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, 2016
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   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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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. 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
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 Exchange Act).    Yes  o    No  ý
The number of the registrant’s common shares (par value $1.00 per share) outstanding as of May 2, 2016 was 1.
 



 
 
 


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

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
PartnerRe Ltd.

We have reviewed the condensed consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of March 31, 2016, and the related condensed consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the three-month period ended March 31, 2016. These financial statements are the responsibility of the Company’s management. The condensed consolidated financial statements of the Company as of March 31, 2015, and for the three-month period then ended, were reviewed by other auditors whose report dated May 4, 2015 stated that based on their review they were not aware of any material modifications that should be made to those statements for them to be in conformity with U.S. generally accepted accounting principles. The consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of December 31, 2015, and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the year then ended (not presented herein) were audited by other auditors whose report dated February 25, 2016 expressed an unqualified opinion on those statements.
We conducted our review 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, 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 review, we are not aware of any material modifications that should be made to the 2016 condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 
 
/s/ Ernst & Young Ltd.
Ernst & Young Ltd.
 
Hamilton, Bermuda
May 2, 2016


3


 
 
 


PartnerRe Ltd.
Condensed Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except parenthetical share data)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, at fair value (amortized cost: 2016, $12,668,635; 2015, $13,313,819)
$
13,020,014

 
$
13,448,262

Short-term investments, at fair value (amortized cost: 2016, $33,536; 2015, $46,689)
33,555

 
46,688

Equities, at fair value (cost: 2016, $326,909; 2015, $418,428)
324,427

 
443,861

Other invested assets
458,709

 
399,204

Total investments
13,836,705

 
14,338,015

Funds held – directly managed (cost: 2016, $572,550; 2015, $537,661)
579,571

 
539,743

Cash and cash equivalents
1,749,851

 
1,577,097

Accrued investment income
134,735

 
141,672

Reinsurance balances receivable
2,964,950

 
2,428,020

Reinsurance recoverable on paid and unpaid losses
300,731

 
282,916

Funds held by reinsured companies
685,564

 
657,815

Deferred acquisition costs
691,117

 
629,372

Deposit assets
82,018

 
88,152

Net tax assets
82,405

 
102,596

Goodwill
456,380

 
456,380

Intangible assets
126,423

 
133,011

Other assets
265,013

 
31,254

Total assets
$
21,955,463

 
$
21,406,043

Liabilities
 
 
 
Unpaid losses and loss expenses
$
9,331,087

 
$
9,064,711

Policy benefits for life and annuity contracts
2,089,055

 
2,051,935

Unearned premiums
2,086,332

 
1,644,757

Other reinsurance balances payable
293,342

 
246,089

Deposit liabilities
33,506

 
44,420

Net tax liabilities
197,973

 
218,652

Accounts payable, accrued expenses and other
192,994

 
411,539

Debt related to senior notes
750,000

 
750,000

Debt related to capital efficient notes
70,989

 
70,989

Total liabilities
15,045,278

 
14,503,092

Shareholders’ Equity
 
 
 
Common shares (par value $1.00; issued: 2016, 1 share and 2015, 87,237,220 shares) (1)

 
87,237

Preferred shares (par value $1.00; issued and outstanding: 2016 and 2015, 34,150,000 shares; aggregate liquidation value: 2016 and 2015, $853,750)
34,150

 
34,150

Additional paid-in capital
2,537,359

 
3,982,147

Accumulated other comprehensive loss
(63,192
)
 
(83,283
)
Retained earnings
4,401,868

 
6,146,802

Common shares held in treasury, at cost (2016, nil shares; 2015, 39,303,068 shares)

 
(3,266,552
)
Total shareholders’ equity attributable to PartnerRe Ltd.
6,910,185

 
6,900,501

Noncontrolling interests

 
2,450

Total shareholders’ equity
6,910,185

 
6,902,951

Total liabilities and shareholders’ equity
$
21,955,463

 
$
21,406,043

 
 
(1)
On March 18, 2016, EXOR S.p.A. acquired 100% ownership of the Company’s common shares pursuant to the terms of a Merger Agreement (acquisition). All common shares issued and outstanding and all treasury shares held immediately prior to the acquisition were canceled and one common share of $1.00 par value was issued (see Note 1 to the Condensed Consolidated Financial Statements for further details).
See accompanying Notes to Condensed Consolidated Financial Statements.

