Edgar Filing: RENAISSANCERE HOLDINGS LTD

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-14428

RENAISSANCERE HOLDINGS LTD.

(Exact Name Of Registrant As Specified In Its Charter)



Bermuda	98-014-1974
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

Renaissance House, 12 Crow Lane, Pembroke HM 19 Bermuda

(Address of Principal Executive Offices)

(441) 295-4513

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Q No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Q No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Act. Large accelerated filer Q, Accelerated filer o, Non-accelerated filer o, Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No Q

The number of Common Shares, par value US $1.00 per share, outstanding at October 31, 2016 was 41,155,526.

RENAISSANCERE HOLDINGS LTD.

TABLE OF CONTENTS



		Page
	NOTE ON FORWARD-LOOKING STATEMENTS	3
PART I
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets at September 30, 2016 (unaudited) and December 31, 2015	5
	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015	6
	Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015	7
	Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2016 and 2015	8
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	9
	Notes to the Consolidated Financial Statements	10
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	51
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	100
ITEM 4.	CONTROLS AND PROCEDURES	100
PART II
ITEM 1.	LEGAL PROCEEDINGS	101
ITEM 1A.	RISK FACTORS	101
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	101
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	101
ITEM 4.	MINE SAFETY DISCLOSURES	102
ITEM 5.	OTHER INFORMATION	102
ITEM 6.	EXHIBITS	102
SIGNATURES - RENAISSANCERE HOLDINGS LTD.		103

NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) of RenaissanceRe Holdings Ltd. (“RenaissanceRe”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us. In particular, statements using words such as “may”, “should”, “estimate”, “expect”, “anticipate”, “intend”, “believe”, “predict”, “potential”, or words of similar import generally involve forward-looking statements. For example, we may include certain forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” with regard to trends in results, prices, volumes, operations, investment results, margins, combined ratios, fees, reserves, market conditions, risk management and exchange rates. This Form 10-Q also contains forward-looking statements with respect to our business and industry, such as those relating to our strategy and management objectives, market standing and product volumes, competition and new entrants in our industry, industry capital, insured losses from loss events, government initiatives and regulatory matters affecting the reinsurance and insurance industries.

The inclusion of forward-looking statements in this report should not be considered as a representation by us or any other person that our current objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from those addressed by the forward-looking statements, including the following:


•	the frequency and severity of catastrophic and other events we cover;


•	the effectiveness of our claims and claim expense reserving process;


•	our ability to maintain our financial strength ratings;


•	the effect of climate change on our business;


•	the effect of emerging claims and coverage issues;


•	our reliance on a small and decreasing number of reinsurance brokers and other distribution services for the preponderance of our revenue;


•	our exposure to credit loss from counterparties in the normal course of business;


•	the effect of continued challenging economic conditions throughout the world;


•	continued soft reinsurance underwriting market conditions;


•	a contention by the Internal Revenue Service (“IRS”) that Renaissance Reinsurance Ltd. (“Renaissance Reinsurance”), or any of our other Bermuda subsidiaries, is subject to taxation in the United States (“U.S.”);


•	the performance of our investment portfolio;


•	our ability to successfully implement our business strategies and initiatives;


•	our ability to retain our key senior officers and to attract or retain the executives and employees necessary to manage our business;


•	our ability to determine the impairments taken on our investments;


•	the availability of retrocessional reinsurance on acceptable terms;


•	the effect of inflation;


•	the adequacy of our ceding companies’ ability to assess the risks they underwrite;


•	the effect of operational risks, including system or human failures;


•	our ability to effectively manage capital on behalf of investors in joint ventures or other entities we manage;


•	foreign currency exchange rate fluctuations;


•	uncertainties related to the vote in the United Kingdom (“U.K.”) to leave the European Union (“EU”);


•	our ability to raise capital if necessary;


•	our ability to comply with covenants in our debt agreements;


•	changes to the regulatory systems under which we operate, including challenges to the claim of exemption from insurance regulation of RenaissanceRe and our subsidiaries and increased global regulation of the insurance and reinsurance industry;


•	losses we could face from terrorism, political unrest or war;


•	our dependence on the ability of our operating subsidiaries to declare and pay dividends;


•	the success of any of our strategic investments or acquisitions, including our ability to manage our operations as our product and geographical diversity increases;


•	the effect of cybersecurity risks, including technology breaches or failure, on our business;


•	aspects of our corporate structure that may discourage third party takeovers and other transactions;


•	the cyclical nature of the reinsurance and insurance industries;


•	adverse legislative developments that reduce the size of the private markets we serve or impede their future growth;


•	other regulatory or legislative changes adversely impacting us;


•	the effect on our business of the highly competitive nature of our industry, including the effect of new entrants to, competing products for and consolidation in the (re)insurance industry;


•	consolidation of customers or insurance and reinsurance brokers;


•	the effect of Organization for Economic Co-operation and Development (the “OECD”) or EU measures to increase our taxes;


•	adverse tax developments, including potential changes to the taxation of inter-company or related party transactions, or changes to the tax treatment of investors in RenaissanceRe or our joint ventures or other entities we manage;


•	changes in regulatory regimes and/or accounting rules, including the EU directive concerning capital adequacy, risk management and regulatory reporting for insurers; and


•	our need to make many estimates and judgments in the preparation of our financial statements.

