RNR Q3 2014 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 September 30, 2014
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 November 3, 2014 was 38,529,054.
 



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


NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us.
In particular, statements using words such as “may”, “should”, “estimate”, “expect”, “anticipate”, “intends”, “believe”, “predict”, “potential”, or words of similar import generally involve forward-looking statements. For example, we may include certain forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” with regard to trends in results, prices, volumes, operations, investment results, margins, combined ratios, fees, reserves, market conditions, risk management and exchange rates. This Form 10-Q also contains forward-looking statements with respect to our business and industry, such as those relating to our strategy and management objectives, market standing and product volumes, competition and new entrants in our industry, industry capital, insured losses from loss events, government initiatives and regulatory matters affecting the reinsurance and insurance industries.
In light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be considered as a representation by us or any other person that our objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from those addressed by the forward-looking statements, including the following:
•
we are exposed to significant losses from catastrophic events and other exposures that we cover, which we expect to cause significant volatility in our financial results from time to time;
•
the inherent uncertainties in our reserving process, particularly as regards to large catastrophic events and longer tail casualty lines, the uncertainties of which we expect to increase as our product and geographical diversity increases;
•
the frequency and severity of catastrophic and other events which we cover could exceed our estimates and cause losses greater than we expect;
•
the risk of the lowering or loss of any of the financial strength, claims paying or enterprise wide risk management ratings of RenaissanceRe Holdings Ltd. (“RenaissanceRe”) or of one or more of our subsidiaries or joint ventures or changes in the policies or practices of the rating agencies;
•
risks associated with appropriately modeling, pricing for, and contractually addressing new or potential factors in loss emergence, such as the trend toward potentially significant global warming and other aspects of climate change which have the potential to adversely affect our business, any of which could cause us to underestimate our exposures and potentially adversely impact our financial results;
•
the risk we might be bound to policyholder obligations beyond our underwriting intent, or unable to enforce our own intent in respect of retrocessional arrangements, including in each case due to emerging claims and coverage issues;
•
risks due to our increasing reliance on a small and decreasing number of reinsurance brokers and other distribution services for the preponderance of our revenue;
•
risks relating to operating in a highly competitive environment, which we expect to continue to increase over time from new competition from traditional and non-traditional participants, particularly as capital markets products provide alternatives and replacements for more traditional reinsurance and insurance products, as new entrants or existing competitors attempt to replicate our business model, and as a result of consolidation in the (re)insurance industry;
•
risks relating to deteriorating market conditions, including the risks of decreasing revenues, margins, capital efficiency and returns;

3


•
the risk that our customers may fail to make premium payments due to us, as well as the risk of failures of our reinsurers, brokers or other counterparties to honor their obligations to us, including as regards to large catastrophic events, and also including their obligations to make third party payments for which we might be liable;
•
a contention by the Internal Revenue Service that Renaissance Reinsurance Ltd. (“Renaissance Reinsurance”), or any of our other Bermuda subsidiaries, is subject to U.S. taxation;
•
other risks relating to potential adverse tax developments, including potential changes to the taxation of inter-company or related party transactions, or potential changes to the tax treatment of investors in RenaissanceRe or our joint ventures or other entities we manage;
•
risks relating to adverse legislative developments that could reduce the size of the private markets we serve, or impede their future growth, including proposals to shift United States (“U.S.”) catastrophe risks to federal mechanisms; similar proposals at the state level in the U.S., including the risk of legislation in Florida to expand the reinsurance coverage offered by the Florida Hurricane Catastrophe Fund (“FHCF”) and the insurance policies written by Citizens Property Insurance Corporation (“Citizens”), or failing to implement reforms to reduce such coverage; risks of adverse legislation in relation to U.S. flood insurance or the failure to implement reform legislation; and the risk that new legislation will be enacted in the international markets we serve which might reduce market opportunities in the private sector, weaken our customers or otherwise adversely impact us;
•
risks associated with our investment portfolio, including the risk that our investment assets may fail to yield attractive or even positive results; and the risk that investment managers may breach our investment guidelines, or the inability of such guidelines to mitigate investment risks;
•
risks associated with implementing our business strategies and initiatives, including risks related to strategic transactions, developing or enhancing the operations, controls and other infrastructure necessary in respect of our more recent, new or proposed initiatives, and the risk that we may fail to succeed in our business or financing plans for these initiatives;
•
risks that certain of our new or potentially expanding business lines could have a significant negative impact on our financial results or cause significant volatility in our results for any particular period;
•
risks associated with potential for loss of services of any one of our key senior officers, the risk that we fail to attract or retain the executives and employees necessary to manage our business, and difficulties associated with the transition of members of our senior management team for new or expanded roles necessary to execute our strategic and tactical plans;
•
risks relating to the inability, or delay, in the claims paying ability of Citizens, FHCF or of private market participants in Florida, particularly following a large windstorm or of multiple smaller storms, which we believe would weaken or destabilize the Florida market and give rise to an unpredictable range of impacts which might be adverse to us, perhaps materially so;
•
risks associated with the management of our operations as our product and geographical diversity increases, including the potential inability to allocate sufficient resources to our strategic and tactical plans or to address additional industry or regulatory developments and requirements;
•
changes in economic conditions, including interest rate, currency, equity and credit conditions which could affect our investment portfolio or declines in our investment returns for other reasons which could reduce our profitability and hinder our ability to pay claims promptly in accordance with our strategy, which risks we believe are currently enhanced in light of the current macroeconomic uncertainty and the recent period of relative economic weakness, both globally, particularly in respect of Eurozone countries and companies, and in the U.S.;
•
risks associated with highly subjective judgments, such as valuing our more illiquid assets, and determining the impairments taken on our investments, all of which impact our reported financial position and operating results;
•
risks associated with our retrocessional reinsurance protection, including the risks that the coverages and protections we seek may become unavailable or only available on unfavorable terms, that the forms of retrocessional protection available in the market on acceptable terms may give rise to more risk in our net portfolio than we find desirable or that we correctly identify, or that we are otherwise