4


 
 
 


PartnerRe Ltd.
Condensed Consolidated Statements of Operations and Comprehensive Income (1) 
(Expressed in thousands of U.S. dollars)
(Unaudited)
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Revenues
 
 
 
Gross premiums written
$
1,629,009

 
$
1,748,933

Net premiums written
$
1,500,718

 
$
1,653,215

Increase in unearned premiums
(359,002
)
 
(418,493
)
Net premiums earned
1,141,716

 
1,234,722

Net investment income
102,987

 
104,631

Net realized and unrealized investment gains
167,193

 
115,645

Other income
4,840

 
4,292

Total revenues
1,416,736

 
1,459,290

Expenses
 
 
 
Losses and loss expenses and life policy benefits
714,268

 
721,281

Acquisition costs
282,974

 
275,791

Other expenses
152,674

 
124,750

Interest expense
12,259

 
12,245

Amortization of intangible assets
6,588

 
6,768

Net foreign exchange gains
(2,074
)
 
(13,147
)
Total expenses
1,166,689

 
1,127,688

Income before taxes and interest in losses of equity method investments
250,047

 
331,602

Income tax expense
30,954

 
79,665

Interest in losses of equity method investments
(3,467
)
 
(3,838
)
Net income
215,626

 
248,099

Net income attributable to noncontrolling interests

 
(2,182
)
Net income attributable to PartnerRe Ltd.
215,626

 
245,917

Preferred dividends
14,184

 
14,184

Net income attributable to PartnerRe Ltd. common shareholders
$
201,442

 
$
231,733

Comprehensive income
 
 
 
Net income attributable to PartnerRe Ltd.
$
215,626

 
$
245,917

Change in currency translation adjustment
21,123

 
(2,504
)
Change in unfunded pension obligation, net of tax
(829
)
 
(436
)
Change in unrealized losses on investments, net of tax
(203
)
 
(217
)
Total other comprehensive income (loss), net of tax
20,091

 
(3,157
)
Comprehensive income attributable to PartnerRe Ltd.
$
235,717

 
$
242,760

 
 
(1)
On March 18, 2016, EXOR S.p.A. acquired 100% ownership of the Company’s common shares pursuant to the terms of a Merger Agreement (acquisition). All common shares issued and outstanding and all treasury shares held immediately prior to the acquisition were canceled and one common share of $1.00 par value was issued (see Note 1 to the Condensed Consolidated Financial Statements for further details). As such, earnings per share data is no longer considered meaningful for both the current reporting period and for the comparative period and has been excluded.


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, 2016
 
March 31, 2015
Common shares
 
 
 
Balance at beginning of period
$
87,237

 
$
87,237

Cancellation of treasury shares
(39,082
)
 

Cancellation of common shares
(48,155
)
 

Balance at end of period

 
87,237

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

 
34,150

Additional paid-in capital
 
 
 
Balance at beginning of period
3,982,147

 
3,949,665

Stock compensation expense, net of taxes paid
48,731

 
9,800

Cancellation of treasury shares
(1,466,363
)
 

Cancellation of common shares
48,155

 

Settlement of share-based awards upon change in control
(75,311
)
 

Balance at end of period
2,537,359

 
3,959,465

Accumulated other comprehensive loss
 
 
 
Balance at beginning of period
(83,283
)
 
(34,083
)
Currency translation adjustment
 
 
 
Balance at beginning of period
(53,970
)
 
(7,915
)
Change in foreign currency translation adjustment
10,760

 
(5,063
)
Change in net unrealized gain on designated net investment hedges
10,363

 
2,559

Balance at end of period
(32,847
)
 
(10,419
)
Unfunded pension obligation
 
 
 
Balance at beginning of period
(31,861
)
 
(29,576
)
Change in unfunded pension obligation, net of tax
(829
)
 
(436
)
Balance at end of period (net of tax: 2016, $9,019; 2015, $8,432)
(32,690
)
 
(30,012
)
Unrealized gain on investments
 
 
 
Balance at beginning of period
2,548

 
3,408

Change in unrealized losses on investments, net of tax
(203
)
 
(217
)
Balance at end of period (net of tax: 2016 and 2015: $nil)
2,345

 
3,191

Balance at end of period
(63,192
)
 
(37,240
)
Retained earnings
 
 
 
Balance at beginning of period
6,146,802

 
6,270,811

Net income
215,626

 
248,099

Net income attributable to noncontrolling interests

 
(2,182
)
Reissuance of common shares
(17,229
)
 
(26,917
)
Dividends on common shares
(186,430
)
 
(33,185
)
Dividends on preferred shares
(14,184
)
 
(14,184
)
Cancellation of treasury shares
(1,742,717
)
 

Balance at end of period
4,401,868

 
6,442,442

Common shares held in treasury
 
 
 