As a consequence, our future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of us. The factors listed above, which are discussed in more detail in our filings with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2015, should not be construed as exhaustive. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to revise or update forward-looking statements to reflect new information, events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RenaissanceRe Holdings Ltd. and Subsidiaries

Consolidated Balance Sheets

(in thousands of United States Dollars, except per share amounts)



	September 30, 2016		December 31, 2015
Assets	(Unaudited)		(Audited)
Fixed maturity investments trading, at fair value – amortized cost $7,014,564 at September 30, 2016 (December 31, 2015 – $6,825,877)	$	7,088,419	$	6,765,005
Fixed maturity investments available for sale, at fair value – amortized cost $10,323 at September 30, 2016 (December 31, 2015 – $15,943)	11,721		17,813
Short term investments, at fair value	1,136,660		1,208,401
Equity investments trading, at fair value	345,565		393,877
Other investments, at fair value	511,621		481,621
Investments in other ventures, under equity method	120,569		132,351
Total investments	9,214,555		8,999,068
Cash and cash equivalents	493,330		506,885
Premiums receivable	1,181,331		778,009
Prepaid reinsurance premiums	511,421		230,671
Reinsurance recoverable	240,769		134,526
Accrued investment income	37,245		39,749
Deferred acquisition costs	351,841		199,380
Receivable for investments sold	193,071		220,834
Other assets	181,290		181,011
Goodwill and other intangible assets	254,678		265,154
Total assets	$	12,659,531	$	11,555,287
Liabilities, Noncontrolling Interests and Shareholders’ Equity
Liabilities
Reserve for claims and claim expenses	$	2,861,099	$	2,767,045
Unearned premiums	1,434,136		889,102
Debt	951,620		960,495
Reinsurance balances payable	774,660		523,974
Payable for investments purchased	437,826		391,378
Other liabilities	227,847		245,145
Total liabilities	6,687,188		5,777,139
Commitments and Contingencies
Redeemable noncontrolling interest	1,164,553		1,045,964
Shareholders’ Equity
Preference shares: $1.00 par value – 16,000,000 shares issued and outstanding at September 30, 2016 (December 31, 2015 – 16,000,000)	400,000		400,000
Common shares: $1.00 par value – 41,155,526 shares issued and outstanding at September 30, 2016 (December 31, 2015 – 43,701,064)	41,156		43,701
Additional paid-in capital	213,053		507,674
Accumulated other comprehensive income	2,621		2,108
Retained earnings	4,150,960		3,778,701
Total shareholders’ equity attributable to RenaissanceRe	4,807,790		4,732,184
Total liabilities, noncontrolling interests and shareholders’ equity	$	12,659,531	$	11,555,287

See accompanying notes to the consolidated financial statements

RenaissanceRe Holdings Ltd. and Subsidiaries

Consolidated Statements of Operations

For the three and nine months ended September 30, 2016 and 2015

(in thousands of United States Dollars, except per share amounts) (Unaudited)



	Three months ended						Nine months ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Revenues
Gross premiums written	$	430,224		$	369,642		$	2,051,485		$	1,675,217
Net premiums written	$	284,222		$	266,820		$	1,315,813		$	1,179,532
Decrease (increase) in unearned premiums	62,299			95,568			(264,284		)	(140,556		)
Net premiums earned	346,521			362,388			1,051,529			1,038,976
Net investment income	51,423			28,338			134,410			106,649
Net foreign exchange (losses) gains	(5,986		)	616			(8,368		)	(4,254		)
Equity in (losses) earnings of other ventures	(11,630		)	5,730			(3,997		)	17,185
Other income	2,268			2,306			9,001			5,272
Net realized and unrealized gains (losses) on investments	59,870			(41,138		)	191,295			(26,101		)
Total revenues	442,466			358,240			1,373,870			1,137,727
Expenses
Net claims and claim expenses incurred	112,575			100,028			406,930			346,225
Acquisition expenses	80,580			78,126			215,177			183,193
Operational expenses	40,493			54,518			147,801			154,812
Corporate expenses	11,537			7,322			25,514			65,723
Interest expense	10,536			10,542			31,610			25,720
Total expenses	255,721			250,536			827,032			775,673
Income before taxes	186,745			107,704			546,838			362,054
Income tax benefit (expense)	1,316			4,573			(8,040		)	54,319
Net income	188,061			112,277			538,798			416,373
Net income attributable to redeemable noncontrolling interests	(35,641		)	(31,153		)	(110,867		)	(82,982		)
Net income attributable to RenaissanceRe	152,420			81,124			427,931			333,391
Dividends on preference shares	(5,595		)	(5,595		)	(16,786		)	(16,786		)
Net income available to RenaissanceRe common shareholders	$	146,825		$	75,529		$	411,145		$	316,605
Net income available to RenaissanceRe common shareholders per common share – basic	$	3.58		$	1.68		$	9.77		$	7.25
Net income available to RenaissanceRe common shareholders per common share – diluted	$	3.56		$	1.66		$	9.71		$	7.19
Dividends per common share	$	0.31		$	0.30		$	0.93		$	0.90

See accompanying notes to the consolidated financial statements

RenaissanceRe Holdings Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2016 and 2015

(in thousands of United States Dollars) (Unaudited)



	Three months ended						Nine months ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Comprehensive income
Net income	$	188,061		$	112,277		$	538,798		$	416,373
Change in net unrealized gains on investments	284			(733		)	513			(1,156		)
Comprehensive income	188,345			111,544			539,311			415,217
Net income attributable to redeemable noncontrolling interests	(35,641		)	(31,153		)	(110,867		)	(82,982		)
Comprehensive income attributable to redeemable noncontrolling interests	(35,641		)	(31,153		)	(110,867		)	(82,982		)
Comprehensive income attributable to RenaissanceRe	$	152,704		$	80,391		$	428,444		$	332,235
Disclosure regarding net unrealized gains
Total net realized and unrealized holding gains (losses) on investments	$	284		$	(733	)	$	513		$	(818	)
Net realized gains on fixed maturity investments available for sale	—			—			—			(338		)
Change in net unrealized gains on investments	$	284		$	(733	)	$	513		$	(1,156	)

See accompanying notes to the consolidated financial statements

RenaissanceRe Holdings Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the nine months ended September 30, 2016 and 2015

(in thousands of United States Dollars) (Unaudited)



