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.

18


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.

19


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):
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt related to Senior Notes (1)
$
750,000

 
$
842,521

 
$
750,000

 
$
829,755

Debt related to CENts (2)
63,384

 
64,394

 
63,384

 
63,265

 
 
(1)
PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the Senior Notes, do not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $750 million in its Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015.
(2)
PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015.
At March 31, 2016 and December 31, 2015, the Company’s debt related to the Senior Notes and CENts was classified as Level 2 in the fair value hierarchy.
Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments.
5. Derivatives
The Company’s derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value recognized in either net foreign exchange gains and losses or net realized and unrealized investment gains and losses in the Condensed Consolidated Statements of Operations or accumulated other comprehensive income or loss in the Condensed Consolidated Balance Sheets, depending on the nature of the derivative instrument. The Company’s objectives for holding or issuing these derivatives are as follows:
Foreign Exchange Forward Contracts
The Company utilizes foreign exchange forward contracts as part of its overall currency risk management and investment strategies. From time to time, the Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and branches whose functional currency is other than the U.S. dollar.
Foreign Currency Option Contracts and Futures Contracts
The Company utilizes foreign currency option contracts to mitigate foreign currency risk. The Company uses exchange traded treasury note futures contracts to manage portfolio duration and equity futures to hedge certain investments.
Insurance-Linked Securities
The Company enters into various weather derivatives and longevity total return swaps for which the underlying risks reference parametric weather risks for the weather derivatives and longevity risk for the longevity total return swaps.
Total Return and Interest Rate Swaps and Interest Rate Derivatives
The Company enters into total return swaps referencing various project, investments and principal finance obligations. The Company enters into interest rate swaps to mitigate the interest rate risk on certain of the total return swaps and certain fixed maturity investments. The Company also uses other interest rate derivatives to mitigate exposure to interest rate volatility.
To-Be-Announced Mortgage-Backed Securities
The Company utilizes TBAs as part of its overall investment strategy and to enhance investment performance.
The net fair values and the related net notional values of derivatives included in the Company’s Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015 were as follows (in thousands of U.S. dollars):

20


 
 
 


 
 
Asset
derivatives
at fair value

Liability
derivatives
at fair value

Net derivatives
March 31, 2016
 
Net notional
exposure

Fair value
Derivatives designated as hedges
 
 
 
 
 
 
 
 
Foreign exchange forward contracts (net investment hedges)
 
$
1,058

 
$

 
$
394,807

 
$
1,058

Total derivatives designated as hedges
 
$
1,058

 
$

 
 
 
$
1,058

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedges
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
14,061

 
$
(4,258
)
 
$
1,632,863

 
$
9,803

Foreign currency option contracts
 
1,977

 

 
90,413

 
1,977

Futures contracts
 
5,588

 
(1,441
)
 
3,186,204

 
4,147

Insurance-linked securities (1)
 
9,491

 
(5,830
)
 
140,558

 
3,661

Total return swaps
 
2,953

 
(2,999
)
 
42,418

 
(46
)
Interest rate swaps (2)
 

 
(25,280
)
 
196,268

 
(25,280
)
TBAs
 
1,619

 

 
439,105

 
1,619

Total derivatives not designated as hedges
 
$
35,689

 
$
(39,808
)
 
 
 
$
(4,119
)
 
 
 
 
 
 
 
 
 
Total derivatives
 
$
36,747

 
$
(39,808
)
 

 
$
(3,061
)
 
 
Asset
derivatives
at fair value
 
Liability
derivatives
at fair value
 
Net derivatives
December 31, 2015
 
Net notional
exposure
 
Fair value
Derivatives designated as hedges
 
 
 
 
 
 
 
 
Foreign exchange forward contracts (net investment hedges)
 
$

 
$
(9,305
)
 
$
392,523

 
$
(9,305
)
Total derivatives designated as hedges
 
$

 
$
(9,305
)
 
 
 
$
(9,305
)
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedges
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
15,311

 
$
(5,804
)
 
$
1,708,285

 
$
9,507

Foreign currency option contracts
 

 

 
82,148

 

Futures contracts
 
5,675

 
(140
)
 
3,610,658

 
5,535

Insurance-linked securities (1)
 
9,428

 
(3,944
)
 
140,320

 
5,484

Total return swaps
 
2,745

 
(2,878
)
 
42,438

 
(133
)
Interest rate swaps (2)
 

 
(24,383
)
 
196,804

 
(24,383
)
TBAs
 

 
(1,462
)
 
447,315

 
(1,462
)
Total derivatives not designated as hedges
 
$
33,159

 
$
(38,611
)
 
 
 
$
(5,452
)
 
 
 
 
 
 
 
 
 
Total derivatives
 
$
33,159

 
$
(47,916
)
 
 
 
$
(14,757
)
 
 
(1)
At March 31, 2016 and December 31, 2015, insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional amount.
(2)
The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps and certain fixed maturities. Only the notional value of interest rate swaps on fixed maturities is presented separately in the table.
The fair value of all derivatives at March 31, 2016 and December 31, 2015 is recorded in Other invested assets in the Company’s Condensed Consolidated Balance Sheets. At March 31, 2016 and December 31, 2015, the Company held foreign exchange forward contracts with notional amounts of €350 million, to hedge a portion of its net investment exposure to the euro against the U.S. dollar. The effective portion of the net investment hedging derivatives recognized in Accumulated other comprehensive loss at March 31, 2016 and December 31, 2015 was a gain of $1.1 million and a loss of $9.3 million, respectively.

21


 
 
 


The gains and losses in the Condensed Consolidated Statements of Operations for derivatives not designated as hedges 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
 
March 31, 2015
Foreign exchange forward contracts
$
(5,925
)
 
$
(4,636
)
Foreign currency option contracts
1,977

 
2,028

Total included in net foreign exchange gains and losses
$
(3,948
)
 
$
(2,608
)
Futures contracts
$
(41,674
)
 
$
(34,539
)
Insurance-linked securities
(405
)
 
2

Total return swaps
86

 
465

Interest rate swaps
(897
)
 
(4,791
)
TBAs
10,926

 
3,671

Other

 
2,493

Total included in net realized and unrealized investment gains and losses
$
(31,964
)
 
$
(32,699
)
Total derivatives not designated as hedges
$
(35,912
)
 
$
(35,307
)
Offsetting of Derivatives
The gross and net fair values of derivatives that are subject to offsetting in the Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015 were as follows (in thousands of U.S. dollars):
 
 
 
 
Gross
amounts
offset in the
balance sheet
 
Net amounts of
assets/liabilities
presented in the
balance sheet
 
Gross amounts not offset
in the balance sheet
 
 
March 31, 2016
 
Gross
amounts
recognized (1)
 
Financial
instruments
 
Cash collateral
received/pledged
 
Net amount
Total derivative assets
 
$
36,747

 
$

 
$
36,747

 
$
(2,405
)
 
$
(12,335
)
 
$
22,007

Total derivative liabilities
 
$
(39,808
)
 
$

 
$
(39,808
)
 
$
2,405

 
$
7,076

 
$
(30,327
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
33,159

 
$

 
$
33,159

 
$
(1,037
)
 
$
(10,222
)
 
$
21,900

Total derivative liabilities
 
$
(47,916
)
 
$

 
$
(47,916
)
 
$
1,037

 
$
25,904

 
$
(20,975
)
 
 
(1)
Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.
6. Share-Based Awards
In accordance with the Company’s share-based award plans and the Merger Agreement, all of the Company’s share-based awards fully vested and were settled in cash upon the change in control of the Company on March 18, 2016. As a result, the total unrecognized share-based compensation expense related to unvested awards was expensed and no share-based awards remain outstanding at March 31, 2016.
For the three months ended March 31, 2016, the Company’s total share-based compensation expense was $36.2 million, which primarily related to the vesting of the share-based awards upon the change in control.
The activity related to the Company’s share options, share-settled share appreciation rights (SSARs), restricted stock units (RSUs), performance stock units (PSUs) and warrants for the three months ended March 31, 2016 was as follows:


22


 
 
 


Share Options
 
 
Options
Outstanding at January 1, 2016
 
267,918

Exercised prior to March 18, 2016
 
(15,997
)
Settled in cash by the Company upon change in control
 
(251,921
)
Outstanding at March 31, 2016
 

Share-Settled Share Appreciation Rights (SSARs)
 
SSARs
Outstanding at January 1, 2016
991,724

Exercised prior to March 18, 2016
(12,294
)
Settled in cash by the Company upon change in control
(979,430
)
Outstanding at March 31, 2016

Pursuant to the terms of the Merger Agreement, the Company funded the settlement of the share options and SSARs of $75.3 million, which was recorded as a reduction in additional paid-in capital during the three months ended March 31, 2016.
Restricted Share Units and Performance Share Units
 
RSUs and PSUs
Outstanding at January 1, 2016
861,608

Performance based adjustment
76,889

Vested prior to March 18, 2016
(270,986
)
Converted to common shares and settled in cash by EXOR upon change in control
(667,511
)
Outstanding at March 31, 2016

Pursuant to the terms of the Merger Agreement, EXOR funded the settlement of the RSUs and PSUs, which was included as part of the consideration paid to acquire the Company.
Warrants
During the three months ended March 31, 2016, 371 warrants were exercised and 186 warrants were settled in cash by the Company upon the change in control. At March 31, 2016, no warrants were outstanding.
7. Commitments and Contingencies
(a) Legal Proceedings
At March 31, 2016, the Company was not party to any litigation that it believes could have a material effect on the financial condition, results of operations or liquidity of the Company. See Note 18(f) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
(b) Employment Agreements
The Company has entered into employment agreements with its executive officers. These agreements provide for annual compensation in the form of salary, benefits, annual incentive payments, the reimbursement of certain expenses, retention incentive payments, as well as certain severance and change in control provisions. Specifically, the Company expects to incur a pre-tax charge of approximately $10 million in 2016 related to certain executive changes.
8. Agreements with Related Parties
The Company was party to agreements with certain entities on an arm’s-length basis as follows:

23


 
 
 


Lorenz Re Ltd. (Lorenz Re)
In the normal course of its underwriting activities, the Company entered into reinsurance and underwriting agreements with Lorenz Re, a segregated accounts company under the laws of Bermuda. Distinct segregated accounts are formed and capitalized within Lorenz Re on a fully collateralized basis. All transactions entered into with Lorenz Re were completed on market terms.
 
Other Agreements
In the normal course of its investment operations, the Company bought or held securities of companies affiliated with the Company. All transactions entered into as part of the investment portfolio were completed on market terms.
9. Segment Information
The Company monitors the performance of its operations in three segments, Non-life, Life and Health and Corporate and Other as described in Note 21 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Non-life segment is further divided into four sub-segments: North America, Global (Non-U.S.) P&C, Global Specialty and Catastrophe.
The North America sub-segment includes agriculture, casualty, credit/surety, motor, multiline, property and other risks generally originating in the United States. The Global (Non-U.S.) P&C sub-segment includes casualty, motor and property business generally originating outside of the United States. The Global Specialty sub-segment is comprised of business that is generally considered to be specialized due to the sophisticated technical underwriting required to analyze risks, and is global in nature. This sub-segment consists of several lines of business for which the Company believes it has developed specialized knowledge and underwriting capabilities. These lines of business include agriculture, aviation/space, credit/surety, energy, engineering, marine, multiline, specialty casualty, specialty property and other lines. The Catastrophe sub-segment is comprised of the Company’s catastrophe line of business. The Life and Health segment includes mortality, longevity and accident and health lines of business. Corporate and Other is comprised of the capital markets and investment related activities of the Company, including principal finance transactions, insurance-linked securities and strategic investments, and its corporate activities, including other expenses.
Since the Company does not manage its assets by segment, net investment income is not allocated to the Non-life segment. However, because of the interest-sensitive nature of some of the Company’s Life and Health products, net investment income is considered in Management’s assessment of the profitability of the Life and Health segment. The following items are not considered in evaluating the results of the Non-life and Life and Health segments: net realized and unrealized investment gains and losses, interest expense, amortization of intangible assets, net foreign exchange gains and losses, income tax expense or benefit and interest in earnings and losses of equity method investments. Segment results are shown before consideration of intercompany transactions.
Management measures results for the Non-life segment on the basis of the loss ratio, acquisition ratio, technical ratio, other expense ratio and combined ratio (all defined below). Management measures results for the Non-life sub-segments on the basis of the loss ratio, acquisition ratio and technical ratio. Management measures results for the Life and Health segment on the basis of the allocated underwriting result, which includes revenues from net premiums earned, other income or loss and allocated net investment income for Life and Health, and expenses from life policy benefits, acquisition costs and other expenses.

24


 
 
 


The segment results for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars, except ratios):
Segment Information
For the three months ended March 31, 2016
 
North
America
 
Global
(Non-U.S.)
P&C
 
Global
Specialty
 
Catastrophe
 
Total
Non-life
segment
 
Life
and Health
segment
 
Corporate
and Other
 
Total
Gross premiums written
$
494

 
$
274

 
$
398

 
$
170

 
$
1,336

 
$
293

 
$

 
$
1,629

Net premiums written
$
481

 
$
269

 
$
333

 
$
141

 
$
1,224

 
$
277

 
$

 
$
1,501

Increase in unearned premiums
(129
)
 
(119
)
 
(11
)
 
(93
)
 
(352
)
 
(7
)
 

 
(359
)
Net premiums earned
$
352

 
$
150

 
$
322

 
$
48

 
$
872

 
$
270

 
$

 
$
1,142

Losses and loss expenses and life policy benefits
(199
)
 
(123
)
 
(184
)
 
(3
)
 
(509
)
 
(205
)
 

 
(714
)
Acquisition costs
(107
)
 
(47
)
 
(90
)
 
(1
)
 
(245
)
 
(38
)
 

 
(283
)
Technical result
$
46

 
$
(20
)
 
$
48

 
$
44

 
$
118

 
$
27

 
$

 
$
145

Other income
 
 
 
 
 
 
 
 
2

 
2

 
1

 
5

Other expenses
 
 
 
 
 
 
 
 
(68
)
 
(18
)
 
(67
)
 
(153
)
Underwriting result
 
 
 
 
 
 
 
 
$
52

 
$
11

 
n/a

 
$
(3
)
Net investment income
 
 
 
 
 
 
 
 
 
 
13

 
90

 
103

Allocated underwriting result (1)
 
 
 
 
 
 
 
 
 
 
$
24

 
n/a

 
n/a

Net realized and unrealized investment gains
 
 
 
 
 
 
 
 
 
 
 
 
167

 
167

Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(12
)
 
(12
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
(7
)
 
(7
)
Net foreign exchange gains
 
 
 
 
 
 
 
 
 
 
 
 
2

 
2

Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
(31
)
 
(31
)
Interest in losses of equity method investments
 
 
 
 
 
 
 
 
 
 
 
 
(3
)
 
(3
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
n/a

 
$
216

Loss ratio (2)
56.5
%
 
82.1
%
 
57.2
%
 
7.2
%
 
58.5
%
 
 
 
 
 
 
Acquisition ratio (3)
30.4

 
31.1

 
27.8

 
3.1

 
28.0

 
 
 
 
 
 
Technical ratio (4)
86.9
%
 
113.2
%
 
85.0
%
 
10.3
%
 
86.5
%
 
 
 
 
 
 
Other expense ratio (5)
 
 
 
 
 
 
 
 
7.8

 
 
 
 
 
 
Combined ratio (6)
 
 
 
 
 
 
 
 
94.3
%
 
 
 
 
 
 
 
 
(1)
Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs and other expenses.
(2)
Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.
(3)
Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.
(4)
Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.
(5)
Other expense ratio is obtained by dividing other expenses by net premiums earned.
(6)
Combined ratio is defined as the sum of the technical ratio and the other expense ratio.
n/a Not applicable

25


 
 
 


Segment Information
For the three months ended March 31, 2015
 
North
America
 
Global
(Non-U.S.)
P&C
 
Global
Specialty
 
Catastrophe
 
Total
Non-life
segment
 
Life
and Health
segment
 
Corporate
and Other
 
Total
Gross premiums written
$
473

 
$
334

 
$
427

 
$
191

 
$
1,425

 
$
324

 
$

 
$
1,749

Net premiums written
$
471

 
$
331

 
$
362

 
$
176

 
$
1,340

 
$
313

 
$

 
$
1,653

(Increase) decrease in unearned premiums
(132
)
 
(157
)
 
3

 
(118
)
 
(404
)
 
(14
)
 

 
(418
)
Net premiums earned
$
339

 
$
174

 
$
365

 
$
58

 
$
936

 
$
299

 
$

 
$
1,235

Losses and loss expenses and life policy benefits
(172
)
 
(119
)
 
(170
)
 
(20
)
 
(481
)
 
(240
)
 

 
(721
)
Acquisition costs
(93
)
 
(52
)
 
(93
)
 
(4
)
 
(242
)
 
(34
)
 

 
(276
)
Technical result
$
74

 
$
3

 
$
102

 
$
34

 
$
213

 
$
25

 
$

 
$
238

Other income
 
 
 
 
 
 
 
 

 
1

 
3

 
4

Other expenses
 
 
 
 
 
 
 
 
(52
)
 
(15
)
 
(58
)
 
(125
)
Underwriting result
 
 
 
 
 
 
 
 
$
161

 
$
11

 
n/a

 
$
117

Net investment income
 
 
 
 
 
 
 
 
 
 
14

 
91

 
105

Allocated underwriting result
 
 
 
 
 
 
 
 
 
 
$
25

 
n/a

 
n/a

Net realized and unrealized investment gains
 
 
 
 
 
 
 
 
 
 
 
 
116

 
116

Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(12
)
 
(12
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
(7
)
 
(7
)
Net foreign exchange gains
 
 
 
 
 
 
 
 
 
 
 
 
13

 
13

Income tax expense
 
 
 
 
 
 
 
 
 
 
 
 
(80
)
 
(80
)
Interest in losses of equity method investments
 
 
 
 
 
 
 
 
 
 
 
 
(4
)
 
(4
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
n/a

 
$
248

Loss ratio
50.7
%
 
68.4
%
 
46.7
%
 
33.7
%
 
51.4
%
 
 
 
 
 
 
Acquisition ratio
27.5

 
30.1

 
25.4

 
7.0

 
25.9

 
 
 
 
 
 
Technical ratio
78.2
%
 
98.5
%
 
72.1
%
 
40.7
%
 
77.3
%
 
 
 
 
 
 
Other expense ratio
 
 
 
 
 
 
 
 
5.5

 
 
 
 
 
 
Combined ratio
 
 
 
 
 
 
 
 
82.8
%
 
 
 
 
 
 
10. Other Expenses
Transaction Related Charges
Other expenses recorded in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 include $66 million, pre-tax, and $31 million, pre-tax, respectively, related primarily to professional fees and personnel costs associated with the EXOR acquisition and terminated Amalgamation Agreement with Axis Capital Holdings Limited, respectively.
11. Subsequent Events
On March 24, 2016, the Company agreed to purchase from EXOR a 36% shareholding in the privately held United Kingdom real estate investment and development group, Almacantar Group S.A. (Almacantar), as well as certain financial investments, mainly third party funds, based upon the net asset value of these investments. In April 2016, the Company paid a total cash consideration of $729 million for its investments in Almacantar and the third party funds. In addition to this amount, the Company expects to pay a further amount of less than $10 million in the second quarter of 2016 related to the purchase of the remaining assets from EXOR. These transactions between related parties were entered into at arms-length.
On April 1, 2016, the Company launched an exchange offer, in accordance with the Merger Agreement, whereby participating preferred shareholders may exchange any or all existing preferred shares for newly issued preferred shares reflecting an extended call date of the fifth anniversary from the date of issuance. The terms of the newly issued preferred shares would be otherwise

26


 
 
 


identical in all material respects to the Company’s existing preferred shares. The exchange offer provides for a restriction on the payment of dividends on common shares to an amount not exceeding 67% of net income until December 31, 2020. The exchange offer expired on April 29, 2016. As a result of the exchange offer, the Company will cancel the existing preferred shares tendered in the exchange offer. Non-tendered existing preferred shares will remain outstanding and continue to trade on the NYSE until such time as the Company decides to redeem them in accordance with their terms of issuance. The Company will seek a comparable credit rating for the new preferred shares as is held by the existing preferred shares.

