.


2
    


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATMENTS
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except per share amounts)
 
March 31
2012
 
December 31, 2011
Assets
(Unaudited)
 
(Audited)
Fixed maturity investments trading, at fair value
 
 
 
(Amortized cost $4,129,942 and $4,265,929 at March 31, 2012 and December 31, 2011, respectively)
$
4,176,827

 
$
4,291,465

Fixed maturity investments available for sale, at fair value
 
 
 
(Amortized cost $113,131 and $130,669 at March 31, 2012 and December 31, 2011, respectively)
125,292

 
142,052

Short term investments, at fair value
1,172,839

 
905,477

Equity investments trading, at fair value
53,080

 
50,560

Other investments, at fair value
806,782

 
748,984

Investments in other ventures, under equity method
76,723

 
70,714

Total investments
6,411,543

 
6,209,252

Cash and cash equivalents
260,982

 
216,984

Premiums receivable
703,932

 
471,878

Prepaid reinsurance premiums
143,690

 
58,522

Reinsurance recoverable
279,398

 
404,029

Accrued investment income
30,782

 
33,523

Deferred acquisition costs
71,162

 
43,721

Receivable for investments sold
237,372

 
117,117

Other assets
205,660

 
180,992

Goodwill and other intangible assets
9,077

 
8,894

Total assets
$
8,353,598

 
$
7,744,912

Liabilities, Noncontrolling Interests and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Reserve for claims and claim expenses
$
1,858,203

 
$
1,992,354

Unearned premiums
646,733

 
347,655

Debt
351,999

 
353,620

Reinsurance balances payable
285,207

 
256,883

Payable for investments purchased
361,460

 
303,264

Other liabilities
242,257

 
211,369

Liabilities of discontinued operations held for sale
12,539

 
13,507

Total liabilities
3,758,398

 
3,478,652

Commitments and Contingencies

 

Redeemable noncontrolling interest – DaVinciRe
796,743

 
657,727

Shareholders’ Equity (Note 11)
 
 
 
Preference Shares: $1.00 par value – 22,000,000 shares issued and outstanding at March 31, 2012 (December 31, 2011 – 22,000,000)
550,000

 
550,000

Common shares: $1.00 par value – 51,765,197 shares issued and outstanding at March 31, 2012 (December 31, 2011 – 51,542,955)
51,765

 
51,543

Additional paid-in capital
379

 
—

Accumulated other comprehensive income
12,988

 
11,760

Retained earnings
3,179,433

 
2,991,890

Total shareholders’ equity attributable to RenaissanceRe
3,794,565

 
3,605,193

Noncontrolling interest
3,892

 
3,340

Total shareholders’ equity
3,798,457

 
3,608,533

Total liabilities, noncontrolling interests and shareholders’ equity
$
8,353,598

 
$
7,744,912

See accompanying notes to the consolidated financial statements

3
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three months ended March 31, 2012 and 2011
(in thousands of United States Dollars, except per share amounts) (Unaudited)
 
Three months ended
 
March 31,
2012
 
March 31,
2011
Revenues
 
 
 
Gross premiums written
$
664,151

 
$
610,505

Net premiums written
$
492,575

 
$
452,575

Increase in unearned premiums
(213,910
)
 
(147,034
)
Net premiums earned
278,665

 
305,541

Net investment income
66,971

 
60,281

Net foreign exchange (losses) gains
(1,460
)
 
660

Equity in earnings (losses) of other ventures
5,470

 
(23,753
)
Other (loss) income
(39,094
)
 
50,145

Net realized and unrealized gains (losses) on investments
46,113

 
(5,214
)
Total other-than-temporary impairments
(161
)
 
—

Portion recognized in other comprehensive income, before taxes
27

 
—

Net other-than-temporary impairments
(134
)
 
—

Total revenues
356,531

 
387,660

Expenses
 
 
 
Net claims and claim expenses incurred
15,552

 
628,537

Acquisition expenses
24,111

 
32,335

Operational expenses
42,383

 
41,830

Corporate expenses
4,811

 
2,064

Interest expense
5,718

 
6,195

Total expenses
92,575

 
710,961

Income (loss) from continuing operations before taxes
263,956

 
(323,301
)
Income tax benefit
37

 
52

Income (loss) from continuing operations
263,993

 
(323,249
)
Loss from discontinued operations
(173
)
 
(1,526
)
Net income (loss)
263,820

 
(324,775
)
Net (income) loss attributable to noncontrolling interests
(53,641
)
 
85,492

Net income (loss) attributable to RenaissanceRe
210,179

 
(239,283
)
Dividends on preference shares
(8,750
)
 
(8,750
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders
$
201,429

 
$
(248,033
)
Income (loss) from continuing operations available (attributable) to RenaissanceRe common shareholders per common share – basic
$
3.93

 
$
(4.66
)
Loss from discontinued operations attributable to RenaissanceRe common shareholders per common share – basic
—

 
(0.03
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – basic
$
3.93

 
$
(4.69
)
Income (loss) from continuing operations available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
3.88

 
$
(4.66
)
Loss from discontinued operations attributable to RenaissanceRe common shareholders per common share – diluted
—

 
(0.03
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
3.88

 
$
(4.69
)
Dividends per common share
$
0.27

 
$
0.26


See accompanying notes to the consolidated financial statements

4
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended March 31, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
 
Three months ended
 
March 31,
2012
 
March 31,
2011
Comprehensive income (loss)
 
 
 
Net income (loss)
$
263,820

 
$
(324,775
)
Change in net unrealized gains on investments
1,255

 
19

Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(27
)
 
—

Comprehensive income (loss)
265,048

 
(324,756
)
Net (income) loss attributable to noncontrolling interests
(53,641
)
 
85,492

Change in net unrealized gains on fixed maturity investments available for sale attributable to noncontrolling interests
—

 
3

Comprehensive (income) loss attributable to noncontrolling interests
(53,641
)
 
85,495

Comprehensive income (loss) attributable to RenaissanceRe
$
211,407

 
$
(239,261
)
Disclosure regarding net unrealized gains
 
 
 
Total realized and net unrealized holding gains (losses) on investments and net other-than-temporary impairments
$
2,424

 
$
(390
)
Net realized (gains) losses on fixed maturity investments available for sale
(1,303
)
 
412

Net other-than-temporary impairments recognized in earnings
134

 
—

Change in net unrealized gains on investments
$
1,255

 
$
22

 










See accompanying notes to the consolidated financial statements

5
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the three months ended March 31, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
 
Three months ended
 
March 31,
2012
 
March 31,
2011
Preference shares
 
 
 
Balance – January 1
$
550,000

 
$
550,000

Balance – March 31
550,000

 
550,000

Common shares
 
 
 
Balance – January 1
51,543

 
54,110

Repurchase of shares
(51
)
 
(2,655
)
Exercise of options and issuance of restricted stock awards
273

 
287

Balance – March 31
51,765

 
51,742

Additional paid-in capital
 
 
 
Balance – January 1
—

 
—

Repurchase of shares
(3,584
)
 
