Q1 2015 10-Q

 
 
 


 
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 MARCH 31, 2015
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 April 27, 2015 was 47,734,606.
 



 
 
 


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
 Item 1. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of PartnerRe Ltd.
We have reviewed the accompanying condensed consolidated balance sheet of PartnerRe Ltd. and subsidiaries (the “Company”) as of March 31, 2015, and the related condensed consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the three-month periods ended March 31, 2015 and 2014. 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, 2014, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and of cash flows for the year then ended (not presented herein); and in our report dated February 26, 2015, 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, 2014 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
May 4, 2015


3


 
 
 


PartnerRe Ltd.
Condensed Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except parenthetical share and per share data)
 
March 31,
2015
 
December 31,
2014
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, at fair value (amortized cost: 2015, $12,920,945; 2014, $13,489,633)
$
13,412,011

 
$
13,918,745

Short-term investments, at fair value (amortized cost: 2015, $20,054; 2014, $25,699)
20,055

 
25,678

Equities, at fair value (cost: 2015, $1,115,408; 2014, $843,429)
1,320,284

 
1,056,514

Other invested assets
286,596

 
298,827

Total investments
15,038,946

 
15,299,764

Funds held – directly managed (cost: 2015, $581,850; 2014, $600,379)
592,609

 
608,853

Cash and cash equivalents
1,413,799

 
1,313,468

Accrued investment income
150,255

 
158,737

Reinsurance balances receivable
2,899,821

 
2,454,850

Reinsurance recoverable on paid and unpaid losses
290,018

 
246,158

Funds held by reinsured companies
659,058

 
765,905

Deferred acquisition costs
706,779

 
661,186

Deposit assets
75,692

 
92,973

Net tax assets
10,600

 
6,876

Goodwill
456,380

 
456,380

Intangible assets
152,836

 
159,604

Other assets
41,802

 
45,603

Total assets
$
22,488,595

 
$
22,270,357

Liabilities
 
 
 
Unpaid losses and loss expenses
$
9,401,397

 
$
9,745,806

Policy benefits for life and annuity contracts
1,996,519

 
2,050,107

Unearned premiums
2,159,446

 
1,750,607

Other reinsurance balances payable
188,941

 
182,395

Deposit liabilities
52,638

 
70,325

Net tax liabilities
275,700

 
240,989

Accounts payable, accrued expenses and other
338,137

 
304,728

Debt related to senior notes
750,000

 
750,000

Debt related to capital efficient notes
70,989

 
70,989

Total liabilities
15,233,767

 
15,165,946

Shareholders’ Equity
 
 
 
Common shares (par value $1.00; issued: 2015 and 2014, 87,237,220 shares)
87,237

 
87,237

Preferred shares (par value $1.00; issued and outstanding: 2015 and 2014, 34,150,000 shares; aggregate liquidation value: 2015 and 2014, $853,750)
34,150

 
34,150

Additional paid-in capital
3,959,465

 
3,949,665

Accumulated other comprehensive loss
(37,240
)
 
(34,083
)
Retained earnings
6,442,442

 
6,270,811

Common shares held in treasury, at cost (2015, 39,572,572 shares; 2014, 39,400,936 shares)
(3,288,909
)
 
(3,258,870
)
Total shareholders’ equity attributable to PartnerRe Ltd.
7,197,145

 
7,048,910

Noncontrolling interests
57,683

 
55,501

Total shareholders’ equity
7,254,828

 
7,104,411

Total liabilities and shareholders’ equity
$
22,488,595

 
$
22,270,357

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
 
March 31, 2015
 
March 31, 2014
Revenues
 
 
 
Gross premiums written
$
1,748,933

 
$
1,871,740

Net premiums written
$
1,653,215

 
$
1,738,494

Increase in unearned premiums
(418,493
)
 
(484,712
)
Net premiums earned
1,234,722

 
1,253,782

Net investment income
104,631

 
116,867

Net realized and unrealized investment gains
115,645

 
142,172

Other income
4,292

 
404

Total revenues
1,459,290

 
1,513,225

Expenses
 
 
 
Losses and loss expenses and life policy benefits
721,281

 
749,457

Acquisition costs
275,791

 
264,608

Other expenses
124,750

 
111,462

Interest expense
12,245

 
12,238

Amortization of intangible assets
6,768

 
7,002

Net foreign exchange gains
(13,147
)
 