27


 
 
 


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
The Company is a leading global reinsurer and insurer, with a broadly diversified and balanced portfolio of traditional reinsurance and insurance risks and capital markets risks.
Successful risk management is the foundation of the Company’s value proposition, with diversification of risks at the core of its risk management strategy. The Company’s ability to succeed in the risk assumption and management business is dependent on its ability to accurately analyze and quantify risk, to understand volatility and how risks aggregate or correlate, and to establish the appropriate capital requirements and limits for the risks assumed. All risks, whether they are reinsurance related risks or capital market risks, are managed by the Company within an integrated framework of policies and processes to ensure the intelligent and consistent evaluation and valuation of risk, and to ultimately provide an appropriate return to shareholders. The Company’s Risk Management framework is discussed below and in Risk Management in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
For a discussion of the Company’s long-term objective and the metrics that Management uses to measure its success in achieving its long-term objective, see below in Key Financial Measures.
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.
Overview of the Results of Operations for the Three Months Ended March 31, 2016
The Company measures its performance in several ways. In addition to the performance measures accepted under U.S. GAAP, the Company also utilizes certain non-GAAP measures to assess performance (see the discussion of these non-GAAP measures and the reconciliation to the most directly comparable GAAP measures in Key Financial Measures below).
Net income or loss attributable to PartnerRe Ltd. common shareholders is defined as net income or loss less preferred dividends. The Company’s net income, net income attributable to PartnerRe Ltd. and net income attributable to PartnerRe Ltd. common shareholders are discussed below in Review of Net Income. Following the Merger, the Company has only one common share outstanding, which is wholly owned by Exor N.V. Accordingly, operating earnings per share and book value per share data are no longer considered meaningful and has been excluded for both the current reporting period and for the comparative period.
Key Factors Affecting Period over Period Comparability
The following key factors affected the period over period comparison of the Company’s results for the three months ended March 31, 2016 and 2015 and may continue to affect our results of operations and financial condition in the future.
Other expenses
During the three months ended March 31, 2016, the Company recorded $66 million, pre-tax, of transaction related costs associated with the Merger within Other expenses, of which $35 million related to professional fees.

28


 
 
 


In accordance with the Company’s share-based award plans and the Merger Agreement, all of the Company’s share-based awards fully vested and were settled in cash upon the change in control of the Company on March 18, 2016. As a result, the Company recorded $31 million, pre-tax, in stock-based compensation expense, included within Other expenses.
On January 25, 2015, the Company entered into an Agreement and Plan of Amalgamation (Amalgamation Agreement) with Axis Capital Holdings Limited (AXIS). In connection with the execution of the Merger Agreement with EXOR, the Company and AXIS terminated the Amalgamation Agreement. During the three months ended March 31, 2015, the Company recorded $31 million, pre-tax, of costs related to this transaction within Other expenses, which was primarily related to Costas Miranthis’ stepping down as the Chief Executive Officer of the Company and as a member of the Company’s Board of Directors (Board).
Volatility in Capital Markets
The results for the three months ended March 31, 2016 and 2015 were significantly impacted by the volatility in the capital markets. Decreases in U.S. and European risk-free interest rates impacted the three months ended March 31, 2016 and modest decreases in U.S. and European risk-free rates impacted the same period of 2015.
Large Catastrophic and Large Loss Events
As the Company’s reinsurance operations are exposed to low frequency and high severity risk events, some of which are seasonal, results for certain periods may include unusually low loss experience, while results for other periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods may be volatile from period to period and are not necessarily indicative of results for the full year. The results for the three months ended March 31, 2016 and 2015 include no significant catastrophic losses.
Overview of Net Income
Net income, net income attributable to noncontrolling interests, net income attributable to PartnerRe Ltd., preferred dividends and net income attributable to PartnerRe Ltd. common shareholders for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Net income
$
216

 
$
248

Net income attributable to noncontrolling interests

 
(2
)
Net income attributable to PartnerRe Ltd.
216

 
246

Less: Preferred dividends
14

 
14

Net income attributable to PartnerRe Ltd. common shareholders
$
202

 
$
232

The decrease in net income, net income attributable to PartnerRe Ltd., and net income attributable to PartnerRe Ltd. common shareholders in the three months ended March 31, 2016 compared to the same period of 2015 was primarily due to:
a decrease in the Non-life technical result of $95 million, primarily related to a lower current accident year technical result and lower net favorable prior year loss development, as described in Review of Net Income below; and
an increase in other expenses of $28 million, mainly driven by higher costs related to the Merger; partially offset by
an increase in pre-tax net realized and unrealized investment gains of $51 million, as described in Volatility in Capital Markets above; and
a decrease in income tax expense of $49 million, primarily reflecting the geographical distribution of the Company’s pre-tax net income between its taxable and non-taxable jurisdictions and a lower pre-tax net income.
The factors driving these increases and decreases are described in more detail in Review of Net Income below.
Key Financial Measures
In addition to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations and Comprehensive Income, Management uses certain other key measures, some of which are non-GAAP financial measures within the meaning of Regulation G (see below), to evaluate its financial performance and the overall growth in value generated for the Company’s shareholders.

29


 
 
 


The Company’s long-term objective is to manage a portfolio of diversified risks that will create total shareholder value. The Company measures its success in achieving its long-term objective by targeting a return, which is variable and can be adjusted by Management. Given the Company’s profitability in any particular quarterly or annual period can be significantly affected by the level of large catastrophic losses, Management assesses this long-term objective over the reinsurance cycle as the Company’s performance during any particular quarterly or annual period is not necessarily indicative of its performance over the longer-term reinsurance cycle.
Management currently uses certain key financial measures to monitor performance. At March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 these measures were as follows:
 
 
 
 
 
March 31, 2016
 
December 31, 2015
Tangible book value (in millions of U.S. dollars)(1)
 
$
5,513

 
$
5,500

Annualized growth in tangible book value (2)
 
0.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended
 
 
 
 
 
March 31, 2016
 
March 31, 2015
Operating earnings attributable to PartnerRe Ltd. common shareholders (in millions of U.S. dollars) (3)
 
$
44

 
$
151

Annualized operating return on average common shareholders’ equity (4)
 
2.9
%
 
9.6
%
Combined ratio (5)
 
94.3
%
 
82.8
%
 
(1)
Tangible book value is calculated using common shareholders equity attributable to PartnerRe Ltd. (total shareholders equity less noncontrolling interests and the aggregate liquidation value of preferred shares) less goodwill and intangible assets, net of tax. The presentation of tangible book value is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
(2)
Annualized growth in tangible book value is calculated using the change in the tangible book value during the period divided by tangible book value at the beginning of the year, and annualized. The presentation of growth in tangible book value is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
(3)
Annualized operating earnings or loss attributable to PartnerRe Ltd. common shareholders (operating earnings or loss) is calculated as net income or loss attributable to PartnerRe Ltd. common shareholders excluding net realized and unrealized gains or losses on investments, net of tax (except where the Company has made a strategic investment in an insurance or reinsurance related investee), net foreign exchange gains or losses, net of tax and the interest in earnings or losses of equity method investments, net of tax (except where the Company has made a strategic investment in an insurance or reinsurance related investee and where the Company does not control the investee’s activities), and is calculated after preferred dividends. Quarterly periods are annualized. The presentation of operating earnings or loss is a non-GAAP financial measures within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
(4)
Annualized operating return on average common shareholders equity (Operating ROE) is calculated using annualized operating earnings or loss, as defined above, divided by average common shareholders equity for the period. The presentation of Operating ROE is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
(5)
The combined ratio of the Non-life segment is calculated as the sum of the technical ratio (losses and loss expenses and acquisition costs divided by net premiums earned) and the other expense ratio (other expenses divided by net premiums earned).
Tangible book value: Tangible book value focuses on the underlying fundamentals of the Company’s financial position and performance without the impact of goodwill or intangible assets. Tangible book value is impacted by the Company’s net income or loss, capital resources management and external factors such as foreign exchange, interest rates, credit spreads and equity markets, which can drive changes in realized and unrealized gains or losses on its investment portfolio.
The Company’s tangible book value of $5.5 billion at March 31, 2016 modestly increased compared to December 31, 2015, reflecting an annualized growth of 0.9%. The modest increase in tangible book value and in the annualized growth in tangible book value are primarily due to net income attributable to PartnerRe Ltd., which was partially offset by dividends on common and preferred shares, including the Special Dividend.

30


 
 
 


Tangible book value is a non-GAAP financial measure within the meaning of Regulation G and should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP (see Comment on Non-GAAP Measures below). The reconciliation of tangible book value to the most directly comparable GAAP financial measure at March 31, 2016 and December 31, 2015 was as follows (in millions of U.S. dollars):
 
March 31, 2016
 
December 31, 2015
Common shareholders’ equity attributable to PartnerRe (1)
$
6,056

 
$
6,047

Less: goodwill and other intangible assets, net of tax
543

 
547

Tangible book value
$
5,513

 
$
5,500

 
(1)
Common shareholders’ equity attributable to PartnerRe is calculated using total shareholders’ equity less any noncontrolling interests and the aggregate liquidation value of preferred shares.
Operating earnings or loss attributable to PartnerRe Ltd. common shareholders (operating earnings or loss): Management uses operating earnings or loss to measure its financial performance as this measure focuses on the underlying fundamentals of the Company’s operations by excluding net realized and unrealized gains or losses on investments (except where the Company has made a strategic investment in an investee whose operations are insurance or reinsurance related and where the Company does not control the investee’s activities), net foreign exchange gains or losses and certain interest in earnings or losses of equity method investments (except where the Company has made a strategic investment in an investee whose operations are insurance or reinsurance related and where the Company does not control the investee’s activities). Net realized and unrealized gains or losses on investments in any particular period are not indicative of the performance of, and distort trends in, the Company’s business as they predominantly result from general economic and financial market conditions, and the timing of realized gains or losses on investments is largely opportunistic. Net foreign exchange gains or losses are not indicative of the performance of, and distort trends in, the Company’s business as they predominantly result from general economic and foreign exchange market conditions. Interest in earnings or losses of equity method investments are also not indicative of the performance of, or trends in, the Company’s business where the investee’s operations are not insurance or reinsurance related and where the Company does not control the investee companies’ activities. Management believes that the use of operating earnings or loss enables users of the Company’s financial information to analyze its performance in a manner similar to how Management analyzes performance. Management also believes that this measure follows industry practice and, therefore, allows the users of financial information to compare the Company’s performance with its industry peer group, and that certain rating agencies which follow the Company, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons.
Operating earnings decreased by $107 million, from $151 million in the three months ended March 31, 2015 to $44 million in the same period of 2016. The decrease in operating earnings was primarily due to a reduction in the Non-life technical result, mainly driven by lower current accident year technical result and lower net favorable prior year loss development, and an increase in other expenses, primarily due to higher costs related to the Merger. These decreases in operating earnings were partially offset by a lower tax expense associated with the decrease in the pre-tax operating earnings.
Other less significant factors contributing to the increases or decreases in operating earnings in the three months ended March 31, 2016 compared to the same period of 2015 are further described in Review of Net Income below.
Operating earnings or loss attributable to PartnerRe Ltd. common shareholders is a non-GAAP financial measure within the meaning of Regulation G and should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP (see Comment on Non-GAAP Measures). The reconciliation of operating earnings to the most directly comparable GAAP financial measure for the three months ended March 31, 2016 and 2015 was as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Net income attributable to PartnerRe Ltd.
$
216

 
$
246

Less:
 
 
 
Net realized and unrealized investment gains, net of tax
148

 
100

Net foreign exchange gains (losses), net of tax
10

 
(16
)
Interest in losses of equity method investments, net of tax

 
(3
)
Dividends to preferred shareholders
14

 
14

Operating earnings attributable to PartnerRe Ltd. common shareholders
$
44

 
$
151


31


 
 
 


Operating ROE: Management uses annualized Operating ROE as a measure of profitability that focuses on the return on capital (equity). To support the Company’s growth objectives, most economic decisions, including capital attribution and underwriting pricing decisions, incorporate an Operating ROE impact analysis. For the purpose of that analysis, an appropriate amount of capital (equity) is attributed to each transaction for determining the transaction’s priced return on attributed capital. Subject to an adequate return for the risk level as well as other factors, such as the contribution of each risk to the overall risk level and risk diversification, capital is attributed to the transactions generating the highest priced return on deployed capital. Management’s challenge consists of (i) attributing an appropriate amount of capital to each transaction based on the risk created by the transaction, (ii) properly estimating the Company’s overall risk level and the impact of each transaction on the overall risk level, (iii) assessing the diversification benefit, if any, of each transaction, and (iv) deploying available capital. The risk for the Company lies in misestimating any one of these factors, which are critical in calculating a meaningful priced return on deployed capital, and entering into transactions that do not contribute to the Company’s growth objectives.
Annualized Operating ROE decreased from 9.6% in the three months ended March 31, 2015 to 2.9% in the same period of 2016. The decrease in annualized Operating ROE was primarily due to lower operating earnings, as described above, partially offset by lower average shareholders’ equity. The other factors contributing to increases or decreases in operating earnings are described further in Review of Net Income below.
The presentation of Operating ROE is a non-GAAP financial measure within the meaning of Regulation G and should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP (see Comment on Non-GAAP Measures below). The reconciliation of Operating ROE to the most directly comparable GAAP financial measure for the three months ended March 31, 2016 and 2015 was as follows:
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Annualized return on average common shareholders’ equity calculated with net income attributable to common shareholders
13.3
 %
 
14.8
 %
Less:
 
 
 
Annualized net realized and unrealized investment gains, net of tax, on average common shareholders’ equity
9.8

 
6.4

Annualized net foreign exchange gains (losses), net of tax, on average common shareholders’ equity
0.6

 
(1.0
)
Annualized net interest in losses of equity method investments, net of tax, on average common shareholders’ equity

 
(0.2
)
Annualized operating return on average common shareholders’ equity
2.9
 %
 
9.6
 %
Combined ratio: The combined ratio is used industry-wide as a measure of underwriting profitability for Non-life business. A combined ratio under 100% indicates underwriting profitability, as the total losses and loss expenses, acquisition costs and other expenses are less than the premiums earned on that business. While an important metric of underwriting profitability, the combined ratio does not reflect all components of profitability, as it does not recognize the impact of investment income earned on premiums between the time premiums are received and the time loss payments are ultimately made to clients. The key challenges in managing the combined ratio metric consist of (i) focusing on underwriting profitable business even in the weaker part of the reinsurance cycle, as opposed to growing the book of business at the cost of profitability, (ii) diversifying the portfolio to achieve a good balance of business, with the expectation that underwriting losses in certain lines or markets may potentially be offset by underwriting profits in other lines or markets, and (iii) maintaining control over expenses.
The Non-life combined ratio increased by 11.5 points, from 82.8% in the three months ended March 31, 2015 to 94.3% in the same period of 2016. The increase in the combined ratio for the three months ended March 31, 2016 compared to the same period of 2015 was driven by a reduction in the Non-life technical result, mainly due to a lower current accident year technical result, lower net favorable prior year loss development and higher expenses as a result of the vesting of stock-based awards. Additional detail of the Non-life underwriting result is provided in the discussion of individual sub-segments in Results by Segment and Review of Net Income below.
The other lesser factors contributing to increases or decreases in the combined ratio are described further in Review of Net Income below.
The Company uses the combined ratio to measure its overall underwriting profitability for its Non-life segment as a whole. Given the Company does not allocate other expenses to its Non-life sub-segments, Management measures the underwriting profitability of the Non-life sub-segments by using the technical result and technical ratio as described in Results by Segment below.

32


 
 
 


Comment on Non-GAAP Measures
Throughout this filing, the Company’s results of operations have been presented in the way that Management believes will be the most meaningful and useful to its preferred shareholders, rating agencies and others who use financial information in evaluating the performance of the Company. This presentation includes the use of operating earnings or loss and Operating ROE that are not calculated under standards or rules that comprise U.S. GAAP. These measures are referred to as non-GAAP financial measures within the meaning of Regulation G. Management believes that these non-GAAP financial measures are important to its preferred shareholders, rating agencies and others who use the Company’s financial information and will help provide a consistent basis for comparison between years and for comparison with the Company’s peer group, although non-GAAP measures may be defined or calculated differently by other companies. Users should consider these non-GAAP measures in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable U.S. GAAP financial measures net income or loss and return on common shareholders’ equity calculated with net income or loss attributable to common shareholders, is presented above.
Risk Management
In the insurance and reinsurance industry, the core of the business model is the assumption and management of risk. A key challenge is to create total shareholder value through the intelligent and optimal assumption and management of reinsurance, insurance and investment risks while limiting and mitigating those risks that can destroy tangible as well as intangible value, those risks for which the organization is not sufficiently compensated, and those risks that could threaten the ability of the Company to achieve its objectives. While many companies start with a return goal, the Company starts with a capital-based risk appetite and then looks for risks that meet its return targets within that framework. Management believes that this construct allows the Company to balance the cedants’ need for certainty of claims payment with the shareholders’ need for an adequate total return.
All business decisions entail a risk/return trade-off, and these decisions are applicable to the Company’s risks. In the context of assumed business risks, this requires an accurate evaluation of risks to be assumed, and a determination of the appropriate economic returns required as fair compensation for such risks.
The Company’s results are primarily determined by how well the Company understands, prices and manages assumed risk. Management also believes that every organization faces numerous risks that could threaten the successful achievement of a company’s goals and objectives. These include all factors which can be viewed as either strategic, financial, or operational risks that are common to any industry, such as choice of strategy and markets, economic and business cycles, competition, changes in regulation, data quality and security, fraud, business interruption and management continuity. See Risk Factors in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
For additional information related to the Company’s risk management approach, see Business—Risk Management in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Assumed Risks
Central to the Company’s assumed risk framework is its risk appetite. The Company’s risk appetite is a statement of how much and how often the Company will tolerate economic losses during an annual period. The Company’s risk appetite is expressed as the maximum economic loss that the Board is willing to incur. The Company’s risk appetite is approved by the Board on an annual basis.
The Company manages exposure levels from multiple risk sources to provide reasonable assurance that modeled economic losses are contained within the risk appetite approved by the Board. Definitions for economic losses in the context of the Company’s risk management framework are included in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Company establishes key risk limits net of any reinsurance/retrocession for any risk source deemed by Management to have the potential to cause operating losses or economic losses greater than the Company’s risk appetite. The Company has currently established key risk limits for ten risk sources. The Company may also establish risk limits for any risk source deemed to have the possibility of causing reputational damage. The Board approves the key risk limits. Executive and Business and Support Unit Management may set additional specific and aggregate risk limits within the key risk limits approved by the Board. The actual level of risk is dependent on current market conditions and the need for balance in the Company’s portfolio of risks. On a quarterly basis, Management reviews and reports to the Risk and Finance Committee the actual limits deployed against the approved limits.
For a detailed discussion of these ten risk sources see Business—Risk Management in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The limits approved by the Board and the actual limits deployed at March 31, 2016 and December 31, 2015 were as follows (in billions of U.S. dollars, except interest rate risk data):
 