546

Change in redeemable noncontrolling interest
3,578

 
26

Exercise of options and issuance of restricted stock awards
385

 
(572
)
Balance – March 31
379

 
—

Accumulated other comprehensive income
 
 
 
Balance – January 1
11,760

 
19,823

Change in net unrealized gains on investments
1,255

 
22

Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(27
)
 
—

Balance – March 31
12,988

 
19,845

Retained earnings
 
 
 
Balance – January 1
2,991,890

 
3,312,392

Net income (loss)
263,820

 
(324,775
)
Net (income) loss attributable to noncontrolling interests
(53,641
)
 
85,492

Repurchase of shares
—

 
(172,683
)
Dividends on common shares
(13,886
)
 
(13,361
)
Dividends on preference shares
(8,750
)
 
(8,750
)
Balance – March 31
3,179,433

 
2,878,315

Noncontrolling interest
3,892

 
3,160

Total shareholders’ equity
$
3,798,457

 
$
3,503,062

 











See accompanying notes to the consolidated financial statements

6
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended March 31, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
Three months ended
 
March 31,
2012
 
March 31,
2011
Cash flows provided by (used in) operating activities
 
 
 
Net income (loss)
$
263,820

 
$
(324,775
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
Amortization, accretion and depreciation
13,581

 
10,523

Equity in undistributed (earnings) losses of other ventures
(4,933
)
 
26,368

Net realized and unrealized (gains) losses on investments
(46,113
)
 
5,214

Net other-than-temporary impairments
134

 
—

Net unrealized gains included in net investment income
(36,061
)
 
(28,067
)
Net unrealized gains included in other (loss) income
(18,563
)
 
(56,820
)
Change in:
 
 
 
Premiums receivable
(232,054
)
 
(252,467
)
Prepaid reinsurance premiums
(85,168
)
 
(65,079
)
Reinsurance recoverable
124,631

 
(222,413
)
Deferred acquisition costs
(27,441
)
 
(21,008
)
Reserve for claims and claim expenses
(134,151
)
 
812,252

Unearned premiums
299,078

 
213,982

Reinsurance balances payable
28,324

 
(61,361
)
Other
26,020

 
(42,646
)
Net cash provided by (used in) operating activities
171,104

 
(6,297
)
Cash flows (used in) provided by investing activities
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
2,656,296

 
1,628,600

Purchases of fixed maturity investments trading
(2,551,249
)
 
(1,414,735
)
Proceeds from sales and maturities of fixed maturity investments available for sale
20,385

 
13,984

Purchases of equity investments trading
—

 
(12,108
)
Net purchases of short term investments
(305,867
)
 
(249,878
)
Net (purchases) sales of other investments
(9,663
)
 
38,083

Net purchases of investments in other ventures
—

 
(21,000
)
Net sales of other assets
125

 
47,400

Net proceeds from sale of discontinued operations held for sale
—

 
269,520

Net cash (used in) provided by investing activities
(189,973
)
 
299,866

Cash flows provided by (used in) financing activities
 
 
 
Dividends paid – RenaissanceRe common shares
(13,886
)
 
(13,361
)
Dividends paid – preference shares
(8,750
)
 
(8,750
)
RenaissanceRe common share repurchases
(3,635
)
 
(174,792
)
Net third party DaVinciRe share repurchases
88,146

 
(124,047
)
Net cash provided by (used in) financing activities
61,875

 
(320,950
)
Effect of exchange rate changes on foreign currency cash
992

 
2,274

Net increase (decrease) in cash and cash equivalents
43,998

 
(25,107
)
Cash and cash equivalents, beginning of period
216,984

 
277,738

Cash and cash equivalents, end of period
$
260,982

 
$
252,631


See accompanying notes to the consolidated financial statements

7
    


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
(unless otherwise noted, amounts in tables expressed in thousands of United States (“U.S.”) dollars, except per share amounts and percentages) (Unaudited)
NOTE 1. ORGANIZATION
This report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
RenaissanceRe Holdings Ltd. (“RenaissanceRe”) was formed under the laws of Bermuda on June 7, 1993. Together with its wholly owned and majority-owned subsidiaries and DaVinciRe (as defined below), which are collectively referred to herein as the “Company”, RenaissanceRe provides reinsurance and insurance coverages and related services to a broad range of customers.
•
Renaissance Reinsurance Ltd. (“Renaissance Reinsurance”), the Company’s principal reinsurance subsidiary, provides property catastrophe and specialty reinsurance coverages to insurers and reinsurers on a worldwide basis.
•
The Company also manages property catastrophe and specialty reinsurance business written on behalf of joint ventures, which principally include Top Layer Reinsurance Ltd. (“Top Layer Re”), recorded under the equity method of accounting, and DaVinci Reinsurance Ltd. (“DaVinci”). Because the Company owns a noncontrolling equity interest in, but controls a majority of the outstanding voting power of DaVinci's parent, DaVinciRe Holdings Ltd. (“DaVinciRe”), the results of DaVinci and DaVinciRe are consolidated in the Company’s financial statements. Redeemable noncontrolling interest – DaVinciRe represents the interests of external parties with respect to the net loss (income) and shareholders’ equity of DaVinciRe. Renaissance Underwriting Managers, Ltd. (“RUM”), a wholly owned subsidiary, acts as exclusive underwriting manager for these joint ventures in return for fee-based income and profit participation.
•
RenaissanceRe Syndicate 1458 (“Syndicate 1458”) is the Company’s Lloyd’s syndicate which was licensed to start writing certain lines of insurance and reinsurance business effective June 1, 2009. RenaissanceRe Corporate Capital (UK) Limited (“RenaissanceRe CCL”), a wholly owned subsidiary of the Company, is Syndicate 1458’s sole corporate member and RenaissanceRe Syndicate Management Ltd. (“RSML”), a wholly owned subsidiary of the Company from November 2, 2009, is the managing agent for Syndicate 1458.
•
The Company, through Renaissance Trading Ltd. (“Renaissance Trading”) and RenRe Energy Advisors Ltd. (“REAL”), transacts certain derivative-based risk management products primarily to address weather and energy risk and engages in hedging and trading activities related to those transactions.
•
On November 18, 2010, the Company entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) with QBE Holdings, Inc. (“QBE”) to sell substantially all of its U.S.-based insurance operations including its U.S. property and casualty business underwritten through managing general agents, its crop insurance business underwritten through Agro National Inc. (“Agro National”), its commercial property insurance operations and its claims operations. At December 31, 2010, the Company classified the assets and liabilities associated with this transaction as held for sale. The financial results for these operations have been presented in the Company's consolidated financial statements as “discontinued operations” for all periods presented. On March 4, 2011, the Company and QBE closed the transaction contemplated by the Stock Purchase Agreement. Refer to “Note 3. Discontinued Operations,” for more information.