(670
)
Total expenses
1,127,688

 
1,144,097

Income before taxes and interest in (losses) earnings of equity method investments
331,602

 
369,128

Income tax expense
79,665

 
62,305

Interest in (losses) earnings of equity method investments
(3,838
)
 
6,064

Net income
248,099

 
312,887

Net income attributable to noncontrolling interests
(2,182
)
 
(3,044
)
Net income attributable to PartnerRe Ltd.
245,917

 
309,843

Preferred dividends
14,184

 
14,184

Net income attributable to PartnerRe Ltd. common shareholders
$
231,733

 
$
295,659

Comprehensive income
 
 
 
Net income attributable to PartnerRe Ltd.
$
245,917

 
$
309,843

Change in currency translation adjustment
(2,504
)
 
(15,223
)
Change in unfunded pension obligation, net of tax
(436
)
 
(1
)
Change in unrealized losses on investments, net of tax
(217
)
 
(225
)
Total other comprehensive loss, net of tax
(3,157
)
 
(15,449
)
Comprehensive income attributable to PartnerRe Ltd.
$
242,760

 
$
294,394

Per share data attributable to PartnerRe Ltd. common shareholders
 
 
 
Net income per common share:
 
 
 
Basic net income
$
4.88

 
$
5.72

Diluted net income
$
4.76

 
$
5.61

Weighted average number of common shares outstanding
47,525,344

 
51,652,177

Weighted average number of common shares and common share equivalents outstanding
48,710,228

 
52,727,573

Dividends declared per common share
$
0.70

 
$
0.67

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 three months ended
 
March 31, 2015
 
March 31, 2014
Common shares
 
 
 
Balance at beginning of period
$
87,237

 
$
86,657

Issuance of common shares

 
222

Balance at end of period
87,237

 
86,879

Preferred shares
 
 
 
Balance at beginning and end of period
34,150

 
34,150

Additional paid-in capital
 
 
 
Balance at beginning of period
3,949,665

 
3,901,627

Stock compensation expense, net of taxes paid
9,800

 
4,619

Issuance of common shares

 
1,101

Balance at end of period
3,959,465

 
3,907,347

Accumulated other comprehensive loss
 
 
 
Balance at beginning of period
(34,083
)
 
(12,238
)
Currency translation adjustment
 
 
 
Balance at beginning of period
(7,915
)
 
977

Change in foreign currency translation adjustment
(5,063
)
 
(15,223
)
Change in net unrealized gain on designated net investment hedges
2,559

 

Balance at end of period
(10,419
)
 
(14,246
)
Unfunded pension obligation
 
 
 
Balance at beginning of period
(29,576
)
 
(17,509
)
Change in unfunded pension obligation, net of tax
(436
)
 
(1
)
Balance at end of period (net of tax: 2015, $8,432; 2014, $5,023)
(30,012
)
 
(17,510
)
Unrealized gain on investments
 
 
 
Balance at beginning of period
3,408

 
4,294

Change in unrealized losses on investments, net of tax
(217
)
 
(225
)
Balance at end of period (net of tax: 2015 and 2014: $nil)
3,191

 
4,069

Balance at end of period
(37,240
)
 
(27,687
)
Retained earnings
 
 
 
Balance at beginning of period
6,270,811

 
5,406,797

Net income
248,099

 
312,887

Net income attributable to noncontrolling interests
(2,182
)
 
(3,044
)
Reissuance of common shares
(26,917
)
 

Dividends on common shares
(33,185
)
 
(34,588
)
Dividends on preferred shares
(14,184
)
 
(14,184
)
Balance at end of period
6,442,442

 
5,667,868

Common shares held in treasury
 
 
 
Balance at beginning of period
(3,258,870
)
 
(2,707,461
)
Repurchase of common shares
(59,266
)
 
(180,168
)
Reissuance of common shares
29,227

 

Balance at end of period
(3,288,909
)
 
(2,887,629
)
Total shareholders’ equity attributable to PartnerRe Ltd.
$
7,197,145

 
$
6,780,928

Noncontrolling interests
57,683

 
59,671

Total shareholders’ equity
$
7,254,828

 
$
6,840,599

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 three months ended
 
March 31, 2015
 
March 31, 2014
Cash flows from operating activities
 
 
 
Net income
$
248,099

 
$
312,887

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of net premium on investments
29,911