March 31, 2016
 
December 31, 2015
 
Limit
approved(2)
 
Actual
deployed(2)
 
Limit
approved(2)
 
Actual
deployed(2)
Natural Catastrophe Risk
$
2.3

 
$
1.3

 
$
2.3

 
$
1.3

Long Tail Reinsurance Risk
1.2

 
0.8

 
1.2

 
0.8

Market Risk
3.4

 
2.0

 
3.4

 
2.0

Equity and equity-like sublimit
2.8

 
1.4

 
2.8

 
1.4

Interest Rate Risk (duration)—excess fixed income investment portfolio(1)
6.0 years

 
3.0 years

 
6.0 years

 
3.0 years

Default and Credit Spread Risk
$
9.5

 
$
5.6

 
$
9.5

 
$
5.6

Trade Credit Underwriting Risk
0.9

 
0.6

 
0.9

 
0.6

Longevity Risk
2.0

 
1.5

 
2.0

 
1.5

Pandemic Risk
1.3

 
0.6

 
1.3

 
0.6

Agriculture Risk
0.3

 
0.1

 
0.3

 
0.1

Mortgage Reinsurance Risk
1.0

 
0.6

 
1.0

 
0.6

Any one country sub-limit
0.8

 
0.5

 
0.8

 
0.5

 
(1)
The excess fixed income investment portfolio relates to fixed income securities included in the Company’s capital funds, which are in excess of those included in the Company’s liability funds that support the net reinsurance liabilities.
(2)
The limits approved and the actual limits deployed in the table above are shown net of retrocession.
Natural Catastrophe Probable Maximum Loss (PML)
The following discussion of the Company’s natural catastrophe probable maximum loss (PML) information contains forward-looking statements based upon assumptions and expectations concerning the potential effect of future events that are subject to uncertainties. See Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a list of the Company’s risk factors. Any of these risk factors could result in actual losses that are materially different from the Company’s PML estimates below.
Natural catastrophe risk is a source of significant aggregate exposure for the Company and is managed by setting risk appetite and limits, as discussed above. The peril zones in the disclosure below are major peril zones for the industry.
The Company has exposures in other peril zones that can potentially generate losses greater than the PML estimates below. The Company’s PMLs represent an estimate of loss for a single event for a given return period. The table below discloses the Company’s 1-in-250 and 1-in-500 year return period estimated loss for a single occurrence of a natural catastrophe event in a one-year period. In other words, the 1-in-250 and 1-in-500 year return period PMLs mean that there is a 0.4% and 0.2% chance, respectively, in any given year that an occurrence of a natural catastrophe in a specific peril zone will lead to losses exceeding the stated estimate.
The PML estimates below include all significant exposure from our Non-life and Life and Health business operations. This includes coverage for property, marine, energy, engineering, workers’ compensation and mortality and exposure to catastrophe from insurance-linked securities. The PML estimates do not include casualty coverage that could be exposed as a result of a catastrophic event. In addition, they do not include estimates for contingent losses to insureds that are not directly impacted by the event (e.g. loss of earnings due to disruption in supply lines).
For additional information related to the Company’s natural catastrophe PML information and definitions, see Business—Natural Catastrophe Probable Maximum Loss (PML) in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Company’s single occurrence estimated net PML exposures (pre-tax and net of retrocession and reinstatement premiums) for certain selected peak industry natural catastrophe perils at January 1, 2016 were as follows (in millions of U.S. dollars):

33


 
 
 


 
 
 
 
Single Occurrence
Estimated Net PML Exposure
 
Zone
Peril
 
1-in-250 year PML
 
1-in-500 year PML
(Earthquake Perils Only)
U.S. Southeast
Hurricane
 
 
$
580

 
 
 

 
U.S. Northeast
Hurricane
 
 
701

 
 
 

 
U.S. Gulf Coast
Hurricane
 
 
596

 
 
 

 
Caribbean
Hurricane
 
 
180

 
 
 

 
Europe
Windstorm
 
 
461

 
 
 

 
Japan
Typhoon
 
 
195

 
 
 

 
California
Earthquake
 
 
553

 
 
 
$
699

 
British Columbia
Earthquake
 
 
196

 
 
 
358

 
Japan
Earthquake
 
 
335

 
 
 
383

 
Australia
Earthquake
 
 
241

 
 
 
325

 
New Zealand
Earthquake
 
 
133

 
 
 
197

 
Critical Accounting Policies and Estimates
Critical Accounting Policies and Estimates of the Company at March 31, 2016 have not changed materially compared to December 31, 2015. The following discussion updates specific information related to the Company’s estimates for losses and loss expenses and life policy benefits and valuation of investments and funds held – directly managed, including certain derivative financial instruments. See Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of the Company’s other critical accounting policies which are not specifically updated in this report given they have not changed materially compared to December 31, 2015.
Unpaid Losses and Loss Expenses
See Critical Accounting Policies and Estimates—Unpaid Losses and Loss Expenses in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information on the reserving methodologies employed by the Company, the principal reserving methods used for the reserving lines, the principal parameter assumptions underlying the methods and the main underlying factors upon which the estimates of reserving parameters are predicated.
The Company’s best estimate of total loss reserves is typically in excess of the midpoint of the actuarial ultimate liability estimate. The Company believes that there is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature underwriting years that may not be adequately captured through traditional actuarial projection methodologies as these methodologies usually rely heavily on projections of prior year trends into the future. In selecting its best estimate of future liabilities, the Company considers both the results of actuarial point estimates of loss reserves as well as the potential variability of these estimates as captured by a reasonable range of actuarial liability estimates. The selected best estimates of reserves are always within the reasonable range of estimates indicated by the Company’s actuaries.
During the three months ended March 31, 2016 and 2015, the Company reviewed its estimate for prior year losses for the Non-life segment (defined below in Results by Segment) and, in light of developing data, adjusted its ultimate loss ratios for prior accident years. The net prior year favorable loss development for each sub-segment of the Company’s Non-life segment for the three months ended March 31, 2016 and 2015 was as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Net Non-life prior year favorable loss development:
 
 
 
North America
$
81

 
$
82

Global (Non-U.S.) P&C
23

 
18

Global Specialty
69

 
110

Catastrophe
10

 
14

Total net Non-life prior year favorable loss development
$
183

 
$
224


34


 
 
 


The net Non-life prior year favorable loss development for the three months ended March 31, 2016 and 2015 was driven by the following factors (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Net Non-life prior year favorable (adverse) loss development:
 
 
 
Net prior year loss development due to changes in premiums(1)
$
19

 
$
(4
)
Net prior year loss development due to all other factors(2)
164

 
228

Total net Non-life prior year favorable loss development
$
183

 
$
224

 
(1)
Net prior year loss development due to changes in premiums includes, but it is not limited to, the impact to prior years’ reserves associated with decreases (increases) in the estimated or actual premium exposure reported by cedants.
(2)
Net prior year loss development due to all other factors includes, but is not limited to, loss experience, changes in assumptions and changes in methodology.
For a discussion of net prior year favorable loss development by Non-life sub-segment, see Results by Segment below. See Critical Accounting Policies and Estimates—Unpaid Losses and Loss Expenses in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information by reserving lines.
The gross reserves reported by cedants (case reserves), those estimated by the Company (ACRs and IBNR reserves) and the total gross, ceded and net loss reserves recorded at March 31, 2016 for each Non-life sub-segment were as follows (in millions of U.S. dollars):
 
Case
reserves
 
ACRs
 
IBNR
reserves
 
Total gross
loss reserves
 
Ceded loss
reserves
 
Total net
loss reserves
North America
$
884

 
$
103

 
$
2,243

 
$
3,230

 
$
(51
)
 
$
3,179

Global (Non-U.S.) P&C
1,178

 
10

 
913

 
2,101

 
(16
)
 
2,085

Global Specialty
1,534

 
73

 
2,085

 
3,692

 
(96
)
 
3,596

Catastrophe
184

 
29

 
95

 
308

 
(30
)
 
278

Total Non-life reserves
$
3,780

 
$
215

 
$
5,336

 
$
9,331

 
$
(193
)
 
$
9,138

The net loss reserves represent the Company’s best estimate of future losses and loss expense amounts based on the information available at March 31, 2016. Loss reserves rely upon estimates involving actuarial and statistical projections at a given time that reflect the Company’s expectations of the costs of the ultimate settlement and administration of claims. Estimates of ultimate liabilities are contingent on many future events and the eventual outcome of these events may be different from the assumptions underlying the reserve estimates. In the event that the business environment and social trends diverge from historical trends, the Company may have to adjust its loss reserves to amounts falling significantly outside its current estimate. These estimates are regularly reviewed and the ultimate liability may be in excess of, or less than, the amounts provided, for which any adjustments will be reflected in the period in which the need for an adjustment is determined.
The Company’s best estimates are point estimates within a reasonable range of actuarial liability estimates. These ranges are developed using stochastic simulations and techniques and provide an indication as to the degree of variability of the loss reserves. The Company interprets the ranges produced by these techniques as confidence intervals around the point estimates for each Non-life sub-segment. However, due to the inherent volatility in the business written by the Company, there can be no assurance that the final settlement of the loss reserves will fall within these ranges.
The point estimates related to net loss reserves recorded by the Company and the range of actuarial estimates at March 31, 2016 for each Non-life sub-segment were as follows (in millions of U.S. dollars):
 
Recorded Point
Estimate
 
High
 
Low
Net Non-life sub-segment loss reserves:
 
 
 
 
 
North America
$
3,179

 
$
3,440

 
$
2,605

Global (Non-U.S.) P&C
2,085

 
2,275

 
1,800

Global Specialty
3,596

 
4,016

 
2,995

Catastrophe
278

 
307

 
243


35


 
 
 


It is not appropriate to add together the ranges of each sub-segment in an effort to determine a high and low range around the Company’s total Non-life carried loss reserves.
Of the Company’s $9,138 million of net Non-life loss reserves at March 31, 2016, net loss reserves for accident years 2005 and prior of $547 million are guaranteed by Colisée Re, pursuant to the Reserve Agreement. The Company is not subject to any loss reserve variability associated with the guaranteed reserves. See Business—Reserves in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of the Reserve Agreement.
Policy Benefits for Life and Annuity Contracts
Policy benefits for life and annuity contracts relate to the Company’s Life and Health segment, which predominantly includes:
reinsurance of longevity, subdivided into standard and non-standard annuities primarily written in the United Kingdom (U.K.);
mortality business, which includes death and disability covers (with various riders) primarily written in Continental Europe, term assurance and critical illness primarily written in the U.K. and Ireland, and guaranteed minimum death benefit (GMDB) business primarily written in Continental Europe; and
specialty accident and health business, including Health Maintenance Organizations (HMO) reinsurance, medical reinsurance and provider and employer excess of loss programs primarily written in the U.S.
The Company’s reserving practices begin with the categorization of the contracts written as short duration, long duration, or universal life business for U.S. GAAP reserving purposes. This categorization determines the Company’s reserving methodology. See Critical Accounting Policies and Estimates—Policy Benefits for Life and Annuity Contracts in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information on the reserving methodologies employed by the Company for its longevity, mortality and accident and health lines.
The Company’s gross and net reserves for life and health contracts by reserving line at March 31, 2016 were as follows (in millions of U.S. dollars):
 
Case
reserves
 
IBNR
reserves
 
Reserves for
future policy
benefits
 
Total gross Life
and Health
reserves
 
Ceded
reserves
 
Total net Life 
and Health
reserves
Accident and Health
$
8

 
$
268

 
$

 
$
276

 
$
(40
)
 
$
236

Longevity
1

 
105

 
364

 
470

 
(3
)
 
467

Mortality
275

 
450

 
618

 
1,343

 


 
1,343

Total
$
284

 
$
823

 
$
982

 
$
2,089

 
$
(43
)
 
$
2,046

Valuation of Investments and Funds Held – Directly Managed, including certain Derivative Financial Instruments
The Company defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures the fair value of its financial instruments according to a fair value hierarchy that prioritizes the information used to measure fair value into three broad levels.
Under the fair value hierarchy, Management uses certain assumptions and judgments to derive the fair value of its investments, particularly for those assets with significant unobservable inputs, commonly referred to as Level 3 assets. At March 31, 2016, the Company’s financial instruments that were measured at fair value and categorized as Level 3 were as follows (in millions of U.S. dollars):
 
March 31, 2016
Fixed maturities
$
515

Equities
33

Other invested assets (including certain derivatives)
261

Funds held – directly managed account
10

Total
$
819


36


 
 
 


For additional information on the valuation techniques, methods and assumptions that were used by the Company to estimate the fair value of its fixed maturities, short-term investments, equities, other invested assets and investments underlying the funds held – directly managed account, see Note 4 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. For information on the Company’s use of derivative financial instruments, see Note 5 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Results of Operations—for the Three Months Ended March 31, 2016 and 2015
The following discussion of Results of Operations contains forward-looking statements based upon assumptions and expectations concerning the potential effect of future events that are subject to uncertainties. See Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a complete list of the Company’s risk factors. Any of these risk factors could cause actual results to differ materially from those reflected in such forward-looking statements.
The Company’s reporting currency is the U.S. dollar. The Company’s significant subsidiaries and branches have one of the following functional currencies: U.S. dollar, euro or Canadian dollar. As a significant portion of the Company’s operations is transacted in foreign currencies, fluctuations in foreign exchange rates may affect year over year comparisons. To the extent that fluctuations in foreign exchange rates affect comparisons, their impact has been quantified, when possible, and discussed in each of the relevant sections. See Note 2(m) to Consolidated Financial Statements in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of translation of foreign currencies.
The foreign exchange fluctuations for the principal currencies in which the Company transacts business were as follows:
the U.S. dollar average exchange rate was stronger against most currencies in the three months ended March 31, 2016 compared to the same period of 2015; and
the U.S. dollar ending exchange rate weakened against most currencies, except the British pound, at March 31, 2016 compared to December 31, 2015.
Review of Net Income
Management analyzes the Company’s net income or loss in three parts: underwriting result, investment result and other components of net income or loss. Underwriting result consists of net premiums earned and other income or loss less losses and loss expenses and life policy benefits, acquisition costs and other expenses. Investment result consists of net investment income, net realized and unrealized investment gains or losses and interest in earnings or losses of equity method investments. Net investment income includes interest, dividends and amortization, net of investment expenses, generated by the Company’s investment activities, as well as interest income generated on funds held assets. Net realized and unrealized investment gains or losses include sales of the Company’s fixed income, equity and other invested assets and investments underlying the funds held – directly managed account and changes in net unrealized gains or losses. Interest in earnings or losses of equity method investments includes the Company’s strategic investments. Other components of net income or loss include technical result and other income or loss, other expenses, interest expense, amortization of intangible assets, net foreign exchange gains or losses and income tax expense or benefit.

37


 
 
 


The components of net income for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Underwriting result:
 
 
 
Non-life
$
52

 
$
161

Life and Health
11

 
11

Investment result:
 
 
 
Net investment income
103

 
105

Net realized and unrealized investment gains
167

 
116

Interest in losses of equity method investments(1)
(3
)
 
(4
)
Corporate and Other:
 
 
 
Other income(2)
1

 
3

Other expenses
(67
)
 
(58
)
Interest expense
(12
)
 
(12
)
Amortization of intangible assets(3)
(7
)
 
(7
)
Net foreign exchange gains
2

 
13

Income tax expense
(31
)
 
(80
)
Net income
$
216

 
$
248

 
 
(1)
Interest in earnings or losses of equity method investments represents the Company’s aggregate share of earnings or losses related to several private placement investments and limited partnerships within the Corporate and Other segment.
(2)
Other income primarily relates to income on principal finance transactions within the Corporate and Other segment.
(3)
Amortization of intangible assets relates to intangible assets acquired in the acquisition of Paris Re in 2009 and PartnerRe Health in 2012.
Underwriting result is a measurement that the Company uses to manage and evaluate its Non-life and Life and Health segments, as it is a primary measure of underlying profitability for the Company’s core reinsurance operations, separate from the investment results. The Company believes that in order to enhance the understanding of its profitability, it is useful for users of its financial statements to evaluate the components of net income or loss separately and in the aggregate. Underwriting result should not be considered a substitute for net income or loss and does not reflect the overall profitability of the business, which is also impacted by investment results and other items.
The components of the underwriting result and combined ratio for the Non-life segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Current accident year technical result and ratio
$
(53
)
 
106.1
 %
 
$
(11
)
 
101.3
 %
Prior accident years technical result and ratio
 
 
 
 
 
 
 
Profit commissions in the North America agriculture line of business
(12
)
 
1.4

 

 

Net favorable prior year loss development
183

 
(21.0
)
 
224

 
(24.0
)
Technical result and ratio, as reported
$
118

 
86.5
 %
 
$
213

 
77.3
 %
Other income
2

 

 

 

Other expenses
(68
)
 
7.8

 
(52
)
 
5.5

Underwriting result and combined ratio, as reported
$
52

 
94.3
 %
 
$
161

 
82.8
 %
The underwriting result for the Non-life segment decreased by $109 million (corresponding to an increase of 11.5% in the combined ratio), from $161 million (82.8% on the combined ratio) in the three months ended March 31, 2015 to $52 million (94.3% points on the combined ratio) in the same period of 2016 primarily due to:
The current accident year technical result—a decrease in the technical result (and corresponding increase in the technical ratio) which was primarily related to higher downward premium adjustments in the Global (Non-U.S.) P&C and Global

38


 
 
 


Specialty sub-segments and a shift in the mix of business in the North America sub-segment. These decreases were partially offset by a lower level of mid-sized loss activity.
Net favorable prior year loss development—a decrease of $41 million (an increase of 3.0 points in the technical ratio) from $224 million (24.0 points on the technical ratio) in the three months ended March 31, 2015 to $183 million (21.0 points on the technical ratio) in the same period of 2016. The decrease in net favorable prior year loss development was primarily driven by the Global Specialty sub-segment. The components of the net favorable prior year loss development are described in more detail in the discussion of individual sub-segments in Results by Segment below.
Other expenses—an increase of $16 million (a decrease of 2.3 points in the combined ratio) from $52 million (5.5 points on the combined ratio) in the three months ended March 31, 2015 to $68 million (7.8 points on the combined ratio) in the same period of 2016, primarily as a result of the vesting of stock-based awards, as discussed in Executive Overview above.
Profit commissions in the North America agriculture line of business—a decline in the technical result of $12 million (and a corresponding increase in the technical ratio of 1.4%) in the three months ended March 31, 2016 compared to the same period of 2015 as a result of profit commission adjustments related to net favorable prior year loss development on the 2015 crop year in the North America sub-segment.
The underwriting result for the Life and Health segment, which does not include allocated investment income, of $11 million in the three months ended March 31, 2016 was comparable to the same period of 2016. See Results by Segment below.
Net investment income decreased by $2 million, from $105 million in the three months ended March 31, 2015 to $103 million in the same period of 2016. The decrease in net investment income was primarily attributable to lower dividend income from the equity portfolio following certain asset reallocations from equities to fixed income and the strengthening of the U.S. dollar against most major currencies, partially offset by a modest increase in income from fixed maturities. See Corporate and Other – Net Investment Income below for more details.
Net realized and unrealized investment gains increased by $51 million, from $116 million in the three months ended March 31, 2015 to $167 million in the same period of 2016. The net realized and unrealized investment gains of $167 million in the three months ended March 31, 2016 were primarily due to decreases in U.S. and European risk-free interest rates, which were partially offset by losses on treasury note futures. See Corporate and Other—Net Realized and Unrealized Investment Gains below for more details.
Other expenses included in Corporate and Other increased by $9 million, from $58 million in the three months ended March 31, 2015 to $67 million in the same period of 2016. The increase was primarily due to higher transaction costs related to the Merger in the three months ended March 31, 2016 compared to the costs related to the terminated Amalgamation Agreement with AXIS in the same period of 2015.
Interest expense in the three months ended March 31, 2016 was comparable to the same period of 2015.
Net foreign exchange gains decreased by $11 million, from $13 million in the three months ended March 31, 2015 to $2 million in the same period of 2016. The net foreign exchange gains of $2 million in the three months ended March 31, 2016 resulted primarily from differences in forward points embedded in the Company’s hedges, partially offset by the impact of certain unhedged investment portfolios. The Company hedges a significant portion of its currency risk exposure as discussed in Quantitative and Qualitative Disclosures about Market Risk in Item 3 of Part I of this report.
Income tax expense decreased by $49 million, from $80 million in the three months ended March 31, 2015 to $31 million in the same period of 2016, primarily reflecting the geographical distribution of the Company’s pre-tax net income between its taxable and non-taxable jurisdictions and lower pre-tax net income. See Corporate and Other—Income Taxes below for more details.
Results by Segment
The Company monitors the performance of its operations in three segments, Non-life, Life and Health and Corporate and Other. The Non-life segment is further divided into four sub-segments, North America, Global (Non-U.S.) Property and Casualty (Global (Non-U.S.) P&C), Global Specialty and Catastrophe. Segments and sub-segments represent markets that are reasonably homogeneous in terms of geography, client types, buying patterns, underlying risk patterns and approach to risk management. See the description of the Company’s segments and sub-segments as well as a discussion of how the Company measures its segment results in Note 21 to Consolidated Financial Statements included in Item 8 of Part II of Form 10-K for the year ended December 31, 2015 and in Note 9 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.
Non-life Segment