8
    


NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to our significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2011.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company's financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated from these statements. Except as discussed in “Note 3. Discontinued Operations,” and unless otherwise noted, the notes to the consolidated financial statements reflect the Company's continuing operations.
Certain comparative information has been reclassified to conform to the current presentation. Because of the seasonality of the Company's business, the results of operations and cash flows for any interim period will not necessarily be indicative of the results of operations and cash flows for the full fiscal year or subsequent quarters.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The major estimates reflected in the Company’s consolidated financial statements include, but are not limited to, the reserve for claims and claim expenses, reinsurance recoverables, including allowances for reinsurance recoverables deemed uncollectible, estimates of written and earned premiums, fair value, including the fair value of investments, financial instruments and derivatives, impairment charges and the Company’s deferred tax valuation allowance.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”), which amends FASB ASC Topic Financial Services - Insurance. ASU 2010-26 modifies the definition of the types of costs that can be capitalized in relation to the acquisition of new and renewal insurance contracts. The amended guidance requires costs to be incremental or directly related to the successful acquisition of new or renewal contracts in order to be capitalized as a deferred acquisition cost. Capitalized costs would include incremental direct costs, such as commissions paid to brokers. Additionally, the portion of employee salaries and benefits directly related to time spent for acquired contracts would be capitalized. Costs that fall outside the revised definition must be expensed when incurred. ASU 2010-26 became effective for fiscal periods beginning on or after December 15, 2011, and as a result, the Company adopted ASU 2010-26 effective January 1, 2012. The adoption of ASU 2010-26 did not have a material impact on the Company's consolidated statements of operations and financial condition.

9
    


Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends FASB ASC Topic Fair Value Measurement. ASU 2011-04 was issued to provide largely identical guidance about fair value measurement and disclosure requirements with the International Accounting Standards Board's new International Financial Reporting Standards (“IFRS”) 13, Fair Value Measurement. ASU 2011-04 does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under GAAP and requires enhanced disclosures covering all transfers between Levels 1 and 2 of the fair value hierarchy. Additional disclosures covering Level 3 assets are also required. ASU 2011-04 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and as a result, the Company adopted ASU 2011-04 effective January 1, 2012. The adoption of ASU 2011-04 did not have a material impact on the Company's consolidated statements of operations and financial condition. The additional disclosures required by ASU 2011-04 have been provided in "Note 5. Fair Value Measurements" of the Company's Notes to Consolidated Financial Statements.
Presentation of Comprehensive Income
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends FASB ASC Topic Comprehensive Income. ASU 2011-05 increases the prominence of items reported in other comprehensive income and eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity. ASU 2011-05 requires that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retroactive application required. The Company adopted ASU 2010-26 effective January 1, 2012 and it did not have a material impact on the Company's consolidated statements of operations and financial condition.
NOTE 3. DISCONTINUED OPERATIONS
U.S.-Based Insurance Operations
On November 18, 2010, the Company entered into a Stock Purchase Agreement with QBE to sell substantially all of its U.S.-based insurance operations, including its U.S. property and casualty business underwritten through managing general agents, its crop insurance business underwritten through Agro National, its commercial property insurance operations and its claims operations.  At December 31, 2010, the Company classified the assets and liabilities associated with this transaction as held for sale and the assets and liabilities were recorded at the lower of the carrying value or fair value less costs to sell. The financial results for these operations have been presented as discontinued operations in the Company's consolidated statements of operations for all periods presented.
Consideration for the transaction was book value at December 31, 2010, for the aforementioned businesses, payable in cash at closing and subject to adjustment for certain tax and other items. The transaction closed on March 4, 2011 and net consideration of $269.5 million was received by the Company.
Pursuant to the Stock Purchase Agreement, the Company is subject to a post-closing review following December 31, 2011 of the net reserve for claims and claim expenses for loss events occurring on or prior to December 31, 2010 (the “Reserve Collar”). Subsequent to the post-closing review, the Company is liable to pay, or otherwise reimburse QBE amounts up to $10.0 million for net adverse development on prior accident years net claims and claim expenses. Conversely, if prior accident years net claims and claim expenses experience net favorable development, QBE is liable to pay, or otherwise reimburse the Company amounts up to $10.0 million.
During 2011, the Company recognized a $10.0 million liability and corresponding expense in liabilities of discontinued operations held for sale and (loss) income from discontinued operations, respectively, due to purported net adverse development on prior accident years net claims and claim expenses associated with the Reserve Collar.  The $10.0 million represented the maximum amount payable under the Reserve Collar.


10
    


NOTE 4. INVESTMENTS
Fixed Maturity Investments Trading
The following table summarizes the fair value of fixed maturity investments trading:
 
 
 
 
 
 
 
 
March 31,
2012
 
December 31,
2011
 
 
U.S. treasuries
$
1,309,243

 
$
885,152

 
 
Agencies
343,575

 
158,561

 
 
Non-U.S. government (Sovereign debt)
122,875

 
216,916

 
 
FDIC guaranteed corporate
103,554

 
423,630

 
 
Non-U.S. government-backed corporate
500,835

 
640,757

 
 
Corporate
1,131,255

 
1,187,437

 
 
Agency mortgage-backed
307,134

 
428,042

 
 
Non-agency mortgage-backed
85,095

 
82,096

 
 
Commercial mortgage-backed
267,250

 
255,885

 
 
Asset-backed
6,011

 
12,989

 
 
Total fixed maturity investments trading
$
4,176,827

 
$
4,291,465

 
 
 
 
 
 
 
Fixed Maturity Investments Available For Sale
The following table summarizes the amortized cost, fair value and related unrealized gains and losses and non-credit other-than-temporary impairments of fixed maturity investments available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
 
At March 31, 2012
Amortized 
Cost
 
Gross
Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments 
(1)  
 
 
Non-U.S. government (Sovereign debt)
$
7,448

 
$
578

 
$
(2
)
 
$
8,024

 
$
—

 
 
Non-U.S. government-backed corporate
310

 
15

 
—

 
325

 
—

 
 
Corporate
13,923

 
1,276

 
(243
)
 
14,956

 
(165
)
 
 
Agency mortgage-backed
11,135

 
946

 
—

 
12,081

 
—

 
 
Non-agency mortgage-backed
20,319

 
2,665

 
(32
)
 
22,952

 
(1,784
)
 
 
Commercial mortgage-backed
55,346

 
6,747

 
—

 
62,093

 
—

 
 
Asset-backed
4,650

 
211

 
—

 
4,861

 
—

 
 
Total fixed maturity investments available for sale
$
113,131

 
$
12,438

 
$
(277
)
 
$
125,292

 
$
(1,949
)
 
 
 
 
 
 
 
 
 
 
 
 
 

11
    


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
 
At December 31, 2011
Amortized Cost
 
Gross
Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments
 (1)  
 
 
Non-U.S. government (Sovereign debt)
$
10,087

 
$
921

 
$
(12
)
 
$
10,996

 
$
—

 
 
Non-U.S. government-backed corporate
312

 
13

 
—

 
325

 
—

 
 
Corporate
18,449

 
1,535

 
(517
)
 
19,467

 
(176
)
 
 
Agency mortgage-backed
12,636

 
1,071

 
—

 
13,707

 
—

 
 
Non-agency mortgage-backed
21,097

 
1,862

 
(284
)
 
22,675

 
(1,837
)
 