 
29,366

Amortization of intangible assets
6,768

 
7,002

Net realized and unrealized investment gains
(115,645
)
 
(142,172
)
Changes in:
 
 
 
Reinsurance balances, net
(572,301
)
 
(581,275
)
Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable
45,691

 
86,002

Funds held by reinsured companies and funds held – directly managed
71,350

 
17,627

Deferred acquisition costs
(76,800
)
 
(79,315
)
Net tax assets and liabilities
37,445

 
(33,973
)
Unpaid losses and loss expenses including life policy benefits
80,728

 
13,732

Unearned premiums
418,493

 
484,712

Other net changes in operating assets and liabilities
(34,992
)
 
(35,852
)
Net cash provided by operating activities
138,747

 
78,741

Cash flows from investing activities
 
 
 
Sales of fixed maturities
2,495,633

 
1,734,246

Redemptions of fixed maturities
161,229

 
180,311

Purchases of fixed maturities
(2,293,577
)
 
(1,963,428
)
Sales and redemptions of short-term investments
12,692

 
15,830

Purchases of short-term investments
(7,391
)
 
(31,141
)
Sales of equities
120,973

 
9,094

Purchases of equities
(374,211
)
 
(29,421
)
Other, net
(573
)
 
13,295

Net cash provided by (used in) investing activities
114,775

 
(71,214
)
Cash flows from financing activities
 
 
 
Dividends paid to common and preferred shareholders
(47,369
)
 
(48,772
)
Repurchase of common shares
(71,376
)
 
(180,383
)
Reissuance of treasury shares and issuance of common shares, net of taxes paid
(4,084
)
 
(2,581
)
Net cash used in financing activities
(122,829
)
 
(231,736
)
Effect of foreign exchange rate changes on cash
(30,362
)
 
(3,239
)
Increase (decrease) in cash and cash equivalents
100,331

 
(227,448
)
Cash and cash equivalents—beginning of period
1,313,468

 
1,496,485

Cash and cash equivalents—end of period
$
1,413,799

 
$
1,269,037

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
Taxes paid
$
42,257

 
$
95,871

Interest paid
$

 
$

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., Partner Reinsurance Europe SE, Partner Reinsurance Company of the U.S. and, effective April 1, 2015, Partner Reinsurance Asia Pte. Ltd (PartnerRe Asia). 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.
In January 2015, the Company announced that PartnerRe Asia was licensed by the Monetary Authority of Singapore (MAS) to operate as a non-life and life reinsurer in Singapore. As of April 1, 2015, PartnerRe Asia became the principal reinsurance carrier for the Company’s business underwritten in the Asia Pacific region. The establishment of PartnerRe Asia will enable the Company's Asian reinsurance operations to be consolidated into one regional, well-capitalized entity and will support its growing underwriting presence in the region.
On January 25, 2015, the Company entered into an Agreement and Plan of Amalgamation (the Amalgamation Agreement) with Axis Capital Holdings Limited, a Bermuda exempted company (AXIS), pursuant to which the Company would amalgamate with AXIS (Amalgamation), and the two companies would continue as a single Bermuda exempted company (Amalgamated Company). The transaction, which is structured as a merger of equals, has been unanimously approved by the Boards of Directors of both companies. Under the terms of the Amalgamation Agreement, the Company’s shareholders would receive 2.18 shares of the Amalgamated Company’s common shares for each share of the Company’s common shares they own and AXIS’ shareholders would receive one share of the Amalgamated Company’s common shares for each share of AXIS’ common shares they own. Upon completion of the transaction, shareholders of the Company and shareholders of AXIS would own approximately 51.5% and 48.5% of the Amalgamated Company, respectively. The Amalgamated Company's headquarters would be located in Bermuda. The transaction is subject to approval by the shareholders of both companies, regulatory clearance and other customary closing conditions. Both companies will continue to operate as two independent entities until the closing of the transaction and such conditions are met.
On May 3, 2015, the Company and AXIS amended the Amalgamation Agreement (the Amendment to the Amalgamation Agreement) to allow the Company to pay a one-time special dividend of $11.50 per share to PartnerRe common shareholders in connection with the closing of the Amalgamation. See Notes 8 (b) and 10 for further details.
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.

