2014.09.30-10Q

 
 
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
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
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    .
Commission file number 1-14536
 
PartnerRe Ltd.
(Exact name of registrant as specified in its charter)
 
Bermuda
 
Not Applicable
(State of incorporation)
 
(I.R.S. Employer
Identification No.)
90 Pitts Bay Road, Pembroke, HM08, Bermuda
(Address of principal executive offices) (Zip Code)
(441) 292-0888
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of the registrant’s common shares (par value $1.00 per share) outstanding, net of treasury shares, as of October 27, 2014 was 48,972,567.
 



 
 
 


PartnerRe Ltd.
INDEX TO FORM 10-Q
 
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
PART II—OTHER INFORMATION
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
 
 
 
 
 



PART I—FINANCIAL INFORMATION
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of PartnerRe Ltd.
We have reviewed the accompanying condensed consolidated balance sheet of PartnerRe Ltd. and subsidiaries (the “Company”) as of September 30, 2014, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013, and of shareholders’ equity, and of cash flows for the nine-month periods ended September 30, 2014 and 2013. These condensed consolidated interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of December 31, 2013, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and of cash flows for the year then ended (not presented herein); and in our report dated February 27, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
 
/s/ Deloitte Ltd.
Deloitte Ltd.
 
Hamilton, Bermuda
October 31, 2014


3


 
 
 


PartnerRe Ltd.
Condensed Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except parenthetical share and per share data)
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, at fair value (amortized cost: 2014, $13,575,112; 2013, $13,376,455)
$
13,950,629

 
$
13,593,303

Short-term investments, at fair value (amortized cost: 2014, $37,010; 2013, $13,543)
37,016

 
13,546

Equities, at fair value (cost: 2014, $804,920; 2013, $1,009,286)
1,001,307

 
1,221,053

Other invested assets
299,260

 
320,981

Total investments
15,288,212

 
15,148,883

Funds held – directly managed (cost: 2014, $642,278; 2013, $778,569)
650,374

 
785,768

Cash and cash equivalents
1,519,287

 
1,496,485

Accrued investment income
171,050

 
185,717

Reinsurance balances receivable
2,974,668

 
2,465,713

Reinsurance recoverable on paid and unpaid losses
317,071

 
308,892

Funds held by reinsured companies
808,686

 
843,081

Deferred acquisition costs
707,481

 
644,952

Deposit assets
104,218

 
351,905

Net tax assets
5,029

 
14,133

Goodwill
456,380

 
456,380

Intangible assets
166,083

 
187,090

Other assets
38,804

 
149,296

Total assets
$
23,207,343

 
$
23,038,295

Liabilities
 
 
 
Unpaid losses and loss expenses
$
10,264,001

 
$
10,646,318

Policy benefits for life and annuity contracts
2,113,463

 
1,974,133

Unearned premiums
2,048,550

 
1,723,767

Other reinsurance balances payable
237,175

 
202,549

Deposit liabilities
71,857

 
328,588

Net tax liabilities
234,651

 
284,442

Accounts payable, accrued expenses and other
350,401

 
291,350

Debt related to senior notes
750,000

 
750,000

Debt related to capital efficient notes
70,989

 
70,989

Total liabilities
16,141,087

 
16,272,136

Shareholders’ Equity
 
 
 
Common shares (par value $1.00; issued: 2014, 87,141,960 shares; 2013, 86,657,045 shares)
87,142

 
86,657

Preferred shares (par value $1.00; issued and outstanding: 2014 and 2013, 34,150,000 shares; aggregate liquidation value: 2014 and 2013, $853,750)
34,150

 
34,150

Additional paid-in capital
3,936,396

 
3,901,627

Accumulated other comprehensive loss
(8,718
)
 
(12,238
)
Retained earnings
6,040,875

 
5,406,797

Common shares held in treasury, at cost (2014, 37,794,611 shares; 2013, 34,213,611 shares)
(3,075,865
)
 
(2,707,461
)
Total shareholders’ equity attributable to PartnerRe Ltd.
7,013,980

 
6,709,532

Noncontrolling interests
52,276

 
56,627

Total shareholders’ equity
7,066,256

 
6,766,159

Total liabilities and shareholders’ equity
$
23,207,343

 
$
23,038,295

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 
 
 