 
Commercial mortgage-backed
63,269

 
6,576

 
(1
)
 
69,844

 
—

 
 
Asset-backed
4,819

 
219

 
—

 
5,038

 
—

 
 
Total fixed maturity investments available for sale
$
130,669

 
$
12,197

 
$
(814
)
 
$
142,052

 
$
(2,013
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents the non-credit component of other-than-temporary impairments recognized in accumulated other comprehensive income since the adoption of guidance related to the recognition and presentation of other-than-temporary impairments under FASB ASC Topic Financial Instruments – Debt and Equity Securities, during the second quarter of 2009, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
Contractual maturities of fixed maturity investments are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading
 
Available for Sale
 
Total Fixed Maturity Investments
 
 
At March 31, 2012
Amortized 
Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
Due in less than one year
$
385,039

 
$
385,831

 
$
437

 
$
428

 
$
385,476

 
$
386,259

 
 
Due after one through five years
2,348,627

 
2,357,996

 
8,861

 
9,348

 
2,357,488

 
2,367,344

 
 
Due after five through ten years
619,557

 
636,756

 
8,658

 
9,335

 
628,215

 
646,091

 
 
Due after ten years
120,767

 
130,754

 
3,725

 
4,194

 
124,492

 
134,948

 
 
Mortgage-backed
649,942

 
659,479

 
86,800

 
97,126

 
736,742

 
756,605

 
 
Asset-backed
6,010

 
6,011

 
4,650

 
4,861

 
10,660

 
10,872

 
 
Total
$
4,129,942

 
$
4,176,827

 
$
113,131

 
$
125,292

 
$
4,243,073

 
$
4,302,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Investments Trading
The following table summarizes the fair value of equity investments trading:
 
 
 
 
 
 
 
 
March 31,
2012
 
December 31,
2011
 
 
Financial institution securities
$
53,080

 
$
50,560

 
 
 
 
 
 
 

12
    


Pledged Investments
At March 31, 2012, $1,252.1 million of cash and investments at fair value were on deposit with, or in trust accounts for the benefit of various counterparties, including with respect to the Company's principal letter of credit facility. Of this amount, $483.0 million is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities.
Net Investment Income, Net Realized and Unrealized Gains (Losses) on Investments and Net Other-Than-Temporary Impairments
The components of net investment income are as follows:
 
 
 
 
 
 
 
Three months ended March 31,
2012
 
2011
 
 
Fixed maturity investments
$
26,333

 
$
27,913

 
 
Short term investments
500

 
595

 
 
Equity investments
170

 
14

 
 
Other investments
 
 
 
 
 
Hedge funds and private equity investments
28,473

 
23,507

 
 
Other
14,170

 
10,827

 
 
Cash and cash equivalents
26

 
41

 
 
 
69,672

 
62,897

 
 
Investment expenses
(2,701
)
 
(2,616
)
 
 
Net investment income
$
66,971

 
$
60,281

 
 
 
 
 
 
 
Net realized and unrealized gains (losses) on investments and net other-than-temporary impairments are as follows:
 
 
 
 
 
 
 
Three months ended March 31,
2012
 
2011
 
 
Gross realized gains
$
36,286

 
$
10,562

 
 
Gross realized losses
(6,950
)
 
(12,617
)
 
 
Net realized gains (losses) on fixed maturity investments
29,336

 
(2,055
)
 
 
Net unrealized gains (losses) on fixed maturity investments trading
14,257

 
(3,758
)
 
 
Net unrealized gains on equity investments trading
2,520

 
599

 
 
Net realized and unrealized gains (losses) on investments
$
46,113

 
$
(5,214
)
 
 
Total other-than-temporary impairments
$
(161
)
 
$
—

 
 
Portion recognized in other comprehensive income, before taxes
27

 
—

 
 
Net other-than-temporary impairments
$
(134
)
 
$
—

 
 
 
 
 
 
 
The following table provides an analysis of the length of time the Company’s fixed maturity investments available for sale in an unrealized loss have been in a continual unrealized loss position.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
At March 31, 2012
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Non-U.S. government (Sovereign debt)
$
240

 
$
(2
)
 
$
—

 
$
—

 
$
240

 
$
(2
)
 
 
Corporate
1,838

 
(101
)
 
513

 
(142
)
 
2,351

 
(243
)
 
 
Non-agency mortgage-backed
555

 
(6
)
 
813

 
(26
)
 
1,368

 
(32
)
 
 
Total
$
2,633

 
$
(109
)
 
$
1,326

 
$
(168
)
 
$
3,959

 
$
(277
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

13
    


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
At December 31, 2011
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Non-U.S. government (Sovereign debt)
$
915

 
$
(9
)
 
$
42

 
$
(3
)
 
$
957

 
$
(12
)
 
 
Corporate
3,935

 
(385
)
 
412

 
(132
)
 
4,347

 
(517
)
 
 
Non-agency mortgage-backed
8,024

 
(224
)
 
798

 
(60
)
 
8,822

 
(284
)
 
 
Commercial mortgage-backed
—

 
—

 
455

 
(1
)
 
455

 
(1
)
 
 
Total
$
12,874

 
$
(618
)
 
$
1,707

 
$
(196
)
 
$
14,581

 
$
(814
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2012, the Company held 15 fixed maturity investments available for sale securities that were in an unrealized loss position for twelve months or greater. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. The Company performed reviews of its fixed maturity investments available for sale for the three months ended March 31, 2012 and 2011, respectively, in order to determine whether declines in the fair value below the amortized cost basis were considered other-than-temporary in accordance with the applicable guidance, as discussed below.
Other-Than-Temporary Impairment Process
The Company's process for assessing whether declines in the fair value of its fixed maturity investments available for sale represent impairments that are other-than-temporary includes reviewing each fixed maturity investment available for sale that is impaired and determining: (i) if the Company has the intent to sell the debt security or (ii) if it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery; and (iii) whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the security are less than the amortized cost basis of the security.
In assessing the Company’s intent to sell securities, the Company’s procedures may include actions such as discussing planned sales with its third party investment managers, reviewing sales that have occurred shortly after the balance sheet date, and consideration of other qualitative factors that may be indicative of the Company’s intent to sell or hold the relevant securities. For the three months ended March 31, 2012, the Company recognized $Nil other-than-temporary impairments due to the Company’s intent to sell these securities as of March 31, 2012 (2011 – $Nil).
In assessing whether it is more likely than not that the Company will be required to sell a security before its anticipated recovery, the Company considers various factors including its future cash flow forecasts and requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short term investments, fixed maturity investments trading and fixed maturity investments available for sale in an unrealized gain position, and other relevant factors. For the three months ended March 31, 2012, the Company recognized $Nil of other-than-temporary impairments due to required sales (2011 – $Nil).
In evaluating credit losses, the Company considers a variety of factors in the assessment of a security including: (i) the time period during which there has been a significant decline below cost; (ii) the extent of the decline below cost and par; (iii) the potential for the security to recover in value; (iv) an analysis of the financial condition of the issuer; (v) the rating of the issuer; (vi) the implied rating of the issuer based on an analysis of option adjusted spreads; (vii) the absolute level of the option adjusted spread for the issuer; and (viii) an analysis of the collateral structure and credit support of the security, if applicable.
Once the Company determines that it is possible that a credit loss may exist for a security, the Company performs a detailed review of the cash flows expected to be collected from the issuer. The Company estimates expected cash flows by applying estimated default probabilities and recovery rates to the contractual cash flows of the issuer, with such default and recovery rates reflecting long-term historical averages adjusted to reflect current credit, economic and market conditions, giving due consideration to collateral and credit support, if applicable, and discounting the expected cash flows at the purchase yield on the security. In instances in which a determination is made that an impairment exists but the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, the impairment is