4


unable to cede our own assumed risk to third parties; and the risk that providers of protection do not meet their obligations to us or do not do so on a timely basis;
•
risks associated with inflation, which could cause loss costs to increase, and impact the performance of our investment portfolio, thereby adversely impacting our financial position or operating results;
•
operational risks, including system or human failures, which risks could result in our incurring material losses;
•
risks in connection with our management of capital on behalf of investors in joint ventures or other entities we manage, such as failing to comply with complex laws and regulations relating to the management of such capital or the potential rights of third party investors, which failure could result in our incurring significant liabilities, penalties or other losses;
•
risks that we may require additional capital in the future, particularly after a catastrophic event or to support potential growth opportunities in our business, which may not be available or may be available only on unfavorable terms;
•
risks relating to our potential failure to comply with covenants in our debt agreements, which failure could provide our lenders the right to accelerate our debt which would adversely impact us;
•
the risk of potential challenges to the claim of exemption from insurance regulation of RenaissanceRe and certain of our subsidiaries in certain jurisdictions under certain current laws and the risk of increased global regulation of the insurance and reinsurance industry;
•
risks relating to the inability of our operating subsidiaries to declare and pay dividends, which could cause us to be unable to pay dividends to our shareholders or to repay our indebtedness;
•
the risk that there could be regulatory or legislative changes adversely impacting us, as a Bermuda-based company, relative to our competitors, or actions taken by multinational organizations having such an impact;
•
risks arising out of possible changes in the distribution or placement of risks due to increased consolidation of customers or insurance and reinsurance brokers; and
•
risks relating to changes in regulatory regimes and/or accounting rules, which could result in significant changes to our financial results, including but not limited to, the European Union directive concerning capital adequacy, risk management and regulatory reporting for insurers.
The factors listed above should not be construed as exhaustive. Certain of these risk factors and others are described in more detail from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2013. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

5


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except per share amounts)
 
September 30,
2014
 
December 31,
2013
Assets
(Unaudited)
 
(Audited)
Fixed maturity investments trading, at fair value (Amortized cost $4,735,061 and $4,781,712 at September 30, 2014 and December 31, 2013, respectively)
$
4,750,766

 
$
4,809,036

Fixed maturity investments available for sale, at fair value (Amortized cost $24,664 and $30,273 at September 30, 2014 and December 31, 2013, respectively)
28,069

 
34,241

Short term investments, at fair value
1,031,143

 
1,044,779

Equity investments trading, at fair value
301,714

 
254,776

Other investments, at fair value
501,487

 
573,264

Investments in other ventures, under equity method
118,245

 
105,616

Total investments
6,731,424

 
6,821,712

Cash and cash equivalents
300,547

 
408,032

Premiums receivable
630,718

 
474,087

Prepaid reinsurance premiums
195,978

 
66,132

Reinsurance recoverable
79,043

 
101,025

Accrued investment income
25,514

 
34,065

Deferred acquisition costs
130,108

 
81,684

Receivable for investments sold
147,206

 
75,845

Other assets
108,443

 
108,438

Goodwill and other intangible assets
7,954

 
8,111

Total assets
$
8,356,935

 
$
8,179,131

Liabilities, Noncontrolling Interests and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Reserve for claims and claim expenses
$
1,532,780

 
$
1,563,730

Unearned premiums
758,272

 
477,888

Debt
249,499

 
249,430

Reinsurance balances payable
501,155

 
293,022

Payable for investments purchased
284,295

 
193,221

Other liabilities
203,908

 
397,596

Total liabilities
3,529,909

 
3,174,887

Commitments and Contingencies


 


Redeemable noncontrolling interest
1,091,166

 
1,099,860

Shareholders’ Equity
 
 
 
Preference shares: $1.00 par value – 16,000,000 shares issued and outstanding at September 30, 2014 (December 31, 2013 – 16,000,000)
400,000

 
400,000

Common shares: $1.00 par value – 38,887,563 shares issued and outstanding at September 30, 2014 (December 31, 2013 – 43,646,436)
38,888

 
43,646

Accumulated other comprehensive income
3,829

 
4,131

Retained earnings
3,293,143

 
3,456,607

Total shareholders’ equity attributable to RenaissanceRe
3,735,860

 
3,904,384

Total liabilities, noncontrolling interests and shareholders’ equity
$
8,356,935

 
$
8,179,131

See accompanying notes to the consolidated financial statements

6


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three and nine months ended September 30, 2014 and 2013
(in thousands of United States Dollars, except per share amounts) (Unaudited)
 