8


 
 
 


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, 2014.
3. Recent Accounting Pronouncements
In February 2015, the FASB issued updated guidance on the consolidation of voting interest entities and variable interest entities. The guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its Consolidated Financial Statements and disclosures.
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; asset-backed securities; mortgage-backed securities; short-term investments; certain equities traded on foreign exchanges; certain fixed income mutual funds; foreign exchange forward contracts and 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; 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 March 31, 2015 and December 31, 2014, 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


March 31, 2015
 
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
 
$

 
$
2,299,063

 
$

 
$
2,299,063

U.S. states, territories and municipalities
 

 
473,388

 
147,683

 
621,071

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

 
1,557,126

 

 
1,557,126

Corporate
 

 
5,494,967

 

 
5,494,967

Asset-backed securities
 

 
670,115

 
451,583

 
1,121,698

Residential mortgage-backed securities
 

 
2,263,463

 

 
2,263,463

Other mortgage-backed securities
 

 
54,623

 

 
54,623

Fixed maturities
 
$

 
$
12,812,745

 
$
599,266

 
$
13,412,011

Short-term investments
 
$

 
$
20,055

 
$

 
$
20,055

Equities
 
 
 
 
 
 
 
 
Real estate investment trusts
 
$
177,130

 
$

 
$

 
$
177,130

Insurance
 
123,839

 
4,682

 

 
128,521

Consumer noncyclical
 
113,740

 

 

 
113,740

Energy
 
108,648

 

 

 
108,648

Finance
 
75,760

 
8,086

 
20,532

 
104,378

Technology
 
56,709

 

 
8,602

 
65,311

Consumer cyclical
 
59,747

 

 

 
59,747

Industrials
 
58,435

 

 

 
58,435

Communications
 
50,665

 

 
2,723

 
53,388

Utilities
 
28,946

 

 

 
28,946

Other
 
21,959

 

 

 
21,959

Mutual funds and exchange traded funds
 
142,104

 

 
257,977

 
400,081

Equities
 
$
1,017,682

 
$
12,768

 
$
289,834

 
$
1,320,284

Other invested assets
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
15,414

 
$

 
$
15,414

Foreign currency option contracts
 

 
1,848

 

 
1,848

Insurance-linked securities
 

 

 
23

 
23

Total return swaps
 

 

 
1,061

 
1,061

TBAs
 

 
1,409

 

 
1,409

Other
 
 
 
 
 
 
 
 
Notes and loan receivables and notes securitization
 

 

 
51,103

 
51,103

Annuities and residuals
 

 

 
12,155

 
12,155

Private equities
 

 

 
64,642

 
64,642

Derivative liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
(7,623
)
 

 
(7,623
)
Futures contracts
 
(21,382
)
 

 

 
(21,382
)
Insurance-linked securities
 

 

 
(343
)
 
(343
)
Total return swaps
 

 

 
(2,118
)
 
(2,118
)
Interest rate swaps
 

 
(21,074
)
 

 
(21,074
)
Other invested assets
 
$
(21,382
)
 
$
(10,026
)
 
$
126,523

 
$
95,115

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

 
$
155,341

 
$

 
$
155,341

U.S. states, territories and municipalities
 

 

 
132

 
132

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

 
111,021

 

 
111,021

Corporate
 

 
145,062

 

 
145,062

Short-term investments
 

 
10,984

 

 
10,984

Other invested assets
 

 

 
12,008

 
12,008

Funds held – directly managed
 
$

 
$
422,408

 
$
12,140

 
$
434,548

Total
 
$
996,300

 
$
13,257,950

 
$
1,027,763

 
$
15,282,013


10


December 31, 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
 
$

 
$
2,315,422

 
$

 
$
2,315,422

U.S. states, territories and municipalities
 

 
380,875

 
149,728

 
530,603

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

 
1,976,202

 

 
1,976,202

Corporate
 

 
5,604,160

 

 
5,604,160

Asset-backed securities
 

 
681,502

 
449,918

 
1,131,420

Residential mortgage-backed securities
 

 
2,306,476

 

 
2,306,476

Other mortgage-backed securities
 

 
54,462

 

 
54,462

Fixed maturities
 
$

 
$
13,319,099

 
$
599,646

 
$
13,918,745

Short-term investments
 
$

 
$
25,678

 
$

 
$
25,678

Equities
 
 
 
 
 
 
 
 
Real estate investment trusts
 
$
213,770

 
$

 
$

 
$
213,770

Insurance
 
140,916

 
4,521

 

 
145,437

Energy
 
123,978

 

 