PartnerRe Ltd.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Expressed in thousands of U.S. dollars, except share and per share data)
(Unaudited)
 
For the three months ended
 
For the nine months ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
1,361,280

 
$
1,281,477

 
$
4,695,327

 
$
4,378,944

Net premiums written
$
1,342,690

 
$
1,264,775

 
$
4,499,849

 
$
4,210,525

Decrease (increase) in unearned premiums
213,924

 
156,694

 
(336,384
)
 
(433,740
)
Net premiums earned
1,556,614

 
1,421,469

 
4,163,465

 
3,776,785

Net investment income
118,176

 
121,811

 
365,010

 
370,017

Net realized and unrealized investment (losses) gains
(34,420
)
 
16,118

 
273,468

 
(260,154
)
Other income
2,223

 
5,399

 
11,892

 
13,205

Total revenues
1,642,593

 
1,564,797

 
4,813,835

 
3,899,853

Expenses
 
 
 
 
 
 
 
Losses and loss expenses and life policy benefits
959,543

 
750,999

 
2,592,847

 
2,278,793

Acquisition costs
321,756

 
282,948

 
888,937

 
758,890

Other operating expenses
108,615

 
108,467

 
327,149

 
369,340

Interest expense
12,241

 
12,233

 
36,719

 
36,694

Amortization of intangible assets
7,003

 
7,045

 
21,007

 
21,136

Net foreign exchange (gains) losses
(8,206
)
 
1,279

 
(10,900
)
 
9,822

Total expenses
1,400,952

 
1,162,971

 
3,855,759

 
3,474,675

Income before taxes and interest in earnings of equity method investments
241,641

 
401,826

 
958,076

 
425,178

Income tax expense
45,617

 
70,232

 
186,363

 
37,338

Interest in earnings of equity method investments
5,294

 
5,941

 
16,283

 
9,677

Net income
201,318

 
337,535

 
787,996

 
397,517

Net income attributable to noncontrolling interests
(4,920
)
 
(4,112
)
 
(9,914
)
 
(5,296
)
Net income attributable to PartnerRe Ltd.
196,398

 
333,423

 
778,082

 
392,221

Preferred dividends
14,184

 
14,184

 
42,551

 
43,678

Loss on redemption of preferred shares

 

 

 
9,135

Net income attributable to PartnerRe Ltd. common shareholders
$
182,214

 
$
319,239

 
$
735,531

 
$
339,408

Comprehensive income
 
 
 
 
 
 
 
Net income attributable to PartnerRe Ltd.
$
196,398

 
$
333,423

 
$
778,082

 
$
392,221

Change in currency translation adjustment
1,412

 
14,432

 
3,209

 
(16,912
)
Change in unfunded pension obligation, net of tax
989

 
114

 
979

 
980

Change in unrealized losses on investments, net of tax
(221
)
 
(229
)
 
(668
)
 
(692
)
Total other comprehensive income (loss), net of tax
2,180

 
14,317

 
3,520

 
(16,624
)
Comprehensive income attributable to PartnerRe Ltd.
$
198,578

 
$
347,740

 
$
781,602

 
$
375,597

Per share data attributable to PartnerRe Ltd. common shareholders
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic net income
$
3.68

 
$
5.95

 
$
14.58

 
$
6.04

Diluted net income
$
3.60

 
$
5.84

 
$
14.26

 
$
5.93

Weighted average number of common shares outstanding
49,514,980

 
53,671,245

 
50,461,749

 
56,176,260

Weighted average number of common shares and common share equivalents outstanding
50,681,325

 
54,625,151

 
51,566,134

 
57,217,561

Dividends declared per common share
$
0.67

 
$
0.64

 
$
2.01

 
$
1.92

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 
 
 


PartnerRe Ltd.
Condensed Consolidated Statements of Shareholders’ Equity
(Expressed in thousands of U.S. dollars)
(Unaudited)
 
For the nine months ended
 
September 30, 2014
 
September 30, 2013
Common shares
 
 
 
