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 June 30, 2017
OR
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 Number: 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, Bermuda
HM 19
(Address of Principal Executive Offices)
(Zip Code)

(441) 295-4513
(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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
Large accelerated filer Q, Accelerated filer o, Non-accelerated filer o (do not check if a smaller reporting company), Smaller reporting company o, Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 July 21, 2017 was 40,265,190.
 



RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
 
 
 
Page
 
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.


2


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 effects of United States (“U.S.”) business tax reform proposals;
•
adverse tax developments, including potential changes to the taxation of inter-company or related party transactions, or changes to the tax treatment of our shareholders or investors in our joint ventures or other entities we manage;
•
the effect of emerging claims and coverage issues;
•
continued soft reinsurance underwriting market conditions;
•
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;
•
a contention by the Internal Revenue Service (the “IRS”) that Renaissance Reinsurance Ltd. (“Renaissance Reinsurance”), or any of our other Bermuda subsidiaries, is subject to taxation in the U.S.;
•
the performance of our investment portfolio;
•
losses we could face from terrorism, political unrest or war;
•
the effect of cybersecurity risks, including technology breaches or failure, on our business;
•
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 effects of inflation;

3


•
the ability of our ceding companies and delegated authority counterparties to accurately 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;
•
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 as a result of increased global regulation of the insurance and reinsurance industry;
•
changes in Bermuda laws and regulations and the political environment in Bermuda;
•
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;
•
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 political, regulatory or industry initiatives adversely impacting us;
•
risks related to Solvency II;
•
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 competitors, customers and insurance and reinsurance brokers;
•
increasing barriers to free trade and the free flow of capital;
•
international restrictions on the writing of reinsurance by foreign companies and government intervention in the natural catastrophe market;
•
the effect of Organization for Economic Co-operation and Development (the “OECD”) or European Union (“EU”) measures to increase our taxes and reporting requirements;
•
the effect of the vote by the U.K. to leave the EU;
•
changes in regulatory regimes and accounting rules that may impact financial results irrespective of business operations; 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, 2016, 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.

4


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)
 
June 30,
2017
 
December 31,
2016
Assets
(Unaudited)
 
(Audited)
Fixed maturity investments trading, at fair value – amortized cost $7,257,020
at June 30, 2017 (December 31, 2016 – $6,920,690)
$
7,282,264

 
$
6,891,244

Short term investments, at fair value
1,070,950

 
1,368,379

Equity investments trading, at fair value
393,405

 
383,313

Other investments, at fair value
561,212

 
549,805

Investments in other ventures, under equity method
101,077

 
124,227

Total investments
9,408,908

 
9,316,968

Cash and cash equivalents
623,150

 
421,157

Premiums receivable
1,533,833

 
987,323

Prepaid reinsurance premiums
705,322

 
441,260

Reinsurance recoverable
370,586

 
279,564

Accrued investment income
40,118

 
38,076

Deferred acquisition costs
430,106

 
335,325

Receivable for investments sold
170,411

 
105,841

Other assets
176,816

 
175,382

Goodwill and other intangible assets
246,430

 
251,186

Total assets
$
13,705,680

 
$
12,352,082

Liabilities, Noncontrolling Interests and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Reserve for claims and claim expenses
$
2,989,806

 
$
2,848,294

Unearned premiums
1,847,206

 
1,231,573

Debt
988,866

 
948,663

Reinsurance balances payable
1,052,494

 
673,983

Payable for investments purchased
407,312

 
305,714

Other liabilities
222,658

 
301,684

Total liabilities
7,508,342

 
6,309,911

Commitments and Contingencies


 


Redeemable noncontrolling interests
1,242,083

 
1,175,594

Shareholders’ Equity
 
 
 
Preference shares: $1.00 par value – 16,000,000 shares issued and outstanding at June 30, 2017 (December 31, 2016 – 16,000,000)
400,000

 
400,000

Common shares: $1.00 par value – 40,282,418 shares issued and outstanding at June 30, 2017 (December 31, 2016 – 41,187,413)
40,282

 
41,187

Additional paid-in capital
67,583

 
216,558

Accumulated other comprehensive (loss) income
(139
)
 