 
123,978

Consumer noncyclical
 
100,134

 

 

 
100,134

Finance
 
70,621

 
7,354

 
20,353

 
98,328

Technology
 
52,707

 

 
8,555

 
61,262

Communications
 
51,829

 

 
2,640

 
54,469

Industrials
 
49,983

 

 

 
49,983

Consumer cyclical
 
39,002

 

 

 
39,002

Utilities
 
31,748

 

 

 
31,748

Other
 
11,571

 

 

 
11,571

Mutual funds and exchange traded funds
 
118,246

 

 
8,586

 
126,832

Equities
 
$
1,004,505

 
$
11,875

 
$
40,134

 
$
1,056,514

Other invested assets
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
20,033

 
$

 
$
20,033

Futures contracts
 
846

 

 

 
846

Insurance-linked securities
 

 

 
3

 
3

Total return swaps
 

 

 
485

 
485

TBAs
 

 
154

 

 
154

Other
 
 
 
 
 
 
 
 
Notes and loan receivables and notes securitization
 

 

 
44,817

 
44,817

Annuities and residuals
 

 

 
13,243

 
13,243

Private equities
 

 

 
59,872

 
59,872

Derivative liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
(7,446
)
 

 
(7,446
)
Foreign currency option contracts
 

 
(1,196
)
 

 
(1,196
)
Futures contracts
 
(467
)
 

 

 
(467
)
Insurance-linked securities
 

 

 
(339
)
 
(339
)
Total return swaps
 

 

 
(2,007
)
 
(2,007
)
Interest rate swaps
 

 
(16,282
)
 

 
(16,282
)
TBAs
 

 
(240
)
 

 
(240
)
Other invested assets
 
$
379

 
$
(4,977
)
 
$
116,074

 
$
111,476

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

 
$
153,483

 
$

 
$
153,483

U.S. states, territories and municipalities
 

 

 
132

 
132

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

 
128,233

 

 
128,233

Corporate
 

 
177,347

 

 
177,347

Other invested assets
 

 

 
13,398

 
13,398

Funds held – directly managed
 
$

 
$
459,063

 
$
13,530

 
$
472,593

Total
 
$
1,004,884

 
$
13,810,738

 
$
769,384

 
$
15,585,006


11


At March 31, 2015 and December 31, 2014, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $191.5 million and $187.3 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 $434.5 million and $472.6 million at March 31, 2015 and December 31, 2014, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $53.9 million and $42.3 million, respectively, and accrued investment income of $4.9 million and $5.7 million, respectively. At March 31, 2015 and December 31, 2014, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $99.3 million and $88.3 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, 2014).
At March 31, 2015 and December 31, 2014, 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 ended March 31, 2015 and 2014, 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 March 31, 2015 and December 31, 2014, the fair values of financial instrument assets recorded in the Condensed Consolidated Balance Sheets not described above, approximate their carrying values.
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 March 31, 2015 and 2014, were as follows (in thousands of U.S. dollars):
For the three months ended March 31, 2015
 
Balance at
beginning
of period
 
Realized and
unrealized
investment
(losses) gains
included in
net income
 
Purchases
and
issuances (1)
 
Settlements
and
sales (1)
 
Net
transfers
into/
(out of)
Level 3
 
Balance
at end
of period
 
Change in
unrealized
investment
(losses) gains
relating to
assets held at
end of period
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
149,728

 
$
(1,861
)
 
$

 
$
(184
)
 
$

 
$
147,683

 
$
(1,863
)
Asset-backed securities
 
449,918

 
1,261

 
43,422

 
(43,018
)
 

 
451,583

 
1,293

Fixed maturities
 
$
599,646

 
$
(600
)
 
$
43,422

 
$
(43,202
)
 
$

 
$
599,266

 
$
(570
)
Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
20,353

 
$
179

 
$

 
$

 
$

 
$
20,532

 
$
179

Technology
 
8,555

 
47

 

 

 

 
8,602

 
47

Communications
 
2,640

 
83

 

 

 

 
2,723

 
83

Mutual funds and exchange traded funds
 
8,586

 
51

 
249,340

 

 

 
257,977

 
51

Equities
 
$
40,134

 
$
360

 
$
249,340

 
$

 
$

 
$
289,834

 
$
360

Other invested assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, net
 
$
(1,858
)
 
$
481

 
$

 
$

 
$

 
$
(1,377
)
 