Balance at beginning of period
$
86,657

 
$
85,460

Issuance of common shares
485

 
966

Balance at end of period
87,142

 
86,426

Preferred shares
 
 
 
Balance at beginning of period
34,150

 
35,750

Issuance of preferred shares

 
10,000

Redemption of preferred shares

 
(11,600
)
Balance at end of period
34,150

 
34,150

Additional paid-in capital
 
 
 
Balance at beginning of period
3,901,627

 
3,861,844

Issuance of common shares
34,769

 
56,568

Issuance of preferred shares

 
231,265

Redemption of preferred shares

 
(269,265
)
Balance at end of period
3,936,396

 
3,880,412

Accumulated other comprehensive loss
 
 
 
Balance at beginning of period
(12,238
)
 
10,597

Currency translation adjustment
 
 
 
Balance at beginning of period
977

 
32,755

Change in currency translation adjustment
3,209

 
(16,912
)
Balance at end of period
4,186

 
15,843

Unfunded pension obligation
 
 
 
Balance at beginning of period
(17,509
)
 
(27,370
)
Change in unfunded pension obligation, net of tax
979

 
980

Balance at end of period (net of tax: 2014, $4,780; 2013, $7,752)
(16,530
)
 
(26,390
)
Unrealized gain on investments
 
 
 
Balance at beginning of period
4,294

 
5,212

Change in unrealized losses on investments, net of tax
(668
)
 
(692
)
Balance at end of period (net of tax: 2014 and 2013: $nil)
3,626

 
4,520

Balance at end of period
(8,718
)
 
(6,027
)
Retained earnings
 
 
 
Balance at beginning of period
5,406,797

 
4,952,002

Net income
787,996

 
397,517

Net income attributable to noncontrolling interests
(9,914
)
 
(5,296
)
Dividends on common shares
(101,453
)
 
(108,191
)
Dividends on preferred shares
(42,551
)
 
(43,678
)
Loss on redemption of preferred shares

 
(9,135
)
Balance at end of period
6,040,875

 
5,183,219

Common shares held in treasury
 
 
 
Balance at beginning of period
(2,707,461
)
 
(2,012,157
)
Repurchase of common shares
(368,404
)
 
(594,336
)
Balance at end of period
(3,075,865
)
 
(2,606,493
)
Total shareholders’ equity attributable to PartnerRe Ltd.
$
7,013,980

 
$
6,571,687

Noncontrolling interests
52,276

 
52,489

Total shareholders’ equity
$
7,066,256

 
$
6,624,176

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 
 
 


PartnerRe Ltd.
Condensed Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
(Unaudited)
 
For the nine months ended
 
September 30, 2014
 
September 30, 2013
Cash flows from operating activities
 
 
 
Net income
$
787,996

 
$
397,517

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of net premium on investments
82,519

 
119,468

Amortization of intangible assets
21,007

 
21,136

Net realized and unrealized investment (gains) losses
(273,468
)
 
260,154

Changes in:
 
 
 
Reinsurance balances, net
(565,187
)
 
(592,380
)
Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable
32,421

 
65,593

Funds held by reinsured companies and funds held – directly managed
138,659

 
76,159

Deferred acquisition costs
(83,758
)
 
(111,562
)
Net tax assets and liabilities
(27,792
)
 
(83,379
)
Unpaid losses and loss expenses including life policy benefits
144,663

 
(65,725
)
Unearned premiums
336,384

 
433,740

Other net changes in operating assets and liabilities
(10,207
)
 
63,014

Net cash provided by operating activities
583,237

 
583,735

Cash flows from investing activities
 
 
 
Sales of fixed maturities
6,227,896

 
5,831,364

Redemptions of fixed maturities
527,367

 
1,002,991

Purchases of fixed maturities
(6,990,492
)
 
(6,501,873
)
Sales and redemptions of short-term investments
70,750

 
290,011

Purchases of short-term investments
(95,168
)
 
(176,339
)
Sales of equities
464,212

 
595,848

Purchases of equities
(202,322
)
 
(556,303
)
Other, net
(4,822
)
 
98,813

Net cash (used in) provided by investing activities
(2,579
)
 