	Nine months ended
	September 30, 2016			September 30, 2015
Preference shares
Balance – January 1	$	400,000		$	400,000
Balance – September 30	400,000			400,000
Common shares
Balance – January 1	43,701			38,442
Issuance of shares	—			7,435
Repurchase of shares	(2,741		)	(2,026		)
Exercise of options and issuance of restricted stock awards	196			270
Balance – September 30	41,156			44,121
Additional paid-in capital
Balance – January 1	507,674			—
Issuance of shares	—			754,384
Repurchase of shares	(306,693		)	(209,462		)
Change in redeemable noncontrolling interests	(1,040		)	(403		)
Exercise of options and issuance of restricted stock awards	13,112			7,164
Balance – September 30	213,053			551,683
Accumulated other comprehensive income
Balance – January 1	2,108			3,416
Change in net unrealized gains on investments	513			(1,156		)
Balance – September 30	2,621			2,260
Retained earnings
Balance – January 1	3,778,701			3,423,857
Net income	538,798			416,373
Net income attributable to redeemable noncontrolling interests	(110,867		)	(82,982		)
Dividends on common shares	(38,886		)	(40,883		)
Dividends on preference shares	(16,786		)	(16,786		)
Balance – September 30	4,150,960			3,699,579
Total shareholders’ equity	$	4,807,790		$	4,697,643

See accompanying notes to the consolidated financial statements

RenaissanceRe Holdings Ltd. and Subsidiaries

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2016 and 2015

(in thousands of United States Dollars) (Unaudited)



	Nine months ended
	September 30, 2016			September 30, 2015
Cash flows provided by operating activities
Net income	$	538,798		$	416,373
Adjustments to reconcile net income to net cash provided by operating activities
Amortization, accretion and depreciation	18,343			3,837
Equity in undistributed losses (earnings) of other ventures	10,173			(11,303		)
Net realized and unrealized (gains) losses on investments	(191,295		)	26,101
Net unrealized losses included in net investment income	17,608			10,690
Net unrealized losses included in other income	—			426
Change in:
Premiums receivable	(403,322		)	(191,470		)
Prepaid reinsurance premiums	(280,750		)	(156,184		)
Reinsurance recoverable	(106,243		)	(70,994		)
Deferred acquisition costs	(152,461		)	(103,460		)
Reserve for claims and claim expenses	94,054			(14,293		)
Unearned premiums	545,034			296,950
Reinsurance balances payable	250,686			74,124
Other	29,378			(118,650		)
Net cash provided by operating activities	370,003			162,147
Cash flows provided by (used in) investing activities
Proceeds from sales and maturities of fixed maturity investments trading	6,509,019			6,956,729
Purchases of fixed maturity investments trading	(6,744,838		)	(7,194,793		)
Proceeds from sales and maturities of fixed maturity investments available for sale	5,931			6,741
Net sales (purchases) of equity investments trading	183,112			(153,452		)
Net sales of short term investments	128,869			896,027
Net (purchases) sales of other investments	(56,765		)	7,033
Net purchases of investments in other ventures	—			(45		)
Net sales of other assets	400			4,500
Net purchase of Platinum	—			(678,152		)
Net cash provided by (used in) investing activities	25,728			(155,412		)
Cash flows (used in) provided by financing activities
Dividends paid – RenaissanceRe common shares	(38,886		)	(40,883		)
Dividends paid – preference shares	(16,786		)	(16,786		)
RenaissanceRe common share repurchases	(309,434		)	(197,350		)
Issuance of debt, net of expenses	—			445,589
Net third party redeemable noncontrolling interest share transactions	(45,496		)	(187,339		)
Net cash (used in) provided by financing activities	(410,602		)	3,231
Effect of exchange rate changes on foreign currency cash	1,316			(11,004		)
Net decrease in cash and cash equivalents	(13,555		)	(1,038		)
Cash and cash equivalents, beginning of period	506,885			525,584
Cash and cash equivalents, end of period	$	493,330		$	524,546

See accompanying notes to the consolidated financial statements

RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unless otherwise noted, amounts in tables expressed in thousands of United States (“U.S.”) dollars,

except shares, per share amounts and percentages) (Unaudited)

NOTE 1. ORGANIZATION

This report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2015.

RenaissanceRe was formed under the laws of Bermuda on June 7, 1993. Together with its wholly owned and majority-owned subsidiaries and DaVinciRe (as defined below), which are collectively referred to herein as the “Company”, RenaissanceRe provides reinsurance and insurance coverages and related services to a broad range of customers.

•

On March 2, 2015, RenaissanceRe completed its acquisition of Platinum Underwriters Holdings, Ltd. (“Platinum”). As a result of the acquisition, Platinum and its subsidiaries became wholly owned subsidiaries of RenaissanceRe, including Renaissance Reinsurance U.S. Inc., formerly known as Platinum Underwriters Reinsurance, Inc. ("Renaissance Reinsurance U.S."). The Company accounted for the acquisition of Platinum under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic Business Combinations and the Company's consolidated results of operations include those of Platinum from March 2, 2015.

•

Renaissance Reinsurance, a Bermuda-domiciled reinsurance company, is the Company’s principal reinsurance subsidiary and provides property catastrophe and specialty reinsurance coverages to insurers and reinsurers on a worldwide basis. Effective October 1, 2016, each of Renaissance Reinsurance Specialty Risks Ltd. and Platinum Underwriters Bermuda, Ltd. merged into Renaissance Reinsurance, with Renaissance Reinsurance being the sole surviving entity.


•	Renaissance Reinsurance U.S. is a reinsurance company domiciled in the state of Maryland that provides property and casualty reinsurance coverages to insurers and reinsurers, primarily in the Americas.

•

RenaissanceRe Underwriting Managers U.S. LLC, a specialty reinsurance agency domiciled in the state of Connecticut, provides specialty treaty reinsurance solutions on both a quota share and excess of loss basis; and writes business on behalf of RenaissanceRe Specialty U.S. Ltd. (“RenaissanceRe Specialty U.S.”), a Bermuda-domiciled reinsurer, which operates subject to U.S. federal income tax, and RenaissanceRe Syndicate 1458 (“Syndicate 1458”).


•	Syndicate 1458 is the Company’s Lloyd’s syndicate. RenaissanceRe Corporate Capital (UK) Limited (“RenaissanceRe CCL”), a wholly owned subsidiary of RenaissanceRe, is Syndicate 1458’s sole corporate member and RenaissanceRe Syndicate Management Ltd. (“RSML”), a wholly owned subsidiary of RenaissanceRe, is the managing agent for Syndicate 1458.