1,133

Retained earnings
4,447,529

 
4,207,699

Total shareholders’ equity attributable to RenaissanceRe
4,955,255

 
4,866,577

Total liabilities, noncontrolling interests and shareholders’ equity
$
13,705,680

 
$
12,352,082




See accompanying notes to the consolidated financial statements

5


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three and six months ended June 30, 2017 and 2016
(in thousands of United States Dollars, except per share amounts) (Unaudited)
 
Three months ended
 
Six months ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
827,415

 
$
759,128

 
$
1,749,505

 
$
1,621,261

Net premiums written
$
555,745

 
$
519,916

 
$
1,099,881

 
$
1,031,591

Increase in unearned premiums
(173,480
)
 
(168,514
)
 
(351,571
)
 
(326,583
)
Net premiums earned
382,265

 
351,402

 
748,310

 
705,008

Net investment income
54,163

 
54,124

 
108,488

 
82,987

Net foreign exchange gains (losses)
3,109

 
(690
)
 
11,274

 
(2,382
)
Equity in earnings of other ventures
5,543

 
6,022

 
4,036

 
7,633

Other income
2,392

 
2,654

 
4,057

 
6,733

Net realized and unrealized gains on investments
58,113

 
69,772

 
101,486

 
131,425

Total revenues
505,585

 
483,284

 
977,651

 
931,404

Expenses
 
 
 
 
 
 
 
Net claims and claim expenses incurred
142,587

 
167,750

 
335,668

 
294,355

Acquisition expenses
88,251

 
69,005

 
171,533

 
134,597

Operational expenses
41,766

 
51,073

 
89,049

 
107,308

Corporate expenses
4,636

 
5,752

 
9,922

 
13,977

Interest expense
10,091

 
10,536

 
20,617

 
21,074

Total expenses
287,331

 
304,116

 
626,789

 
571,311

Income before taxes
218,254

 
179,168

 
350,862

 
360,093

Income tax expense
(3,904
)
 
(6,612
)
 
(4,238
)
 
(9,356
)
Net income
214,350

 
172,556

 
346,624

 
350,737

Net income attributable to redeemable noncontrolling interests
(37,612
)
 
(30,635
)
 
(71,939
)
 
(75,226
)
Net income attributable to RenaissanceRe
176,738

 
141,921

 
274,685

 
275,511

Dividends on preference shares
(5,596
)
 
(5,596
)
 
(11,191
)
 
(11,191
)
Net income available to RenaissanceRe common shareholders
$
171,142

 
$
136,325

 
$
263,494

 
$
264,320

Net income available to RenaissanceRe common shareholders per common share – basic
$
4.25

 
$
3.23

 
$
6.50

 
$
6.20

Net income available to RenaissanceRe common shareholders per common share – diluted
$
4.24

 
$
3.22

 
$
6.47

 
$
6.16

Dividends per common share
$
0.32

 
$
0.31

 
$
0.64

 
$
0.62













See accompanying notes to the consolidated financial statements

6


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the three and six months ended June 30, 2017 and 2016
(in thousands of United States Dollars) (Unaudited)
 
 
Three months ended
 
Six months ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Comprehensive income
 
 
 
 
 
 
 
Net income
$
214,350

 
$
172,556

 
$
346,624

 
$
350,737

Change in net unrealized gains on investments
219

 
672

 
(1,272
)
 
229

Comprehensive income
214,569

 
173,228

 
345,352

 
350,966

Net income attributable to redeemable noncontrolling interests
(37,612
)
 
(30,635
)
 
(71,939
)
 
(75,226
)
Comprehensive income attributable to redeemable noncontrolling interests
(37,612
)
 
(30,635
)
 
(71,939
)
 
(75,226
)
Comprehensive income attributable to RenaissanceRe
$
176,957

 
$
142,593

 
$
273,413

 
$
275,740

 



































See accompanying notes to the consolidated financial statements

7


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the six months ended June 30, 2017 and 2016
(in thousands of United States Dollars) (Unaudited)
 
 
Six months ended
 
June 30,
2017
 
June 30,
2016
Preference shares
 
 
 
Balance – January 1
$
400,000

 
$
400,000

Balance – June 30
400,000

 
400,000

Common shares
 
 
 