Three months ended
 
Nine months ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
200,992

 
$
182,649

 
$
1,417,792

 
$
1,521,290

Net premiums written
$
159,713

 
$
127,241

 
$
956,467

 
$
1,123,163

Decrease (increase) in unearned premiums
99,266

 
167,476

 
(150,538
)
 
(265,302
)
Net premiums earned
258,979

 
294,717

 
805,929

 
857,861

Net investment income
24,941

 
59,931

 
98,430

 
129,296

Net foreign exchange gains
5,036

 
488

 
6,367

 
170

Equity in earnings of other ventures
9,806

 
7,313

 
21,237

 
16,920

Other (loss) income
(1,169
)
 
651

 
(1,642
)
 
(2,186
)
Net realized and unrealized (losses) gains on investments
(31,097
)
 
28,472

 
10,958

 
(26,788
)
Total revenues
266,496

 
391,572

 
941,279

 
975,273

Expenses
 
 
 
 
 
 
 
Net claims and claim expenses incurred
69,647

 
60,928

 
209,950

 
192,141

Acquisition expenses
37,550

 
37,699

 
104,727

 
94,475

Operational expenses
46,972

 
44,672

 
135,437

 
133,447

Corporate expenses
3,905

 
4,307

 
12,404

 
30,318

Interest expense
4,290

 
4,298

 
12,875

 
13,632

Total expenses
162,364

 
151,904

 
475,393

 
464,013

Income from continuing operations before taxes
104,132

 
239,668

 
465,886

 
511,260

Income tax expense
(245
)
 
(223
)
 
(207
)
 
(356
)
Income from continuing operations
103,887

 
239,445

 
465,679

 
510,904

(Loss) income from discontinued operations
—

 
(9,779
)
 
—

 
2,422

Net income
103,887

 
229,666

 
465,679

 
513,326

Net income attributable to noncontrolling interests
(30,477
)
 
(44,331
)
 
(109,323
)
 
(96,953
)
Net income attributable to RenaissanceRe
73,410

 
185,335

 
356,356

 
416,373

Dividends on preference shares
(5,595
)
 
(5,595
)
 
(16,786
)
 
(19,353
)
Net income available to RenaissanceRe common shareholders
$
67,815

 
$
179,740

 
$
339,570

 
$
397,020

Income from continuing operations available to RenaissanceRe common shareholders per common share – basic
$
1.72

 
$
4.32

 
$
8.38

 
$
8.95

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

 
(0.23
)
 
—

 
0.06

Net income available to RenaissanceRe common shareholders per common share – basic
$
1.72

 
$
4.09

 
$
8.38

 
$
9.01

Income from continuing operations available to RenaissanceRe common shareholders per common share – diluted
$
1.70

 
$
4.23

 
$
8.26

 
$
8.79

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

 
(0.22
)
 
—

 
0.05

Net income available to RenaissanceRe common shareholders per common share – diluted
$
1.70

 
$
4.01

 
$
8.26

 
$
8.84

Dividends per common share
$
0.29

 
$
0.28

 
$
0.87

 
$
0.84

See accompanying notes to the consolidated financial statements

7


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the three and nine months ended September 30, 2014 and 2013
(in thousands of United States Dollars) (Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Comprehensive income
 
 
 
 
 
 
 
Net income
$
103,887

 
$
229,666

 
$
465,679

 
$
513,326

Change in net unrealized gains on investments
(89
)
 
(343
)
 
(302
)
 
(9,056
)
Comprehensive income
103,798

 
229,323

 
465,377

 
504,270

Net income attributable to noncontrolling interests
(30,477
)
 
(44,331
)
 
(109,323
)
 
(96,953
)
Comprehensive income attributable to noncontrolling interests
(30,477
)
 
(44,331
)
 
(109,323
)
 
(96,953
)
Comprehensive income attributable to RenaissanceRe
$
73,321

 
$
184,992

 
$
356,054

 
$
407,317

Disclosure regarding net unrealized gains
 
 
 
 
 
 
 
Total net realized and unrealized holding (gains) losses on investments and net other-than-temporary impairments
$
(89
)
 
$
25

 
$
(302
)
 
$
(1,508
)
Net realized gains on fixed maturity investments available for sale
—

 
(368
)
 
—

 
(7,548
)
Change in net unrealized gains on investments
$
(89
)
 
$
(343
)
 
$
(302
)
 
$
(9,056
)
 




























See accompanying notes to the consolidated financial statements

8


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the nine months ended September 30, 2014 and 2013
(in thousands of United States Dollars) (Unaudited)
 
 
Nine months ended
 
September 30, 2014
 
September 30, 2013
Preference shares
 
 
 
Balance – January 1
$
400,000

 
$
400,000

Issuance of shares
—

 
275,000

Repurchase of shares
—

 
(275,000
)
Balance – September 30
400,000

 
400,000

Common shares
 
 
 
Balance – January 1
43,646

 
45,542

Repurchase of shares
(4,996
)
 