584,512

Cash flows from financing activities
 
 
 
Dividends paid to common and preferred shareholders
(144,004
)
 
(151,869
)
Repurchase of common shares
(374,557
)
 
(619,534
)
Issuance of common shares, net of taxes paid
12,639

 
37,193

Net proceeds from issuance of preferred shares

 
241,265

Repurchase of preferred shares

 
(290,000
)
(Distribution) sale of shares to noncontrolling interests
(14,265
)
 
47,136

Net cash used in financing activities
(520,187
)
 
(735,809
)
Effect of foreign exchange rate changes on cash
(37,669
)
 
(3,081
)
Increase in cash and cash equivalents
22,802

 
429,357

Cash and cash equivalents—beginning of period
1,496,485

 
1,121,705

Cash and cash equivalents—end of period
$
1,519,287

 
$
1,551,062

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
Taxes paid
$
243,396

 
$
148,522

Interest paid
24,630

 
24,630

See accompanying Notes to Condensed Consolidated Financial Statements.

7


 
 
 


PartnerRe Ltd.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
PartnerRe Ltd. (PartnerRe or the Company) predominantly provides reinsurance and certain specialty insurance lines on a worldwide basis through its principal wholly-owned subsidiaries, including Partner Reinsurance Company Ltd. (PartnerRe Bermuda), Partner Reinsurance Europe SE and Partner Reinsurance Company of the U.S. Risks reinsured include, but are not limited to, property, casualty, motor, agriculture, aviation/space, catastrophe, credit/surety, engineering, energy, marine, specialty property, specialty casualty, multiline and other lines, mortality, longevity, accident and health and alternative risk products. The Company’s alternative risk products include weather and credit protection to financial, industrial and service companies on a worldwide basis.
Effective December 31, 2012, the Company completed the acquisition of Presidio Reinsurance Group, Inc. (subsequently renamed and referred to as PartnerRe Health), a California-based U.S. specialty accident and health reinsurance and insurance writer. The Condensed Consolidated Statements of Operations and Cash Flows include PartnerRe Health’s results from January 1, 2013.
2. Significant Accounting Policies
The Company’s Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While Management believes that the amounts included in the Condensed Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:
Unpaid losses and loss expenses;
Policy benefits for life and annuity contracts;
Gross and net premiums written and net premiums earned;
Recoverability of deferred acquisition costs;
Recoverability of deferred tax assets;
Valuation of goodwill and intangible assets; and
Valuation of certain assets and derivative financial instruments that are measured using significant unobservable inputs.
In the opinion of Management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. As the Company’s reinsurance operations are exposed to low-frequency, high-severity risk events, some of which are seasonal, results for certain interim periods may include unusually low loss experience, while results for other interim periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods are not necessarily indicative of results for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
3. Recent Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (FASB) issued updated guidance on the accounting for investments in affordable housing projects that qualify for low-income housing tax credits by entities that manage or invest in such projects. The update modifies the conditions that an entity must meet to elect the effective yield or proportional amortization method to account for such investments. The guidance is effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on its Consolidated Financial Statements or disclosures.
In June 2014, the FASB issued updated guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on its Consolidated Financial Statements or disclosures.

8


4. Fair Value
(a) Fair Value of Financial Instrument Assets
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement.
The Company determines the appropriate level in the hierarchy for each financial instrument that it measures at fair value. In determining fair value, the Company uses various valuation approaches, including market, income and cost approaches. The hierarchy is broken down into three levels based on the observability of inputs as follows:
 
Level 1 inputs—Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
The Company’s financial instruments that it measures at fair value using Level 1 inputs generally include: equities and real estate investment trusts listed on a major exchange, exchange traded funds and exchange traded derivatives, including futures that are actively traded.
 
Level 2 inputs—Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and significant directly or indirectly observable inputs, other than quoted prices, used in industry accepted models.
The Company’s financial instruments that it measures at fair value using Level 2 inputs generally include: U.S. government issued bonds; U.S. government sponsored enterprises bonds; U.S. state, territory and municipal entities bonds; non-U.S. sovereign government, supranational and government related bonds consisting primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations; investment grade and high yield corporate bonds; catastrophe bonds; mortality bonds; asset-backed securities; mortgage-backed securities; certain equities traded on foreign exchanges; certain fixed income mutual funds; foreign exchange forward contracts; over-the-counter derivatives such as foreign currency option contracts, credit default swaps, interest rate swaps and to-be-announced mortgage-backed securities (TBAs).