•

The Company also manages property catastrophe and specialty reinsurance business written on behalf of joint ventures, which principally include Top Layer Reinsurance Ltd. (“Top Layer Re”), recorded under the equity method of accounting, and DaVinci Reinsurance Ltd. (“DaVinci”). Because the Company owns a noncontrolling equity interest in, but controls a majority of the outstanding voting power of DaVinci’s parent, DaVinciRe Holdings Ltd. (“DaVinciRe”), the results of DaVinci and DaVinciRe are consolidated in the Company’s financial statements and all significant intercompany transactions have been eliminated. Redeemable noncontrolling interest - DaVinciRe represents the interests of external parties with respect to the net income and shareholders’ equity of DaVinciRe. Renaissance Underwriting Managers, Ltd. (“RUM”), a wholly owned subsidiary of RenaissanceRe, acts as exclusive underwriting manager for these joint ventures in return for fee-based income and profit participation.


•	RenaissanceRe Medici Fund Ltd. (“Medici”) is an exempted fund, incorporated under the laws of Bermuda. Medici’s objective is to seek to invest substantially all of its assets in various insurance based investment instruments that have returns primarily tied to property catastrophe risk. Third party

investors have subscribed for a portion of the participating, non-voting common shares of Medici. Because the Company owns a noncontrolling equity interest in, but controls a majority of the outstanding voting power of, Medici’s parent, RenaissanceRe Fund Holdings Ltd. (“Fund Holdings”), the results of Medici and Fund Holdings are consolidated in the Company’s financial statements and all significant inter-company transactions have been eliminated. Redeemable noncontrolling interest - Medici represents the interests of external parties with respect to the net income and shareholders’ equity of Medici.

•

Effective January 1, 2013, the Company formed and launched a managed joint venture, Upsilon RFO Re Ltd., formerly known as Upsilon Reinsurance II Ltd. (“Upsilon RFO”), a Bermuda domiciled special purpose insurer, to provide additional capacity to the worldwide aggregate and per-occurrence primary and retrocessional property catastrophe excess of loss market. Upsilon RFO is considered a variable interest entity (“VIE”) and the Company is considered the primary beneficiary. As a result, Upsilon RFO is consolidated by the Company and all significant inter-company transactions have been eliminated.

•

Effective November 13, 2014, the Company incorporated RenaissanceRe Upsilon Fund Ltd. (“Upsilon Fund”), an exempted Bermuda segregated accounts company. Upsilon Fund was formed to provide a fund structure through which third party investors can invest in reinsurance risk managed by the Company. As a segregated accounts company, Upsilon Fund is permitted to establish segregated accounts to invest in and hold identified pools of assets and liabilities. Each pool of assets and liabilities in each segregated account is structured to be ring-fenced from any claims from the creditors of Upsilon Fund’s general account and from the creditors of other segregated accounts within Upsilon Fund. Third party investors purchase redeemable, non-voting preference shares linked to specific segregated accounts of Upsilon Fund and own 100% of these shares. Upsilon Fund is an investment company and is considered a VIE. The Company does not have a variable interest in Upsilon Fund and as a result Upsilon Fund is not consolidated by the Company.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Company’s significant accounting policies as described in its Form 10-K for the year ended December 31, 2015, except as noted below.

BASIS OF PRESENTATION

These consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated from these statements.

Certain comparative information has been reclassified to conform to the current presentation. Because of the seasonality of the Company’s business, the results of operations and cash flows for any interim period will not necessarily be indicative of the results of operations and cash flows for the full fiscal year or subsequent quarters.

USE OF ESTIMATES IN FINANCIAL STATEMENTS

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The major estimates reflected in the Company’s consolidated financial statements include, but are not limited to, the reserve for claims and claim expenses; reinsurance recoverables, including allowances for reinsurance recoverables deemed uncollectible; estimates of written and earned premiums; fair value, including the fair value of investments, financial instruments and derivatives; impairment charges and the Company’s deferred tax valuation allowance.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The objective of ASU 2014-12 is to resolve the diverse accounting treatment of share-based payment awards in situations where an employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved. For example, if an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award. ASU 2014-12 will resolve if and when the performance target is achieved. ASU 2014-12 became effective for all entities in annual and interim periods beginning after December 15, 2015. Early adoption was permitted. The Company adopted ASU 2014-12 effective January 1, 2016, and prospectively applied the amendments in ASU 2014-12 to all awards granted or modified after the effective date. The adoption of ASU 2014-12 did not have a material impact on the Company’s consolidated statements of operations and financial position.

Amendments to the Consolidation Analysis

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 will affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under ASU 2015-02. ASU 2015-02 set forth amendments: modifying the evaluation of whether limited partnerships and similar legal entities are VIEs; eliminating the presumption that a general partner should consolidate a limited partnership; affecting the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangement and related party relationships; and providing a scope exception from consolidation guidance for reporting entities with interests in certain investment funds. ASU 2015-02 became effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted. The Company adopted ASU 2015-02 effective January 1, 2016 and it did not have a material impact on the Company’s consolidated statements of operations and financial position. See “Note 7. Variable Interest Entities” for additional information related to the Company’s VIE’s.

Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The objective of ASU 2015-03 is to simplify the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 became effective for public business entities in annual and interim periods beginning after December 15, 2015 with retroactive application. The Company retrospectively adopted ASU 2015-03 effective January 1, 2016 and the impact on the Company’s consolidated balance sheet at December 31, 2015 was to reduce each of other assets and debt by $5.6 million, respectively, which represented the deferred debt issuance costs previously recorded in other assets and reclassified as an offset to debt. In addition, for the nine months ended September 30, 2015, corporate expense was reduced by $0.4 million and interest expense was increased by $0.4 million to reclassify the amortization of deferred debt issuance costs from corporate expense to interest expense. There was no net impact on the Company’s consolidated statements of operations or financial position as a result of the retrospective adoption of ASU 2015-03.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. ASU 2015-07 also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net

asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. ASU 2015-07 became effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application was permitted. The Company retrospectively adopted ASU 2015-07 effective January 1, 2016; since this update is disclosure-related only, it did not have a material impact on the Company’s statements of operations and financial position.