Balance – January 1
41,187

 
43,701

Repurchase of shares
(1,052
)
 
(2,420
)
Exercise of options and issuance of restricted stock awards
147

 
215

Balance – June 30
40,282

 
41,496

Additional paid-in capital
 
 
 
Balance – January 1
216,558

 
507,674

Repurchase of shares
(148,608
)
 
(269,847
)
Change in redeemable noncontrolling interests
(306
)
 
(731
)
Exercise of options and issuance of restricted stock awards
(61
)
 
5,465

Balance – June 30
67,583

 
242,561

Accumulated other comprehensive (loss) income
 
 
 
Balance – January 1
1,133

 
2,108

Change in net unrealized gains on investments
(1,272
)
 
229

Balance – June 30
(139
)
 
2,337

Retained earnings
 
 
 
Balance – January 1
4,207,699

 
3,778,701

Cumulative effect of adoption of ASU 2016-09 (Note 2)
2,213

 
—

Net income
346,624

 
350,737

Net income attributable to redeemable noncontrolling interests
(71,939
)
 
(75,226
)
Dividends on common shares
(25,877
)
 
(26,198
)
Dividends on preference shares
(11,191
)
 
(11,191
)
Balance – June 30
4,447,529

 
4,016,823

Total shareholders’ equity
$
4,955,255

 
$
4,703,217

 















See accompanying notes to the consolidated financial statements

8


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 2017 and 2016
(in thousands of United States Dollars) (Unaudited)
 
Six months ended
 
June 30,
2017
 
June 30,
2016
Cash flows provided by operating activities
 
 
 
Net income
$
346,624

 
$
350,737

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Amortization, accretion and depreciation
11,499

 
11,036

Equity in undistributed losses (earnings) of other ventures
20,304

 
(2,308
)
Net realized and unrealized gains on investments
(101,486
)
 
(131,425
)
Net unrealized (gains) losses included in net investment income
(12,491
)
 
20,360

Change in:
 
 
 
Premiums receivable
(546,510
)
 
(554,658
)
Prepaid reinsurance premiums
(264,062
)
 
(302,421
)
Reinsurance recoverable
(91,022
)
 
(87,480
)
Deferred acquisition costs
(94,781
)
 
(131,772
)
Reserve for claims and claim expenses
141,512

 
77,198

Unearned premiums
615,633

 
629,004

Reinsurance balances payable
378,511

 
229,725

Other
(62,708
)
 
17,245

Net cash provided by operating activities
341,023

 
125,241

Cash flows provided by investing activities
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
5,163,972

 
4,780,406

Purchases of fixed maturity investments trading
(5,451,362
)
 
(4,984,820
)
Proceeds from sales and maturities of fixed maturity investments available for sale
—

 
5,216

Net sales of equity investments trading
46,305

 
181,634

Net sales of short term investments
276,075

 
245,899

Net sales (purchases) of other investments
2,551

 
(52,778
)
Net cash provided by investing activities
37,541

 
175,557

Cash flows used in financing activities
 
 
 
Dividends paid – RenaissanceRe common shares
(25,877
)
 
(26,198
)
Dividends paid – preference shares
(11,191
)
 
(11,191
)
RenaissanceRe common share repurchases
(145,940
)
 
(265,003
)
Issuance of debt, net of expenses
295,866

 
—

Repayment of debt
(250,000
)
 
—

Net third party redeemable noncontrolling interest share transactions
(33,655
)
 
(43,909
)
Taxes paid on withholding shares
(11,251
)
 
(8,069
)
Net cash used in financing activities
(182,048
)
 
(354,370
)
Effect of exchange rate changes on foreign currency cash
5,477

 
2,208

Net increase (decrease) in cash and cash equivalents
201,993

 
(51,364
)
Cash and cash equivalents, beginning of period
421,157

 
506,885

Cash and cash equivalents, end of period
$
623,150

 
$
455,521







See accompanying notes to the consolidated financial statements

9


RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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, 2016.
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.
•
Renaissance Reinsurance, a Bermuda-domiciled reinsurance company, is the Company’s principal reinsurance subsidiary and provides property, casualty 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. Inc. (“Renaissance Reinsurance U.S.”) is a reinsurance company domiciled in the state of Maryland that provides property, casualty and specialty 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, casualty 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.