39


 
 
 


North America
The North America sub-segment is comprised of lines of business that are considered to be either short, medium or long-tail. The short-tail lines consist primarily of agriculture, property and motor business. Casualty is considered to be long-tail, while credit/surety and multiline are considered to have a medium tail. The casualty line typically tends to have a higher loss ratio and a lower technical result due to the long-tail nature of the risks involved. Casualty treaties typically provide for investment income on premiums invested over a longer period as losses are typically paid later than for other lines. Investment income, however, is not considered in the calculation of technical result.
The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Gross premiums written
$
494

 
$
473

Net premiums written
481

 
471

Net premiums earned
$
352

 
$
339

Losses and loss expenses
(199
)
 
(172
)
Acquisition costs
(107
)
 
(93
)
Technical result (1)
$
46

 
$
74

Loss ratio (2)
56.5
%
 
50.7
%
Acquisition ratio (3)
30.4

 
27.5

Technical ratio (4)
86.9
%
 
78.2
%
 
(1)
Technical result is defined as net premiums earned less losses and loss expenses and acquisition costs.
(2)
Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.
(3)
Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.
(4)
Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.
Premiums
The North America sub-segment represented 32% and 28% of total net premiums written in the three months ended March 31, 2016 and 2015, respectively. The net premiums written and net premiums earned by line of business for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):

 
For the three months ended March 31, 2016
 
For the three months ended March 31, 2015
 
Net premiums written
 
Net premiums earned
 
Net premiums written
 
Net premiums earned
Agriculture
$
168

 
35
%
 
$
98

 
28
%
 
$
141

 
30
%
 
$
65

 
19
%
Casualty
163

 
34

 
140

 
40

 
163

 
35

 
143

 
42

Credit/Surety
26

 
5

 
21

 
6

 
30

 
7

 
25

 
8

Motor
14

 
3

 
15

 
4

 
20

 
4

 
20

 
6

Multiline
46

 
10

 
34

 
10

 
49

 
10

 
31

 
9

Property
49

 
10

 
32

 
9

 
62

 
13

 
51

 
15

Other
15

 
3

 
12

 
3

 
6

 
1

 
4

 
1

Total
$
481

 
100
%
 
$
352

 
100
%
 
$
471

 
100
%
 
$
339

 
100
%

40


 
 
 


Business reported in this sub-segment is, to an extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2016 compared to the same period of 2015 was as follows:
 
 
Gross premiums written
 
Net premiums written
 
Net premiums earned
Increase in original currency
 
5
 %
 
3
 %
 
4
%
Foreign exchange effect
 
(1
)
 
(1
)
 

Increase as reported in U.S. dollars
 
4
 %
 
2
 %
 
4
%
Gross and net premiums written and net premiums earned increased by 5%, 3% and 4% on a constant foreign exchange basis, respectively, in the three months ended March 31, 2016 compared to the same period of 2015. The increase in gross premiums written was primarily driven by the timing of renewals in the agriculture and casualty lines of business and new business written in the casualty and structured property lines of business. These increases were partially offset by cancellations, higher downward prior year premium adjustments and renewal changes in the casualty, property and agriculture lines of business. The increases in net premiums written and earned were driven by the same factors as the increase in gross premiums written, partially offset by higher premiums ceded in the credit/surety line of business. Notwithstanding the competitive conditions prevailing in various markets within this sub-segment, the Company was able to write business that met its portfolio objectives.
Technical result and technical ratio
The components of the technical result and ratio for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Current accident year technical result and ratio
$
(23
)
 
106.4
 %
 
$
(8
)
 
102.5
 %
Prior accident years technical result and ratio
 
 
 
 
 
 
 
Profit commissions in the agriculture line of business
(12
)
 
3.4

 

 

Net favorable prior year loss development
81

 
(22.9
)
 
82

 
(24.3
)
Technical result and ratio, as reported
$
46

 
86.9
 %
 
$
74

 
78.2
 %

The decrease of $28 million in the technical result (and the corresponding increase of 8.7 points in the technical ratio) in the three months ended March 31, 2016 compared to the same period of 2015 was primarily attributable to:
The current accident year technical result—a decline in the technical result (and corresponding increase in the technical ratio) primarily due to a change in the mix of business to lines that carry a higher technical ratio and normal fluctuations in profitability between periods.
Profit commissions in the agriculture line of business—a decline in the technical result of $12 million (and a corresponding increase in the technical ratio of 3.4%) in the three months ended March 31, 2016 compared to the same period of 2015 as a result of profit commission adjustments related to net favorable prior year loss development from the 2015 crop year.
Net favorable prior year loss development of $81 million (22.9 points on the technical ratio) in the three months ended March 31, 2016 was comparable to the same period of 2015. The net favorable loss development for prior accident years in the three months ended March 31, 2016 was driven by most lines of business, predominantly the casualty and agriculture lines. The net favorable loss development for prior accident years in the three months ended March 31, 2015 was driven by most lines of business, predominantly the casualty line.
Global (Non-U.S.) P&C
The Global (Non-U.S.) P&C sub-segment is composed of short-tail business, in the form of property and proportional motor business, that represented approximately 77% of net premiums written in the three months ended March 31, 2016 and 2015 and long-tail business, in the form of casualty and non-proportional motor business, that represented the balance of net premiums written.

41


 
 
 


The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Gross premiums written
$
274

 
$
334

Net premiums written
269

 
331

Net premiums earned
$
150

 
$
174

Losses and loss expenses
(123
)
 
(119
)
Acquisition costs
(47
)
 
(52
)
Technical result
$
(20
)
 
$
3

Loss ratio
82.1
%
 
68.4
%
Acquisition ratio
31.1

 
30.1

Technical ratio
113.2
%
 
98.5
%
Premiums
The Global (Non-U.S.) P&C sub-segment represented 18% and 20% of total net premiums written in the three months ended March 31, 2016 and 2015, respectively. The net premiums written and net premiums earned by line of business for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended March 31, 2016
 
For the three months ended March 31, 2015
 
Net premiums written
 
Net premiums earned
 
Net premiums written
 
Net premiums earned
Casualty
$
25

 
9
%
 
$
13

 
9
%
 
$
33

 
10
%
 
$
15

 
9
%
Motor
90

 
33

 
61

 
40

 
120

 
36

 
70

 
40

Property
154

 
58

 
76

 
51

 
178

 
54

 
89

 
51

Total
$
269

 
100
%
 
$
150

 
100
%
 
$
331

 
100
%
 
$
174

 
100
%
Business reported in this sub-segment is, to a significant extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2016 compared to the same period of 2015 was as follows:
 
 
Gross premiums written
 
Net premiums written
 
Net premiums earned
Decrease in original currency
 
(11
)%
 
(11
)%
 
(7
)%
Foreign exchange effect
 
(7
)
 
(8
)
 
(7
)
Decrease as reported in U.S. dollars
 
(18
)%
 
(19
)%
 
(14
)%
Gross and net premiums written decreased by 11% and net premiums earned decreased by 7% on a constant foreign exchange basis in the three months ended March 31, 2016 compared to the same period of 2015. The decreases in gross and net premiums written on a constant foreign exchange basis resulted primarily from higher downward prior year premium adjustments, cancellations and reduced participations in the motor line of business. The decrease in net premiums earned was driven by the same factors as the decrease in gross and net premiums written, partially offset by the earning of new property and motor business written in 2015. Notwithstanding the continued competitive conditions in most markets, the Company was able to write business that met its portfolio objectives.

42


 
 
 


Technical result and technical ratio
The components of the technical result and ratio for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
 
 
 
 
Current accident year technical result and ratio
$
(43
)
 
128.7
 %
 
$
(15
)
 
108.9
 %
Prior accident years technical result and ratio
 
 
 
 
 
 
 
Net favorable prior year loss development
23

 
(15.5
)
 
18

 
(10.4
)
Technical result and ratio, as reported
$
(20
)
 
113.2
 %
 
$
3

 
98.5
 %
The decrease of $23 million in the technical result (and the corresponding increase of 14.7 points in the technical ratio) in the three months ended March 31, 2016 compared to the same period of 2015 was primarily attributable to:
The current accident year technical result—a decline in the technical result (and corresponding increase in the technical ratio) primarily due to higher downward prior year premium adjustments, a higher level of mid-sized loss activity and normal fluctuations in profitability between periods.
This factor driving the decrease in the technical result in the three months ended March 31, 2016 compared to the same period of 2015 was partially offset by:
Net favorable prior year loss development—an increase of $5 million (decrease of 5.1 points in the technical ratio) from $18 million (10.4 points on the technical ratio) in the three months ended March 31, 2015 to $23 million (15.5 points on the technical ratio) in the same period of 2016. The net favorable loss development for prior accident years in the three months ended March 31, 2016 was driven by all lines of business, with the motor and property lines being the most pronounced. The net favorable loss development for prior accident years in the three months ended March 31, 2015 was driven by most lines of business, with the property line being the most pronounced.
Global Specialty
The Global Specialty sub-segment is primarily comprised of lines of business that are considered to be either short, medium or long-tail. The short-tail lines consist of agriculture, energy and specialty property. Aviation/space, credit/surety, engineering, marine and multiline are considered to have a medium tail, while specialty casualty is considered to be long-tail.
The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Gross premiums written
$
398

 
$
427

Net premiums written
333

 
362

Net premiums earned
$
322

 
$
365

Losses and loss expenses
(184
)
 
(170
)
Acquisition costs
(90
)
 
(93
)
Technical result
$
48

 
$
102

Loss ratio
57.2
%
 
46.7
%
Acquisition ratio
27.8

 
25.4

Technical ratio
85.0
%
 
72.1
%
Premiums
The Global Specialty sub-segment represented 22% of total net premiums written in the three months ended March 31, 2016 and 2015. The net premiums written and net premiums earned by line of business for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):


43


 
 
 


 
For the three months ended March 31, 2016
 
For the three months ended March 31, 2015
 
Net premiums written
 
Net premiums earned
 
Net premiums written
 
Net premiums earned
Agriculture
$
35

 
10
%
 
$
20

 
6
%
 
$
53

 
15
%
 
$
32

 
9
%
Aviation/Space
32

 
10

 
43

 
13

 
39

 
11

 
51

 
14

Credit/Surety
67

 
20

 
51

 
16

 
59

 
16

 
55

 
15

Energy
16

 
5

 
14

 
4

 
17

 
4

 
20

 
5

Engineering
37

 
11

 
34

 
11

 
39

 
11

 
42

 
12

Marine
40

 
12

 
49

 
15

 
40

 
11

 
50

 
14

Multiline
36

 
11

 
40

 
12

 
44

 
12

 
34

 
9

Specialty casualty
46

 
14

 
31

 
10

 
40

 
11

 
36

 
10

Specialty property
24

 
7

 
40

 
13

 
31

 
9

 
45

 
12

Total
$
333

 
100
%
 
$
322

 
100
%
 
$
362

 
100
%
 
$
365

 
100
%
Business reported in this sub-segment is, to a significant extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2016 compared to the same period of 2015 was as follows:
 
 
Gross premiums written
 
Net premiums written
 
Net premiums earned
Decrease in original currency
 
(2
)%
 
(3
)%
 
(8
)%
Foreign exchange effect
 
(5
)
 
(5
)
 
(4
)
Decrease as reported in U.S. dollars
 
(7
)%
 
(8
)%
 
(12
)%
Gross and net premiums written and net premiums earned decreased by 2%, 3% and 8% on a constant foreign exchange basis, respectively, in the three months ended March 31, 2016 compared to the same period of 2015. The decreases in gross and net premiums written on a constant foreign exchange basis were mainly driven by cancellations, reduced participations and higher downward prior year premium adjustments. These decreases were partially offset by new business written in all lines of business and a timing difference related to a significant treaty in the specialty casualty line of business. The decrease in net premiums earned was higher than the decreases in gross and net premiums written mainly as a result of net premiums earned reflecting the lower premiums that were written during 2015. Notwithstanding the diverse conditions prevailing in various markets within this sub-segment, the Company was able to write business that met its portfolio objectives.
Technical result and technical ratio
The components of the technical result and ratio for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Current accident year technical result and ratio
$
(21
)
 
106.4
 %
 
$
(8
)
 
102.1
 %
Prior accident years technical result and ratio
 
 
 
 
 
 
 
Net favorable prior year loss development
69

 
(21.4
)
 
110

 
(30.0
)
Technical result and ratio, as reported
$
48

 
85.0
 %
 
$
102

 
72.1
 %
The decrease of $54 million in the technical result (and the corresponding increase of 12.9 points in the technical ratio) in the three months ended March 31, 2016 compared to the same period of 2015 was primarily attributable to:
Net favorable prior year loss development—a decrease of $41 million (increase of 8.6 points in the technical ratio) from $110 million (30.0 points on the technical ratio) in the three months ended March 31, 2015 to $69 million (21.4 points on the technical ratio) in the same period of 2016. The net favorable loss development for prior accident years in the three months ended March 31, 2016 was driven by most lines of business, primarily the specialty casualty and credit/surety lines. The net favorable loss development for prior accident years in the three months ended March 31, 2015 was driven by most lines of business, primarily the marine, specialty casualty, aviation/space and credit/surety lines.
The current accident year technical result—a deterioration in the technical result (and a corresponding increase in the technical ratio) mainly due to higher downward prior year premium adjustments, an increase in the acquisition cost ratio,

44


 
 
 


driven by higher profit commission adjustments and timing differences, and normal fluctuations in profitability between periods. These decreases were partially offset by a lower level of mid-sized loss activity.
Catastrophe
The Catastrophe sub-segment writes business predominantly on a non-proportional basis and is exposed to volatility resulting from catastrophic losses. The varying amounts of catastrophic losses from period to period can significantly impact the technical result and ratio of this sub-segment and affect period over period comparisons and, as a result, profitability in any one quarter is not necessarily predictive of future profitability. The sub-segment’s results for both the three months ended March 31, 2016 and 2015 included no catastrophic loss activity.
The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Gross premiums written
$
170

 
$
191

Net premiums written
141

 
176

Net premiums earned
$
48

 
$
58

Losses and loss expenses
(3
)
 
(20
)
Acquisition costs
(1
)
 
(4
)
Technical result
$
44

 
$
34

Loss ratio
7.2
%
 
33.7
%
Acquisition ratio
3.1

 
7.0

Technical ratio
10.3
%
 
40.7
%
Premiums
The Catastrophe sub-segment represented 10% and 11% of total net premiums written in the three months ended March 31, 2016 and 2015, respectively.
Business reported in this sub-segment is, to an extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2016 compared to the same period of 2015 was as follows:

 
 
Gross premiums written
 
Net premiums written
 
Net premiums earned
Decrease in original currency
 
(7
)%
 
(16
)%
 
(11
)%
Foreign exchange effect
 
(3
)
 
(4
)
 
(6
)
Decrease as reported in U.S. dollars
 
(10
)%
 
(20
)%
 
(17
)%
Gross and net premiums written and net premiums earned decreased by 7%, 16% and 11% on a constant foreign exchange basis, respectively, in the three months ended March 31, 2016 compared to the same period of 2015. The decrease in gross premiums written was primarily due to the timing of renewals, cancellations and non-renewals, and was partially offset by new business written. The decrease in net premiums written and earned was driven by the same factors as well as higher premiums ceded under the Company’s retrocessional programs.

45


 
 
 


Technical result and technical ratio
The components of the technical result and ratio for this sub-segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Current accident year technical result and ratio
$
34

 
32.3
 %
 
$
20

 
65.0
 %
Prior accident years technical result and ratio
 
 
 
 
 
 
 
Net favorable prior year loss development
10

 
(22.0
)
 
14

 
(24.3
)
Technical result and ratio, as reported
$
44

 
10.3
 %
 
$
34

 
40.7
 %
The increase of $10 million in the technical result (and the corresponding decrease of 30.4 points in the technical ratio) in the three months ended March 31, 2016 compared to the same period of 2015 was primarily attributable to:
The current accident year technical result—an increase in the technical result (and corresponding decrease in the technical ratio) primarily due to a lower level of mid-sized loss activity and normal fluctuations in profitability between periods.
This factor driving the increase in the technical result and a decrease in the technical ratio in the three months ended March 31, 2016 compared to the same period of 2015 was partially offset by:
Net favorable prior year loss development—a decrease of $4 million (increase of 2.3 points in the technical ratio) from $14 million (24.3 points on the technical ratio) in the three months ended March 31, 2015 to $10 million (22.0 points on the technical ratio) in the same period of 2016. The net favorable loss development for prior accident years in the three months ended March 31, 2016 and 2015 was primarily due to net favorable loss emergence.
Life and Health Segment
The Company’s Life and Health segment includes the mortality, longevity and accident and health lines of business written primarily in the U.K., Ireland and France and accident and health business written in the U.S.
The components of the allocated underwriting result for this segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Gross premiums written
$
293

 
$
324

Net premiums written
277

 
313

Net premiums earned
$
270

 
$
299

Life policy benefits
(205
)
 
(240
)
Acquisition costs
(38
)
 
(34
)
Technical result
$
27

 
$
25

Other income
2

 
1

Other expenses
(18
)
 
(15
)
Net investment income
13

 
14

Allocated underwriting result (1)
$
24

 
$
25

 
 
(1) Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs and other expenses.
Premiums
The Life and Health segment represented 18% and 19% of total net premiums written in the three months ended March 31, 2016 and 2015, respectively. The net premiums written and net premiums earned by line of business for this segment for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):


46


 
 
 


 
For the three months ended March 31, 2016
 
For the three months ended March 31, 2015
 
Net premiums written
 
Net premiums earned
 
Net premiums written
 
Net premiums earned
Accident and Health
$
77

 
28
%
 
$
78

 
29
%
 
$
84

 
27
%
 
$
85

 
28
%
Longevity
70

 
25

 
70

 
26

 
69

 
22

 
69

 
23

Mortality
130

 
47

 
122

 
45

 
160

 
51

 
145

 
49

Total
$
277

 
100
%
 
$
270

 
100
%
 
$
313

 
100
%
 
$
299

 
100
%
Business reported in this segment is, to a significant extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2016 compared to the same period of 2015 was as follows:
 
 
Gross premiums written
 
Net premiums written
 
Net premiums earned
Decrease in original currency
 
(5
)%
 
(7
)%
 
(5
)%
Foreign exchange effect
 
(5
)
 
(5
)
 
(5
)
Decrease as reported in U.S. dollars
 
(10
)%
 
(12
)%
 
(10
)%
Gross and net premiums written and net premiums earned decreased by 5%, 7% and 5% on a constant foreign exchange basis, respectively, in the three months ended March 31, 2016 compared to the same period of 2015. The decreases in gross and net premiums written and net premiums earned were driven by the mortality and accident and health lines of business. The decrease in the mortality line of business resulted from downward prior year premium adjustments on a significant contract and non-renewals of certain treaties, partially offset by new business written. The decrease in the accident and health line was primarily driven by continued competitive market conditions and increased cedant retentions.
Allocated underwriting result
The allocated underwriting result of $24 million in the three months ended March 31, 2016 was comparable to the same period of 2015. The allocated underwriting result in the three months ended March 31, 2016 included a higher level of other expenses driven by the vesting of stock-based awards related to the Merger, which was almost entirely offset by a modestly higher level of favorable prior year loss development and modestly higher other income.
The net favorable prior year loss development increased modestly from $14 million in the three months ended March 31, 2015 to $15 million in the three months ended March 31, 2016. The net favorable prior year loss development of $15 million during the three months ended March 31, 2016 was primarily related to the Health business, the GMDB business, driven mainly by updated lapse assumptions, and the short-term mortality business. The net favorable prior year loss development of $14 million during the three months ended March 31, 2015 was primarily related to the Health business, improvements in the capital markets which had a positive impact on the GMDB business, and the short-term mortality business.