Balance at beginning of period
(3,266,552
)
 
(3,258,870
)
Reissuance of common shares
18,390

 
29,227

Cancellation of treasury shares
3,248,162

 

Repurchase of common shares

 
(59,266
)
Balance at end of period

 
(3,288,909
)
Total shareholders’ equity attributable to PartnerRe Ltd.
$
6,910,185

 
$
7,197,145

Noncontrolling interests

 
57,683

Total shareholders’ equity
$
6,910,185

 
$
7,254,828

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, 2016
 
March 31, 2015
Cash flows from operating activities
 
 
 
Net income
$
215,626

 
$
248,099

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of net premium on investments
22,522

 
29,911

Amortization of intangible assets
6,588

 
6,768

Net realized and unrealized investment gains
(167,193
)
 
(115,645
)
Changes in:
 
 
 
Reinsurance balances, net
(480,517
)
 
(572,301
)
Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable
50,856

 
45,691

Funds held by reinsured companies and funds held – directly managed
(49,124
)
 
71,350

Deferred acquisition costs
(56,386
)
 
(76,800
)
Net tax assets and liabilities
(4,072
)
 
37,445

Unpaid losses and loss expenses including life policy benefits
187,614

 
80,728

Unearned premiums
359,002

 
418,493

Other net changes in operating assets and liabilities
6,741

 
(34,992
)
Net cash provided by operating activities
91,657

 
138,747

Cash flows from investing activities
 
 
 
Sales of fixed maturities
1,959,793

 
2,495,633

Redemptions of fixed maturities
160,065

 
161,229

Purchases of fixed maturities
(1,851,309
)
 
(2,293,577
)
Sales and redemptions of short-term investments
44,496

 
12,692

Purchases of short-term investments
(31,425
)
 
(7,391
)
Sales of equities
108,333

 
120,973

Purchases of equities
(3,126
)
 
(374,211
)
Other, net
(49,036
)
 
(573
)
Net cash provided by investing activities
337,791

 
114,775

Cash flows from financing activities
 
 
 
Dividends paid to common and preferred shareholders
(200,614
)
 
(47,369
)
Settlement of share-based awards upon change in control
(75,311
)
 

Reissuance of treasury shares, net of taxes
12,938

 
(4,084
)
Repurchase of common shares

 
(71,376
)
Net cash used in financing activities
(262,987
)
 
(122,829
)
Effect of foreign exchange rate changes on cash
6,293

 
(30,362
)
Increase in cash and cash equivalents
172,754

 
100,331

Cash and cash equivalents—beginning of period
1,577,097

 
1,313,468

Cash and cash equivalents—end of period
$
1,749,851

 
$
1,413,799

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
Taxes paid
$
16,019

 
$
42,257

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 Partner Reinsurance Asia Pte. Ltd. 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.
On August 2, 2015, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Exor N.V., Pillar Ltd., a wholly owned subsidiary of Exor N.V., and solely with respect to certain specified sections thereof, EXOR S.p.A. (EXOR), a European investment company controlled by the Agnelli family, whereby Pillar Ltd. would be merged with and into the Company, with the Company continuing as the surviving company and a wholly owned subsidiary of Exor N.V. (the Merger).
On November 19, 2015, the Merger was approved by the Company’s shareholders, pending certain regulatory approvals and other customary closing conditions.
On March 18, 2016, the Company announced completion of the acquisition by EXOR following receipt of all regulatory approvals. Pursuant to the terms of the Merger Agreement, each PartnerRe common share issued and outstanding immediately prior to the effective time of the Merger was cancelled and converted into $137.50 in cash per share and entitled to receive a one-time special pre-closing cash dividend in the amount of $3.00 per common share (Special Dividend). One common share at $1.00 par value was issued to Exor N.V., representing 100% common share ownership of the Company, and the Company paid the Special Dividend of approximately $150 million.
In addition, under the terms of the Merger Agreement, EXOR paid cash of approximately of $42.7 million in aggregate to the holders of record of the Company’s preferred shares on March 18, 2016.
Pursuant to the terms of the Merger Agreement, PartnerRe common shares are no longer traded on the New York Stock Exchange (NYSE). The Company’s preferred shares continue to be traded on the NYSE following the closing of the transaction.
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, 2015.
3. Recent Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (FASB) issued updated guidance on the consolidation of voting interest entities and variable interest entities. The update required entities to reevaluate whether they should consolidate certain legal entities. This guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The adoption of the guidance on January 1, 2016 did not have a significant impact on the Company’s Condensed Consolidated Financial Statements and disclosures.
In February 2016, the FASB issued updated guidance on the accounting for leases. This update requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance and expands required disclosures. The guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its Consolidated Financial Statements and disclosures.
In March 2016, the FASB issued updated guidance on the transition to the equity method of accounting. This update eliminates the requirement to retroactively adjust the carrying value of an investment when it qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its Consolidated Financial Statements.
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 common and preferred equities; certain fixed income mutual funds; notes and loan receivables; foreign exchange forward contracts and over-the-counter derivatives such as foreign currency option contracts, interest rate swaps and to-be-announced mortgage-backed securities (TBAs).