10


•
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 (“SPI”), 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 is not considered the primary beneficiary of Upsilon Fund and, as a result, the Company does not consolidate the financial position and results of operations of Upsilon Fund.
•
Effective November 7, 2016, Fibonacci Reinsurance Ltd. ("Fibonacci Re"), a Bermuda-domiciled SPI, was formed to provide collateralized capacity to Renaissance Reinsurance and its affiliates. Fibonacci Re raised capital from third party investors and the Company, via private placements of participating notes which are listed on the Bermuda Stock Exchange. Fibonacci Re is considered a VIE. The Company is not considered the primary beneficiary of Fibonacci Re and, as a result, the Company does not consolidate the financial position and results of operations of Fibonacci Re.
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, 2016, 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.

11


RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 was issued to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification of taxes paid on the statements of cash flows. ASU 2016-09 became effective for the Company in annual and interim periods beginning after December 15, 2016. The cumulative effect of the adoption of ASU 2016-09 was a $2.2 million increase to opening retained earnings as of January 1, 2017.
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 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016, however in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as a result, ASU 2014-09 will be 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.

Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous guidance. ASU 2016-02 is effective for public business entities for annual and interim periods beginning after December 15, 2018. Early application 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.
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 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.

12


Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 modifies the recognition of credit losses by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is applicable to financial assets such as loans, debt securities, trade receivables, off-balance sheet credit exposures, reinsurance receivables, and other financial assets that have the contractual right to receive cash. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The Company's invested assets are measured at fair value through net income, and therefore those invested assets would not be impacted by the adoption of ASU 2016-13. The Company has other financial assets, such as reinsurance recoverables, that could be impacted by the adoption of ASU 2016-13. ASU 2016-13 is effective for public business entities that are SEC filers for annual and interim periods beginning after December 15, 2019. 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.

Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies the classification of receipts and payments in the statement of cash flows. ASU 2016-15 provides guidance related to (1) settlement and payment of zero coupon debt instruments, (2) contingent consideration, (3) proceeds from settlement of insurance claims, (4) proceeds from settlement of corporate and bank owned life insurance policies, (5) distributions from equity method investees, (6) cash receipts from beneficial interests obtained by a transferor, and (7) general guidelines for cash receipts and payments that have more than one aspect of classification. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. 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 cash flows.

Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfers occur; this is a change from current guidance which prohibits the recognition of current and deferred income taxes until the underlying assets have been sold to outside entities. ASU 2016-16 is effective for public business entities for annual and interim periods beginning after December 15, 2018. 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.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). Among other things, ASU 2017-04 requires the following: (1) the elimination of step 2 of the goodwill impairment test; entities will no longer utilize the implied fair value of their assets and liabilities for purposes of testing goodwill for impairment, (2) the quantitative portion of the goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount; an impairment charge is to be recognized for the excess of carrying amount over fair value, but only to the extent of the amount of goodwill allocated to that reporting unit, and (3) foreign currency translation adjustments are not to be allocated to a reporting unit from an entity’s accumulated other comprehensive income; the reporting unit’s carrying amount should include only the currently translated balances of the assets and liabilities assigned to the reporting unit. ASU 2017-04 is effective for public business entities that are SEC filers for annual periods, or any interim goodwill impairment tests in annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this guidance; however, it is not

13


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:
 
 
 
 
 
 
 
 
June 30,
2017
 
December 31,
2016
 
 
U.S. treasuries
$
2,826,681

 
$
2,617,894

 
 
Agencies
83,343

 
90,972

 
 
Municipal
518,912

 
519,069

 
 
Non-U.S. government (Sovereign debt)
173,667

 
333,224

 
 
Non-U.S. government-backed corporate
74,620

 
133,300

 
 
Corporate
2,186,040

 
1,877,243

 
 
Agency mortgage-backed
567,560

 
462,493

 
 
Non-agency mortgage-backed
275,268

 
258,944

 
 
Commercial mortgage-backed
384,610

 
409,747

 
 
Asset-backed
191,563

 
188,358

 
 
Total fixed maturity investments trading
$
7,282,264

 
$
6,891,244

 
 
 
 
 
 
 
Contractual maturities of fixed maturity investments trading 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.
 