Simplifying the Accounting for Measurement-Period Adjustments

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 removes the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. Rather, those adjustments are to be recognized by the acquirer in the reporting period in which the adjustment amounts are determined. A reporting entity is also required to disclose, in the reporting period in which the adjustment amounts are recorded, the effect on earnings of changes in depreciation, amortization, or other income effects, as a result of the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, the reporting entity would present on the face of the income statement or disclose in the notes the amounts that would have been recorded in previous reporting periods if the adjustment to provisional amounts had been recognized as of the acquisition date. ASU 2015-16 was effective for public business entities in annual and interim periods beginning after December 15, 2015. ASU 2015-16 should be applied prospectively to adjustments for provisional amounts that occur after the effective date, with earlier application permitted for financial statements that have not been issued. The Company adopted ASU 2015-16 effective January 1, 2016 and it did not have a material impact on the Company’s consolidated statements of operations and financial position.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 is effective for public business entities in annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.

Disclosures about Short-Duration Contracts

In May 2015, the FASB issued ASU No. 2015-09, Disclosures about Short-Duration Contracts (“ASU 2015-09”). ASU 2015-09 requires insurance entities to disclose for annual reporting periods additional information about the liability for unpaid claims and claim adjustment expenses, including: (1) incurred and paid claims development information by accident year, on a net basis, for the number of years for which claims incurred typically remain outstanding, not exceeding 10 years; (2) a reconciliation of incurred and paid claims development information to the aggregate carry amount of the liability for claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position; (3) for each accident year presented of incurred claims development information, the total of incurred but not reported liabilities plus expected development on reported claims including in the liability for unpaid claims and claim adjustment expenses, accompanied by a description of the reserving methodologies; (4) for each accident year presented of incurred claims development information, quantitative information about claim frequency accompanied by a qualitative description of methodologies used for determining claim frequency information; and (5) for all claims, the

average annual percentage payout of incurred claims by age for the same number of accident years presented in (3) and (4) above. ASU 2015-09 also requires insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including the reasons for the change and the effects on the financial statements. In addition, ASU 2015-09 requires insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses. ASU 2015-09 is effective for public business entities in annual periods beginning after December 31, 2015, and interim periods within annual periods beginning after December 31, 2016. Early adoption is permitted. ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As this guidance is disclosure-related only, the adoption of this guidance is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in the consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liabilities in accordance with the fair value option, requires the separate presentation of financial assets and financial liabilities by measurement category and for form of financial asset on the balance sheet or the accompanying notes to the financial statements and clarifies that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the organization’s other deferred tax assets. ASU 2016-01 is effective for public business entities in annual and interim periods beginning after December 15, 2017. Earlier adoption is generally not permitted, except for certain specific provisions of ASU 2016-01. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.

NOTE 3. INVESTMENTS

Fixed Maturity Investments Trading

The following table summarizes the fair value of fixed maturity investments trading:




	September 30, 2016		December 31, 2015
U.S. treasuries	$	2,564,635	$	2,064,944
Agencies	120,761		137,976
Municipal	550,062		583,282
Non-U.S. government (Sovereign debt)	313,560		334,981
Non-U.S. government-backed corporate	129,423		138,994
Corporate	1,916,092		2,055,323
Agency mortgage-backed	521,851		504,368
Non-agency mortgage-backed	276,438		262,235
Commercial mortgage-backed	487,621		554,625
Asset-backed	207,976		128,277
Total fixed maturity investments trading	$	7,088,419	$	6,765,005

Fixed Maturity Investments Available For Sale

The following table summarizes the amortized cost, fair value and related unrealized gains and losses and non-credit other-than-temporary impairments of fixed maturity investments available for sale:




			Included in Accumulated Other Comprehensive Income
September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Non-Credit Other-Than- Temporary Impairments (1)
Agency mortgage-backed	$	136	$	—	$	—	$	136	$	—
Non-agency mortgage-backed	5,683		1,212		—		6,895		474
Commercial mortgage-backed	4,504		186		—		4,690		—
Total fixed maturity investments available for sale	$	10,323	$	1,398	$	—	$	11,721	$	474




			Included in Accumulated Other Comprehensive Income
December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Non-Credit Other-Than- Temporary Impairments (1)
Agency mortgage-backed	$	143	$	7	$	—	$	150	$	—
Non-agency mortgage-backed	7,005		1,523		—		8,528		550
Commercial mortgage-backed	6,578		293		—		6,871		—
Asset-backed	2,217		47		—		2,264		—
Total fixed maturity investments available for sale	$	15,943	$	1,870	$	—	$	17,813	$	550


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

Contractual maturities of fixed maturity investments are described in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.




	Trading				Available for Sale				Total Fixed Maturity Investments
September 30, 2016	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	$	280,939	$	280,850	$	—	$	—	$	280,939	$	280,850
Due after one through five years	4,083,141		4,102,622		—		—		4,083,141		4,102,622
Due after five through ten years	1,014,691		1,044,737		—		—		1,014,691		1,044,737
Due after ten years	159,118		166,324		—		—		159,118		166,324
Mortgage-backed	1,269,868		1,285,910		10,323		11,721		1,280,191		1,297,631
Asset-backed	206,807		207,976		—		—		206,807		207,976
Total	$	7,014,564	$	7,088,419	$	10,323	$	11,721	$	7,024,887	$	7,100,140

Equity Investments Trading

The following table summarizes the fair value of equity investments trading:




	September 30, 2016		December 31, 2015
Financials	$	238,572	$	193,716
Communications and technology	36,421		65,833
Industrial, utilities and energy	28,361		51,168
Consumer	20,846		40,918
Healthcare	17,966		36,148
Basic materials	3,399		6,094
Total	$	345,565	$	393,877

Pledged Investments

At September 30, 2016, $2.4 billion of cash and investments at fair value were on deposit with, or in trust accounts for the benefit of various counterparties, including with respect to the Company’s letter of credit facilities (December 31, 2015 - $2.5 billion). Of this amount, $686.0 million is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities (December 31, 2015 - $664.6 million).