47


 
 
 


Premium Distribution by Line of Business
The distribution of net premiums written by line of business for the three months ended March 31, 2016 and 2015 was as follows:
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Non-life
 
 
 
Property and casualty
 
 
 
Casualty
13
%
 
12
%
Motor
7

 
8

Multiline and other
6

 
6

Property
14

 
15

Specialty
 
 
 
Agriculture
13

 
12

Aviation / Space
2

 
2

Catastrophe
10

 
11

Credit / Surety
6

 
5

Energy
1

 
1

Engineering
2

 
2

Marine
3

 
2

Specialty casualty
3

 
3

Specialty property
2

 
2

Life and Health
18

 
19

Total
100
%
 
100
%
The changes in the distribution of net premiums written by line of business between the three months ended March 31, 2016 and the same period of 2015 reflected the Company’s response to existing market conditions and may also be affected by the timing of renewals of treaties, a change in treaty structure, premium adjustments reported by cedants and significant increases or decreases in other lines of business. In addition, foreign exchange fluctuations affected the comparison for all lines.
The distribution of net premiums written by line of business in the three months ended March 31, 2016 was comparable to the same period of 2015.
Premium Distribution by Reinsurance Type
The Company typically writes business on either a proportional or non-proportional basis. On proportional business, the Company shares proportionally in both the premiums and losses of the cedant. On non-proportional business, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio. In both proportional and non-proportional business, the Company typically reinsures a large group of primary insurance contracts written by the ceding company. In addition, the Company writes business on a facultative basis. Facultative arrangements are generally specific to an individual risk and can be written on either a proportional or non-proportional basis. Generally, the Company has more influence over pricing, as well as terms and conditions, in non-proportional and facultative arrangements.
The distribution of gross premiums written by reinsurance type for the three months ended March 31, 2016 and 2015 was as follows:

48


 
 
 


 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Non-life segment
 
 
 
Proportional
48
%
 
47
%
Non-proportional
28

 
28

Facultative
6

 
6

Life and Health segment
 
 
 
Proportional
17

 
17

Non-proportional
1

 
2

Total
100
%
 
100
%

The distribution of gross premiums written by reinsurance type is affected by changes in the allocation of capacity among lines of business, the timing of receipt by the Company of cedant accounts and premium adjustments reported by cedants. In addition, foreign exchange fluctuations affected the comparison for all treaty types.
The distribution of gross premiums written by reinsurance type for the three months ended March 31, 2016 was comparable to the same period of 2015.
Premium Distribution by Geographic Region
The geographic distribution of gross premiums written based on the location of the underlying risk for the three months ended March 31, 2016 and 2015 was as follows:
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Asia, Australia and New Zealand
9
%
 
10
%
Europe
40

 
43

Latin America, Caribbean and Africa
9

 
9

North America
42

 
38

Total
100
%
 
100
%
The decrease in the relative distribution of gross premiums written in Europe during the three months ended March 31, 2016 compared to the same period of 2015 was primarily due to the impact of the strengthening of the U.S. dollar against the euro and the increase in gross premiums written in North America. The increase in gross premiums written in North America was driven by the timing of renewals in the agriculture and casualty lines of business and new business written in the casualty and structured property lines of business, as discussed in the North America sub-segment above.
Premium Distribution by Production Source
The Company generates its gross premiums written both through brokers and through direct relationships with cedants. The percentage of gross premiums written by production source for the three months ended March 31, 2016 and 2015 was as follows:
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Broker
72
%
 
69
%
Direct
28

 
31

Total
100
%
 
100
%
The percentage of gross premiums written through brokers in the three months ended March 31, 2016 increased compared to the same period of 2015 due to an increase in gross premiums written in the North America sub-segment both on an absolute and relative basis, as discussed above, and which is primarily written through brokers.
Corporate and Other
Corporate and Other is comprised of the Company’s investment and corporate activities, including other expenses.

49


 
 
 


Net Investment Income
Net investment income by asset source for the three months ended March 31, 2016 and 2015 was as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Fixed maturities
$
104

 
$
103

Equities
2

 
6

Funds held and other
7

 
5

Funds held – directly managed
3

 
3

Investment expenses
(13
)
 
(12
)
Net investment income
$
103

 
$
105

Because of the interest-sensitive nature of some of the Company’s life products, net investment income is considered in Management’s assessment of the profitability of the Life and Health segment (see Life and Health segment above). The above table and the following discussion includes net investment income from all investment activities, including the net investment income allocated to the Life and Health segment.
Net investment income decreased in the three months ended March 31, 2016 compared to the same period of 2015 due to:
lower dividend income from the equity portfolio following certain asset reallocations from equities to fixed income; and
the strengthening of the U.S. dollar against most major currencies, which resulted in a 3% decrease in net investment income; partially offset by
an increase in net investment income from fixed maturities primarily due to a negative adjustment recorded in the three months ended March 31, 2015 related to an increase in the U.S. Consumer Price Index which impacted the Company’s Treasury Inflation-Protected Securities portfolio.
Net Realized and Unrealized Investment Gains
The Company’s portfolio managers have dual investment objectives of optimizing current investment income and achieving capital appreciation. To meet these objectives, it is often desirable to buy and sell securities to take advantage of changing market conditions and to reposition the investment portfolios. Accordingly, recognition of realized gains and losses is considered by the Company to be a normal consequence of its ongoing investment management activities. In addition, the Company records changes in fair value for substantially all of its investments as unrealized investment gains or losses in its Condensed Consolidated Statements of Operations. Realized and unrealized investment gains and losses are generally a function of multiple factors, with the most significant being prevailing interest rates, credit spreads, and equity market conditions.
The components of net realized and unrealized investment gains for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Net realized investment (losses) gains on fixed maturities and short-term investments
$
(4
)
 
$
52

Net realized investment gains on equities
10

 
20

Net realized investment losses on other invested assets
(33
)
 
(8
)
Change in net unrealized investment gains (losses) on other invested assets
3

 
(21
)
Change in net unrealized investment gains on fixed maturities and short-term investments
212

 
77

Change in net unrealized investment losses on equities
(27
)
 
(7
)
Net realized and unrealized investment gains on funds held – directly managed
6

 
3

Net realized and unrealized investment gains
$
167

 
$
116

Net realized and unrealized investment gains increased by $51 million, from $116 million in the three months ended March 31, 2015 to $167 million in the same period of 2016. The net realized and unrealized investment gains of $167 million in

50


 
 
 


the three months ended March 31, 2016 were primarily due to decreases in U.S. and European risk-free interest rates, which were partially offset by losses on treasury note futures. Net realized and unrealized investment gains of $116 million in the three months ended March 31, 2015 were primarily due to decreases in U.S. and European risk-free interest rates and modest improvements in equity markets, which were partially offset by losses on treasury note futures.
Net realized losses and the change in net unrealized investment losses on other invested assets were a combined loss of $30 million in the three months ended March 31, 2016 primarily related to treasury note futures, partially offset by realized and unrealized gains on to-be-announced mortgage-backed securities (TBAs). The combined loss of $29 million for the same period of 2015 primarily related to treasury note futures.
Other Expenses
The Company’s total other expenses for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Other expenses, as reported
$
153

 
$
125

Transaction related costs
(66
)
 
(31
)
Other expenses, as adjusted for transaction related costs
87

 
94

Other expenses, as adjusted, as a % of total net premiums earned (Non-life and Life and Health)
7.6
%
 
7.6
%
Other expenses increased by $28 million, or 23%, from $125 million in the three months ended March 31, 2015 to $153 million in the same period of 2016 primarily due to higher transaction related costs associated with the Merger in the three months ended March 31, 2016 compared to costs related to the terminated Amalgamation Agreement with AXIS in the same period in 2015, as described in Executive Overview above. After adjusting for transaction related costs, other expenses decreased by $7 million, from $94 million in the three months ended March 31, 2015 to $87 million in the same period of 2016 due to lower personnel costs.
Income Taxes
The effective income tax rate, which the Company calculates as income tax expense or benefit divided by net income or loss before taxes, may fluctuate significantly from period to period depending on the geographic distribution of pre-tax net income or loss in any given period between different jurisdictions with comparatively higher tax rates and those with comparatively lower tax rates. The geographic distribution of pre-tax net income or loss can vary significantly between periods due to, but not limited to, the following factors: the business mix of net premiums written and earned, the geographic location, quantum and nature of net losses and loss expenses incurred, the quantum and geographic location of other expenses, net investment income, net realized and changes in unrealized investment gains and losses and the quantum of specific adjustments to determine the income tax basis in each of the Company’s operating jurisdictions. In addition, a significant portion of the Company’s gross and net premiums are currently written and earned in Bermuda, a non-taxable jurisdiction, including the majority of the Company’s catastrophe business, which can result in significant volatility in the Company’s pre-tax net income or loss from period to period.
The Company’s income tax expense and effective income tax rate for the three months ended March 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Income tax expense
$
31

 
$
80

Effective income tax rate
12.6
%
 
24.3
%
Income tax expense and the effective income tax rate during the three months ended March 31, 2016 were $31 million and 12.6%, respectively. Income tax expense and the effective income tax rate during the three months ended March 31, 2016 were primarily driven by the geographic distribution of the Company’s pre-tax net income between its various taxable and non-taxable jurisdictions. Specifically, the income tax expense and the effective income tax rate reflect a relatively even distribution of the pre-tax income between the Company’s taxable and non-taxable jurisdictions. The Company’s pre-tax net income recorded in taxable jurisdictions was driven by net realized and unrealized investment gains, strong net favorable prior year loss development and a release of an uncertain tax position following agreement with the local tax authority. The Company’s pre-tax

51


 
 
 


net income recorded in non-taxable jurisdictions and jurisdictions with comparatively lower tax rates was driven by the absence of large catastrophic losses and strong net favorable prior year loss development, which were partially offset by transaction related costs.
Income tax expense and the effective income tax rate during the three months ended March 31, 2015 were $80 million and 24.3%, respectively. Income tax expense and the effective income tax rate during the three months ended March 31, 2015 were primarily driven by the geographic distribution of the Company’s pre-tax net income between its various taxable and non-taxable jurisdictions. Specifically, the income tax expense and the effective income tax rate reflect approximately half of the Company’s pre-tax net income being recorded in its taxable jurisdictions. The Company’s pre-tax net income recorded in taxable jurisdictions was driven by net realized and unrealized investment gains, foreign exchange gains and strong net favorable prior year loss development. The Company’s pre-tax net income recorded in non-taxable jurisdictions and jurisdictions with comparatively lower tax rates was driven by the absence of large catastrophic losses, strong net favorable prior year loss development and costs related to the terminated Amalgamation Agreement with AXIS.
Financial Condition, Liquidity and Capital Resources
The Company purchased, as part of its acquisition of Paris Re in 2009, an investment portfolio and a funds held – directly managed account. The discussion of the acquired Paris Re investment portfolio is included in the discussion of Investments below. The discussion of the segregated investment portfolio underlying the funds held – directly managed account is included separately in Funds Held – Directly Managed below.
Investments
Investment philosophy
The Company employs a prudent investment philosophy. It maintains a high quality, well balanced and liquid portfolio having the dual objectives of optimizing current investment income and achieving capital appreciation. The Company’s invested assets are comprised of total investments, cash and cash equivalents and accrued investment income. From a risk management perspective, the Company allocates its invested assets into two categories: liability funds and capital funds. For additional information on the Company’s capital and liability funds, see Financial Condition, Liquidity and Capital Resources—Investments in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Company’s total invested assets (including funds held – directly managed and net receivable/payable for securities sold/purchased) at March 31, 2016 and December 31, 2015 were split between liability and capital funds as follows (in millions of U.S. dollars):

March 31, 2016

% of Total
Invested Assets

December 31, 2015

% of Total
Invested Assets
Liability funds
$
9,096

 
55
%
 
$
9,043

 
55
%
Capital funds
7,331

 
45

 
7,297

 
45

Total invested assets
$
16,427

 
100
%
 
$
16,340

 
100
%
The increase of $87 million in total invested assets at March 31, 2016 compared to December 31, 2015 was primarily related to decreases in U.S. and European risk-free interest rates and the impact of the weakening of the U.S. dollar against most major currencies. These increases in total invested assets were partially offset by cash outflows from the investment portfolio into cash to fund certain real estate and third party fund asset purchases that are expected to be completed in the second quarter of 2016, and the payment of the Special Dividend upon closing of the Merger on March 18, 2016.
The liability funds were comprised of cash and cash equivalents, accrued investment income and high quality fixed income securities. The increase in the liability funds at March 31, 2016 compared to December 31, 2015 was primarily driven by the impact of the weakening of the U.S. dollar against most major currencies, which increased the Company’s unpaid losses and loss expenses and policy benefits for life and annuity contracts and net reinsurance assets.
The capital funds were generally comprised of accrued investment income, investment grade and below investment grade fixed maturity securities, preferred and common stocks, private placement equity and bond investments, and certain other specialty asset classes. The increase in the capital funds at March 31, 2016 compared to December 31, 2015 was primarily driven by the same factors as the increase in total invested assets. At March 31, 2016, approximately 75% of the capital funds were invested in cash and cash equivalents and investment grade fixed income securities.

52


 
 
 


Overview
Total investments and cash and cash equivalents (excluding the funds held – directly managed account) were $15.6 billion at March 31, 2016 compared to $15.9 billion at December 31, 2015. The major factors contributing to the decrease in the three months ended March 31, 2016 were:
an increase in the net receivable for securities sold of $421 million;
dividend payments on common and preferred shares totaling $201 million, including the payment of the Special Dividend;
settlement of certain share-based awards by the Company of $75 million upon the closing of the Merger; and
various other factors which net to approximately $8 million; partially offset by
net realized and unrealized gains related to the investment portfolio of $161 million, primarily resulting from an increase in the fixed maturity and short-term investment portfolios of $208 million, reflecting decreases in U.S. and European risk-free interest rates, partially offset by a decrease in other invested assets of $30 million, primarily driven by losses on treasury note futures (see discussion related to duration below) and a decrease in the equity portfolio of $17 million;
the impact of foreign exchange of $123 million due to the weakening of the U.S. dollar against most major currencies; and
net cash provided by operating activities of $92 million.
Trading securities
The following discussion relates to the composition of the Company’s trading securities. The Company’s other invested assets and the investments underlying the funds held – directly managed account are discussed separately below. Trading securities are carried at fair value with changes in fair value included in net realized and unrealized investment gains and losses in the Condensed Consolidated Statements of Operations.
At March 31, 2016, approximately 94% of the Company’s fixed maturity and short-term investments, which includes fixed income type mutual funds, were publicly traded and approximately 93% were rated investment grade (BBB- or higher) by Standard & Poor’s (or estimated equivalent).
The average credit quality, the average yield to maturity and the expected average duration of the Company’s fixed maturities and short-term investments (which includes fixed income type mutual funds) at March 31, 2016 and December 31, 2015 were as follows:
 
March 31, 2016
 
December 31, 2015
Average credit quality
A

 
 
A

 
Average yield to maturity
2.4

%
 
2.9

%
Expected average duration
4.0

years
 
3.6

years
The average credit quality of fixed maturities and short-term investments at March 31, 2016 was comparable to December 31, 2015.
The decrease in the average yield to maturity of fixed maturities and short-term investments at March 31, 2016 compared to December 31, 2015 was primarily due to decreases in U.S. and European risk-free interest rates.
The expected average duration of fixed maturities and short-term investments increased from 3.6 years at December 31, 2015 to 4.0 years at March 31, 2016, primarily due to an increase in the measured duration of the underlying reinsurance liabilities. For the purposes of managing portfolio duration, the Company uses exchange traded treasury note futures. The use of treasury note futures reduced the expected average duration of the investment portfolio from 4.1 years to 4.0 years at March 31, 2016, and reflects the Company’s decision to continue to hedge against potential further rises in risk-free interest rates.
The Company’s investment portfolio generated a total accounting return (calculated based on the carrying value of all investments in local currency) of 1.8% in the three months ended March 31, 2016, compared to 1.4% in the same period of 2015. The total accounting return in the three months ended March 31, 2016 and 2015 was primarily due to decreases in U.S. and European risk-free interest rates.