14
    


separated into: (i) the amount of the total other-than-temporary impairment related to the credit loss; and (ii) the amount of the total other-than-temporary impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income. For the three months ended March 31, 2012, the Company recognized $0.1 million of other-than-temporary impairments which were recognized in earnings and $27 thousand related to other factors which were recognized in other comprehensive income (2011 – $Nil and $Nil, respectively).
The following table provides a rollforward of the amount of other-than-temporary impairments related to credit losses recognized in earnings for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income:
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – January 1
$
564

 
$
3,098

 
 
Additions:
 
 
 
 
 
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized
—

 
—

 
 
Amount related to credit loss for which an other-than-temporary impairment was previously recognized
9

 
—

 
 
Reductions:
 
 
 
 
 
Securities sold during the period
(53
)
 
(223
)
 
 
Securities for which the amount previously recognized in other comprehensive income was recognized in earnings, because the Company intends to sell the security or is more likely than not the Company will be required to sell the security
—

 
—

 
 
Increases in cash flows expected to be collected that are recognized over the remaining life of the security
—

 
—

 
 
Balance – March 31
$
520

 
$
2,875

 
 
 
 
 
 
 
NOTE 5. FAIR VALUE MEASUREMENTS
The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within the Company's financial statements. Fair value is defined under accounting guidance currently applicable to the Company to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. The Company recognizes the change in unrealized gains and losses arising from changes in fair value in its consolidated statements of operations, with the exception of changes in unrealized gains and losses on its fixed maturity investments available for sale, which are recognized as a component of accumulated other comprehensive income in shareholders' equity.
FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•
Fair values determined by Level 1 inputs utilize unadjusted quoted prices obtained from active markets for identical assets or liabilities for which the Company has access. The fair value is determined by multiplying the quoted price by the quantity held by the Company;
•
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals, broker quotes and certain pricing indices; and
 

15
    


•
Level 3 inputs are based on unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management's best estimate of the assumptions used by other market participants in determining the fair value of the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability.
In order to determine if a market is active or inactive for a security, the Company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity. 
There have been no material changes in the Company's valuation techniques, nor have there been any transfers between Level 1 and Level 2, or Level 2 and Level 3, respectively, during the period represented by these consolidated financial statements.
 

16
    


Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis and also represents the carrying amount on the Company’s consolidated balance sheet:
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2012
Total
 
Quoted
Prices in Active
Markets for
Identical 
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
1,309,243

 
$
1,309,243

 
$
—

 
$
—

 
 
Agencies
343,575

 
—

 
343,575

 
—

 
 
Non-U.S. government (Sovereign debt)
130,899

 
—

 
130,899

 
—

 
 
FDIC guaranteed corporate
103,554

 
—

 
103,554

 
—

 
 
Non-U.S. government-backed corporate
501,160

 
—

 
501,160

 
—

 
 
Corporate
1,146,211

 
—

 
1,118,373

 
27,838

 
 
Agency mortgage-backed
319,215

 
—

 
319,215

 
—

 
 
Non-agency mortgage-backed
108,047

 
—

 
108,047

 
—

 
 
Commercial mortgage-backed
329,343

 
—

 
329,343

 
—

 
 
Asset-backed
10,872

 
—

 
10,872

 
—

 
 
Total fixed maturity investments
4,302,119

 
1,309,243

 
2,965,038

 
27,838

 
 
Short term investments
1,172,839

 
—

 
1,172,839

 
—

 
 
Equity investments trading
53,080

 
53,080

 
—

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity partnerships
389,451

 
—

 
—

 
389,451

 
 
Senior secured bank loan funds
266,141

 
—

 
245,141

 
21,000

 
 
Catastrophe bonds
95,827

 
—

 
95,827

 
—

 
 
Non-U.S. fixed income funds
31,713

 
—

 
31,713

 
—

 
 
Hedge funds
22,310

 
—

 
15,564

 
6,746

 
 
Miscellaneous other investments
1,340

 
—

 
—

 
1,340

 
 
Total other investments
806,782

 
—

 
388,245

 
418,537

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
6,163

 
—

 
—

 
6,163

 
 
Derivatives (1)
33,405

 
413

 
6,427

 
26,565

 
 
Other
13,936

 
(1,481
)
 
—

 
15,417

 
 
Total other assets and (liabilities)
53,504

 
(1,068
)
 
6,427

 
48,145

 
 
 
$
6,388,324

 
$
1,361,255

 
$
4,532,549

 
$
494,520

 
 
 
 
 
 
 
 
 
 
 
(1) See "Note 11. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.


17
    


 
 
 
 
 
 
 
 
 
 
 
At December 31, 2011
Total
 
Quoted
Prices in Active
Markets for
Identical
 Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
885,152

 
$
885,152

 
$
—

 
$
—

 
 
Agencies
158,561

 
—

 
158,561

 
—

 
 
Non-U.S. government (Sovereign debt)
227,912

 
—

 
227,912

 
—

 
 
FDIC guaranteed corporate
423,630

 
—

 
423,630

 
—

 
 
Non-U.S. government-backed corporate
641,082

 
—

 
641,082

 
—

 
 
Corporate
1,206,904

 
—

 
1,179,143

 
27,761

 
 
Agency mortgage-backed
441,749

 
—

 
441,749

 
—

 
 
Non-agency mortgage-backed
104,771

 
—

 
104,771

 
—

 
 
Commercial mortgage-backed
325,729

 
—

 
325,729

 
—

 
 
Asset-backed
18,027

 
—

 
18,027

 
—

 
 
Total fixed maturity investments
4,433,517

 
885,152

 
3,520,604

 
27,761

 
 
Short term investments
905,477

 
—

 
905,477

 
—

 
 
Equity investments trading
50,560

 
50,560

 
—

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity partnerships
367,909

 
—

 
—

 
367,909

 
 
Senior secured bank loan funds
257,870

 
—

 
237,815

 
20,055

 
 
Catastrophe bonds
70,999

 
—

 
70,999

 
—

 
 
Non-U.S. fixed income funds
28,862

 
—

 
28,862

 
—

 
 
Hedge funds
21,344

 
—

 
14,782

 
6,562

 
 
Miscellaneous other investments
2,000

 
—

 
—

 
2,000

 
 
Total other investments
748,984

 
—

 
352,458

 
396,526

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
2,115

 
—

 
—

 
2,115

 
 
Derivatives (1)
3,312

 
707

 
(6,293
)
 