Reverse Repurchase Agreements

At September 30, 2016, the Company held $58.2 million (December 31, 2015 - $26.2 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of short term investments on the Company’s consolidated balance sheets. The required collateral for these loans typically includes high-quality, readily marketable instruments at a minimum amount of 102% of the loan principal. Upon maturity, the Company receives principal and interest income.

Net Investment Income

The components of net investment income are as follows:




	Three months ended						Nine months ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Fixed maturity investments	$	39,959		$	37,023		$	122,056		$	96,753
Short term investments	1,174			267			3,401			761
Equity investments	797			1,791			3,325			6,308
Other investments
Private equity investments	4,572			(14,505		)	(430		)	1,333
Other	8,765			7,261			17,109			11,443
Cash and cash equivalents	246			80			584			355
	55,513			31,917			146,045			116,953
Investment expenses	(4,090		)	(3,579		)	(11,635		)	(10,304		)
Net investment income	$	51,423		$	28,338		$	134,410		$	106,649

Net Realized and Unrealized Gains on Investments

Net realized and unrealized gains on investments are as follows:




	Three months ended						Nine months ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Gross realized gains	$	20,383		$	9,160		$	60,794		$	39,364
Gross realized losses	(3,363		)	(13,720		)	(25,832		)	(40,143		)
Net realized gains (losses) on fixed maturity investments	17,020			(4,560		)	34,962			(779		)
Net unrealized (losses) gains on fixed maturity investments trading	(4,235		)	10,208			125,501			(11,924		)
Net realized and unrealized gains (losses) on investments-related derivatives	1,727			(16,612		)	(26,873		)	(1,004		)
Net realized gains (losses) on equity investments trading	127			(114		)	14,038			16,199
Net unrealized gains (losses) on equity investments trading	45,231			(30,060		)	43,667			(28,593		)
Net realized and unrealized gains (losses) on investments	$	59,870		$	(41,138	)	$	191,295		$	(26,101	)

The Company did not have any fixed maturity investments available for sale in an unrealized loss position at September 30, 2016 or December 31, 2015.

NOTE 4. FAIR VALUE MEASUREMENTS

The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within the Company’s consolidated financial statements. Fair value is defined under accounting guidance currently applicable to the Company to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. The Company recognizes the change in unrealized gains and losses arising from changes in fair value in its consolidated statements of operations, with the exception of changes in unrealized gains and losses on its fixed maturity investments available for sale, which are recognized as a component of accumulated other comprehensive income in shareholders’ equity.

FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that use at least one significant input that is unobservable (Level 3). The three levels of the fair value hierarchy are described below:


•	Fair values determined by Level 1 inputs utilize unadjusted quoted prices obtained from active markets for identical assets or liabilities for which the Company has access. The fair value is determined by multiplying the quoted price by the quantity held by the Company;

•

Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals, broker quotes and certain pricing indices; and

•

Level 3 inputs are based all or in part on significant unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management’s best estimate of the assumptions used by other market participants in determining the fair value of the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability.

In order to determine if a market is active or inactive for a security, the Company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity.

There have been no material changes in the Company’s valuation techniques, nor have there been any transfers between Level 1 and Level 2, or Level 2 and 3 during the period represented by these consolidated financial statements.

Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis and also represents the carrying amount on the Company’s consolidated balance sheets:




At September 30, 2016	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fixed maturity investments
U.S. treasuries	$	2,564,635		$	2,564,635	$	—		$	—
Agencies	120,761			—		120,761			—
Municipal	550,062			—		550,062			—
Non-U.S. government (Sovereign debt)	313,560			—		313,560			—
Non-U.S. government-backed corporate	129,423			—		129,423			—
Corporate	1,916,092			—		1,916,092			—
Agency mortgage-backed	521,987			—		521,987			—
Non-agency mortgage-backed	283,333			—		283,333			—
Commercial mortgage-backed	492,311			—		492,311			—
Asset-backed	207,976			—		207,976			—
Total fixed maturity investments	7,100,140			2,564,635		4,535,505			—
Short term investments	1,136,660			—		1,136,660			—
Equity investments trading	345,565			345,565		—			—
Other investments
Catastrophe bonds	298,408			—		298,408			—
Private equity partnerships (1)	192,217			—		—			—
Senior secured bank loan fund (1)	19,440			—		—			—
Hedge funds (1)	1,556			—		—			—
Total other investments	511,621			—		298,408			—
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts (2)	(12,012		)	—		—			(12,012		)
Derivatives (3)	4,682			916		3,766			—
Other	(8,173		)	—		(8,173		)	—
Total other assets and (liabilities)	(15,503		)	916		(4,407		)	(12,012		)
	$	9,078,483		$	2,911,116	$	5,966,166		$	(12,012	)


(1)	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.


(2)	Included in assumed and ceded (re)insurance contracts at September 30, 2016 was $5.8 million and $17.8 million of other assets and other liabilities, respectively.


(3)	See “Note 11. Derivative Instruments” for additional information related to the fair value by type of contract, of derivatives entered into by the Company.




At December 31, 2015	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fixed maturity investments
U.S. treasuries	$	2,064,944		$	2,064,944		$	—		$	—
Agencies	137,976			—			137,976			—
Municipal	583,282			—			583,282			—
Non-U.S. government (Sovereign debt)	334,981			—			334,981			—
Non-U.S. government-backed corporate	138,994			—			138,994			—
Corporate	2,055,323			—			2,047,705			7,618
Agency mortgage-backed	504,518			—			504,518			—
Non-agency mortgage-backed	270,763			—			270,763			—
Commercial mortgage-backed	561,496			—			561,496			—
Asset-backed	130,541			—			130,541			—
Total fixed maturity investments	6,782,818			2,064,944			4,710,256			7,618
Short term investments	1,208,401			—			1,208,401			—
Equity investments trading	393,877			393,877			—			—
Other investments
Catastrophe bonds	241,253			—			241,253			—
Private equity partnerships (1)	214,848			—			—			—
Senior secured bank loan fund (1)	23,231			—			—			—
Hedge funds (1)	2,289			—			—			—
Total other investments	481,621			—			241,253			—
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts (2)	(5,899		)	—			—			(5,899		)
Derivatives (3)	1,486			(1,234		)	2,720			—
Other	(12,320		)	—			(12,320		)	—
Total other assets and (liabilities)	(16,733		)	(1,234		)	(9,600		)	(5,899		)
	$	8,849,984		$	2,457,587		$	6,150,310		$	1,719


(1)	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.