 
 
 
 
 
 
June 30, 2017
Amortized 
Cost
 
Fair Value
 
 
Due in less than one year
$
428,307

 
$
427,683

 
 
Due after one through five years
4,112,662

 
4,111,191

 
 
Due after five through ten years
1,137,632

 
1,153,811

 
 
Due after ten years
168,920

 
170,578

 
 
Mortgage-backed
1,218,486

 
1,227,438

 
 
Asset-backed
191,013

 
191,563

 
 
Total
$
7,257,020

 
$
7,282,264

 
 
 
 
 
 
 
Equity Investments Trading
The following table summarizes the fair value of equity investments trading:
 
 
 
 
 
 
 
 
June 30,
2017
 
December 31,
2016
 
 
Financials
$
272,982

 
$
275,065

 
 
Communications and technology
42,316

 
36,770

 
 
Industrial, utilities and energy
31,852

 
30,303

 
 
Consumer
22,078

 
20,501

 
 
Healthcare
20,087

 
17,245

 
 
Basic materials
4,090

 
3,429

 
 
Total
$
393,405

 
$
383,313

 
 
 
 
 
 
 

14


Pledged Investments
At June 30, 2017, $2.8 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, 2016 - $2.7 billion). Of this amount, $888.2 million is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities (December 31, 2016 - $842.6 million).
Reverse Repurchase Agreements
At June 30, 2017, the Company held $33.8 million (December 31, 2016 - $78.7 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
 
Six months ended
 
 
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
 
 
Fixed maturity investments
$
44,356

 
$
46,091

 
$
87,775

 
$
82,097

 
 
Short term investments
2,981

 
1,227

 
4,705

 
2,227

 
 
Equity investments
889

 
865

 
1,700

 
2,528

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity investments
6,611

 
4,356

 
14,413

 
(5,002
)
 
 
Other
2,899

 
5,035

 
6,971

 
8,344

 
 
Cash and cash equivalents
295

 
209

 
484

 
338

 
 
 
58,031

 
57,783

 
116,048

 
90,532

 
 
Investment expenses
(3,868
)
 
(3,659
)
 
(7,560
)
 
(7,545
)
 
 
Net investment income
$
54,163

 
$
54,124

 
$
108,488

 
$
82,987

 
 
 
 
 
 
 
 
 
 
 
Net Realized and Unrealized Gains on Investments
Net realized and unrealized gains on investments are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Six months ended
 
 
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
 
 
Gross realized gains
$
15,249

 
$
22,661

 
$
26,710

 
$
40,411

 
 
Gross realized losses
(7,243
)
 
(7,804
)
 
(23,776
)
 
(22,469
)
 
 
Net realized gains on fixed maturity investments
8,006

 
14,857

 
2,934

 
17,942

 
 
Net unrealized gains on fixed maturity investments trading
18,760

 
44,271

 
43,395

 
129,736

 
 
Net realized and unrealized losses on investments-related derivatives
(268
)
 
(9,151
)
 
(324
)
 
(28,600
)
 
 
Net realized gains on equity investments trading
15,146

 
14,729

 
36,061

 
13,911

 
 
Net unrealized gains (losses) on equity investments trading
16,469

 
5,066

 
19,420

 
(1,564
)
 
 
Net realized and unrealized gains on investments
$
58,113

 
$
69,772

 
$
101,486

 
$
131,425

 
 
 
 
 
 
 
 
 
 
 

15


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.
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.

16


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 June 30, 2017
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
$
2,826,681

 
$
2,826,681

 
$
—

 
$
—

 
 
Agencies
83,343

 
—

 
83,343

 
—

 
 
Municipal
518,912

 
—

 
518,912

 
—

 
 
Non-U.S. government (Sovereign debt)
173,667

 
—

 
173,667

 
—

 
 
Non-U.S. government-backed corporate
74,620

 
—

 
74,620

 
—

 
 
Corporate
2,186,040

 
—

 
2,186,040

 
—

 
 
Agency mortgage-backed
567,560

 
—

 
567,560

 
—

 
 
Non-agency mortgage-backed
275,268

 
—

 
275,268

 
—

 
 
Commercial mortgage-backed
384,610

 
—

 
384,610

 
—

 
 