8,898

 
 
Other
10,644

 
(6,869
)
 
—

 
17,513

 
 
Total other assets and (liabilities)
16,071

 
(6,162
)
 
(6,293
)
 
28,526

 
 
 
$
6,154,609

 
$
929,550

 
$
4,772,246

 
$
452,813

 
 
 
 
 
 
 
 
 
 
 
(1) See "Note 11. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.
Level 1 and Level 2 Assets and Liabilities Measured at Fair Value
Fixed Maturity Investments
Fixed maturity investments included in Level 1 consist of the Company's investments in U.S. treasuries. Fixed maturity investments included in Level 2 are agencies, non-U.S. government, Federal Deposit Insurance Company ("FDIC") guaranteed corporate, non-U.S. government-backed corporate, corporate, agency mortgage-backed, non-agency mortgage-backed, commercial mortgage-backed and asset-backed fixed maturity investments.
The Company’s fixed maturity investments portfolios are primarily priced using pricing services, such as index providers and pricing vendors, as well as broker quotations. In general, the pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an

18
    


exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers, reference data and industry and economic events. Index pricing generally relies on market traders as the primary source for pricing, however models are also utilized to provide prices for all index eligible securities. The models use a variety of observable inputs such as benchmark yields, transactional data, dealer runs, broker-dealer quotes and corporate actions. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.
The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of our fixed maturity investments are detailed below by asset class.
U.S. treasuries
Level 1 - At March 31, 2012, the Company’s U.S. treasuries fixed maturity investments are primarily priced by pricing services and had a weighted average effective yield of 0.6% and a weighted average credit quality of AA (December 31, 2011 - 0.6% and AA, respectively). When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers. Certain data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue and maturity date.
Agencies
Level 2 - At March 31, 2012, the Company’s agency fixed maturity investments had a weighted average effective yield of 0.7% and a weighted average credit quality of AA (December 31, 2011 - 0.5% and AA, respectively). The issuers of the Company’s agency fixed maturity investments primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Fixed maturity investments included in agencies are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrates other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.
Non-U.S. government (Sovereign debt)
Level 2 - Non-U.S. government fixed maturity investments held by the Company at March 31, 2012, had a weighted average effective yield of 2.9% and a weighted average credit quality of AA (December 31, 2011 - 2.3% and AA, respectively). The issuers of securities in this sector are non-U.S. governments and their respective agencies as well as supranational organizations. Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

19
    


FDIC guaranteed corporate
Level 2 - The Company’s FDIC guaranteed corporate fixed maturity investments had a weighted average effective yield of 0.2% and a weighted average credit quality of AA at March 31, 2012 (December 31, 2011 - 0.3% and AA, respectively). The issuers consist of well known corporate issuers who participate in the FDIC program. The Company’s FDIC guaranteed corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve.
Non-U.S. government-backed corporate
Level 2 - Non-U.S. government-backed corporate fixed maturity investments had a weighted average effective yield of 1.3% and a weighted average credit quality of AAA at March 31, 2012 (December 31, 2011 - 1.4% and AAA, respectively). Non-U.S. government-backed fixed maturity investments are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread to the respective curve for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.
Corporate
Level 2 - At March 31, 2012, the Company’s corporate fixed maturity investments principally consist of U.S. and international corporations and had a weighted average effective yield of 3.7% and a weighted average credit quality of A (December 31, 2011 - 4.2% and A, respectively). The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.
Agency mortgage-backed
Level 2 - At March 31, 2012, the Company’s agency mortgage-backed fixed maturity investments included agency residential mortgage-backed securities with a weighted average effective yield of 1.4%, a weighted average credit quality of AA and a weighted average life of 2.6 years (December 31, 2011 - 1.5%, AA and 2.6 years, respectively). The Company’s agency mortgage-backed fixed maturity investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active and the to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.
Non-agency mortgage-backed
Level 2 - The Company’s non-agency mortgage-backed fixed maturity investments include non-agency prime residential mortgage-backed and non-agency Alt-A fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. At March 31, 2012, the Company’s non-agency prime residential mortgage-backed fixed maturity investments have a weighted average effective yield of 6.4%, a weighted average credit quality of BBB, and a weighted average life of 3.5 years (December 31, 2011 - 8.0%, BBB and 3.3 years, respectively). The Company’s non-agency Alt-A fixed maturity investments held at March 31, 2012 have a weighted average effective yield

20
    


of 6.7%, a weighted average credit quality of A, a weighted average life of 3.9 years, and are from vintage years 2006 and prior (December 31, 2011 - 9.1%, A, 3.8 years and 2006 and prior, respectively) . Securities held in these sectors are primarily priced by pricing services using an option adjusted spread (”OAS”) model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.
Commercial mortgage-backed
Level 2 - The Company’s commercial mortgage-backed fixed maturity investments held at March 31, 2012 have a weighted average effective yield of 2.7%, a weighted average credit quality of AA, and a weighted average life of 3.9 years (December 31, 2011 - 3.2%, AA and 4.2 years, respectively). Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bid and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services discount the expected cash flows for each security held in this sector using a spread adjusted benchmark yield based on the characteristics of the security.
Asset-backed
Level 2 - At March 31, 2012, the Company’s asset-backed fixed maturity investments had a weighted average effective yield of 0.5%, a weighted average credit quality of AAA and a weighted average life of 1.2 years (December 31, 2011 - 0.9%, AAA and 1.8 years, respectively). The underlying collateral for the Company’s asset-backed fixed maturity investments primarily consists of student loans, credit card receivables, auto loans and other receivables. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.
Short Term Investments
Level 2 - The fair value of the Company's portfolio of short term investments are generally determined using amortized cost which approximates fair value and, in certain cases, in a manner similar to the Company’s fixed maturity investments noted above.
Equity Investments, Classified as Trading
Level 1 - The fair value of the Company's portfolio of equity investments, classified as trading are primarily priced by pricing services, reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers and applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue.
Other investments
Senior secured bank loan funds
Level 2 - At March 31, 2012, the Company’s investments in senior secured bank loan funds include funds that invest primarily in bank loans and other senior debt instruments. The fair value of the Company’s senior secured bank loan funds are determined using the net asset value per share of the funds. Investments of $245.1 million are redeemable, in part on a monthly basis, or in whole over a three month period.