$
481

Notes and loan receivables and notes securitization
 
44,817

 
1,104

 
6,411

 
(1,229
)
 

 
51,103

 
2,623

Annuities and residuals
 
13,243

 
231

 

 
(1,319
)
 

 
12,155

 
231

Private equities
 
59,872

 
497

 
5,184

 
(911
)
 

 
64,642

 
497

Other invested assets
 
$
116,074

 
$
2,313

 
$
11,595

 
$
(3,459
)
 
$

 
$
126,523

 
$
3,832

Funds held – directly managed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
132

 
$

 
$

 
$

 
$

 
$
132

 
$

Other invested assets
 
13,398

 
(1,390
)
 

 

 

 
12,008

 
(1,390
)
Funds held – directly managed
 
$
13,530

 
$
(1,390
)
 
$

 
$

 
$

 
$
12,140

 
$
(1,390
)
Total
 
$
769,384

 
$
683

 
$
304,357

 
$
(46,661
)
 
$

 
$
1,027,763

 
$
2,232

 
(1)
There were no issuances or sales for the three months ended March 31, 2015.

12


For the three months ended March 31, 2014
 
Balance at
beginning
of period
 
Realized and
unrealized
investment
gains (losses)
included in
net income
 
Purchases
and
issuances (1)
 
Settlements
and
sales (2)
 
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

 
$
892

 
$
4,265

 
$
(70
)
 
$

 
$
113,467

 
$
890

Asset-backed securities
 
446,577

 
5,996

 
59,418

 
(64,290
)
 

 
447,701

 
6,259

Fixed maturities
 
$
554,957

 
$
6,888

 
$
63,683

 
$
(64,360
)
 
$

 
$
561,168

 
$
7,149

Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
20,207

 
$
2,499

 
$

 
$

 
$

 
$
22,706

 
$
2,499

Communications
 
2,199

 
(88
)
 

 

 

 
2,111

 
(88
)
Technology
 
7,752

 
(352
)
 

 

 

 
7,400

 
(352
)
Mutual funds and exchange traded funds
 
7,887

 
166

 

 

 

 
8,053

 
166

Equities
 
$
38,045

 
$
2,225

 
$

 
$

 
$

 
$
40,270

 
$
2,225

Other invested assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, net
 
$
(788
)
 
$
466

 
$
(720
)
 
$

 
$

 
$
(1,042
)
 
$
466

Notes and loan receivables and notes securitization
 
41,446

 
600

 
720

 
(523
)
 

 
42,243

 
600

Annuities and residuals
 
24,064

 
89

 

 
(5,208
)
 

 
18,945

 
128

Private equities
 
39,131

 
433

 
5,066

 
(1,975
)
 

 
42,655

 
401

Other invested assets
 
$
103,853

 
$
1,588

 
$
5,066

 
$
(7,706
)
 
$

 
$
102,801

 
$
1,595

Funds held – directly managed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
286

 
$
15

 
$

 
$

 
$

 
$
301

 
$
15

Other invested assets
 
15,165

 
(197
)
 
255

 

 

 
15,223

 
(197
)
Funds held – directly managed
 
$
15,451

 
$
(182
)
 
$
255

 
$

 
$

 
$
15,524

 
$
(182
)
Total
 
$
712,306

 
$
10,519

 
$
69,004

 
$
(72,066
)
 
$

 
$
719,763

 
$
10,787

 
 
(1)
Purchases and issuances of derivatives include issuances of $0.7 million.
(2)
There were no sales for the three months ended March 31, 2014.




13


The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at March 31, 2015 and December 31, 2014 were as follows (fair value in thousands of U.S. dollars):
March 31, 2015
 
Fair value
 
Valuation techniques
 
Unobservable inputs
 
Range
(Weighted average)
Fixed maturities
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
147,683

 
Discounted cash flow
 
Credit spreads
 
2.6% -10.5% (6.0%)
Asset-backed securities – other
 
451,583

 
Discounted cash flow
 
Credit spreads
 
4.0% – 12.0% (7.2%)
Equities
 
 
 
 
 
 
 
 
Finance
 
14,748

 
Weighted market comparables
 
Net income multiple
 
19.0 (19.0)
 
 
 
 
 
Tangible book value multiple
 
1.3 (1.3)
 
 
 
 
 
 
Liquidity discount
 
25.0% (25.0%)
 
 
 
 
 