Level 3 inputs—Unobservable inputs.
The Company’s financial instruments that it measures at fair value using Level 3 inputs generally include: inactively traded fixed maturities including U.S. state, territory and municipal bonds; privately issued corporate securities; special purpose financing asset-backed bonds; unlisted equities; real estate and certain other mutual fund investments; inactively traded weather derivatives; notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps.
The Company’s policy is to recognize transfers between the hierarchy levels at the beginning of the period.
The Company’s financial instruments measured at fair value include investments and the segregated investment portfolio underlying the funds held – directly managed account. At September 30, 2014 and December 31, 2013, the Company’s financial instruments measured at fair value were classified between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):

9


September 30, 2014
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Fixed maturities
 
 
 
 
 
 
 
 
U.S. government and government sponsored enterprises
 
$

 
$
2,184,417

 
$

 
$
2,184,417

U.S. states, territories and municipalities
 

 
189,755

 
130,743

 
320,498

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

 
2,209,335

 

 
2,209,335

Corporate
 

 
5,706,486

 

 
5,706,486

Asset-backed securities
 

 
689,609

 
458,175

 
1,147,784

Residential mortgage-backed securities
 

 
2,331,870

 

 
2,331,870

Other mortgage-backed securities
 

 
50,239

 

 
50,239

Fixed maturities
 
$

 
$
13,361,711

 
$
588,918

 
$
13,950,629

Short-term investments
 
$

 
$
37,016

 
$

 
$
37,016

Equities
 
 
 
 
 
 
 
 
Real estate investment trusts
 
$
213,461

 
$

 
$

 
$
213,461

Energy
 
155,113

 

 

 
155,113

Insurance
 
127,740

 

 

 
127,740

Finance
 
70,010

 
8,431

 
19,136

 
97,577

Consumer noncyclical
 
91,334

 

 

 
91,334

Communications
 
72,619

 

 
1,966

 
74,585

Technology
 
47,848

 

 
7,318

 
55,166

Industrials
 
43,930

 

 

 
43,930

Consumer cyclical
 
36,252

 

 

 
36,252

Utilities
 
32,012

 

 

 
32,012

Other
 
17,372

 

 
7

 
17,379

Mutual funds and exchange traded funds
 
48,383

 

 
8,375

 
56,758

Equities
 
$
956,074

 
$
8,431

 
$
36,802

 
$
1,001,307

Other invested assets
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
8,456

 
$

 
$
8,456

Foreign currency option contracts
 

 
901

 

 
901

Futures contracts
 
3,723

 

 

 
3,723

Total return swaps
 

 

 
744

 
744

Other
 
 
 
 
 
 
 
 
Notes and loan receivables and notes securitization
 

 

 
45,396

 
45,396

Annuities and residuals
 

 

 
14,880

 
14,880

Private equities
 

 

 
53,019

 
53,019

Derivative liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
(7,904
)
 

 
(7,904
)
Foreign currency option contracts
 

 
(1,682
)
 

 
(1,682
)
Futures contracts
 
(37
)
 

 

 
(37
)
Insurance-linked securities
 

 

 
(375
)
 
(375
)
Total return swaps
 

 

 
(1,859
)
 
(1,859
)
Interest rate swaps
 

 
(10,200
)
 

 
(10,200
)
TBAs
 

 
(508
)
 

 
(508
)
Other invested assets
 
$
3,686

 
$
(10,937
)
 
$
111,805

 
$
104,554

Funds held – directly managed
 
 
 
 
 
 
 
 
U.S. government and government sponsored enterprises
 
$

 
$
149,273

 
$

 
$
149,273

U.S. states, territories and municipalities
 

 

 
311

 
311

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

 
123,210

 

 
123,210

Corporate
 

 
191,621

 

 
191,621

Other invested assets
 

 