(1,722
)
Exercise of options and issuance of restricted stock awards
238

 
571

Balance – September 30
38,888

 
44,391

Additional paid-in capital
 
 
 
Balance – January 1
—

 
—

Repurchase of shares
(5,359
)
 
3,019

Offering expenses
—

 
(9,345
)
Change in noncontrolling interests
1,118

 
622

Exercise of options and issuance of restricted stock awards
4,241

 
5,704

Balance – September 30
—

 
—

Accumulated other comprehensive income
 
 
 
Balance – January 1
4,131

 
13,622

Change in net unrealized gains on investments
(302
)
 
(9,056
)
Balance – September 30
3,829

 
4,566

Retained earnings
 
 
 
Balance – January 1
3,456,607

 
3,043,901

Net income
465,679

 
513,326

Net income attributable to noncontrolling interests
(109,323
)
 
(96,953
)
Repurchase of shares
(468,200
)
 
(142,208
)
Dividends on common shares
(34,834
)
 
(36,956
)
Dividends on preference shares
(16,786
)
 
(19,353
)
Balance – September 30
3,293,143

 
3,261,757

Noncontrolling interest
—

 
3,720

Total shareholders’ equity
$
3,735,860

 
$
3,714,434

 










See accompanying notes to the consolidated financial statements

9


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2014 and 2013
(in thousands of United States Dollars) (Unaudited)
 
Nine months ended
 
September 30, 2014
 
September 30, 2013
Cash flows provided by operating activities
 
 
 
Net income
$
465,679

 
$
513,326

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Amortization, accretion and depreciation
30,270

 
42,423

Equity in undistributed earnings of other ventures
(16,519
)
 
(12,048
)
Net realized and unrealized (gains) losses on investments
(10,958
)
 
26,806

Net unrealized gains included in net investment income
(2,908
)
 
(33,836
)
Net unrealized (gains) losses included in other (loss) income
(264
)
 
12,782

Change in:
 
 
 
Premiums receivable
(156,631
)
 
(244,572
)
Prepaid reinsurance premiums
(129,846
)
 
(89,258
)
Reinsurance recoverable
21,982

 
43,311

Deferred acquisition costs
(48,424
)
 
(51,222
)
Reserve for claims and claim expenses
(30,950
)
 
(195,668
)
Unearned premiums
280,384

 
354,560

Reinsurance balances payable
208,133

 
68,569

Other
(216,559
)
 
(49,375
)
Net cash provided by operating activities
393,389

 
385,798

Cash flows provided by (used in) investing activities
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
5,896,330

 
6,356,691

Purchases of fixed maturity investments trading
(5,843,501
)
 
(6,449,697
)
Proceeds from sales and maturities of fixed maturity investments available for sale
6,076

 
43,564

Net purchases of equity investments trading
(33,925
)
 
(33,714
)
Net sales (purchases) of short term investments
21,578

 
(118,126
)
Net sales of other investments
74,706

 
198,101

Net sales (purchases) of investments in other ventures
1,030

 
(2,500
)
Net sales (puchases) of other assets
6,000

 
(994
)
Net cash provided by (used in) investing activities
128,294

 
(6,675
)
Cash flows used in financing activities
 
 
 
Dividends paid – RenaissanceRe common shares
(34,834
)
 
(36,956
)
Dividends paid – preference shares
(16,786
)
 
(19,353
)
RenaissanceRe common share repurchases
(475,343
)
 
(140,911
)
Net repayment of debt
—

 
(100,847
)
Redemption of 6.08% Series C preference shares
—

 
(125,000
)
Redemption of 6.60% Series D preference shares
—

 
(150,000
)
Issuance of 5.375% Series E preference shares, net of expenses
—

 
265,655

Net third party redeemable noncontrolling interest share transactions
(107,091
)
 
(103,628
)
Net cash used in financing activities
(634,054
)
 
(411,040
)
Effect of exchange rate changes on foreign currency cash
4,886

 
3,366

Net decrease in cash and cash equivalents
(107,485
)
 