9


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, 2016 and December 31, 2015, 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):

10


March 31, 2016
 
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
 
$

 
$
2,794,761

 
$

 
$
2,794,761

U.S. states, territories and municipalities
 

 
639,799

 
140,573

 
780,372

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

 
1,197,012

 

 
1,197,012

Corporate
 

 
4,977,795

 

 
4,977,795

Asset-backed securities
 

 
657,827

 
374,489

 
1,032,316

Residential mortgage-backed securities
 

 
2,189,843

 

 
2,189,843

Other mortgage-backed securities
 

 
47,915

 

 
47,915

Fixed maturities
 
$

 
$
12,504,952

 
$
515,062

 
$
13,020,014

Short-term investments
 
$

 
$
33,555

 
$

 
$
33,555

Equities
 
 
 
 
 
 
 
 
Finance
 
$
18,326

 
$
4,466

 
$
21,409

 
$
44,201

Consumer noncyclical
 
41,544

 

 

 
41,544

Insurance
 
27,382

 
2,651

 

 
30,033

Technology
 
21,366

 

 
6,984

 
28,350

Industrials
 
25,390

 

 

 
25,390

Consumer cyclical
 
25,191

 

 

 
25,191

Communications
 
21,109

 

 
2,037

 
23,146

Other
 
34,094

 

 

 
34,094

Mutual funds and exchange traded funds
 
70,142

 

 
2,336

 
72,478

Equities
 
$
284,544

 
$
7,117

 
$
32,766

 
$
324,427

Other invested assets
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
15,119

 
$

 
$
15,119

Foreign currency option contracts
 

 
1,977

 

 
1,977

Futures contracts
 
5,588

 

 

 
5,588

Insurance-linked securities
 

 

 
9,491

 
9,491

Total return swaps
 

 

 
2,953

 
2,953

TBAs
 

 
1,619

 

 
1,619

Other
 
 
 
 
 
 
 
 
Notes and loan receivables and notes securitization
 

 
1,000

 
175,970

 
176,970

Annuities and residuals
 

 

 
9,116

 
9,116

Private equities
 

 

 
71,899

 
71,899

Derivative liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
(4,258
)
 

 
(4,258
)
Futures contracts
 
(1,441
)
 

 

 
(1,441
)
Insurance-linked securities
 

 

 
(5,830
)
 
(5,830
)
Total return swaps
 

 

 
(2,999
)
 
(2,999
)
Interest rate swaps
 

 
(25,280
)
 

 
(25,280
)
Other invested assets
 
$
4,147

 
$
(9,823
)
 
$
260,600

 
$
254,924

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

 
$
199,258

 
$

 
$
199,258

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

 
126,363

 

 
126,363

Corporate
 

 
90,624

 

 
90,624

Other invested assets
 

 

 
10,292

 
10,292

Funds held – directly managed
 
$

 
$
416,245

 
$
10,292

 
$
426,537

Total
 
$
288,691

 
$
12,952,046

 
$
818,720

 
$
14,059,457


11


December 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
 
$

 
$
2,872,845

 
$

 
$
2,872,845

U.S. states, territories and municipalities
 

 
639,479

 
138,847

 
778,326

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

 
1,332,925

 

 
1,332,925

Corporate
 

 
5,086,199

 

 
5,086,199

Asset-backed securities
 

 
668,117

 
369,699

 
1,037,816

Residential mortgage-backed securities
 

 
2,290,640

 

 
2,290,640

Other mortgage-backed securities
 

 
49,511

 

 
49,511

Fixed maturities
 
$

 
$
12,939,716

 
$
508,546

 
$
13,448,262

Short-term investments
 
$

 
$
46,688

 
$

 
$
46,688

Equities
 
 
 
 
 
 
 
 
Insurance
 
$
72,226

 
$
7,799

 
$

 
$
80,025

Finance
 
29,422

 
5,497

 
22,760

 
57,679

Real estate investment trusts
 
46,379

 

 