(2)	Included in assumed and ceded (re)insurance contracts at December 31, 2015 was $3.5 million and $9.4 million of other assets and other liabilities, respectively.


(3)	See “Note 11. Derivative Instruments” for additional information related to the fair value by type of contract, of derivatives entered into by the Company.

Level 1 and Level 2 Assets and Liabilities Measured at Fair Value

Fixed Maturity Investments

Fixed maturity investments included in Level 1 consist of the Company’s investments in U.S. treasuries. Fixed maturity investments included in Level 2 are agencies, municipal, non-U.S. government, non-U.S. government-backed corporate, corporate, agency mortgage-backed, non-agency mortgage-backed, commercial mortgage-backed and asset-backed.

The Company’s fixed maturity investments are primarily priced using pricing services, such as index providers and pricing vendors, as well as broker quotations. In general, the pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an

exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers, reference data and industry and economic events. Index pricing generally relies on market traders as the primary source for pricing, however models are also utilized to provide prices for all index eligible securities. The models use a variety of observable inputs such as benchmark yields, transactional data, dealer runs, broker-dealer quotes and corporate actions. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.

In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.

The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company’s fixed maturity investments are detailed below by asset class.

U.S. treasuries

Level 1 - At September 30, 2016, the Company’s U.S. treasuries fixed maturity investments were primarily priced by pricing services and had a weighted average effective yield of 0.9% and a weighted average credit quality of AA (December 31, 2015 - 1.3% and AA, respectively). When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers. Certain data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue and maturity date.

Agencies

Level 2 - At September 30, 2016, the Company’s agency fixed maturity investments had a weighted average effective yield of 1.3% and a weighted average credit quality of AA (December 31, 2015 - 1.7% and AA, respectively). The issuers of the Company’s agency fixed maturity investments primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Fixed maturity investments included in agencies are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.

Municipal

Level 2 - At September 30, 2016, the Company’s municipal fixed maturity investments had a weighted average effective yield of 1.7% and a weighted average credit quality of AA (December 31, 2015 - 2.0% and AA, respectively). The Company’s municipal fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information regarding the security from third party sources such as trustees, paying agents or issuers. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread over widely accepted market benchmarks.

Non-U.S. government (Sovereign debt)

Level 2 - At September 30, 2016, the Company’s non-U.S. government fixed maturity investments had a weighted average effective yield of 1.1% and a weighted average credit quality of AAA (December 31, 2015 - 1.4% and AA, respectively). The issuers of securities in this sector are non-U.S. governments and their respective agencies as well as supranational organizations. Securities held in these sectors are primarily

priced by pricing services that employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

Non-U.S. government-backed corporate

Level 2 - At September 30, 2016, the Company’s non-U.S. government-backed corporate fixed maturity investments had a weighted average effective yield of 1.0% and a weighted average credit quality of AAA (December 31, 2015 - 1.3% and AA, respectively). Non-U.S. government-backed fixed maturity investments are primarily priced by pricing services that employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread to the respective curve for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

Corporate

Level 2 - At September 30, 2016, the Company’s corporate fixed maturity investments principally consisted of U.S. and international corporations and had a weighted average effective yield of 3.5% and a weighted average credit quality of BBB (December 31, 2015 - 3.8% and BBB, respectively). The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.

Agency mortgage-backed

Level 2 - At September 30, 2016, the Company’s agency mortgage-backed fixed maturity investments included agency residential mortgage-backed securities with a weighted average effective yield of 2.1%, a weighted average credit quality of AA and a weighted average life of 5.0 years (December 31, 2015 - 2.7%, AA and 6.1 years, respectively). The Company’s agency mortgage-backed fixed maturity investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.

Non-agency mortgage-backed

Level 2 - The Company’s non-agency mortgage-backed fixed maturity investments include non-agency prime residential mortgage-backed and non-agency Alt-A fixed maturity investments. The Company has no fixed maturity investments that were classified as sub-prime at the time of purchase held in its fixed maturity investments portfolio. At September 30, 2016, the Company’s non-agency prime residential mortgage-backed fixed maturity investments had a weighted average effective yield of 4.2%, a weighted average credit quality of non-investment grade, and a weighted average life of 4.5 years (December 31, 2015 - 3.8%, non-investment grade and 4.3 years, respectively). The Company’s non-agency Alt-A fixed maturity investments held at September 30, 2016 had a weighted average effective yield of 5.0%, a weighted average credit quality of non-investment grade and a weighted average life of 5.9 years (December 31, 2015 - 4.7%, non-investment grade and 5.4 years, respectively). Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer

spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.

Commercial mortgage-backed

Level 2 - At September 30, 2016, the Company’s commercial mortgage-backed fixed maturity investments had a weighted average effective yield of 2.3%, a weighted average credit quality of AAA, and a weighted average life of 3.7 years (December 31, 2015 - 2.9%, AAA and 3.7 years, respectively). Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services discount the expected cash flows for each security held in this sector using a spread adjusted benchmark yield based on the characteristics of the security.

Asset-backed

Level 2 - At September 30, 2016, the Company’s asset-backed fixed maturity investments had a weighted average effective yield of 2.1%, a weighted average credit quality of AAA and a weighted average life of 2.8 years (December 31, 2015 - 2.1%, AAA and 2.5 years, respectively). The underlying collateral for the Company’s asset-backed fixed maturity investments primarily consists of student loans, credit card receivables, auto loans and other receivables. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.