(28,551
)
Net increase in cash and cash equivalents of discontinued operations
—

 
(9,244
)
Cash and cash equivalents, beginning of period
408,032

 
304,145

Cash and cash equivalents, end of period
$
300,547

 
$
266,350


See accompanying notes to the consolidated financial statements

10


RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(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 (“Form 10-K”) for the fiscal year ended December 31, 2013.
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 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. RenaissanceRe Corporate Capital (UK) Limited (“RenaissanceRe CCL”), a wholly owned subsidiary of RenaissanceRe, is Syndicate 1458’s sole corporate member and RenaissanceRe Syndicate Management Ltd. (“RSML”), a wholly owned subsidiary of RenaissanceRe, is the managing agent for Syndicate 1458.
•
RenaissanceRe Specialty Risks Ltd. (“RenaissanceRe Specialty Risks”), is a Bermuda-domiciled reinsurance and excess and surplus lines insurance company that is listed on the National Association of Insurance Commissioners’ International Insurance Department’s Quarterly List of Alien Insurers as an eligible surplus lines insurer. RenaissanceRe Underwriting Managers U.S. LLC (“RenaissanceRe Underwriting Managers U.S.”), a specialty reinsurance agency domiciled in Connecticut, provides specialty treaty reinsurance solutions on both a quota share and excess of loss basis; and writes business on behalf of RenaissanceRe Specialty U.S. Ltd. (“RenaissanceRe Specialty U.S.”), a Bermuda-domiciled reinsurer launched in June 2013 which operates subject to U.S. federal income tax, and Syndicate 1458.
•
Effective January 1, 2013, the Company formed and launched a managed joint venture, Upsilon Reinsurance II Ltd. (“Upsilon Re II”), a Bermuda domiciled special purpose insurer (“SPI”), to provide additional capacity to the worldwide aggregate and per-occurrence primary and retrocessional property catastrophe excess of loss market. Effective December 11, 2013, Upsilon Re II was renamed Upsilon Reinsurance Fund Opportunities Ltd. (“Upsilon RFO”). Upsilon RFO is considered a variable interest entity (“VIE”) and the Company is considered the primary beneficiary. As a result, Upsilon RFO is consolidated by the Company and all significant inter-company transactions have been eliminated.
•
RenaissanceRe Medici Fund Ltd. (“Medici”) is an exempted fund, incorporated under the laws of Bermuda. Medici’s objective is to seek to invest substantially all of its assets in various insurance-based investment instruments that have returns primarily tied to property catastrophe risk. Third-party investors have subscribed for a portion of the participating, non-voting common shares of

11


Medici. Because the Company owns a noncontrolling equity interest in, but controls all of the outstanding voting power of Medici, the results of Medici are consolidated in the Company’s financial statements. Redeemable noncontrolling interest - Medici represents the interests of external parties with respect to the net income and shareholders’ equity of Medici.
•
On August 30, 2013, RenaissanceRe entered into a purchase agreement with a subsidiary of Munich-American Holding Corporation (together with applicable affiliates, “Munich”) to sell the Company’s U.S.-based weather and weather-related energy risk management unit, which principally included RenRe Commodity Advisors LLC (“RRCA”), Renaissance Trading Ltd. (“Renaissance Trading”) and RenRe Energy Advisors Ltd. (collectively referred to as “REAL”). REAL offered certain derivative-based risk management products primarily to address weather and energy risk and engaged in hedging and trading activities related to those transactions. On October 1, 2013, RenaissanceRe closed the sale of REAL to Munich. In the third quarter of 2013, 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. Refer to “Note 3. Discontinued Operations”, for more information.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company’s significant accounting policies as described in its Form 10-K for the year ended December 31, 2013, except as noted below.
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 consolidated 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 consolidated 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 consolidated 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.
DISCONTINUED OPERATIONS
The results of operations of REAL, which has been sold to an unaffiliated third party, is classified as held for sale and reported as discontinued operations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic Discontinued Operations. The consolidated financial statements and notes thereto are presented excluding the operations and cash flows of the discontinued operations from the continuing operations of the Company since the Company will not have

12


any significant continuing involvement in the operations after the sale. The financial position and results of operations of discontinued operations are presented as single line items on the consolidated balance sheets and statements of operations, respectively. Certain prior year comparatives have been reclassified to conform to the current year presentation.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The objective of ASU 2013-11 is to improve the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 seeks to reduce the diversity in practice by providing guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 became effective for annual and interim reporting periods beginning after December 15, 2013. The Company prospectively adopted ASU 2013-11 effective January 1, 2014 and the adoption of this guidance did not have a material impact on the Company’s consolidated statements of operations and financial position.
Financial Services - Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements
In June 2013, the FASB issued ASU No. 2013-08, Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). The objective of ASU 2013-08 is to change the approach to the investment company assessment, clarify the characteristics of an investment company and provide comprehensive guidance for assessing whether an entity is an investment company. In addition, ASU 2013-08 will require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting and require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. ASU 2013-08 became effective for annual and interim reporting periods beginning after December 15, 2013. The Company prospectively adopted ASU 2013-08 effective January 1, 2014 and the adoption of this guidance did not have a material impact on the Company’s consolidated statements of operations and financial position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The objective of ASU 2014-08 is to improve the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 will also require expanded disclosures for discontinued operations and require an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 is prospectively effective for public business entities in annual periods beginning on or after December 15, 2014, and interim periods beginning on or after December 15, 2015. Entities may early adopt ASU 2014-08 for new disposals that have not been reported in the consolidated financial statements previously issued or available for issuance. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.

13


NOTE 3. DISCONTINUED OPERATIONS
REAL
On August 30, 2013, RenaissanceRe entered into a purchase agreement with Munich to sell REAL and, on October 1, 2013, RenaissanceRe closed the sale of REAL to Munich. In the third quarter of 2013, the Company classified the assets and liabilities associated with this transaction as held for sale and the financial results are reflected in the Company’s consolidated financial statements as “discontinued operations.”  Consideration for the transaction was $60.0 million, paid in cash at closing, subject to post-closing adjustments for certain tax and other items. The Company recorded a loss on sale of $8.8 million in the third quarter of 2013 in conjunction with the sale, including related direct expenses.
Except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to the Company’s continuing operations. All prior periods presented have been reclassified to conform to this form of presentation.
The Company did not have any assets, liabilities or shareholder’s equity of discontinued operations held for sale related to REAL at September 30, 2014 or December 31, 2013.
Details of the income from discontinued operations for the three and nine months ended September 30, 2014 and 2013 are as follows and relate entirely to REAL:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
 