53


 
 
 


The cost, fair value and credit ratings of the Company’s fixed maturities, short-term investments and equities classified as trading at March 31, 2016 were as follows (in millions of U.S. dollars):
 
 
 
 
 
Credit Rating (2)
March 31, 2016
Cost (1)
 
Fair
Value
 
AAA
 
AA
 
A
 
BBB
 
Below
investment
grade/
Unrated
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
2,651

 
$
2,690

 
$

 
$
2,690

 
$

 
$

 
$

U.S. government sponsored enterprises
104

 
105

 

 
105

 

 

 

U.S. states, territories and municipalities
734

 
780

 
153

 
455

 

 

 
172

Non-U.S. sovereign government, supranational and government related
1,116

 
1,197

 
563

 
509

 
125

 

 

Corporate
4,817

 
4,978

 
126

 
289

 
1,739

 
2,589

 
235

Asset-backed securities
1,034

 
1,032

 
327

 
153

 
124

 

 
428

Residential mortgage-backed securities
2,165

 
2,190

 
305

 
1,853

 
19

 
1

 
12

Other mortgage-backed securities
48

 
48

 
13

 
15

 
18

 

 
2

Fixed maturities
$
12,669

 
$
13,020

 
$
1,487

 
$
6,069

 
$
2,025

 
$
2,590

 
$
849

Short-term investments
33

 
34

 
1

 
29

 

 
3

 
1

Total fixed maturities and short-term investments
$
12,702

 
$
13,054

 
$
1,488

 
$
6,098

 
$
2,025

 
$
2,593

 
$
850

Equities
327

 
324

 
 
 
 
 
 
 
 
 
 
Total
$
13,029

 
$
13,378

 
 
 
 
 
 
 
 
 
 
% of Total fixed maturities and short-term investments
 
 
 
11
%
 
47
%
 
15
%
 
20
%
 
7
%
 
(1)
Cost is amortized cost for fixed maturities and short-term investments and cost for equity securities.
(2)
All references to credit rating reflect Standard & Poor’s (or estimated equivalent). Investment grade reflects a rating of BBB- or above.
The decrease of $0.4 billion in the fair value of the Company’s fixed maturities and short-term investments from $13.5 billion at December 31, 2015 to $13.1 billion at March 31, 2016 primarily reflects cash outflows from the investment portfolio into cash to fund certain real estate and third party fund asset purchases that are expected to be completed in the second quarter of 2016, and the payment of the Special Dividend upon closing of the Merger on March 18, 2016. These cash outflows were partially offset by the impact of decreases in U.S. and European risk-free interest rates, net investment income and the weakening of the U.S. dollar against most major currencies. At March 31, 2016, the distribution of the fixed maturity portfolio is comparable to December 31, 2015.
The U.S. government category includes U.S. treasuries which are not rated, however, they are generally considered to have a credit quality equivalent to or greater than AA+ corporate issues.
The U.S. government sponsored enterprises (GSEs) category includes securities that carry the implicit backing of the U.S. government and securities issued by U.S. government agencies. At March 31, 2016, 87% of this category was rated AA with the remaining 13%, although not specifically rated, generally considered to have a credit quality equivalent to AA+ corporate issues.
The U.S. states, territories and municipalities category includes obligations of U.S. states, territories or counties.

54


 
 
 


The non-U.S. sovereign government, supranational and government related category includes obligations of non-U.S. sovereign governments, political subdivisions, agencies and supranational debt. The fair value and credit ratings of non-U.S. sovereign government, supranational and government related obligations at March 31, 2016 were as follows (in millions of U.S. dollars):
 
 
Non-U.S.
Sovereign
Government
 
Supranational
Debt
 
Non-U.S.
Government
Related
 
Fair
Value
 
Credit Rating (1)
 
 
March 31, 2016
 
AAA
 
AA
 
A
 
BBB
 
Below investment grade /Unrated
Non-European Union
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canada
 
$
127

 
$

 
$
315

 
$
442

 
$
164

 
$
153

 
$
125

 
$

 
$

Singapore
 
107

 

 

 
107

 
107

 

 

 

 

Israel
 
22

 

 

 
22

 

 
22

 

 

 

All Other
 
15

 

 

 
15

 

 
15

 

 

 

Total Non-European Union
 
$
271

 
$

 
$
315

 
$
586

 
$
271

 
$
190

 
$
125

 
$

 
$

European Union
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
$
143

 
$

 
$

 
$
143

 
$
143

 
$

 
$

 
$

 
$

Netherlands
 
118

 

 

 
118

 
118

 

 

 

 

France
 
111

 

 

 
111

 

 
111

 

 

 

Belgium
 
87

 

 

 
87

 

 
87

 

 

 

Supranational
 

 
83

 

 
83

 
31

 
52

 

 

 

Austria
 
65

 

 

 
65

 

 
65

 

 

 

All Other
 
4

 

 

 
4

 

 
4

 

 

 

Total European Union
 
$
528

 
$
83

 
$

 
$
611

 
$
292

 
$
319

 
$

 
$

 
$

Total
 
$
799

 
$
83

 
$
315

 
$
1,197

 
$
563

 
$
509

 
$
125

 
$

 
$

% of Total
 
67
%
 
7
%
 
26
%
 
100
%
 
47
%
 
43
%
 
10
%
 
%
 
%
 
(1)
All references to credit rating reflect Standard & Poor’s (or estimated equivalent).
At March 31, 2016, the Company did not have any investments in securities issued by peripheral European Union (EU) sovereign governments (Portugal, Italy, Ireland, Greece and Spain) or in securities issued by the Russian Federation.

55


 
 
 


Corporate bonds are comprised of obligations of U.S. and foreign corporations. The fair values of corporate bonds issued by U.S. and foreign corporations by economic sector at March 31, 2016 were as follows (in millions of U.S. dollars):
March 31, 2016
U.S.
 
Foreign
 
Fair
Value
 
Percentage to
Total Fair
Value of
Corporate
Bonds
Sector
 
 
 
 
 
 
 
Finance
$
575

 
$
423

 
$
998

 
20
%
Consumer noncyclical
535

 
201

 
736

 
15

Utilities
259

 
353

 
612

 
12

Communications
294

 
217

 
511

 
10

Industrials
313

 
143

 
456

 
9

Consumer cyclical
309

 
120

 
429

 
9

Energy
235

 
132

 
367

 
7

Insurance
238

 
68

 
306

 
6

Technology
125

 

 
125

 
3

Basic materials
61

 
60

 
121

 
3

Real estate investment trusts
105

 
11

 
116

 
2

Catastrophe bonds

 
100

 
100

 
2

Government guaranteed corporate debt

 
50

 
50

 
1

All Other
34

 
17

 
51

 
1

Total
$
3,083

 
$
1,895

 
$
4,978

 
100
%
% of Total
62
%
 
38
%
 
100
%
 
 
At March 31, 2016, other than the U.S., no other country accounted for more than 10% of the Company’s corporate bonds.
At March 31, 2016, the ten largest issuers accounted for 15% of the corporate bonds held by the Company (5% of total investments and cash) and no single issuer accounted for more than 3% of total corporate bonds (1% of total investments and cash).
Within the finance sector, 98% of corporate bonds were rated investment grade and 40% were rated A- or better at March 31, 2016.
At March 31, 2016, the fair value of the Company’s corporate bond portfolio issued by companies in the European Union was as follows (in millions of U.S. dollars):
March 31, 2016
Government
Guaranteed
Corporate Debt
 
Finance Sector
Corporate Bonds
 
Non-Finance
Sector Corporate
Bonds
 
Fair Value
European Union
 
 
 
 
 
 
 
United Kingdom
$

 
$
118

 
$
354

 
$
472

Netherlands

 
63

 
189

 
252

France

 
25

 
145

 
170

Spain

 
11

 
103

 
114

Italy

 
19

 
76

 
95

Germany
50

 
8

 
19

 
77

Ireland

 
31

 
37

 
68

Luxembourg

 

 
48

 
48

All Other

 
21

 
64

 
85

Total
$
50

 
$
296

 
$
1,035

 
$
1,381

% of Total
4
%
 
21
%
 
75
%
 
100
%
At March 31, 2016, the Company did not hold any government guaranteed corporate debt issued in peripheral EU countries (Portugal, Italy, Ireland, Greece and Spain) or the Russian Federation and held less than $61 million in total finance sector corporate bonds issued by companies in those countries.

56


 
 
 


Asset-backed securities, residential mortgage-backed securities and other mortgage-backed securities include U.S. and non-U.S. originations. The fair value and credit ratings of asset-backed securities, residential mortgage-backed securities and other mortgage-backed securities at March 31, 2016 were as follows (in millions of U.S. dollars):
 
Credit Rating (1)
March 31, 2016
GNMA (2)
 
GSEs (3)
 
AAA
 
AA
 
A
 
BBB
 
Below
investment
grade /
Unrated
 
Fair
Value
Asset-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$

 
$

 
$
139

 
$
109

 
$
85

 
$

 
$
390

 
$
723

Non-U.S.

 

 
188

 
44

 
39

 

 
38

 
309

Asset-backed securities
$

 
$

 
$
327

 
$
153

 
$
124

 
$

 
$
428

 
$
1,032

Residential mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
404

 
$
1,413

 
$
6

 
$

 
$

 
$

 
$
12

 
$
1,835

Non-U.S.

 

 
299

 
36

 
19

 
1

 

 
355

Residential mortgage-backed securities
$
404

 
$
1,413

 
$
305

 
$
36

 
$
19

 
$
1

 
$
12

 
$
2,190

Other mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
5

 
$

 
$
6

 
$
10

 
$
18

 
$

 
$
2

 
$
41

Non-U.S.

 

 
7

 

 

 

 

 
7

Other mortgage-backed securities
$
5

 
$

 
$
13

 
$
10

 
$
18

 
$

 
$
2

 
$
48

Total
$
409

 
$
1,413

 
$
645

 
$
199

 
$
161

 
$
1

 
$
442

 
$
3,270

% of Total
13
%
 
43
%
 
20
%
 
6
%
 
5
%
 
%
 
13
%
 
100
%
 
(1)
All references to credit rating reflect Standard & Poor’s (or estimated equivalent).
(2)
GNMA represents the Government National Mortgage Association. The GNMA, or Ginnie Mae as it is commonly known, is a wholly owned U.S. government corporation within the Department of Housing and Urban Development which guarantees mortgage loans of qualifying first-time home buyers and low-income borrowers.
(3)
GSEs, or government sponsored enterprises, includes securities that carry the implicit backing of the U.S. government and securities issued by U.S. government agencies.
Residential mortgage-backed securities includes U.S. residential mortgage-backed securities, which generally have a low risk of default and carry the implicit backing of the U.S. government. The issuers of these securities are U.S. government agencies or GSEs, which set standards on the mortgages before accepting them into the program. Although these U.S. government backed securities do not carry a formal rating, they are generally considered to have a credit quality equivalent to or greater than AA+ corporate issues. They are considered prime mortgages and the major risk is uncertainty of the timing of prepayments. While there have been market concerns regarding sub-prime mortgages, the Company did not have direct exposure to these types of securities in its own investment portfolio at March 31, 2016, other than $13 million of investments in distressed asset vehicles (included in Other invested assets). At March 31, 2016, the Company’s U.S. residential mortgage-backed securities included approximately $4 million (less than 1% of U.S. residential mortgage-backed securities) of collateralized mortgage obligations, where the Company deemed the entry point and price of the investment to be attractive.
Other mortgage-backed securities includes U.S. and non-U.S. commercial mortgage-backed securities.

57


 
 
 


Short-term investments consisted of U.S. and non-U.S. government obligations and foreign corporate bonds. At March 31, 2016, the fair value and credit ratings of short-term investments were as follows (in millions of U.S. dollars):
 
 
 
 
 
 
 
 
 
Credit Rating (1)
 
 
March 31, 2016
U.S.
Government
 
Non-U.S.
Government
 
Corporate
 
Fair
Value
 
AAA
 
AA
 
A
 
BBB
 
Below
investment
grade /
Unrated
Country
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
29

 
$

 
$

 
$
29

 
$

 
$
29

 
$

 
$

 
$

All Other

 
1

 
4

 
5

 
1

 

 

 
3

 
1

Total
$
29

 
$
1

 
$
4

 
$
34

 
$
1

 
$
29

 
$

 
$
3

 
$
1

% of Total
87
%
 
1
%
 
12
%
 
100
%
 
1
%
 
87
%
 
%
 
9
%
 
3
%
 
(1)
All references to credit rating reflect Standard & Poor’s (or estimated equivalent). Investment grade reflects a rating of BBB- or above.
Equities are comprised of publicly traded common stocks, public exchange traded funds (ETFs), real estate investment trusts (REITs) and funds holding fixed income securities. The fair value of equities (including equities held in ETFs, REITs and funds holding fixed income securities) at March 31, 2016 were as follows (in millions of U.S. dollars):
March 31, 2016
Fair
Value
 
Percentage to
Total Fair
Value of
Equities
Sector
 
 
 
Finance
$
44

 
18
%
Consumer noncyclical
42

 
17

Insurance
30

 
12

Technology
28

 
11

Industrials
26

 
10

Consumer cyclical
25

 
10

Communications
23

 
9

All Other
34

 
13
%
Total
$
252

 
100
%
Mutual funds and exchange traded funds
 
 
 
Funds and ETFs holding equities
70

 
 
Funds holding fixed income securities
2

 
 
Total equities
$
324

 
 
At March 31, 2016, the Company’s “insurance sector” equities included an investment of $15 million in Essent Group Ltd. (Essent), the U.S. mortgage guaranty insurance company that conducted an initial public offering in the fourth quarter of 2013.
At March 31, 2016, U.S. issuers represented 65% of the publicly traded common stocks and ETFs. At March 31, 2016, the ten largest common stocks accounted for 29% of equities (excluding equities held in ETFs and funds holding fixed income securities). At March 31, 2016, other than the Company’s investment in Essent, no single common stock issuer accounted for more than 6% of total equities (excluding equities held in ETFs and funds holding fixed income securities) or more than 1% of the Company’s total investments and cash and cash equivalents. At March 31, 2016, approximately 87% (or $63 million) of funds and ETFs holding equities were emerging markets funds. At March 31, 2016, the Company did not hold any emerging markets funds within the funds holding fixed income securities category. At March 31, 2016, the Company did not hold any equities (excluding equities held in ETFs and funds holding fixed income securities) issued by finance sector institutions based in peripheral EU countries (Portugal, Ireland, Italy, Greece and Spain).
Maturity Distribution
The distribution of fixed maturities and short-term investments at March 31, 2016 by contractual maturity date was as follows (in millions of U.S. dollars):

58


 
 
 


March 31, 2016
Cost
 
Fair
Value
One year or less
$
431

 
$
431

More than one year through five years
4,416

 
4,521

More than five years through ten years
3,123

 
3,224

More than ten years
1,485

 
1,608

Subtotal
$
9,455

 
$
9,784

Mortgage/asset-backed securities
3,247

 
3,270

Total
$
12,702

 
$
13,054

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
Other Invested Assets
At March 31, 2016, the Company’s other invested assets consisted primarily of investments in non-publicly traded companies, asset-backed securities, notes and loan receivables, note securitizations, annuities and residuals and other specialty asset classes. These assets, together with the Company’s derivative financial instruments that were in a net unrealized gain or loss position are reported within Other invested assets in the Company’s Condensed Consolidated Balance Sheets. The fair value and notional value (if applicable) of other invested assets at March 31, 2016 were as follows (in millions of U.S. dollars):
March 31, 2016
Carrying
Value (1)
 
Notional Value
of Derivatives
Strategic investments
$
220

 
$
n/a

Asset-backed securities (including annuities and residuals)
9

 
 
n/a

Notes and loan receivables and notes securitizations
187

 
 
n/a

Total return swaps

 
 
42

Interest rate swaps (2)
(25
)
 
 
196

Insurance-linked securities (3)
4

 
 
141

Futures contracts
4

 
 
3,186

Foreign exchange forward contracts
11

 
 
2,028

Foreign currency option contracts
2

 
 
90

TBAs
2

 
 
439

Other
45

 
 
n/a

Total
$
459

 
 
 
 
n/a: Not applicable
(1)
Included in Other invested assets are investments that are accounted for using the cost method of accounting, equity method of accounting or fair value accounting.
(2)
The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps and certain fixed maturities. Only the notional value of interest rate swaps on fixed maturities is presented separately in the table.
(3)
Insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional amount.
At March 31, 2016, the Company’s strategic investments included $220 million of investments classified in Other invested assets. These strategic investments include investments in non-publicly traded companies, private placement equity and bond investments, other specialty asset classes and the investments in distressed asset vehicles comprised of sub-prime mortgages, which were discussed above in the residential mortgage-backed securities category of Investments—Trading Securities. In addition to the Company’s strategic investments that are classified in Other invested assets, strategic investments of $50 million are recorded in equities and other assets at March 31, 2016.
At March 31, 2016, the Company’s principal finance activities included $207 million of investments classified in Other invested assets, which were comprised primarily of asset-backed securities, notes and loan receivables, notes securitizations, annuities and residuals, private placement equity investments and total return and interest rate swaps related to principal finance activities.

59


 
 
 


For total return swaps within the principal finance portfolio, the Company uses internal valuation models to estimate the fair value of these derivatives and develops assumptions that require significant judgment, such as the timing of future cash flows, credit spreads and the general level of interest rates. For interest rate swaps, the Company uses externally modeled quoted prices that use observable market inputs. At March 31, 2016, all of the Company’s principal finance total return and interest rate swap portfolio was related to tax advantaged real estate backed transactions.
Although the Company has not entered into any credit default swaps at March 31, 2016, from time to time the Company also utilizes credit default swaps to mitigate the risk associated with certain of its underwriting obligations, most notably in the credit/surety line, to replicate investment positions or to manage market exposures and to reduce the credit risk for specific fixed maturities in its investment portfolio. The Company uses externally modeled quoted prices that use observable market inputs to estimate the fair value of these swaps.
The Company has entered into various weather derivatives and longevity total return swaps for which the underlying risks reference parametric weather risks and longevity risks, respectively. The Company uses internal valuation models to estimate the fair value of these derivatives and develops assumptions that require significant judgment, except for weather derivatives. In determining the fair value of exchange traded weather derivatives, the Company uses quoted market prices. In determining the fair value of non-exchange traded weather derivatives, the Company uses various valuation methods, including unadjusted loss estimates.
The Company uses exchange traded treasury note futures for the purposes of managing portfolio duration. The Company also uses equity futures to replicate equity investment positions.
The Company utilizes foreign exchange forward contracts and foreign currency option contracts as part of its overall currency risk management and investment strategies. From time to time, the Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and branches whose functional currency is other than the U.S. dollar.
The Company utilizes TBAs as part of its overall investment strategy and to enhance investment performance. TBAs represent commitments to purchase future issuances of U.S. government agency mortgage-backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company’s policy is to maintain designated cash balances at least equal to the amount of outstanding TBA purchases.
At March 31, 2016, the Company’s Other invested assets did not include any exposure to peripheral EU countries (Portugal, Italy, Ireland, Greece and Spain) and included direct exposure to mutual fund investments in other EU countries of less than $1 million. The counterparties to the Company’s foreign exchange forward contracts and foreign currency option contracts include European finance sector institutions rated A- or better by Standard & Poor’s and the Company manages its exposure to individual institutions. The Company also has exposure to the euro related to the utilization of foreign exchange forward contracts and other derivative financial instruments in its hedging strategy (see Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Risk in Item 3 below).
Funds Held – Directly Managed
For a discussion of the funds held – directly managed account and the related quota share retrocession agreement, see Business—Reserves—Reserve Agreement in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. See also Quantitative and Qualitative Disclosures about Market Risk—Counterparty Credit Risk in Item 7A of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and in Item 3 below. The composition of the investments underlying the funds held – directly managed account at March 31, 2016 is discussed below.
At March 31, 2016, all of the fixed income investments underlying the funds held – directly managed account were publicly traded and were rated investment grade (BBB- or higher) by Standard & Poor’s (or estimated equivalent).
The average credit quality, the average yield to maturity and the expected average duration of the fixed maturities underlying the funds held – directly managed account at March 31, 2016 and December 31, 2015 were as follows:
 
March 31, 2016
 
December 31, 2015
Average credit quality
   AA

 
 
AA

 
Average yield to maturity
0.8

%
 
1.2

%
Expected average duration
3.7

years
 
3.6

years
The average credit quality and expected average duration of the fixed maturities underlying the funds held – directly managed account at March 31, 2016 were comparable to December 31, 2015.