Asset-backed
191,563

 
—

 
191,563

 
—

 
 
Total fixed maturity investments
7,282,264

 
2,826,681

 
4,455,583

 
—

 
 
Short term investments
1,070,950

 
—

 
1,070,950

 
—

 
 
Equity investments trading
393,405

 
393,405

 
—

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
348,353

 
—

 
348,353

 
—

 
 
Private equity partnerships (1)
194,331

 
—

 
—

 
—

 
 
Senior secured bank loan funds (1)
17,321

 
—

 
—

 
—

 
 
Hedge funds (1)
1,207

 
—

 
—

 
—

 
 
Total other investments
561,212

 
—

 
348,353

 
—

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts (2)
(9,502
)
 
—

 
—

 
(9,502
)
 
 
Derivatives (3)
6,391

 
210

 
6,181

 
—

 
 
Other
(5,355
)
 
—

 
(5,355
)
 
—

 
 
Total other assets and (liabilities)
(8,466
)
 
210

 
826

 
(9,502
)
 
 
 
$
9,299,365

 
$
3,220,296

 
$
5,875,712

 
$
(9,502
)
 
 
 
 
 
 
 
 
 
 
 
(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 June 30, 2017 was $5.8 million and $15.3 million of other assets and other liabilities, respectively.
(3)
See “Note 13. Derivative Instruments” for additional information related to the fair value by type of contract, of derivatives entered into by the Company.


17


 
 
 
 
 
 
 
 
 
 
 
At December 31, 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
$
2,617,894

 
$
2,617,894

 
$
—

 
$
—

 
 
Agencies
90,972

 
—

 
90,972

 
—

 
 
Municipal
519,069

 
—

 
519,069

 
—

 
 
Non-U.S. government (Sovereign debt)
333,224

 
—

 
333,224

 
—

 
 
Non-U.S. government-backed corporate
133,300

 
—

 
133,300

 
—

 
 
Corporate
1,877,243

 
—

 
1,877,243

 
—

 
 
Agency mortgage-backed
462,493

 
—

 
462,493

 
—

 
 
Non-agency mortgage-backed
258,944

 
—

 
258,944

 
—

 
 
Commercial mortgage-backed
409,747

 
—

 
409,747

 
—

 
 
Asset-backed
188,358

 
—

 
188,358

 
—

 
 
Total fixed maturity investments
6,891,244

 
2,617,894

 
4,273,350

 
—

 
 
Short term investments
1,368,379

 
—

 
1,368,379

 
—

 
 
Equity investments trading
383,313

 
383,313

 
—

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
335,209

 
—

 
335,209

 
—

 
 
Private equity partnerships (1)
191,061

 
—

 
—

 
—

 
 
Senior secured bank loan funds (1)
22,040

 
—

 
—

 
—

 
 
Hedge funds (1)
1,495

 
—

 
—

 
—

 
 
Total other investments
549,805

 
—

 
335,209

 
—

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts (2)
(13,004
)
 
—

 
—

 
(13,004
)
 
 
Derivatives (3)
(8,922
)
 
(646
)
 
(8,276
)
 
—

 
 
Other
(13,105
)
 
—

 
(13,105
)
 
—

 
 
Total other assets and (liabilities)
(35,031
)
 
(646
)
 
(21,381
)
 
(13,004
)
 
 
 
$
9,157,710

 
$
3,000,561

 
$
5,955,557

 
$
(13,004
)
 
 
 
 
 
 
 
 
 
 
 
(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, 2016 was $4.4 million and $17.4 million of other assets and other liabilities, respectively.
(3)
See “Note 13. 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

18


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 June 30, 2017, the Company’s U.S. treasuries fixed maturity investments were primarily priced by pricing services and had a weighted average effective yield of 1.5% and a weighted average credit quality of AA (December 31, 2016 - 1.4% 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 June 30, 2017, the Company’s agency fixed maturity investments had a weighted average effective yield of 2.0% and a weighted average credit quality of AA (December 31, 2016 - 2.0% 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 June 30, 2017, the Company’s municipal fixed maturity investments had a weighted average effective yield of 1.9% and a weighted average credit quality of AA (December 31, 2016 - 2.4% 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 June 30, 2017, the Company’s non-U.S. government fixed maturity investments had a weighted average effective yield of 1.7% and a weighted average credit quality of AAA (December 31, 2016 - 1.6% and AAA, 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