Revenues
 
 
 
 
 
 
 
 
 
Net investment (loss) income
$
—

 
$
(3
)
 
$
—

 
$
1,150

 
 
Net foreign exchange (losses) gains
—

 
(140
)
 
—

 
849

 
 
Other (loss) income
—

 
(1,001
)
 
—

 
9,471

 
 
Net realized and unrealized losses on investments
—

 
(5
)
 
—

 
(18
)
 
 
Total revenues
—

 
(1,149
)
 
—

 
11,452

 
 
Expenses
 
 
 
 
 
 
 
 
 
Operational expenses
—

 
30

 
—

 
89

 
 
Corporate expenses
—

 
(2
)
 
—

 
104

 
 
Total expenses
—

 
28

 
—

 
193

 
 
Loss on sale of REAL
—

 
(8,770
)
 
—

 
(8,770
)
 
 
(Loss) income before taxes
—

 
(9,947
)
 
—

 
2,489

 
 
Income tax expense
—

 
168

 
—

 
(67
)
 
 
(Loss) income from discontinued operations
$
—

 
$
(9,779
)
 
$
—

 
$
2,422

 
 
 
 
 
 
 
 
 
 
 

14


NOTE 4. INVESTMENTS
Fixed Maturity Investments Trading
The following table summarizes the fair value of fixed maturity investments trading:
 
 
 
 
 
 
 
 
September 30,
2014
 
December 31,
2013
 
 
U.S. treasuries
$
1,636,326

 
$
1,352,413

 
 
Agencies
120,025

 
186,050

 
 
Non-U.S. government (Sovereign debt)
282,326

 
334,580

 
 
Non-U.S. government-backed corporate
141,159

 
237,479

 
 
Corporate
1,572,168

 
1,803,415

 
 
Agency mortgage-backed
320,584

 
336,661

 
 
Non-agency mortgage-backed
252,241

 
243,795

 
 
Commercial mortgage-backed
397,685

 
303,214

 
 
Asset-backed
28,252

 
11,429

 
 
Total fixed maturity investments trading
$
4,750,766

 
$
4,809,036

 
 
 
 
 
 
 
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
 
 
 
 
 
 
September 30, 2014
Amortized 
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments 
(1)  
 
 
Agency mortgage-backed
$
4,174

 
$
380

 
$
—

 
$
4,554

 
$
—

 
 
Non-agency mortgage-backed
9,999

 
2,218

 
(3
)
 
12,214

 
(677
)
 
 
Commercial mortgage-backed
7,294

 
656

 
—

 
7,950

 
—

 
 
Asset-backed
3,197

 
154

 
—

 
3,351

 
—

 
 
Total fixed maturity investments available for sale
$
24,664

 
$
3,408

 
$
(3
)
 
$
28,069

 
$
(677
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
 
December 31, 2013
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments
 (1)  
 
 
Agency mortgage-backed
$
4,880

 
$
378

 
$
(11
)
 
$
5,247

 
$
—

 
 
Non-agency mortgage-backed
11,735

 
2,414

 
(6
)
 
14,143

 
(742
)
 
 
Commercial mortgage-backed
10,052

 
970

 
—

 
11,022

 
—

 
 
Asset-backed
3,606

 
223

 
—

 
3,829

 
—

 
 
Total fixed maturity investments available for sale
$
30,273

 
$
3,985

 
$
(17
)
 
$
34,241

 
$
(742
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents the non-credit component of other-than-temporary impairments recognized in accumulated other comprehensive income adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.

15


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
 
 
September 30, 2014
Amortized 
Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
Due in less than one year
$
97,830

 
$
97,868

 
$
—

 
$
—

 
$
97,830

 
$
97,868

 
 
Due after one through five years
2,951,631

 
2,949,329

 
—

 
—

 
2,951,631

 
2,949,329

 
 
Due after five through ten years
595,874

 
593,633

 
—

 
—

 
595,874

 
593,633

 
 
Due after ten years
108,080

 
111,174

 
—

 
—

 
108,080

 
111,174

 
 
Mortgage-backed
953,480

 
970,510

 
21,467

 
24,718

 
974,947

 
995,228

 
 
Asset-backed
28,166

 
28,252

 
3,197

 
3,351

 
31,363

 
31,603

 
 
Total
$
4,735,061

 
$
4,750,766

 
$
24,664

 
$
28,069

 
$
4,759,725

 
$
4,778,835

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Investments Trading
The following table summarizes the fair value of equity investments trading:
 
 
 
 
 
 
 
 
September 30,
2014
 
December 31,
2013
 
 
Financials
$
199,798

 
$
152,905

 
 
Communications and technology
32,377

 
4,300

 
 
Industrial, utilities and energy
30,347

 
25,350

 
 
Consumer
18,796

 
44,115

 
 
Healthcare
16,396

 
15,340

 
 
Basic materials
4,000

 
12,766

 
 
Total
$
301,714

 
$
254,776

 
 
 
 
 
 
 
Pledged Investments
At September 30, 2014, $2,115.6 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 syndicated letter of credit facility and bilateral letter of credit facility (December 31, 2013 - $2,081.1 million). Of this amount, $685.8 million is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities (December 31, 2013 - $652.8 million).
Reverse Repurchase Agreements
At September 30, 2014, the Company held $18.6 million (December 31, 2013 - $37.3 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of short term investments on the Company’s consolidated balance sheets. The required collateral for these loans typically include high-quality, readily marketable instruments at a minimum rate of 102% of the loan principal. Upon maturity, the Company receives principal and interest income.