 
46,379

Consumer noncyclical
 
43,375

 

 

 
43,375

Industrials
 
26,863

 
7,401

 

 
34,264

Technology
 
21,177

 

 
8,207

 
29,384

Consumer cyclical
 
25,871

 

 

 
25,871

Communications
 
20,939

 

 
1,985

 
22,924

Other
 
28,197

 

 

 
28,197

Mutual funds and exchange traded funds
 
71,159

 

 
4,604

 
75,763

Equities
 
$
385,608

 
$
20,697

 
$
37,556

 
$
443,861

Other invested assets
 
 
 
 
 
 
 
 
Derivative assets
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$

 
$
15,311

 
$

 
$
15,311

Futures contracts
 
5,675

 

 

 
5,675

Insurance-linked securities
 

 

 
9,428

 
9,428

Total return swaps
 

 

 
2,745

 
2,745

Other
 
 
 
 
 
 
 
 
Notes and loan receivables and notes securitization
 

 

 
125,922

 
125,922

Annuities and residuals
 

 

 
8,436

 
8,436

Private equities
 

 

 
71,298

 
71,298

Derivative liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 

 
(15,109
)
 

 
(15,109
)
Futures contracts
 
(140
)
 

 

 
(140
)
Insurance-linked securities
 

 

 
(3,944
)
 
(3,944
)
Total return swaps
 

 

 
(2,878
)
 
(2,878
)
Interest rate swaps
 

 
(24,383
)
 

 
(24,383
)
TBAs
 

 
(1,462
)
 

 
(1,462
)
Other invested assets
 
$
5,535

 
$
(25,643
)
 
$
211,007

 
$
190,899

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

 
$
169,951

 
$

 
$
169,951

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

 
119,487

 

 
119,487

Corporate
 

 
99,349

 

 
99,349

Short-term investments
 

 
966

 

 
966

Other invested assets
 

 

 
10,146

 
10,146

Funds held – directly managed
 
$

 
$
389,753

 
$
10,146

 
$
399,899

Total
 
$
391,143

 
$
13,371,211

 
$
767,255

 
$
14,529,609


12


At March 31, 2016 and December 31, 2015, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $203.8 million and $208.3 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 $426.5 million and $399.9 million at March 31, 2016 and December 31, 2015, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $39.0 million and $64.6 million, respectively, and accrued investment income of $4.4 million and $4.5 million, respectively. At March 31, 2016 and December 31, 2015, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $109.7 million and $70.7 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, 2015).
At March 31, 2016 and December 31, 2015, 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, 2016 and 2015, 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, 2016 and December 31, 2015, 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, 2016 and 2015 were as follows (in thousands of U.S. dollars):
For the three months ended March 31, 2016
 
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
 
$
138,847

 
$
1,876

 
$

 
$
(150
)
 
$

 
$
140,573

 
$
1,876

Asset-backed securities
 
369,699

 
7,110

 
21,835

 
(24,155
)
 

 
374,489

 
7,163

Fixed maturities
 
$
508,546

 
$
8,986

 
$
21,835

 
$
(24,305
)
 
$

 
$
515,062

 
$
9,039

Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
$
22,760

 
$
(1,351
)
 
$

 
$

 
$

 
$
21,409

 
$
(1,351
)
Technology
 
8,207

 
(1,223
)
 

 

 

 
6,984

 
(1,223
)
Communications
 
1,985

 
52

 

 

 

 
2,037

 
52

Mutual funds and exchange traded funds
 
4,604

 
(48
)
 

 
(2,220
)
 

 
2,336

 
(781
)
Equities
 
$
37,556

 
$
(2,570
)
 
$

 
$
(2,220
)
 
$

 
$
32,766

 
$
(3,303
)
Other invested assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives, net
 
$
5,351

 
$
(810
)
 
$
414

 
$
(1,340
)
 
$

 
$
3,615

 
$
(1,310
)
Notes and loan receivables and notes securitization
 
125,922

 
2,535

 
50,377

 
(2,864
)
 

 
175,970

 
2,535

Annuities and residuals
 
8,436

 
1,266

 

 
(586
)
 

 
9,116

 
1,266

Private equities
 
71,298

 
(481
)
 
1,940

 
(858
)
 

 
71,899

 
(481
)
Other invested assets
 
$
211,007

 
$
2,510

 
$
52,731

 
$
(5,648
)
 
$

 
$
260,600

 
$
2,010

Funds held – directly managed
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets
 
10,146

 
146

 

 

 

 
10,292

 
146

Funds held – directly managed
 
$
10,146

 
$
146

 
$

 
$

 
$

 
$
10,292

 
$
146

Total
 
$
767,255

 
$
9,072

 
$
74,566

 
$
(32,173
)
 
$

 
$
818,720

 
$
7,892

 
(1)
Purchases and issuances of derivatives include issuances of $0.4 million.
(2)
Settlements and sales of mutual funds and exchange traded funds include sales of $2.2 million during the three months ended March 31, 2016.