 
Comparable return
 
1.4% (1.4%)
Finance
 
5,784

 
Profitability analysis
 
Projected return on equity
 
14.0% (14.0%)
Technology
 
8,602

 
Weighted market comparables
 
Revenue multiple
 
1.6 (1.6)
 
 
 
 
 
Adjusted earnings multiple
 
10.6 (10.6)
Communications
 
2,723

 
Weighted market comparables
 
Adjusted earnings multiple
 
9.4 (9.4)
 
 
 
 
 
Comparable return
 
3.2% (3.2%)
Other invested assets
 
 
 
 
 
 
 
 
Total return swaps
 
(1,057
)
 
Discounted cash flow
 
Credit spreads
 
3.8% – 19.9% (14.6%)
Notes and loan receivables
 
11,607

 
Discounted cash flow
 
Credit spreads
 
6.1% - 10.6% (9.1%)
Notes and loan receivables
 
13,209

 
Discounted cash flow
 
Credit spreads
 
17.5% (17.5%)
 
 
 
 
Gross revenue/fair value
 
1.4 – 1.6 (1.6)
Notes securitization
 
26,287

 
Discounted cash flow
 
Credit spreads
 
3.9% – 6.5% (6.4%)
Annuities and residuals
 
12,155

 
Discounted cash flow
 
Credit spreads
 
5.2% – 9.1% (7.8%)
 
 
 
 
 
 
Prepayment speed
 
0% – 15.0% (3.6%)
 
 
 
 
 
 
Constant default rate
 
0.3% – 17.5% (5.6%)
Private equity – direct
 
9,035

 
Discounted cash flow and weighted market comparables
 
Net income multiple
 
9.2 (9.2)
 
 
 
 
 
Tangible book value multiple
 
2.0 (2.0)
 
 
 
 
 
Recoverability of intangible assets
 
0% (0%)
Private equity funds
 
23,676

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-2.5% – 3.2% (0.0%)
Private equity – other
 
31,931

 
Discounted cash flow
 
Effective yield
 
5.8% (5.8%)
Funds held – directly managed
 
 
 
 
 
 
 
 
Other invested assets
 
12,008

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-19.2% – 0% (-11.1%)

14


December 31, 2014
 
Fair value
 
Valuation techniques
 
Unobservable inputs
 
Range
(Weighted average)
Fixed maturities
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
149,728

 
Discounted cash flow
 
Credit spreads
 
2.2% – 10.1% (4.6%)
Asset-backed securities – other
 
449,918

 
Discounted cash flow
 
Credit spreads
 
4.0% – 12.1% (7.1%)
Equities
 
 
 
 
 
 
 
 
Finance
 
14,561

 
Weighted market comparables
 
Net income multiple
 
19.0 (19.0)
 
 
 
 
 
Tangible book value multiple
 
1.3 (1.3)
 
 
 
 
 
 
Liquidity discount
 
25.0% (25.0%)
 
 
 
 
 
 
Comparable return
 
7.3% (7.3%)
Finance
 
5,792

 
Profitability analysis
 
Projected return on equity
 
14.0% (14.0%)
Technology
 
8,555

 
Weighted market comparables
 
Revenue multiple
 
1.6 (1.6)
 
 
 
 
 
Adjusted earnings multiple
 
10.2 (10.2)
Communications
 
2,640

 
Weighted market comparables
 
Adjusted earnings multiple
 
9.4 (9.4)
 
 
 
 
 
Comparable return
 
-10.6% (-10.6%)
Other invested assets
 
 
 
 
 
 
 
 
Total return swaps
 
(1,522
)
 
Discounted cash flow
 
Credit spreads
 
3.6% – 19.3% (16.3%)
Notes and loan receivables
 
8,068

 
Discounted cash flow
 
Credit spreads
 
12.6% (12.6%)
Notes and loan receivables
 
13,237

 
Discounted cash flow
 
Credit spreads
 
17.5% (17.5%)
 
 
 
 
Gross revenue/fair value
 
1.5 – 1.7 (1.7)
Notes securitization
 
23,512

 
Discounted cash flow
 
Credit spreads
 
3.5% – 6.6% (6.4%)
Annuities and residuals
 
13,243

 
Discounted cash flow
 
Credit spreads
 
4.9% – 9.6% (7.8%)
 
 
 
 
 
 
Prepayment speed
 
0% – 15.0% (4.3%)
 
 
 