Short Term Investments

Level 2 - The fair value of the Company’s portfolio of short term investments is generally determined using amortized cost which approximates fair value and, in certain cases, in a manner similar to the Company’s fixed maturity investments noted above. At September 30, 2016, the Company’s short term investments had a weighted average effective yield of 0.5% and a weighted average credit quality of AAA (December 31, 2015 - 0.4% and AAA, respectively).

Equity Investments, Classified as Trading

Level 1 - The fair value of the Company’s portfolio of equity investments, classified as trading is primarily priced by pricing services, reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing services utilize daily data from many real time market sources, including applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source was used for each security.

Other investments

Catastrophe bonds

Level 2 - The Company’s other investments include investments in catastrophe bonds which are recorded at fair value based on broker or underwriter bid indications.

Other assets and liabilities

Derivatives

Level 1 and Level 2 - Other assets and liabilities include certain derivatives entered into by the Company. The fair value of these transactions includes certain exchange traded foreign currency forward contracts which are considered Level 1, and certain credit derivatives, determined using standard industry valuation models and considered Level 2, as the inputs to the valuation model are based on observable market

inputs, including credit spreads, credit ratings of the underlying referenced security, the risk free rate and the contract term.

Other

Level 2 - The liabilities measured at fair value and included in Level 2 at September 30, 2016 of $8.2 million are comprised of cash settled restricted stock units (“CSRSU”) that form part of the Company’s compensation program. The fair value of the Company’s CSRSUs is determined using observable exchange traded prices for the Company’s common shares.

Level 3 Assets and Liabilities Measured at Fair Value

Below is a summary of quantitative information regarding the significant observable and unobservable inputs (Level 3) used in determining the fair value of assets and liabilities measured at fair value on a recurring basis:




At September 30, 2016	Fair Value (Level 3)			Valuation Technique	Unobservable (U) and Observable (O) Inputs	Low		High		Weighted Average or Actual
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts	(677		)	Internal valuation model	Bond price (U)	$	100.01	$	102.95	$	101.57
					Liquidity discount (U)	n/a		n/a		1.3		%
Assumed and ceded (re)insurance contracts	(11,335		)	Internal valuation model	Net undiscounted cash flows (U)	n/a		n/a		$	(11,520	)
					Expected loss ratio (U)	n/a		n/a		39.0		%
					Net acquisition expense ratio (O)	n/a		n/a		(21.7		)%
					Contract period (O)	0.7 years		4.7 years		4.3 years
					Discount rate (U)	n/a		n/a		1.1		%
Total assumed and ceded (re)insurance contracts	(12,012		)
Total other assets and (liabilities)	(12,012		)
	$	(12,012	)

Other assets and liabilities

Assumed and ceded (re)insurance contracts

Level 3 - At September 30, 2016, the Company had a $0.7 million net liability related to an assumed reinsurance contract accounted for at fair value, with the fair value obtained through the use of an internal valuation model. The inputs to the internal valuation model are principally based on indicative pricing obtained from independent brokers and pricing vendors for similarly structured marketable securities. The most significant unobservable inputs include prices for similar marketable securities and a liquidity premium. The Company considers the prices for similar securities to be unobservable, as there is little, if any market activity for these similar assets. In addition, the Company has estimated a liquidity premium that would be required if the Company attempted to effectively exit its position by executing a short sale of these securities. Generally, an increase in the prices for similar marketable securities or a decrease in the liquidity premium would result in an increase in the expected profit and ultimate fair value of this assumed reinsurance contract.

Level 3 - At September 30, 2016, the Company had an $11.3 million net liability related to assumed and ceded (re)insurance contracts accounted for at fair value, with the fair value obtained through the use of an internal valuation model. The inputs to the internal valuation model are principally based on proprietary data as observable market inputs are generally not available. The most significant unobservable inputs include

the assumed and ceded expected net cash flows related to the contracts, including the expected premium, acquisition expenses and losses; the expected loss ratio and the relevant discount rate used to present value the net cash flows. The contract period and acquisition expense ratio are considered observable input as each is defined in the contract. The negative acquisition expense ratio used to determine the fair value of the contracts at September 30, 2016 is the result of override commissions on the contracts being higher than the gross acquisition expenses. Generally, an increase in the net expected cash flows and expected term of the contract and a decrease in the discount rate, expected loss ratio or acquisition expense ratio, would result in an increase in the expected profit and ultimate fair value of these assumed and ceded (re)insurance contracts.

Below is a reconciliation of the beginning and ending balances, for the periods shown, of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs. Interest and dividend income are included in net investment income and are excluded from the reconciliation.




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other assets and (liabilities)			Total
Balance - July 1, 2016	$	—		$	(2,680	)	$	(2,680	)
Total realized gains
Included in other income	—			795			795
Purchases	—			(10,127		)	(10,127		)
Settlements	—			—			—
Balance - September 30, 2016	$	—		$	(12,012	)	$	(12,012	)



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other assets and (liabilities)			Total
Balance - January 1, 2016	$	7,618		$	(5,899	)	$	1,719
Total unrealized losses
Included in net investment income	(118		)	—			(118		)
Total realized gains
Included in other income	—			4,587			4,587
Purchases	—			(10,700		)	(10,700		)
Settlements	(7,500		)	—			(7,500		)
Balance - September 30, 2016	$	—		$	(12,012	)	$	(12,012	)




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other assets and (liabilities)			Total
Balance - July 1, 2015	$	7,660		$	75,687		$	83,347
Total unrealized (losses) gains
Included in net investment income	(65		)	4			(61		)
Included in other income	—			(78		)	(78		)
Total realized gains
Included in other income	—			1,827			1,827
Total foreign exchange losses	—			7			7
Purchases	—			(498		)	(498		)
Settlements	—			—			—
Balance - September 30, 2015	$	7,595		$	76,949		$	84,544
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in net investment income	$	(65	)	$	4		$	(61	)
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in other income	$	—		$	(78	)	$	(78	)



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other assets and (liabilities)			Total
Balance - January 1, 2015	$	15,660		$	(8,934	)	$	6,726
Total unrealized (losses) gains
Included in net investment income	(565		)	180			(385		)
Included in other income	—			(426		)	(426		)
Total realized gains
Included in other income	—			4,655