21
    


Catastrophe bonds
Level 2 - The Company's other investments include investments in catastrophe bonds which are recorded at fair value. The fair value of the Company's investments in catastrophe bonds is based on broker or underwriter bid indications.
Non-U.S. fixed income funds
Level 2 - The Company’s non-U.S. fixed income funds invest primarily in non-U.S. convertible securities. The fair values of the investments in this category have been estimated using the net asset value per share of the investments which are provided by third parties such as the relevant investment manager or administrator. During April 2012, the Company fully redeemed its remaining investment in non-U.S. fixed income funds at the then net asset value per share.
Hedge funds
Level 2 - The Company has investments in hedge funds that pursue multiple strategies. The fair values of the Company’s hedge funds are determined by adjusting the previous period's reported net asset value, which is generally one month in arrears, for an estimated periodic rate of return obtained from the respective investment manager.
For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the investment manager and the latest audited financial statements to attempt to ensure that the hedge fund investment is following fair value principles consistent with GAAP in determining the net asset value of each investor's interest.
Other assets and liabilities
Derivatives
Level 1 and Level 2 - Other assets and liabilities include certain other derivatives entered into by the Company. The fair value of these transactions include certain exchange traded foreign currency forward contracts which are considered Level 1, and certain credit derivatives, determined using standard industry valuation models and considered Level 2, as the inputs to the valuation model are based on observable market inputs, including credit spreads, credit ratings of the underlying referenced security, the risk free rate and the contract term.
Other
Level 1 - The liabilities measured at fair value and included in Level 1 at March 31, 2012 of $1.5 million are principally cash settled restricted stock units (“CSRSU”) that form part of the Company's compensation program. The fair value of the Company's CSRSUs is determined using observable exchange traded prices for the Company's common shares.
Senior Notes
In January 2003, RenaissanceRe issued $100.0 million, which represents the carrying amount on the Company’s consolidated balance sheet, of 5.875% Senior Notes due February 15, 2013, with interest on the notes payable on February 15 and August 15 of each year. At March 31, 2012, the fair value of the 5.875% Senior Notes was $103.5 million (December 31, 2011 – $103.4 million).
In March 2010, RenRe North America Holdings Inc. (“RRNAH”) issued $250.0 million of 5.75% Senior Notes due March 15, 2020, with interest on the notes payable on March 15 and September 15 of each year. At March 31, 2012, the fair value of the 5.75% Senior Notes was $262.0 million (December 31, 2011 - $263.0 million).
The fair value of RenaissanceRe’s 5.875% Senior Notes and RRNAH’s 5.75% Senior Notes is determined using indicative market pricing obtained from third-party service providers, which the Company considers Level 2 in the fair value hierarchy. There have been no changes during the period in the Company's valuation technique used to determine the fair value of its Senior Notes.

22
    


Level 3 Assets and Liabilities Measured at Fair Value
Below is a summary of quantitative information regarding the significant observable and unobservable inputs (Level 3) used in determining the fair value of assets and liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2012
Fair Value
(Level 3)
 
Valuation Technique
 
Unobservable (U)
and Observable (O)
Inputs
 
Low
 
High
 
Weighted Average or Actual
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
17,584

 
Discounted cash flow ("DCF")
 
Credit spread (U)
 
n/a
 
n/a
 
4.1
%
 
 
 
 
 
 
 
Illiquidity premium (U)
 
n/a
 
n/a
 
1.0
%
 
 
 
 
 
 
 
Risk-free rate (O)
 
n/a
 
n/a
 
0.2
%
 
 
 
 
 
 
 
Dividend rate (O)
 
n/a
 
n/a
 
5.9
%
 
 
 
10,254

 
Internal valuation model
 
Private transaction (U)
 
n/a
 
n/a
 
See below

 
 
Total fixed maturity investments
27,838

 
 
 
 
 
 
 
 
 
 
 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity partnerships
389,451

 
Net asset valuation
 
Estimated performance (U)
 
(6.0
)%
 
64.4
%
 
8.4
%
 
 
Senior secured bank loan funds
21,000

 
Net asset valuation
 
Estimated performance (U)
 
n/a
 
n/a
 
2.1
%
 
 
Hedge funds
6,746

 
Net asset valuation
 
Estimated performance (U)
 
0.0
 %
 
0.7
%
 
0.2
%
 
 
Miscellaneous other investments
1,340

 
DCF
 
Illiquidity premium (U)
 
n/a
 
n/a
 
1.0
%
 
 
 
 
 
 
 
Risk-free rate (O)
 
n/a
 
n/a
 
0.5
%
 
 
 
 
 
 
 
Credit spread (U)
 
n/a
 
n/a
 
7.5
%
 
 
Total other investments
418,537

 
 
 
 
 
 
 
 
 
 
 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
6,163

 
Internal valuation model
 
Net premiums written (O)
 
—

 
$6.0 million

 
See below

 
 
 
 
 
 
 
Contract period (O)
 
183 days

 
365 days

 
See below

 
 
 
 
 
 
 
Net reserve for claims and claim expenses (U)
 
—

 
—

 
See below

 
 
Weather and energy related derivatives
26,565

 
Spread option; Quanto; Black Scholes; Simulation
 
Correlation (U)
 
0

 
1

 
See below

 
 
 
 
 
 
 
Volatility (U)
 
7.0
 %
 
350.0
%
 
See below

 
 
 
 
 
 
 
Commodity curve (U)
 
$
1.77

 
$
66.00

 
See below

 
 
 
 
 
 
 
Weather curve (U)
 
19

 
5,000

 
See below

 
 
 
 
 
 
 
Counterparty default risk (U)
 
0.0
 %
 
22.5
%
 
See below

 
 
Other
14,167

 
Net asset valuation
 
Estimated performance (U)
 
n/a
 
n/a
 
See below

 
 
 
1,250

 
Internal valuation model
 
Private transaction (U)
 
n/a
 
n/a
 
See below

 
 
Total other assets and (liabilities)
48,145

 
 
 
 
 
 
 
 
 
 
 
 
 
$
494,520

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

23
    


Fixed Maturity Investments
Corporate
Level 3 - Included in the Company's corporate fixed maturity investments is an investment with a fair value of $17.6 million in the preferred equity of a property and casualty insurance group organized to market residential property insurance in North America. The Company measures the fair value of this investment using a DCF model and seeks to incorporate all relevant information reasonably available to it. The Company considers the contractual agreement which stipulates the methodology for calculating a dividend rate to be paid upon liquidation, conversion or redemption. At March 31, 2012, the dividend rate was 5.9%. In addition, the Company has estimated an illiquidity premium of 1.0% and a risk-free rate of 0.2%. To ensure the estimate for fair value determined using the DCF model is reasonable, the Company reviews private market comparables of similar investments, if available, and in particular, credit ratings of other private market comparables for similar investments to determine the appropriateness of its estimate of fair value using a DCF model. The fair value of the Company's investment in corporate fixed maturity investments determined by a DCF model is positively correlated to the dividend rate, and inversely correlated to the credit spread, illiquidity premium and the risk-free rate.
In addition, the Company's corporate fixed maturity investments include an investment with a fair value of $10.3 million in the preferred equity of a company that provides insurance for a variety of veterinarian costs, including surgeries, medication and diagnostic testing. When utilizing an internal valuation model to determine the fair value of this investment, the Company uses a combination of quantitative and qualitative factors, which may include, but are not limited to, discounted cash flow analysis, financial statement analysis, budgets and forecasts, capital transactions and third party valuations. In circumstances where a private market transaction has recently occurred, the Company will evaluate the comparableness of that transaction and incorporate into its internal valuation model accordingly. Recent private market transactions of investments similar to that held by the Company have been used to determine the fair value of $10.3 million at March 31, 2012, as the Company believes it represents the price that would be received upon the sale of its investment in an orderly transaction among market participants. Consequently, should future relevant private market transactions occur, the Company will re-evaluate the information available used to determine fair value of this investment and record any adjustments to fair value in its consolidated statements of operations.
Other investments
Private equity partnerships
Level 3 - Included in the Company’s investments in private equity partnerships at March 31, 2012 are alternative asset limited partnerships (or similar corporate structures) that invest in certain private equity asset classes including U.S. and global leveraged buyouts; mezzanine investments; distressed securities; real estate; and oil, gas and power. The fair value of private equity partnership investments is based on current estimated net asset values established in accordance with the governing documents of such investments and is obtained from the investment manager or general partner of the respective entity. The type of underlying investments held by the investee which form the basis of the net asset valuation include assets such as private business ventures, for which the Company does not have access to financial information. As a result, the Company is unable to corroborate the fair value measurement of the underlying investments of the private equity partnership and therefore requires significant management judgment to determine the fair value of the private equity partnership. In circumstances where there is a reporting lag between the current period end reporting date and the reporting date of the latest fund valuation, the Company estimates the fair value of these funds by starting with the prior month or quarter-end fund valuations, adjusting these valuations for actual capital calls, redemptions or distributions, as well as the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which the Company estimates the return for the current period, all relevant information reasonably available to the Company is utilized. This principally includes preliminary estimates reported to the Company by its fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to the Company with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar

24
    


types of investments for which the Company has obtained reported results, or other valuation methods, where possible. The range of such current estimated periodic returns for the three months ended March 31, 2012 was negative 6.0% to positive 64.4% with a weighted average of 8.4%. The fair value of the Company's investment in private equity partnerships is positively correlated to the estimated periodic rate of return. The Company also considers factors such as recent financial information, the value of capital transactions with the partnership and management’s judgment regarding whether any adjustments should be made to the net asset value. For each respective private equity partnership, the Company obtains and reviews the valuation methodology used by the investment manager or general partner and the latest audited financial statements to ensure that the investment partnership is following fair value principles consistent with GAAP in determining the net asset value of each limited partner's interest.
Senior secured bank loan funds
Level 3 - The Company also has a $21.0 million investment in a closed end fund which invests primarily in loans. The Company has no right to redeem its investment in this fund. The Company’s investment in this fund is valued using estimated monthly net asset valuations received from the investment manager. The lock up provisions in this fund result in a lack of current observable market transactions between the fund participants and the fund, and therefore, the Company considers the fair value of its investment in this fund to be determined using Level 3 inputs. The Company obtains and reviews the latest audited financial statements to attempt to ensure that the fund is following fair value principles consistent with GAAP in determining the net asset value.
Hedge funds
Level 3 - In certain instances, a portion of the Company's hedge fund investment may be invested in so called "side pockets" or illiquid investments. In these instances, the Company generally does not have the right to redeem its interest, and as such, the Company classifies this portion of its investment as Level 3. The fair value of these illiquid investments are determined by adjusting the previous periods' reported net asset value (generally one month in arrears) for an estimated periodic rate of return obtained from the respective investment manager.
For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the investment manager and the latest audited financial statements to ensure that the hedge fund investment is following fair value principles consistent with GAAP in determining the net asset value.
Miscellaneous other investments
Level 3 - Included in miscellaneous other investments is a loan to a third party. As a result of the recent restructuring of the loan, including prepayment of principal during the first quarter of 2012, the outstanding principal on the loan decreased to $1.3 million. The Company determines the fair value of this loan using a DCF model and endeavors to incorporate all relevant information reasonably available, including the outstanding principal amount, interest rate inherent in the loan as determined using the 3-month LIBOR, credit spread and an illiquidity premium. The fair value of this loan is inversely correlated to the 3-month LIBOR, credit spread and illiquidity premium.
Other assets and liabilities
Assumed and ceded (re)insurance contracts
Level 3 - The fair value of the Company's assumed and ceded (re)insurance contracts is obtained through the use of an internal valuation model with the inputs to the internal valuation model based on proprietary data as observable market inputs are not available. The Company has elected the fair value option to measure certain of its assumed and ceded (re)insurance contracts. The most significant unobservable input is the reserve for claims and claim expenses and losses recoverable. Generally, an increase (decrease) in the reserve for claims and claim expenses, or a decrease (increase) in losses recoverable, would result in a decrease (increase) to the fair value of the Company's assumed and ceded (re)insurance contracts.

25
    


Derivatives
Level 3 - Derivatives measured at fair value include certain derivative-based risk management products primarily to address weather and energy risks, and hedging and trading activities related to these risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena and in instances where market prices are not available, the Company uses industry or internally developed valuation techniques such as spread option, Black Scholes, quanto and simulation modeling to determine fair value and are considered Level 3. These models may reference prices for similar instruments.
Observable and unobservable inputs to these valuation techniques vary by contract requirements and commodity type, are validated using market-based or independently sourced parameters where applicable and would typically include the following, if applicable, dependent on contract requirements and commodity type:
•
observable inputs: contract price, notional, option strike, term to expiry, interest rate, contractual limits;
•
unobservable inputs: correlation; and
•
both observable and unobservable: spot and forward volatilities, forward commodity price, forward weather curve, counterparty credit risk.
The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the above table on quantitative information.
If a trade has one or more significant valuation inputs that are unobservable, such trades are initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the initial valuation, the Company updates market observable inputs to reflect observable market changes. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. The Company seeks to use broker quotes in less liquid markets.
Changes in any or all of the unobservable inputs listed above may contribute positively or negatively to the overall portfolio fair value depending upon the underlying position. In general, movements in weather curves are the largest contributing factor that impact fair value. However, trades valued using unobservable inputs represent a small percentage of the total number of transactions in the portfolio.
Pricing models are internally approved by the Company's Risk Committee prior to implementation and are reviewed periodically.
Other
Level 3 - The Company has an investment of $14.2 million at March 31, 2012 in the common equity of a mortgage insurance company which provides private capital to lenders and investors that supports financing for homeowner mortgages. The fair value of this investment is based on the unadjusted net asset value obtained from the management of the mortgage insurance company. The fair value of the Company's investment is positively correlated to the net asset valuation. The Company also considers factors such as recent financial information, the value of capital transactions with the mortgage insurance company and management's judgment regarding whether any adjustments should be made to the net asset value.
The Company also has an investment in the preferred equity of a company that develops online risk management products primarily focused on motor fuels risk, more specifically, structuring products, sourcing the risk and facilitating the settlement of capital. The fair value of this investment at March 31, 2012 of $1.3 million was determined using recent private market transactions. In instances where private market transactions are not available, the fair value is measured using a number of qualitative and quantitative factors, including but not limited to a net asset estimation of the company, projected earnings, private market transactions, and any other information that may be available to the Company. At March 31, 2012, the Company determined that the fair value of its investment was appropriate when compared to the net asset position of the company and recent private market transactions. Should the net asset position of the company increase, the fair value of the Company's investment would also increase.

26
    


Below is a reconciliation of the beginning and ending balances, for the periods shown, of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs. Interest and dividend income are included in net investment income and are excluded from the reconciliation.