60


 
 
 


The decrease in the average yield to maturity of fixed maturities underlying the funds held – directly managed account at March 31, 2016 compared to December 31, 2015 was primarily due to the sale and maturity of higher yielding investments (which were used to pay losses related to the run-off of the underlying reserves) and decreases in U.S. and European risk-free interest rates.
The cost, fair value and credit rating of the investments underlying the funds held – directly managed account at March 31, 2016 were as follows (in millions of U.S. dollars):
 
 
 
 
 
Credit Rating (2)
March 31, 2016
Cost (1)
 
Fair
Value
 
AAA
 
AA
 
A
 
BBB
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government
$
143

 
$
145

 
$

 
$
145

 
$

 
$

U.S. government sponsored enterprises
52

 
54

 

 
54

 

 

Non-U.S. sovereign government, supranational and government related
117

 
126

 
27

 
80

 
19

 

Corporate
86

 
91

 
18

 
5

 
43

 
25

Fixed maturities
$
398

 
$
416

 
$
45

 
$
284

 
$
62

 
$
25

Other invested assets
22

 
11

 
 
 
 
 
 
 
 
Total (3)
$
420

 
$
427

 
 
 
 
 
 
 
 
% of Total fixed maturities
 
 
 
 
11
%
 
68
%
 
15
%
 
6
%
 
(1)
Cost is amortized cost for fixed maturities.
(2)
All references to credit rating reflect Standard & Poor’s (or estimated equivalent).
(3)
In addition to the fair value of $427 million of investments underlying the funds held – directly managed account at March 31, 2016, the funds held – directly managed account also includes cash and cash equivalents of $39 million, accrued investment income of $4 million and other assets and liabilities related to the underlying business of $110 million. Accordingly, the total balance in the funds held – directly managed account was $580 million at March 31, 2016.
The increase in the fair value of the investment portfolio underlying the funds held – directly managed account from $400 million at December 31, 2015 to $427 million at March 31, 2016 was primarily related to decreases in U.S. and European risk-free interest rates and the weakening of the U.S. dollar against most major currencies.
The U.S. government category includes U.S. treasuries which are not rated, however, they are generally considered to have a credit quality equivalent to or greater than AA+ corporate issues.
The U.S. government sponsored enterprises (GSEs) category includes securities that carry the implicit backing of the U.S. government and securities issued by U.S. government agencies. At March 31, 2016, 81% of this category was rated AA with the remaining 19%, although not specifically rated, generally considered to have a credit quality equivalent to AA+ corporate issues.

61


 
 
 


The non-U.S. sovereign government, supranational and government related category includes obligations of non-U.S. sovereign governments, political subdivisions, agencies and supranational debt. The fair value and credit ratings of non-U.S. sovereign government, supranational and government related obligations underlying the funds held – directly managed account at March 31, 2016 were as follows (in millions of U.S. dollars):
 
 
 
 
 
 
 
 
 
Credit Rating (1)
March 31, 2016
Non-U.S.
Sovereign
Government
 
Supranational
Debt
 
Non-U.S.
Government
Related
 
Fair
Value
 
AAA
 
AA
 
A
Non-European Union
 
 
 
 
 
 
 
 
 
 
 
 
 
Canada
$
3

 
$

 
$
18

 
$
21

 
$
5

 
$
1

 
$
15

All Other

 
4

 

 
4

 
4

 

 

Total Non-European Union
$
3


$
4


$
18


$
25


$
9


$
1


$
15

European Union
 
 
 
 
 
 

 
 
 
 
 
 
France
$
20

 
$

 
$
22

 
$
42

 
$
1

 
41

 
$

Belgium
20

 

 

 
20

 

 
20

 

All Other
17

 
22

 

 
39

 
17

 
18

 
4

Total European Union
$
57


$
22


$
22


$
101


$
18


$
79


$
4

Total
$
60


$
26


$
40


$
126


$
27


$
80


$
19

% of Total
48
%
 
21
%
 
31
%
 
100
%
 
22
%
 
63
%
 
15
%
 
 
(1)
All references to credit rating reflect Standard & Poor’s (or estimated equivalent).
At March 31, 2016, the investments underlying the funds held – directly managed account included less than $1 million of securities issued by peripheral European Union (EU) sovereign governments (Portugal, Italy, Ireland, Greece and Spain).
Corporate bonds underlying the funds held – directly managed account are comprised of obligations of U.S. and foreign corporations. The fair value of corporate bonds issued by U.S. and foreign corporations underlying funds held – directly managed account by economic sector at March 31, 2016 were as follows (in millions of U.S. dollars):
March 31, 2016
U.S.
 
Foreign
 
Fair
Value
 
Percentage to
Total Fair
Value of
Corporate
Bonds
Sector
 
 
 
 
 
 
 
Finance
$
4

 
$
30

 
$
34

 
37
%
Energy
5

 
9

 
14

 
16

Utilities
4

 
10

 
14

 
16

Consumer noncyclical
10

 
2

 
12

 
13

All Other
6

 
11

 
17

 
18

Total
$
29

 
$
62

 
$
91

 
100
%
% of Total
32
%
 
68
%
 
100
%
 
 
At March 31, 2016, other than the U.S., Norway, Netherlands and France, which accounted for 32%, 14%, 13% and 13%, respectively, no other country accounted for more than 10% of the Company’s corporate bonds underlying the funds held – directly managed account.
At March 31, 2016, the ten largest issuers accounted for 51% of the corporate bonds underlying the funds held – directly managed account and no single issuer accounted for more than 10% of corporate bonds underlying the funds held – directly managed account (or more than 2% of the investments and cash underlying the funds held – directly managed account). At March 31, 2016, all of the finance sector corporate bonds held were rated A or better by Standard & Poor’s (or estimated equivalent).
At March 31, 2016, the fair value of corporate bonds underlying the funds held – directly managed account that were issued by companies in the European Union were as follows (in millions of U.S. dollars):

62


 
 
 


March 31, 2016
Government
Guaranteed
Corporate
Debt
 
Finance Sector
Corporate
Bonds
 
Non-Finance
Sector
Corporate
Bonds
 
Fair
Value
European Union
 
 
 
 
 
 
 
Netherlands
$

 
$
6

 
$
6

 
$
12

France

 
4

 
8

 
12

United Kingdom

 
6

 
2

 
8

Ireland

 
4

 

 
4

All Other
2

 
2

 
4

 
8

Total
$
2

 
$
22

 
$
20

 
$
44

% of Total
3
%
 
51
%
 
46
%
 
100
%
At March 31, 2016, corporate bonds underlying the funds held – directly managed account included less than $5 million of finance sector corporate bonds issued by companies in peripheral EU countries (Portugal, Italy, Ireland, Greece and Spain).
Other invested assets underlying the funds held – directly managed account primarily consists of real estate fund investments.
Maturity Distribution
The distribution of fixed maturities underlying the funds held – directly managed account at March 31, 2016 by contractual maturity date was as follows (in millions of U.S. dollars):
March 31, 2016
Cost
 
Fair
Value
One year or less
$
85

 
$
86

More than one year through five years
187

 
195

More than five years through ten years
108

 
116

More than ten years
18

 
19

Total
$
398

 
$
416

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
European Exposures
For a discussion of the Company’s management of the recent uncertainties related to European sovereign debt exposures, the uncertainties surrounding Europe in general and the Company’s responses to them, see Financial Condition, Liquidity and Capital Resources—Investments—European exposures in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
There have not been any significant changes to the Company’s guidelines adopted in response to the European crisis during the three months ended March 31, 2016.
The Company’s exposures to European sovereign governments and other European related investment risks are discussed above within each category of the Company’s investment portfolio and the investments underlying the funds held – directly managed account. In addition, the Company’s other investment and derivative exposures to European counterparties are discussed in Other Invested Assets above. See Risk Factors in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion of the Company’s exposure to the European sovereign debt crisis.
Funds Held by Reinsured Companies (Cedants)
In addition to the funds held – directly managed account described above, the Company writes certain business on a funds held basis. Funds held by reinsured companies at March 31, 2016 have not changed significantly since December 31, 2015. See Funds Held by Reinsured Companies (Cedants) in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

63


 
 
 


Unpaid Losses and Loss Expenses
The Company establishes loss reserves to cover the estimated liability for the payment of all losses and loss expenses incurred with respect to premiums earned on the contracts that the Company writes. Loss reserves do not represent an exact calculation of the liability. Estimates of ultimate liabilities are contingent on many future events and the eventual outcome of these events may be different from the assumptions underlying the reserve estimates. The Company believes that the recorded unpaid losses and loss expenses represent Management’s best estimate of the cost to settle the ultimate liabilities based on information available at March 31, 2016.
At March 31, 2016 and December 31, 2015, the Company recorded gross and net Non-life reserves for unpaid losses and loss expenses as follows (in millions of U.S. dollars):
 
March 31, 2016
 
December 31, 2015
Gross Non-life reserves for unpaid losses and loss expenses
$
9,331

 
$
9,065

Net Non-life reserves for unpaid losses and loss expenses
9,138

 
8,875

Net reserves guaranteed by Colisée Re
547

 
514

The net Non-life reserves for unpaid losses and loss expenses at March 31, 2016 and December 31, 2015 include $547 million and $514 million, respectively, of reserves guaranteed by Colisée Re (see Item 1 of Part I and Note 8 to Consolidated Financial Statements included in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of the Reserve Agreement).
The net Non-life reserves for unpaid losses and loss expenses for the three months ended March 31, 2016 were as follows (in millions of U.S. dollars):
 
For the three months ended March 31, 2016
Net liability at December 31, 2015
$
8,875

Net incurred losses related to:
 
Current year
693

Prior years
(183
)
 
510

Change in Colisée Re Reserve Agreement
28

Net paid losses
(370
)
Effects of foreign exchange rate changes
95

Net liability at March 31, 2016
$
9,138

The increase in net Non-life reserves for unpaid losses and loss expenses from $8,875 million at December 31, 2015 to $9,138 million at March 31, 2016 primarily reflects net incurred losses and the impact of the weakening of the U.S. dollar against most major currencies, which were partially offset by net paid losses during the three months ended March 31, 2016.
See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits and Results by Segment above for a discussion of losses and loss expenses and prior year loss developments. See also Business—Reserves in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of the impact of foreign exchange on unpaid losses and loss expenses.
Policy Benefits for Life and Annuity Contracts
At March 31, 2016 and December 31, 2015, the Company recorded gross and net policy benefits for life and annuity contracts as follows (in millions of U.S. dollars):
 
March 31, 2016
 
December 31, 2015
Gross policy benefits for life and annuity contracts
$
2,089

 
$
2,052

Net policy benefits for life and annuity contracts
2,046

 
2,009


64


 
 
 


The net policy benefits for life and annuity contracts for the three months ended March 31, 2016 were as follows (in millions of U.S. dollars):
 
For the three months ended March 31, 2016
Net liability at December 31, 2015
$
2,009

Net incurred losses related to:
 
Current year
220

Prior years
(15
)
 
205

Net paid losses
(188
)
Effects of foreign exchange rate changes
20

Net liability at March 31, 2016
$
2,046

The increase in net policy benefits for life and annuity contracts from $2,009 million at December 31, 2015 to $2,046 million at March 31, 2016 was primarily due to net incurred losses and the impact of the weakening of the U.S. dollar against most major currencies, which were partially offset by paid losses. The net incurred losses for the Company’s Life and Health reserves will generally exceed net paid losses in any one given year due to the long-term nature of the liabilities and the growth in the book of business.
See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits and Results by Segment above for a discussion of life policy benefits and prior year loss developments. See also Business—Reserves in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Reinsurance Recoverable on Paid and Unpaid Losses
The Company has exposure to credit risk related to reinsurance recoverable on paid and unpaid losses. See Note 9 to Consolidated Financial Statements and Quantitative and Qualitative Disclosures about Market Risk—Counterparty Credit Risk in Item 7A of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of the Company’s risk related to reinsurance recoverable on paid and unpaid losses and the Company’s process to evaluate the financial condition of its reinsurers.
Contractual Obligations and Commitments
In the normal course of its business, the Company is a party to a variety of contractual obligations, which are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. These contractual obligations are considered by the Company when assessing its liquidity requirements and the Company is confident in its ability to meet all of its obligations.
Other than the items discussed below, the Company’s contractual obligations at March 31, 2016 have not changed materially compared to December 31, 2015.
On March 24, 2016, the Company agreed to purchase from EXOR a 36% shareholding in the privately held United Kingdom real estate investment and development group, Almacantar Group S.A. (Almacantar), as well as certain financial investments, mainly third party funds, based upon the net asset value of these investments. In April 2016, the Company paid a total cash consideration of $729 million for its investments in Almacantar and the third party funds. In addition to this amount, the Company expects to pay a further amount of less than $10 million in the second quarter of 2016 related to the purchase of the remaining assets from EXOR.
On April 1, 2016, the Company launched an exchange offer, in accordance with the Merger Agreement, whereby participating preferred shareholders may exchange any or all existing preferred shares for newly issued preferred shares reflecting an extended call date of the fifth anniversary from the date of issuance. The terms of the newly issued preferred shares would be otherwise identical in all material respects to the Company’s existing preferred shares. As a result, the principal due will not change, however, dividends related to the exchanged shares will extend the contractual obligation related to the preferred shares. The exchange offer expired on April 29, 2016. As a result of the exchange offer, the Company will cancel the existing preferred shares tendered in the exchange offer. Non-tendered existing preferred shares will remain outstanding and continue to trade on the NYSE until such time as the Company decides to redeem them in accordance with their terms of issuance. The Company will seek a comparable credit rating for the new preferred shares as is held by the existing preferred shares.
The Company has entered into employment agreements with its executive officers. These agreements provide for annual compensation in the form of salary, benefits, annual incentive payments, the reimbursement of certain expenses, retention incentive

65


 
 
 


payments, as well as certain severance and change in control provisions. Specifically, the Company expects to incur a pre-tax charge of approximately $10 million in 2016 related to certain executive changes.

Shareholders’ Equity and Capital Resources Management
Shareholders’ equity attributable to PartnerRe Ltd. common shareholders was $6.9 billion at March 31, 2016, flat compared to December 31, 2015. The major changes in shareholders’ equity during the three months ended March 31, 2016 were: 
comprehensive income of $236 million, which was primarily related to net income; and
reissuance of common shares from treasury under the Company’s employee equity plans of $50 million; partially offset by
dividend payments of $201 million related to the Company’s common and preferred shares, including the payment of the Special Dividend; and
settlement of certain share-based awards by the Company of $75 million upon the closing of the Merger.
See Results of Operations and Review of Net Income above for a discussion of the Company’s net income for the three months ended March 31, 2016.
As part of its long-term strategy, the Company will seek to grow capital resources to support its operations throughout the reinsurance cycle, maintain strong ratings from the major rating agencies and maintain the unquestioned ability to pay claims as they arise. The Company may also seek to restructure its capital through the repayment or purchase of debt obligations, or increase or restructure its capital through the issuance of debt, when opportunities arise.
Management uses certain key measures to evaluate its financial performance and the overall growth in value generated for the Company’s common shareholders. For a discussion related to growth in tangible book value see Key Financial Measures above.
The capital structure of the Company at March 31, 2016 and December 31, 2015 was as follows (in millions of U.S. dollars):
 
March 31, 2016
 
December 31, 2015
Capital Structure:
 
 
 
 
 
 
 
Senior notes(1)
$
750

 
10
%
 
$
750

 
10
%
Capital efficient notes(2)
63

 
1

 
63

 
1

Preferred shares, aggregate liquidation value
854

 
11

 
854

 
11

Common shareholders’ equity attributable to PartnerRe Ltd.
6,056

 
78

 
6,047

 
78

Total Capital
$
7,723

 
100
%
 
$
7,714

 
100
%
 
(1)
PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the Senior Notes, do not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $750 million in its Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015.
(2)
PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015.
Total capital was flat at $7.7 billion at March 31, 2016 compared to December 31, 2015 with the major changes related to the same factors described above for shareholders’ equity attributable to PartnerRe Ltd.
Indebtedness
There was no change in the Company’s indebtedness at March 31, 2016 compared to December 31, 2015 and the Company did not enter into any short-term borrowing arrangements during the three months ended March 31, 2016. See Note 10 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of the Company’s indebtedness.

66


 
 
 


Shareholders’ Equity
Share Reissuances
During the three months ended March 31, 2016, the Company reissued approximately 0.2 million of its common shares under its employee share-based awards program at a total cost of $18.4 million, representing an average cost of $83.11 per share.
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 one common share at $1.00 par value was issued to Exor N.V., representing 100% common share ownership of the Company.
Redeemable Preferred Shares
On April 1, 2016, the Company launched an exchange offer, in accordance with the Merger Agreement, whereby participating preferred shareholders may exchange any or all existing preferred shares for newly issued preferred shares reflecting an extended call date of the fifth anniversary from the date of issuance. The terms of the newly issued preferred shares would be otherwise identical in all material respects to the Company’s existing preferred shares. The exchange offer provides for a restriction on the payment of dividends on common shares to an amount not exceeding 67% of net income until December 31, 2020. The exchange offer expired on April 29, 2016. As a result of the exchange offer, the Company will cancel the existing preferred shares tendered in the exchange offer. Non-tendered existing preferred shares will remain outstanding and continue to trade on the NYSE until such time as the Company decides to redeem them in accordance with their terms of issuance. The Company will seek a comparable credit rating for the new preferred shares as is held by the existing preferred shares.
See Shareholders’ Equity and Capital Resources Management—Shareholders’ Equity in Item 7 of Part II and Note 11 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information related to the shareholders’ equity.
Liquidity
Liquidity is a measure of the Company’s ability to access sufficient cash flows to meet the short-term and long-term cash requirements of its business operations. Management believes that its significant cash flows from operations and high quality liquid investment portfolio will provide sufficient liquidity for the foreseeable future. At March 31, 2016 and December 31, 2015, cash and cash equivalents were $1.7 billion and $1.6 billion, respectively. The increase in cash and cash equivalents was primarily due to net investment income, the timing of investing activities and asset reallocations to fund certain real estate and third party fund asset purchases that are expected to be completed in the second quarter of 2016. These increases in cash and cash equivalents were partially offset by dividend payments and payments to settle share-based awards upon the closing of the Merger.
Net cash provided by operating activities was $92 million in the three months ended March 31, 2016 compared to $139 million in same period of 2015. The decrease in net cash provided by operating activities in the three months ended March 31, 2016 was mainly due to higher transaction costs.
Net cash provided by investing activities was $338 million in the three months ended March 31, 2016 compared to $115 million in the same period of 2015. The net cash provided by investing activities in the three months ended March 31, 2016 primarily reflects the timing of investment activities and cash outflows to fund the payment of the Special Dividend upon closing of the Merger and to fund the asset purchases expected to be completed in the second quarter of 2016, as discussed above.
Net cash used in financing activities was $263 million in the three months ended March 31, 2016 compared to $123 million in the same period of 2015. Net cash used in financing activities in the three months ended March 31, 2016 and 2015 was primarily related to the dividend payments on common and preferred shares, including the payment of the Special Dividend, and the settlement of certain share-based awards.
At March 31, 2016, there were no restrictions on the Company’s ability to pay common and preferred shareholders’ dividends from retained earnings except for the reinsurance subsidiaries’ dividend restrictions as described in Note 14 to Consolidated Financial Statements in Item 8 of Part II of the Company’s report on Form 10-K for the year ended December 31, 2015. See also Shareholders’ Equity above for a discussion of future restrictions related to the exchange offer for the preferred shares.
The Company believes that annual positive cash flows from operating activities will be sufficient to cover claims payments, absent a series of additional large catastrophic loss activity. In the event that paid losses accelerate beyond the Company’s ability to fund such payments from operating cash flows, the Company would use its cash and cash equivalents balances available, liquidate a portion of its high quality and liquid investment portfolio or access certain uncommitted credit facilities. As discussed in Investments above, the Company’s investments and cash and cash equivalents (excluding the funds held - directly managed

67


 
 
 


account) totaled $15.6 billion at March 31, 2016, the main components of which were investment grade fixed maturities, short-term investments and cash and cash equivalents totaling $14.0 billion.
Financial strength ratings and senior unsecured debt ratings represent the opinions of rating agencies on the Company’s capacity to meet its obligations. During the three months ended March 31, 2016, Fitch downgraded the Company’s financial strength rating to A+ (Stable) reflecting their view that the Company’s position in the challenging reinsurance market environment, which is expected to result in ongoing pressure on earnings, no longer supported the former ratings. The Company’s current financial strength ratings and outlooks with Standard & Poor’s and A.M. Best have remained unchanged since December 31, 2015 and following the closing of the Merger. The Company continues to be in dialogue with these rating agencies to address their concerns. The Company’s current financial strength ratings and outlook with Moody’s have remained unchanged since December 31, 2015 and following the closing of the Merger.
There were no other changes in the Company’s current financial strength ratings at March 31, 2016 compared to December 31, 2015. See also Shareholders’ Equity and Capital Resources Management—Liquidity in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Credit Agreements
In the normal course of its operations, the Company enters into agreements with financial institutions to obtain unsecured and secured credit facilities. These facilities are used primarily for the issuance of letters of credit, although a portion of these facilities may also be used for liquidity purposes. The Company’s credit facilities have not changed significantly since December 31, 2015. See Credit Agreements in Item 7 of Part II and Note 19 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information related to the credit facilities available to the Company.
Currency
See Results of Operations and Review of Net Income above for a discussion of the impact of foreign exchange and net foreign exchange gains and losses during the three months ended March 31, 2016.
The foreign exchange gain or loss resulting from the translation of the Company’s subsidiaries’ and branches’ financial statements (expressed in euro or Canadian dollar functional currency) into U.S. dollars is classified in the currency translation adjustment account, which is a component of accumulated other comprehensive income or loss in shareholders’ equity. The currency translation adjustment account increased during the three months ended March 31, 2016 primarily due to the translation of the Company’s branch that uses the Canadian dollar as its functional currency due to the weakening of the U.S. dollar against the Canadian dollar.
The reconciliation of the currency translation adjustment for the three months ended March 31, 2016 was as follows (in millions of U.S. dollars):
 
For the three months ended March 31, 2016
Currency translation adjustment at beginning of period
$
(54
)
Change in foreign currency translation adjustment included in accumulated other comprehensive loss, inclusive of the impact of designated net investment hedges
21

Currency translation adjustment at end of period
$
(33
)
From time to time, the Company enters into net investment hedges. At March 31, 2016, the Company held foreign exchange forward contracts (with notional amounts of €350 million) to hedge a portion of its net investment exposure to the euro against the U.S. dollar.
See Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Risk in Item 3 of Part I below for a discussion of the Company’s risk related to changes in foreign currency movements.
New Accounting Pronouncements
See Note 3 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.