16


Net Investment Income, Net Realized and Unrealized Gains on Investments and Net Other-Than-Temporary Impairments
The components of net investment income are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
 
 
Fixed maturity investments
$
24,519

 
$
24,423

 
$
74,751

 
$
71,148

 
 
Short term investments
251

 
563

 
727

 
1,318

 
 
Equity investments
736

 
706

 
2,311

 
1,050

 
 
Other investments
 
 
 
 
 
 
 
 
 
Hedge funds and private equity investments
(3,320
)
 
14,179

 
17,337

 
31,296

 
 
Other
5,547

 
22,735

 
11,558

 
32,874

 
 
Cash and cash equivalents
116

 
47

 
300

 
108

 
 
 
27,849

 
62,653

 
106,984

 
137,794

 
 
Investment expenses
(2,908
)
 
(2,722
)
 
(8,554
)
 
(8,498
)
 
 
Net investment income
$
24,941

 
$
59,931

 
$
98,430

 
$
129,296

 
 
 
 
 
 
 
 
 
 
 
The following table provides an analysis of the components of net realized and unrealized gains on investments.
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
 
 
Gross realized gains
$
7,962

 
$
8,813

 
$
33,595

 
$
60,437

 
 
Gross realized losses
(2,720
)
 
(22,241
)
 
(10,871
)
 
(41,396
)
 
 
Net realized gains on fixed maturity investments
5,242

 
(13,428
)
 
22,724

 
19,041

 
 
Net unrealized (losses) gains on fixed maturity investments trading
(36,600
)
 
33,405

 
21,200

 
(85,338
)
 
 
Net realized and unrealized (losses) gains on investments-related derivatives
(1,868
)
 
3,557

 
(19,651
)
 
24,488

 
 
Net realized gains on equity investments trading
3,523

 
560

 
8,578

 
18,195

 
 
Net unrealized (losses) gains on equity investments trading
(1,394
)
 
4,378

 
(21,893
)
 
(3,174
)
 
 
Net realized and unrealized (losses) gains on investments
$
(31,097
)
 
$
28,472

 
$
10,958

 
$
(26,788
)
 
 
 
 
 
 
 
 
 
 
 

17


The following tables provide an analysis of the components of other comprehensive income and reclassifications out of accumulated other comprehensive income.
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2014
 
 
 
Investments in other ventures
 
Fixed maturity investments available for sale
 
Total
 
 
Beginning balance
$
211

 
$
3,707

 
$
3,918

 
 
Other comprehensive income (loss) before reclassifications
213

 
(302
)
 
(89
)
 
 
Ending balance
$
424

 
$
3,405

 
$
3,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
 
Investments in other ventures
 
Fixed maturity investments available for sale
 
Total
 
 
Beginning balance
$
163

 
$
3,968

 
$
4,131

 
 
Other comprehensive income (loss) before reclassifications
261

 
(563
)
 
(302
)
 
 
Ending balance
$
424

 
$
3,405

 
$
3,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
 
 
Investments in other ventures
 
Fixed maturity investments available for sale
 
Total
 
 
Beginning balance
$
218

 
$
4,691

 
$
4,909

 
 
Other comprehensive (loss) income before reclassifications
(91
)
 
116

 
25

 
 
Amounts reclassified from accumulated other comprehensive income by statement of operations line item:
 
 
 
 
 
 
 
Realized gains reclassified from accumulated other comprehensive income to net realized and unrealized gains (losses) on investments
—

 
(368
)
 
(368
)
 
 
Net current-period other comprehensive loss
(91
)
 
(252
)
 
(343
)
 
 
Ending balance
$
127

 
$
4,439

 
$
4,566

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 
 
 
Investments in other ventures
 
Fixed maturity investments available for sale
 
Total
 
 
Beginning balance
$
1,625

 
$
11,997

 
$
13,622

 
 
Other comprehensive loss before reclassifications
(1,498
)
 
(10
)
 
(1,508
)
 
 
Amounts reclassified from accumulated other comprehensive income by statement of operations line item:
 
 
 
 
 
 
 
Realized gains reclassified from accumulated other comprehensive income to net realized and unrealized gains (losses) on investments
—

 
(7,548
)
 
(7,548
)
 
 
Net current-period other comprehensive loss
(1,498
)
 
(7,558
)
 
(9,056
)
 
 
Ending balance
$
127

 
$
4,439

 
$
4,566

 
 
 
 
 
 
 
 
 

18


The following tables provide 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 September 30, 2014
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Non-agency mortgage-backed
$
—

 
$
—

 
$
73

 
$
(3
)
 
$
73

 
$
(3
)
 