 
14,553

 
14,553

Funds held – directly managed
 
$

 
$
464,104

 
$
14,864

 
$
478,968

Total
 
$
959,760

 
$
13,860,325

 
$
752,389

 
$
15,572,474


10


December 31, 2013
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Fixed maturities
 
 
 
 
 
 
 
 
U.S. government and government sponsored enterprises
 
$

 
$
1,623,859

 
$

 
$
1,623,859

U.S. states, territories and municipalities
 

 
16,207

 
108,380

 
124,587

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

 
2,353,699

 

 
2,353,699

Corporate
 

 
6,048,663

 

 
6,048,663

Asset-backed securities
 

 
691,654

 
446,577

 
1,138,231

Residential mortgage-backed securities
 

 
2,268,517

 

 
2,268,517

Other mortgage-backed securities
 

 
35,747

 

 
35,747

Fixed maturities
 
$

 
$
13,038,346

 
$
554,957

 
$
13,593,303

Short-term investments
 
$

 
$
13,546

 
$

 
$
13,546

Equities
 
 
 
 
 
 
 
 
Real estate investment trusts
 
$
175,796

 
$

 
$

 
$
175,796

Energy
 
159,509

 

 

 
159,509

Insurance
 
144,020

 

 

 
144,020

Finance
 
108,944

 
9,556

 
20,207

 
138,707

Consumer noncyclical
 
108,663

 

 

 
108,663

Communications
 
70,792

 

 
2,199

 
72,991

Technology
 
53,768

 

 
7,752

 
61,520

Industrials
 
47,677

 

 

 
47,677

Consumer cyclical
 
45,915

 

 

 
45,915

Utilities
 
37,151

 

 

 
37,151

Other
 
19,993

 

 

 
19,993

Mutual funds and exchange traded funds
 
61,902

 
139,322

 
7,887

 
209,111

Equities
 
$
1,034,130

 
$
148,878

 
$
38,045

 
$
1,221,053

Other invested assets
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
1,249

 
$

 
$
1,249

Futures contracts
 
41,031

 

 

 
41,031

Total return swaps
 

 

 
79

 
79

Interest rate swaps
 

 
2,147

 

 
2,147

TBAs
 

 
2

 

 
2

Other
 
 
 
 
 
 
 
 
Notes and loan receivables and notes securitization
 

 

 
41,446

 
41,446

Annuities and residuals
 

 

 
24,064

 
24,064

Private equities
 

 

 
39,131

 
39,131

Derivative liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
(8,648
)
 

 
(8,648
)
Foreign currency option contracts
 

 
(535
)
 

 
(535
)
Credit default swaps (protection purchased)
 

 
(71
)
 

 
(71
)
Insurance-linked securities
 

 

 
(268
)
 
(268
)
Total return swaps
 

 

 
(599
)
 
(599
)
Interest rate swaps
 

 
(2,558
)
 

 
(2,558
)
TBAs
 

 
(1,331
)
 

 
(1,331
)
Other invested assets
 
$
41,031

 
$
(9,745
)
 
$
103,853

 
$
135,139

Funds held – directly managed
 
 
 
 
 
 
 
 
U.S. government and government sponsored enterprises
 
$

 
$
157,296

 
$

 
$
157,296

U.S. states, territories and municipalities
 

 

 
286

 
286

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

 
137,186

 

 
137,186

Corporate
 

 
248,947

 

 
248,947

Short-term investments
 

 
2,426

 

 
2,426

Other invested assets
 

 