68


 
 
 


ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
Management believes that the Company is principally exposed to five types of market related risk: interest rate risk, credit spread risk, foreign currency risk, counterparty credit risk and equity price risk. How these risks relate to the Company, and the process used to manage them, is discussed in Item 7A of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The following discussion of market risks at March 31, 2016 focuses only on material changes from December 31, 2015 in the Company’s market risk exposures, or how those exposures are managed.
Interest Rate Risk
The Company’s fixed maturity portfolio and the fixed maturity securities in the investment portfolio underlying the funds held – directly managed account are exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. The Company manages interest rate risk on liability funds by constructing bond portfolios in which the economic impact of a general interest rate shift is comparable to the impact on the related liabilities. The Company believes that this process of matching the duration mitigates the overall interest rate risk on an economic basis. The Company manages the exposure to interest rate volatility on capital funds by choosing a duration profile that it believes will optimize the risk-reward relationship. For additional information on liability funds and capital funds, see Financial Condition, Liquidity and Capital Resources in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
At March 31, 2016, the Company estimates that the hypothetical case of an immediate 100 basis points or 200 basis points parallel shift in global bond curves would result in a change in the fair value of investments exposed to interest rate risk, the fair value of funds held – directly managed account exposed to interest rate risk, total invested assets, and shareholders’ equity attributable to PartnerRe Ltd. as follows (in millions of U.S. dollars):

 
-200 Basis
Points
 
%
Change
 
-100 Basis
Points
 
%
Change
 
March 31,
2016
 
+100 Basis
Points
 
%
Change
 
+200 Basis
Points
 
%
Change
Fair value of investments exposed to interest rate risk (1)(2)
$
15,773

 
8
%
 
$
15,195

 
4
%
 
$
14,617

 
$
14,039

 
(4
)%
 
$
13,461

 
(8
)%
Fair value of funds held – directly managed account exposed to interest rate risk (2)
489

 
8

 
472

 
4

 
455

 
438

 
(4
)
 
421

 
(8
)
Total invested assets (3)
17,381

 
7

 
16,786

 
4

 
16,191

 
15,596

 
(4
)
 
15,001

 
(7
)
Shareholders’ equity attributable to PartnerRe Ltd.
8,100

 
17

 
7,505

 
9

 
6,910

 
6,315

 
(9
)
 
5,720

 
(17
)
 
(1)
Includes certain other invested assets, certain cash and cash equivalents and funds holding fixed income securities.
(2)
Excludes accrued interest.
(3)
Includes total investments, cash and cash equivalents, the investment portfolio underlying the funds held – directly managed account and accrued interest.
The changes do not take into account any potential mitigating impact from the equity market, taxes or the corresponding change in the economic value of the Company’s reinsurance liabilities, which, as noted above, would substantially offset the economic impact on invested assets, although the offset would not be reflected in the Condensed Consolidated Balance Sheet.
As discussed above, the Company strives to match the foreign currency exposure in its fixed income portfolio to its multicurrency liabilities. The Company believes that this matching process creates a diversification benefit. Consequently, the exact market value effect of a change in interest rates will depend on which countries experience interest rate changes and the foreign currency mix of the Company’s fixed maturity portfolio at the time of the interest rate changes. See Foreign Currency Risk below.
The impact of an immediate change in interest rates on the fair value of investments and funds held – directly managed exposed to interest rate risk, the Company’s total invested assets and shareholders’ equity attributable to PartnerRe Ltd., in both absolute terms and as a percentage of total invested assets and shareholders’ equity attributable to PartnerRe Ltd., has not changed significantly at March 31, 2016 compared to December 31, 2015.

69


 
 
 


For additional information related to the Company’s debt obligations and preferred securities, see Item 7A of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. For additional information related to the Company’s debt obligations also see Note 4 to the Condensed Consolidated Financial Statements in Item 1 of Part I of this report.
Credit Spread Risk
The Company’s fixed maturity portfolio and the fixed maturity securities in the investment portfolio underlying the funds held – directly managed account are exposed to credit spread risk. Fluctuations in market credit spreads have a direct impact on the market valuation of these securities. The Company manages credit spread risk by the selection of securities within its fixed maturity portfolio. Changes in credit spreads directly affect the market value of certain fixed maturity securities, but do not necessarily result in a change in the future expected cash flows associated with holding individual securities. Other factors, including liquidity, supply and demand, and changing risk preferences of investors, may affect market credit spreads without any change in the underlying credit quality of the security.
At March 31, 2016, the Company estimates that the hypothetical case of an immediate 100 basis points or 200 basis points parallel shift in global credit spreads would result in a change in the fair value of investments and the fair value of funds held –directly managed account exposed to credit spread risk, total invested assets and shareholders’ equity attributable to PartnerRe Ltd. as follows (in millions of U.S. dollars):

 
-200 Basis
Points
 
%
Change
 
-100 Basis
Points
 
%
Change
 
March 31,
2016
 
+100 Basis
Points
 
%
Change
 
+200 Basis
Points
 
%
Change
Fair value of investments exposed to credit spread risk (1)(2)
$
15,517

 
6
%
 
$
15,067

 
3
%
 
$
14,617

 
$
14,167

 
(3
)%
 
$
13,717

 
(6
)%
Fair value of funds held – directly managed account exposed to credit spread risk (2)
467

 
3

 
461

 
1

 
455

 
449

 
(1
)
 
443

 
(3
)
Total invested assets (3)
17,103

 
6

 
16,647

 
3

 
16,191

 
15,735

 
(3
)
 
15,279

 
(6
)
Shareholders’ equity attributable to PartnerRe Ltd.
7,822

 
13

 
7,366

 
7

 
6,910

 
6,454

 
(7
)
 
5,998

 
(13
)
 
 
(1)
Includes certain other invested assets, certain cash and cash equivalents and funds holding fixed income securities.
(2)
Excludes accrued interest.
(3)
Includes total investments, cash and cash equivalents, the investment portfolio underlying the funds held – directly managed account and accrued interest.
The changes above also do not take into account any potential mitigating impact from the equity market, taxes, and the change in the economic value of the Company’s reinsurance liabilities, which may offset the economic impact on invested assets.
The impact of an immediate change in credit spreads on the fair value of investments and funds held – directly managed exposed to credit spread risk, the Company’s total invested assets and shareholders’ equity attributable to PartnerRe Ltd., in both absolute terms and as a percentage of total invested assets and shareholders’ equity attributable to PartnerRe Ltd., has not changed significantly at March 31, 2016 compared to December 31, 2015.
Foreign Currency Risk
Through its multinational reinsurance operations, the Company conducts business in a variety of non-U.S. currencies, with the principal exposures being the euro, British pound, Canadian dollar, Swiss Franc and Singapore dollar. As the Company’s reporting currency is the U.S. dollar, foreign exchange rate fluctuations may materially impact the Company’s Condensed Consolidated Financial Statements.

70


 
 
 


The Company’s gross and net exposure in its Condensed Consolidated Balance Sheet at March 31, 2016 to foreign currency, as well as the associated foreign currency derivatives the Company has entered into to manage this exposure, was as follows (in millions of U.S. dollars):

 
euro
 
GBP
 
CAD
 
CHF
 
SGD
 
Other
 
Total (1)
Total assets
$
2,863

 
$
1,729

 
$
861

 
$
44

 
$
155

 
$
626

 
$
6,278

Total liabilities
(3,482
)
 
(1,431
)
 
(371
)
 
(339
)
 
(25
)
 
(1,381
)
 
(7,029
)
Total gross foreign currency exposure
(619
)
 
298

 
490

 
(295
)
 
130

 
(755
)
 
(751
)
Total derivative amount
433

 
(350
)
 
(29
)
 
275

 
(104
)
 
672

 
897

Net foreign currency exposure
$
(186
)
 
$
(52
)
 
$
461

 
$
(20
)
 
$
26

 
$
(83
)
 
$
146

  
 
(1)
As the U.S. dollar is the Company’s reporting currency, there is no currency risk attached to the U.S. dollar and it is excluded from this table. The U.S. dollar accounted for the difference between the Company’s total foreign currency exposure in this table and the total assets and total liabilities in the Company’s Condensed Consolidated Balance Sheet at March 31, 2016.
The above numbers include the Company’s investment in certain of its subsidiaries and branches, whose functional currencies are the euro or Canadian dollar, and the foreign exchange forward contracts that the Company entered into during the three months ended March 31, 2016 to hedge a portion of its translation exposure in light of the significant volatility in foreign exchange markets.
At March 31, 2016, assuming all other variables remain constant and disregarding any tax effects, a change in the U.S. dollar of 10% or 20% relative to all of the other currencies held by the Company simultaneously would result in a change in the Company’s net foreign currency exposure of $15 million and $29 million, respectively, inclusive of the effect of foreign exchange forward contracts and other derivative financial instruments.
Counterparty Credit Risk
The Company has exposure to credit risk primarily as a holder of fixed maturity securities. The Company controls this exposure by emphasizing investment grade credit quality in the fixed maturity securities it purchases. At March 31, 2016, approximately 74% the Company’s fixed maturity and short-term investments (including funds holding fixed maturity securities and excluding the funds held – directly managed account) were rated A- or better and 7% were rated below investment grade or not rated. The Company believes this high quality concentration reduces its exposure to credit risk on fixed maturity investments to an acceptable level.
At March 31, 2016, the Company was not exposed to any significant credit concentration risk on its investments, excluding securities issued by the U.S. government which are rated AA+. The single largest non-U.S. sovereign government issuer accounted for less than 12% of the Company’s total non-U.S. sovereign government, supranational and government related category (excluding the funds held – directly managed account) and less than 1% of total investments and cash (excluding the funds held – directly managed account) at March 31, 2016. In addition, the single largest corporate issuer and the top 10 corporate issuers accounted for less than 3% and 15% of the Company’s total corporate fixed maturity securities (excluding the funds held – directly managed account), respectively, at March 31, 2016. Within the segregated investment portfolio underlying the funds held – directly managed account, the single largest corporate issuer and the top 10 corporate issuers accounted for less than 10% and 51% of total corporate fixed maturity securities underlying the funds held – directly managed account at March 31, 2016, respectively.
The Company keeps cash and cash equivalents in several banks and ensures that there are no significant concentrations at any point in time, in any one bank. At March 31, 2016, the Company held cash and cash equivalent of $1.4 billion with a high credit quality international bank which was primarily invested in United States government and government sponsored enterprises’ money market funds. This concentration at March 31, 2016 was partially due to certain specific cash requirements related to funding of certain real estate and third party fund asset purchases in the second quarter of 2016.
To a lesser extent, the Company is also exposed to the following credit risks:
as a party to foreign exchange forward contracts and other derivative contracts;
in its underwriting operations, most notably in the credit/surety line and for alternative risk products;

71


 
 
 


the credit risk of its cedants in the event of their insolvency or their failure to honor the value of the funds held balances due to the Company;
the credit risk of Colisée Re in the event of insolvency or Colisée Re’s failure to honor the value of the funds held balances for any other reason;
the credit risk of AXA or its affiliates in the event of their insolvency or their failure to honor their obligations under the Acquisition Agreements (see Business—Reserves—Reserve Agreement in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015);
as it relates to its business written through brokers if any of the Company’s brokers are unable to fulfill their contractual obligations with respect to payments to the Company;
as it relates to its reinsurance balances receivable and reinsurance recoverable on paid and unpaid losses; and
under its retrocessional reinsurance contracts.
The concentrations of the Company’s counterparty credit risk exposures have not changed materially at March 31, 2016, compared to December 31, 2015. See Counterparty Credit Risk in Item 7A of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional discussion of credit risks.
Equity Price Risk
The Company invests a portion of its capital funds in equity securities (fair market value of $322 million, excluding funds holding fixed income securities of $2 million) at March 31, 2016. These equity investments are exposed to equity price risk, defined as the potential for loss in market value due to a decline in equity prices. The Company believes that the effects of diversification and the relatively small size of its investments in equities relative to total invested assets mitigate its exposure to equity price risk. The Company estimates that its equity investment portfolio has a beta versus the S&P 500 Index of approximately 0.97 on average. Portfolio beta measures the response of a portfolio’s performance relative to a market return, where a beta of 1 would be an equivalent return to the index. Given the estimated beta for the Company’s equity portfolio, a 10% and 20% movement in the S&P 500 Index would result in a change in the fair value of the Company’s equity portfolio, total invested assets and shareholders’ equity attributable to PartnerRe Ltd. at March 31, 2016 as follows (in millions of U.S. dollars):

 
20%
Decrease
 
%
Change
 
10%
Decrease
 
%
Change
 
March 31, 2016
 
10%
Increase
 
%
Change
 
20%
Increase
 
%
Change
Equities (1)
$
260

 
(19
)%
 
$
291

 
(10
)%
 
$
322

 
$
353

 
10
%
 
$
384

 
19
%
Total invested assets (2)
16,129

 

 
16,160

 

 
16,191

 
16,222

 

 
16,253

 

Shareholders’ equity attributable to PartnerRe Ltd.
6,848

 
(1
)
 
6,879

 
(1
)
 
6,910

 
6,941

 
1

 
6,972

 
1

   
 
(1)
Excludes funds holding fixed income securities of $2 million.
(2)
Includes total investments, cash and cash equivalents, the investment portfolio underlying the funds held – directly managed account and accrued interest.
This change does not take into account any potential mitigating impact from the fixed maturity securities or taxes.
There was no material change in the absolute or percentage impact of an immediate change of 10% in the S&P 500 Index on the Company’s equity portfolio, total invested assets and shareholders’ equity attributable to PartnerRe Ltd. at March 31, 2016 compared to December 31, 2015.


72


 
 
 


ITEM 4.
CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of Management, including the Chief Executive Officer and Chief Financial Officer, as of March 31, 2016, of the effectiveness of the design and operation of disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2016, the disclosure controls and procedures are effective such that information required to be disclosed by the Company in reports that it files or submits pursuant to the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to Management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.
There have been no changes in the Company’s internal control over financial reporting identified in connection with such evaluation that occurred during the three months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

73


 
 
 


PART II—OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
There has been no significant change in legal proceedings at March 31, 2016 compared to December 31, 2015. See Note 18(f) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
 
ITEM 1A.
RISK FACTORS
Cautionary Note Concerning Forward-Looking Statements
Certain statements contained in this document, including Management’s Discussion and Analysis, may be considered forward-looking statements as defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. Forward-looking statements are based on the Company’s assumptions and expectations concerning future events and financial performance of the Company and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. The Company’s forward-looking statements could be affected by numerous foreseeable and unforeseeable events and developments such as exposure to catastrophe, or other large property and casualty losses, adequacy of reserves, risks associated with implementing business strategies and integrating new acquisitions, levels and pricing of new and renewal business achieved, credit, interest, currency and other risks associated with the Company’s investment portfolio, changes in accounting policies, and other factors identified in the Company’s filings with the Securities and Exchange Commission.
The words believe, anticipate, estimate, project, plan, expect, intend, hope, forecast, evaluate, will likely result or will continue or words of similar impact generally involve forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
See Risk Factors in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a complete review of important risk factors.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 18, 2016, the Company announced completion of the acquisition by EXOR. 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 one common share at $1.00 par value was issued to Exor N.V., representing 100% common share ownership of the Company. As a result, and as stipulated by the Merger Agreement, PartnerRe common shares are no longer traded on the NYSE or the Bermuda Stock Exchange. The Company’s preferred shares continue to be traded on the NYSE following the closing of the transaction.
The Company did not make any repurchases of its equity securities during the period between January 1, 2016 and March 18, 2016, the acquisition date.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
 
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
 
ITEM 5.
OTHER INFORMATION

74


 
 
 


None. 

ITEM 6.
EXHIBITS
Exhibits—Included on page 77.


75


 
 
 


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
PartnerRe Ltd.
(Registrant)
 
 
 
 
 
 
By:
 
/S/    EMMANUEL CLARKE
 
 
Name:
 
Emmanuel Clarke
 
 
Title:
 
President and Chief Executive Officer and Director
(Principal Executive Officer)
 
 
 
 
Date:
May 2, 2016
 
 
 
 
 
 
 
 
 
By:
 
/S/    MARIO BONACCORSO
 
 
Name:
 
Mario Bonaccorso
 
 
Title:
 
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
Date:
May 2, 2016
 
 
 
 


76


 
 
 


EXHIBIT INDEX
Exhibit
Number
 
Exhibit
15
 
Letter Regarding Unaudited Interim Financial Information.
31.1
 
Section 302 Certification of Emmanuel Clarke.
31.2
 
Section 302 Certification of Mario Bonaccorso.
32
 
Section 906 Certifications.
101.1
 
The following financial information from PartnerRe Ltd.’s Quarterly Report on Form 10–Q for the quarter ended March 31, 2016 formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2016 and 2015; (iii) Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 and (v) Notes to Consolidated Financial Statements.


77