13


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 during the three months ended March 31, 2015.




14


The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at March 31, 2016 and December 31, 2015 were as follows (fair value in thousands of U.S. dollars):
March 31, 2016
 
Fair value
 
Valuation techniques
 
Unobservable inputs
 
Range
(Weighted average)
Fixed maturities
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
140,573

 
Discounted cash flow
 
Credit spreads
 
1.8% -10.5% (6.0%)
Asset-backed securities
 
374,489

 
Discounted cash flow
 
Credit spreads
 
4.1% – 11.1% (7.8%)
Equities
 
 
 
 
 
 
 
 
Finance
 
15,172

 
Weighted market comparables
 
Net income multiple
 
14.4 (14.4)
 
 
 
 
 
Tangible book value multiple
 
1.5 (1.5)
 
 
 
 
 
 
Liquidity discount
 
25.0% (25.0%)
 
 
 
 
 
 
Comparable return
 
-8.5% (-8.5%)
Finance
 
6,237

 
Profitability analysis
 
Projected return on equity
 
11.0% (11.0%)
Technology
 
6,984

 
Weighted market comparables
 
Revenue multiple
 
1.1 (1.1)
 
 
 
 
 
Adjusted earnings multiple
 
6.7 (6.7)
Communications
 
2,037

 
Weighted market comparables
 
Adjusted earnings multiple
 
9.4 (9.4)
 
 
 
 
 
Comparable return
 
2.6% (2.6%)
Other invested assets
 
 
 
 
 
 
 
 
Total return swaps, net
 
(46
)
 
Discounted cash flow
 
Credit spreads
 
3.2% – 29.8% (16.7%)
Insurance-linked securities – longevity swaps
 
9,491

 
Discounted cash flow
 
Credit spreads
 
2.9% (2.9%)
Notes and loan receivables
 
134,108

 
Discounted cash flow
 
Credit spreads
 
4.4% - 29.1% (5.5%)
Notes and loan receivables
 
10,426

 
Discounted cash flow
 
Credit spreads
 
17.5% (17.5%)
 
 
 
 
Gross revenue/fair value
 
1.0 – 1.5 (1.5)
Notes securitization
 
31,436

 
Discounted cash flow
 
Credit spreads
 
3.0% – 7.2% (6.9%)
Annuities and residuals
 
9,116

 
Discounted cash flow
 
Credit spreads
 
5.4% – 11.2% (10.1%)
 
 
 
 
 
 
Prepayment speed
 
0% – 15.0% (1.4%)
 
 
 
 
 
 
Constant default rate
 
0.3% – 17.5% (3.4%)
Private equity – direct
 
7,978

 
Discounted cash flow and weighted market comparables
 
Net income multiple
 
8.4 (8.4)
 
 
 
 
 
Tangible book value multiple
 
1.9 (1.9)
 
 
 
 
 
Recoverability of intangible assets
 
0% (0%)
Private equity funds
 
31,495

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-5.6% – 6.4% (0.3%)
Private equity – other
 
32,426

 
Discounted cash flow
 
Effective yield
 
5.8% (5.8%)
Funds held – directly managed
 
 
 
 
 
 
 
 
Other invested assets
 
10,292

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-18.5% – 0% (-17.0%)

15


December 31, 2015
 
Fair value
 
Valuation techniques
 
Unobservable inputs
 
Range
(Weighted average)
Fixed maturities
 
 
 
 
 
 
 
 
U.S. states, territories and municipalities
 
$
138,847

 
Discounted cash flow
 
Credit spreads
 
1.2% – 10.3% (4.1%)
Asset-backed securities
 
369,699

 
Discounted cash flow
 
Credit spreads
 
4.1% – 11.4% (7.7%)
Equities
 
 
 
 
 
 
 
 
Finance
 
16,627

 
Weighted market comparables
 
Net income multiple
 
14.4 (14.4)
 
 
 
 
 
Tangible book value multiple
 
1.5 (1.5)
 
 
 
 
 
 
Liquidity discount
 
25.0% (25.0%)
 
 
 
 
 