 
15,165

 
15,165

Funds held – directly managed
 
$

 
$
545,855

 
$
15,451

 
$
561,306

Total
 
$
1,075,161

 
$
13,736,880

 
$
712,306

 
$
15,524,347


11


At September 30, 2014 and December 31, 2013, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $194.7 million and $185.8 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting or equity method of accounting.
In addition to the investments underlying the funds held – directly managed account held at fair value of $479.0 million and $561.3 million at September 30, 2014 and December 31, 2013, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $53.1 million and $84.8 million, respectively, and accrued investment income of $6.3 million and $6.7 million, respectively. At September 30, 2014 and December 31, 2013, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $112.0 million and $133.0 million, respectively, which primarily related to other assets and liabilities held by Colisée Re related to the underlying business, which are carried at cost (see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013).
At September 30, 2014 and December 31, 2013, substantially all of the accrued investment income in the Condensed Consolidated Balance Sheets relate to the Company’s investments and the investments underlying the funds held – directly managed account for which the fair value option was elected.
During the three months and nine months ended September 30, 2014 and 2013, there were no transfers between Level 1 and Level 2.
Disclosures about the fair value of financial instruments that the Company does not measure at fair value exclude insurance contracts and certain other financial instruments. At September 30, 2014 and December 31, 2013, the fair values of financial instrument assets recorded in the Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

12


The reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended September 30, 2014 and 2013, were as follows (in thousands of U.S. dollars):
For the three months ended September 30, 2014
 
Balance at
beginning
of period
 
Realized and
unrealized
investment
gains (losses)
included in
net income
 
Purchases
and
issuances
 
Settlements
and
sales
 
Net
transfers
into/
(out of)
Level 3
 
Balance
at end
of period
 
Change in
unrealized
investment
gains (losses)
relating to
assets held at
end of period
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
123,617

 
$
3,636

 
$
5,695

 
$
(2,205
)
 
$

 
$
130,743

 
$
3,747

Asset-backed securities
 
489,106

 
(4,439
)
 
11,085

 
(37,577
)
 

 
458,175

 
(4,403
)
Fixed maturities
 
$
612,723

 
$
(803
)
 
$
16,780

 
$
(39,782
)
 
$

 
$
588,918

 
$
(656
)
Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
19,564

 
$
(428
)
 
$

 
$

 
$

 
$
19,136

 
$
(428
)
Communications
 
2,067

 
(101
)
 

 

 

 
1,966

 
(101
)
Technology
 
7,645

 
(327
)
 

 

 

 
7,318

 
(327
)
Other
 
7

 

 

 

 

 
7

 

Mutual funds and exchange traded funds
 
8,246

 
129

 

 

 

 
8,375

 
129

Equities
 
$
37,529

 
$
(727
)
 
$

 
$

 
$

 
$
36,802

 
$
(727
)
Other invested assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, net
 
$
(852
)
 
$
(1,255
)
 
$
57

 
$
560

 
$

 
$
(1,490
)
 
$
(1,255
)
Notes and loan receivables and notes securitization
 
38,603

 
(1,379
)
 
29,286

 
(21,114
)
 

 
45,396

 
(1,379
)
Annuities and residuals
 
17,134

 
(475
)
 

 
(1,779
)
 

 
14,880

 
(474
)
Private equities
 
54,928

 
(1,348
)
 
248

 
(809
)
 

 
53,019

 
(1,348
)
Other invested assets
 
$
109,813

 
$
(4,457
)
 
$
29,591

 
$
(23,142
)
 
$

 
$
111,805

 
$
(4,456
)
Funds held – directly managed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
305

 
$
6

 
$

 
$

 
$

 
$
311

 
$
6

Other invested assets
 
15,800

 
(1,467
)
 
220

 

 

 
14,553

 
(1,467
)
Funds held – directly managed
 
$
16,105

 
$
(1,461
)
 
$
220

 
$

 
$

 
$
14,864

 
$
(1,461
)
Total
 
$
776,170

 
$
(7,448
)
 
$
46,591

 
$
(62,924
)
 
$

 
$
752,389

 
$
(7,300
)

13


For the three months ended September 30, 2013
 
Balance at
beginning
of period
 
Realized and
unrealized
investment
gains (losses)
included in
net income
 
Purchases
and
issuances
 
Settlements
and
sales (1)
 
Net
transfers
into/(out of)
Level 3
 
Balance
at end of
period
 
Change in
unrealized
investment
gains (losses)
relating to
assets held at
end of period
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
219,163

 
$
8,431

 
$
61,706

 
$
(165
)
 
$

 
$
289,135

 
$
8,431

Corporate
 
99,896

 
(269
)
 

 

 

 
99,627

 
(269
)
Asset-backed securities
 
426,288

 
4,800

 
86,442

 
(63,777
)
 