 
 
 
Constant default rate
 
0.3% – 17.5% (6.3%)
Private equity – direct
 
8,536

 
Discounted cash flow and weighted market comparables
 
Net income multiple
 
9.0 (9.0)
 
 
 
 
 
Tangible book value multiple
 
2.0 (2.0)
 
 
 
 
 
Recoverability of intangible assets
 
0% (0%)
Private equity funds
 
18,494

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-7.6% – 11.0% (-1.6%)
Private equity – other
 
32,842

 
Discounted cash flow
 
Effective yield
 
5.8% (5.8%)
Funds held – directly managed
 
 
 
 
 
 
 
 
Other invested assets
 
13,398

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-15.4% – 0% (-14.5%)
The tables above do not include financial instruments that are measured using unobservable inputs (Level 3) where the unobservable inputs were obtained from external sources and used without adjustment. These financial instruments include mutual fund investments (included within equities) and certain derivatives.
The Company has established a Valuation Committee which is responsible for determining the Company’s invested asset valuation policy and related procedures, for reviewing significant changes in the fair value measurements of securities classified as Level 3 from period to period, and for reviewing in accordance with the invested asset valuation policy an independent internal peer analysis that is performed on the fair value measurements of significant securities that are classified as Level 3. The Valuation Committee is comprised of members of the Company’s senior management team and meets on a quarterly basis. The Company’s invested asset valuation policy is monitored by the Company’s Audit Committee of the Board of Directors (Board) and approved annually by the Company’s Risk and Finance Committee of the Board.

15


Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months ended March 31, 2015 and 2014 were as follows (in thousands of U.S. dollars):
 
For the three months ended
 
March 31, 2015
 
March 31, 2014
Fixed maturities and short-term investments
$
76,971

 
$
119,799

Equities
(7,016
)
 
10,325

Other invested assets
1,833

 
1,042

Funds held – directly managed
2,540

 
736

Total
$
74,328

 
$
131,902

Substantially all of the above changes in fair value are included in the Condensed Consolidated Statements of Operations under the caption Net realized and unrealized investment gains.
The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument recorded in the Condensed Consolidated Balance Sheets. There have been no material changes in the Company’s valuation techniques during the periods presented.
Fixed maturities
 
U.S. government and government sponsored enterprises—U.S. government and government sponsored enterprises securities consist primarily of bonds issued by the U.S. Treasury and corporate debt securities issued by government sponsored enterprises and federally owned or established corporations. These securities are generally priced by independent pricing services. The independent pricing services may use actual transaction prices for securities that have been actively traded. For securities that have not been actively traded, each pricing source has its own proprietary method to determine the fair value, which may incorporate option adjusted spreads (OAS), interest rate data and market news. The Company generally classifies these securities in Level 2.
U.S. states, territories and municipalities—U.S. states, territories and municipalities securities consist primarily of bonds issued by U.S. states, territories and municipalities and the Federal Home Loan Mortgage Corporation. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2. Certain of the bonds that are issued by municipal housing authorities and the Federal Home Loan Mortgage Corporation are not actively traded and are priced based on internal models using unobservable inputs. Accordingly, the Company classifies these securities in Level 3. The significant unobservable input used in the fair value measurement of these U.S. states, territories and municipalities securities classified as Level 3 is credit spreads. A significant increase (decrease) in credit spreads in isolation could result in a significantly lower (higher) fair value measurement.
Non-U.S. sovereign government, supranational and government related—Non-U.S. sovereign government, supranational and government related securities consist primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2.
Corporate—Corporate securities consist primarily of bonds issued by U.S. and foreign corporations covering a variety of industries and issuing countries. These securities are generally priced by independent pricing services and brokers. The pricing provider incorporates information including credit spreads, interest rate data and market news into the valuation of each security. The Company generally classifies these securities in Level 2. When a corporate security is inactively traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3.
Asset-backed securities—Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are predominantly backed by student loans, automobile loans, credit card receivables, equipment leases, and special purpose financing. With the exception of special purpose financing, these asset-backed securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. Special purpose financing securities are generally inactively traded and are priced based on valuation models using unobservable inputs. The Company generally classifies these securities in Level 3. The significant unobservable input used in the fair value measurement of these asset-backed securities classified as Level 3 is credit spreads. A significant increase (decrease) in credit spreads in isolation could result in a significantly lower (higher) fair value measurement.

16


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