 
Total
$
—

 
$
—

 
$
73

 
$
(3
)
 
$
73

 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
December 31, 2013
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Agency mortgage-backed
$
726

 
$
(11
)
 
$
—

 
$
—

 
$
726

 
$
(11
)
 
 
Non-agency mortgage-backed
—

 
—

 
89

 
(6
)
 
89

 
(6
)
 
 
Commercial mortgage-backed
39

 
—

 
—

 
—

 
39

 
—

 
 
Total
$
765

 
$
(11
)
 
$
89

 
$
(6
)
 
$
854

 
$
(17
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2014, the Company held two fixed maturity investments available for sale securities that were in an unrealized loss position (December 31, 2013 - four), including two fixed maturity investments available for sale securities that were in an unrealized loss position for twelve months or greater (December 31, 2013 - two). 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 nine months ended September 30, 2014 and 2013, 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 is less than the amortized cost basis of the security.
For the nine months ended September 30, 2014, the Company recognized $Nil of other-than-temporary impairments which were recognized in earnings and $Nil related to other factors which were recognized in other comprehensive income (2013 – $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:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
 
 
Beginning balance
$
529

 
$
791

 
$
561

 
$
838

 
 
Reductions:
 
 
 
 
 
 
 
 
 
Securities sold during the period
(15
)
 
(38
)
 
(47
)
 
(85
)
 
 
Ending balance
$
514

 
$
753

 
$
514

 
$
753

 
 
 
 
 
 
 
 
 
 
 

19


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 consolidated 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 valuation techniques that use at least one significant input that is unobservable (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
•
Level 3 inputs are based all or in part on significant 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. 
Other than the transaction noted below, 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 3 during the period represented by these consolidated financial statements. As discussed in greater detail below, the Company transferred its investment in the common shares of Trupanion, Inc. (“Trupanion”), a company that provides insurance for a variety of veterinarian costs, from Level 3 to Level 1, effective July 18, 2014, the date on which Trupanion became a publicly traded company on the New York Stock Exchange (the “NYSE”). The fair value transferred from Level 3 to Level 1 was $24.6 million.

20


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 sheets:
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2014
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
$
1,636,326

 
$
1,636,326

 
$
—

 
$
—

 
 
Agencies
120,025

 
—

 
120,025

 
—

 
 
Non-U.S. government (Sovereign debt)
282,326

 
—

 
282,326

 
—

 
 
Non-U.S. government-backed corporate
141,159

 
—

 
141,159

 
—

 
 
Corporate
1,572,168

 
—

 
1,556,232

 
15,936

 
 
Agency mortgage-backed
325,138

 
—

 
325,138

 
—

 
 
Non-agency mortgage-backed
264,455

 
—

 
264,455

 
—

 
 
Commercial mortgage-backed
405,635

 
—

 
405,635

 
—

 
 
Asset-backed
31,603

 
—

 
31,603

 
—

 
 
Total fixed maturity investments
4,778,835

 
1,636,326

 
3,126,573

 
15,936

 
 
Short term investments
1,031,143

 
—

 
1,031,143

 
—

 
 
Equity investments trading
301,714

 
301,714

 
—

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity partnerships
300,800

 
—

 
—

 
300,800

 
 
Catastrophe bonds
179,246

 
—

 
179,246

 
—

 
 
Senior secured bank loan fund
18,723

 
—

 
—

 
18,723

 
 
Hedge funds
2,718

 
—

 
—

 
2,718

 
 
Total other investments
501,487

 
—

 
179,246

 
322,241

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
(7,281
)
 
—

 
—

 
(7,281
)
 
 
Derivatives (1)
(1,468
)
 
479

 
(1,957
)
 
10

 
 
Other
(8,523
)
 
—

 
(8,523
)
 
—

 
 
Total other assets and (liabilities)
(17,272
)
 
479

 
(10,480
)
 
(7,271
)
 
 
 
$
6,595,907

 
$
1,938,519

 
$
4,326,482

 
$
330,906

 
 
 
 
 
 
 
 
 
 
 
(1) See “Note 12. Derivative Instruments” for additional information related to the fair value by type of contract, of derivatives entered into by the Company.


21


 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
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
$
1,352,413

 
$
1,352,413

 
$
—

 
$
—

 
 
Agencies
186,050

 
—

 
186,050

 
—

 
 
Non-U.S. government (Sovereign debt)
334,580

 
—

 
334,580

 
—

 
 
Non-U.S. government-backed corporate
237,479

 
—

 
237,479

 
—

 
 
Corporate
1,803,415

 
—

 
1,775,835

 
27,580

 
 
Agency mortgage-backed
341,908

 
—

 
341,908

 
—

 
 
Non-agency mortgage-backed
257,938

 
—

 
257,938

 
—

 
 
Commercial mortgage-backed
314,236

 
—

 
314,236

 
—

 
 
Asset-backed
15,258

 
—

 
15,258

 
—

 
 
Total fixed maturity investments
4,843,277

 
1,352,413

 
3,463,284

 
27,580

 
 
Short term investments
1,044,779

 
—

 
1,044,779

 
—

 
 
Equity investments trading
254,776

 
254,776

 
—

 
—

 
 
Other investments