 
Comparable return
 
7.9% (7.9%)
Finance
 
6,133

 
Profitability analysis
 
Projected return on equity
 
14.0% (14.0%)
Technology
 
8,207

 
Weighted market comparables
 
Revenue multiple
 
1.2 (1.2)
 
 
 
 
 
Adjusted earnings multiple
 
8.4 (8.4)
Communications
 
1,985

 
Weighted market comparables
 
Adjusted earnings multiple
 
9.4 (9.4)
 
 
 
 
 
Comparable return
 
0% (0%)
Other invested assets
 
 
 
 
 
 
 
 
Total return swaps, net
 
(133
)
 
Discounted cash flow
 
Credit spreads
 
3.0% – 29.3% (16.5%)
Insurance-linked securities – longevity swaps
 
9,428

 
Discounted cash flow
 
Credit spreads
 
2.4% (2.4%)
Notes and loan receivables
 
84,080

 
Discounted cash flow
 
Credit spreads
 
6.0% – 26.8% (7.4%)
Notes and loan receivables
 
10,415

 
Discounted cash flow
 
Credit spreads
 
17.5% (17.5%)
 
 
 
 
 
Gross revenue/fair value
 
1.1 – 1.5 (1.5)
Notes securitization
 
31,427

 
Discounted cash flow
 
Credit spreads
 
2.4% – 7.1% (6.9%)
Annuities and residuals
 
8,436

 
Discounted cash flow
 
Credit spreads
 
5.1% – 15.4% (12.7%)
 
 
 
 
 
Prepayment speed
 
0% – 15.0% (2.1%)
 
 
 
 
 
Constant default rate
 
0.3% – 17.5% (4.4%)
Private equity – direct
 
8,792

 
Discounted cash flow and weighted market comparables
 
Net income multiple
 
9.2 (9.2)
 
 
 
 
 
Tangible book value multiple
 
1.9 (1.9)
 
 
 
 
 
Recoverability of intangible assets
 
0% (0%)
Private equity funds
 
29,222

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-4.9% – 5.2% (-0.5%)
Private equity – other
 
33,284

 
Discounted cash flow
 
Effective yield
 
5.8% (5.8%)
Funds held – directly managed
 
 
 
 
 
 
 
 
Other invested assets
 
10,146

 
Reported market value
 
Net asset value, as reported
 
100.0% (100.0%)
 
 
 
 
 
Market adjustments
 
-16.0% – 0% (-15.0%)
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 procedures, reviewing significant changes in the fair value measurements of securities classified as Level 3 from period to period, and ensuring that there is an appropriate independent internal peer analysis 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 Group Enterprise Risk Management Financial Risk Policy, which covers, among other items, invested asset valuation, is monitored by the Company’s Audit Committee of the Board of Directors (Board) and approved annually by the Company’s Board.

16


Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months ended March 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Fixed maturities and short-term investments
$
211,916

 
$
76,971

Equities
(27,483
)
 
(7,016
)
Other invested assets
2,225

 
1,833

Funds held – directly managed
4,951

 
2,540

Total
$
191,609

 
$
74,328

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 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 securities, 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.

17


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.
Other mortgage-backed securities—Other mortgage-backed securities primarily consist of commercial mortgage-backed securities. These securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2.
In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not been actively traded primarily involve the use of “matrix pricing” in which the independent pricing source applies the credit spread for a comparable security that has traded recently to the current yield curve to determine a reasonable fair value. The Company generally uses one pricing source per security and uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. When fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Most of the Company’s fixed maturities are priced from the pricing services or dealer quotes. The Company will typically not make adjustments to prices received from pricing services or dealer quotes; however, in instances where the quoted external price for a security uses significant unobservable inputs, the Company will classify that security as Level 3. The methods used to develop and substantiate the unobservable inputs used are based on the Company’s valuation policy and are dependent upon the facts and circumstances surrounding the individual investments which are generally transaction specific. The Company’s inactively traded fixed maturities are classified as Level 3. For all fixed maturity investments, the bid price is used for estimating fair value.
To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. The Company also reviews an internally generated fixed maturity price validation report which converts prices received for fixed maturity investments from the independent pricing sources and from broker-dealers quotes and plots OAS and duration on a sector and rating basis. The OAS is calculated using established algorithms developed by an independent risk analytics platform vendor. The OAS on the fixed maturity price validation report are compared for securities in a similar sector and having a similar rating, and outliers are identified and investigated for price reasonableness. In addition, the Company completes quantitative analyses to compare the performance of each fixed maturity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.
Short-term investments
Short-term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2.
Equities
Equity securities include U.S. and foreign common and preferred stocks, real estate investment trusts, mutual funds and exchange traded funds. Equities, real estate investment trusts and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted prices in active markets. Equities classified as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on a daily basis, certain common and preferred equities. Equities classified as Level 3 are generally mutual funds invested in securities other than the common stock of publicly traded companies, where the net asset value is not provided on a daily basis, and inactively traded common stocks. The significant unobservable inputs used in the fair value measurement of inactively traded common stocks classified as Level 3 include market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size, including net income multiples, tangible book value multiples, comparable returns, revenue multiples, adjusted earnings multiples and projected return on equity ratios. Significant increases (decreases) in any of these inputs could result in a significantly higher (lower) fair value measurement. Significant unobservable inputs used in measuring the fair value measurement of inactively traded common stocks also include a liquidity discount. A significant increase (decrease) in the liquidity discount could result in a significantly lower (higher) fair value measurement.
To validate prices, the Company completes quantitative analyses to compare the performance of each equity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.