 
453,753

 
(3,043
)
Fixed maturities
 
$
745,347

 
$
12,962

 
$
148,148

 
$
(63,942
)
 
$

 
$
842,515

 
$
5,119

Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
13,000

 
$
1,285

 
$

 
$

 
$

 
$
14,285

 
$
1,285

Communications
 
2,040

 
103

 

 

 

 
2,143

 
103

Technology
 
8,012

 
1,138

 

 

 

 
9,150

 
1,138

Mutual funds and exchange traded funds
 
7,549

 
125

 

 

 

 
7,674

 
125

Equities
 
$
30,601

 
$
2,651

 
$

 
$

 
$

 
$
33,252

 
$
2,651

Other invested assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, net
 
$
2,333

 
$
(1,885
)
 
$

 
$
(1,395
)
 
$

 
$
(947
)
 
$
(140
)
Notes and loan receivables and notes securitization
 
44,224

 
3,250

 
1,248

 
(941
)
 

 
47,781

 
3,250

Annuities and residuals
 
30,555

 
413

 

 
(4,029
)
 

 
26,939

 
166

Private equities
 
21,100

 
(299
)
 
1,077

 

 

 
21,878

 
(299
)
Other invested assets
 
$
98,212

 
$
1,479

 
$
2,325

 
$
(6,365
)
 
$

 
$
95,651

 
$
2,977

Funds held – directly managed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
337

 
$
(39
)
 
$

 
$

 
$

 
$
298

 
$
(39
)
Other invested assets
 
15,207

 
1,045

 

 
(686
)
 

 
15,566

 
1,045

Funds held – directly managed
 
$
15,544

 
$
1,006

 
$

 
$
(686
)
 
$

 
$
15,864

 
$
1,006

Total
 
$
889,704

 
$
18,098

 
$
150,473

 
$
(70,993
)
 
$

 
$
987,282

 
$
11,753

 
 
(1)
Settlements and sales of asset-backed securities and derivatives include sales of $13.7 million and $1.4 million, respectively.

14


The reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the nine months ended September 30, 2014 and 2013, were as follows (in thousands of U.S. dollars):
For the nine months ended September 30, 2014
 
Balance at
beginning
of period
 
Realized and
unrealized
investment
gains (losses)
included in
net income
 
Purchases
and
issuances (1)
 
Settlements
and
sales
 
Net
transfers
into/(out of)
Level 3
 
Balance
at end of
period
 
Change in
unrealized
investment gains (losses)
relating to
assets held at
end of period
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
108,380

 
$
10,488

 
$
14,220

 
$
(2,345
)
 
$

 
$
130,743

 
$
10,483

Asset-backed securities
 
446,577

 
4,698

 
138,538

 
(131,638
)
 

 
458,175

 
4,993

Fixed maturities
 
$
554,957

 
$
15,186

 
$
152,758

 
$
(133,983
)
 
$

 
$
588,918

 
$
15,476

Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
20,207

 
$
(1,071
)
 
$

 
$

 
$

 
$
19,136

 
$
(1,071
)
Communications
 
2,199

 
(233
)
 

 

 

 
1,966

 
(233
)
Technology
 
7,752

 
(434
)
 

 

 

 
7,318

 
(434
)
Other
 

 
(1
)
 
8

 

 

 
7

 
(1
)
Mutual funds and exchange traded funds
 
7,887

 
488

 

 

 

 
8,375

 
488

Equities
 
$
38,045

 
$
(1,251
)
 
$
8

 
$

 
$

 
$
36,802

 
$
(1,251
)
Other invested assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, net
 
$
(788
)
 
$
(391
)
 
$
(871
)
 
$
560

 
$

 
$
(1,490
)
 
$
(391
)
Notes and loan receivables and notes securitization
 
41,446

 
2,188

 
32,202

 
(30,440
)
 

 
45,396

 
3,707

Annuities and residuals
 
24,064

 
(84
)
 

 
(9,100
)
 

 
14,880

 
(44
)
Private equities
 
39,131

 
(3,179
)
 
20,792

 
(3,725
)
 

 
53,019

 
(3,210