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Other invested assets
The Company’s exchange traded derivatives, such as futures, are generally classified as Level 1 as their fair values are quoted prices in active markets. The Company’s foreign exchange forward contracts, foreign currency option contracts, interest rate swaps and TBAs are generally classified as Level 2 within the fair value hierarchy and are priced by independent pricing services.
Included in the Company’s Level 3 classification, in general, are certain inactively traded weather derivatives, notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps. For Level 3 instruments, the Company will generally (i) receive a price based on a manager’s or trustee’s valuation for the asset; (ii) develop an internal discounted cash flow model to measure fair value; or (iii) use market return information, adjusted if necessary and weighted using management’s judgment, from comparable selected publicly traded equity funds in a similar region and of a similar size. Where the Company receives prices from the manager or trustee, these prices are based on the manager’s or trustee’s estimate of fair value for the assets and are generally audited on an annual basis. Where the Company develops its own discounted cash flow models, the inputs will be specific to the asset in question, based on appropriate historical information, adjusted as necessary, and using appropriate discount rates. The significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 include credit spreads, prepayment speeds, constant default rates, gross revenue to fair value ratios, net income multiples, effective yields, tangible book value multiples and other valuation ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) fair value measurement. Significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 also include an assessment of the recoverability of intangible assets and market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size. Significant increases (decreases) in these inputs in isolation could result in a significantly higher (lower) fair value measurement. As part of the Company’s modeling to determine the fair value of an investment, the Company considers counterparty credit risk as an input to the model, however, the majority of the Company’s counterparties are investment grade rated institutions and the failure of any one counterparty would not have a significant impact on the Company’s consolidated financial statements.
To validate prices, the Company will compare them to benchmarks, where appropriate, or to the business results generally within that asset class and specifically to those particular assets.
Funds held – directly managed
The segregated investment portfolio underlying the funds held – directly managed account is comprised of fixed maturities, short-term investments and other invested assets which are fair valued on a basis consistent with the methods described above. Substantially all fixed maturities and short-term investments within the funds held – directly managed account are classified as Level 2 within the fair value hierarchy.
The other invested assets within the segregated investment portfolio underlying the funds held – directly managed account, which are classified as Level 3 investments, are primarily real estate mutual fund investments carried at fair value. For the real estate mutual fund investments, the Company receives a price based on the real estate fund manager’s valuation for the asset and further adjusts the price, if necessary, based on appropriate current information on the real estate market. A significant increase (decrease) to the adjustment to the real estate fund manager’s valuation could result in a significantly lower (higher) fair value measurement.
To validate prices within the segregated investment portfolio underlying the funds held – directly managed account, the Company utilizes the methods described above.
(b) Fair Value of Financial Instrument Liabilities
At March 31, 2016 and December 31, 2015, the fair values of financial instrument liabilities recorded in the Condensed Consolidated Balance Sheets approximate their carrying values, with the exception of the debt related to senior notes (Senior Notes) and the debt related to capital efficient notes (CENts).
The methods and assumptions used by the Company in estimating the fair value of each class of financial instrument liability recorded in the Condensed Consolidated Balance Sheets for which the Company does not measure that instrument at fair value were as follows:
 
the fair value of the Senior Notes was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $250 million from PartnerRe Finance A LLC and $500 million from PartnerRe Finance B LLC at March 31, 2016 and December 31, 2015; and
the fair value of the CENts was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $63 million from PartnerRe Finance II Inc. at March 31, 2016 and December 31, 2015.

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The carrying values and fair values of the Senior Notes and CENts at March 31, 2016 and December 31, 2015 were as follows (in thousands of U.S. dollars):