19


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 June 30, 2017, the Company’s non-U.S. government-backed corporate fixed maturity investments had a weighted average effective yield of 1.8% and a weighted average credit quality of AA (December 31, 2016 - 1.5% and AAA, 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 June 30, 2017, the Company’s corporate fixed maturity investments principally consisted of U.S. and international corporations and had a weighted average effective yield of 3.6% and a weighted average credit quality of BBB (December 31, 2016 - 3.7% 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 June 30, 2017, the Company’s agency mortgage-backed fixed maturity investments included agency residential mortgage-backed securities with a weighted average effective yield of 3.0%, a weighted average credit quality of AA and a weighted average life of 6.6 years (December 31, 2016 - 2.9%, AA and 6.9 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 June 30, 2017, the Company’s non-agency prime residential mortgage-backed fixed maturity investments had a weighted average effective yield of 4.0%, a weighted average credit quality of non-investment grade, and a weighted average life of 5.1 years (December 31, 2016 - 4.3%, BBB and 5.1 years, respectively). The Company’s non-agency Alt-A fixed maturity investments held at June 30, 2017 had a weighted average effective yield of 4.4%, a weighted average credit quality of non-investment grade and a weighted average life of 6.1 years (December 31, 2016 - 5.2%, non-investment grade and 6.0 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,

20


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 June 30, 2017, the Company’s commercial mortgage-backed fixed maturity investments had a weighted average effective yield of 2.8%, a weighted average credit quality of AAA, and a weighted average life of 4.8 years (December 31, 2016 - 2.6%, AAA and 3.9 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 June 30, 2017, the Company’s asset-backed fixed maturity investments had a weighted average effective yield of 2.5%, a weighted average credit quality of AAA and a weighted average life of 2.7 years (December 31, 2016 - 2.3%, AAA and 2.6 years, respectively). The underlying collateral for the Company’s asset-backed fixed maturity investments primarily consists of bank loans, 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 - At June 30, 2017, the Company’s short term investments had a weighted average effective yield of 1.1% and a weighted average credit quality of AAA (December 31, 2016 - 0.7% and AAA, respectively). 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.
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 futures contracts which are considered Level 1, and foreign currency contracts and certain credit derivatives, determined using

21


standard industry valuation models and considered Level 2, as the inputs to the valuation model are based on observable market inputs. For credit derivatives, these inputs include credit spreads, credit ratings of the underlying referenced security, the risk free rate and the contract term. For foreign currency contracts, these inputs include spot rates and interest rate curves.
Other
Level 2 - The liabilities measured at fair value and included in Level 2 at June 30, 2017 of $5.4 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 June 30, 2017
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
$
809

 
Internal valuation model
 
Bond price (U)
 
$
101.59

 
$
111.15

 
$
106.94

 
 
 
 
 
 
 
Liquidity discount (U)
 
n/a

 
n/a

 
1.3
 %
 
 
Assumed and ceded (re)insurance contracts
(10,311
)
 
Internal valuation model
 
Net undiscounted cash flows (U)
 
n/a

 
n/a

 
$
(12,715
)
 
 
 
 
 
 
 
Expected loss ratio (U)
 
n/a

 
n/a

 
30.6
 %
 
 
 
 
 
 
 
Net acquisition expense ratio (O)
 
n/a

 
n/a

 
(17.4
)%
 
 
 
 
 
 
 
Contract period (O)
 
2.0 years

 
4.7 years

 
4.5 years

 
 
 
 
 
 
 
Discount rate (U)
 
n/a

 
n/a

 
1.9
 %
 
 
Total other assets and (liabilities)
$
(9,502
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Investments
Corporate
Level 3 - Previously, the Company’s corporate fixed maturity investments included an investment in the preferred equity of an insurance holding company. The Company measured the fair value of this investment using a discounted cash flow model and ultimately sold this investment during the year ended December 31, 2016.
Other assets and liabilities
Assumed and ceded (re)insurance contracts
Level 3 - At June 30, 2017, the Company had a $0.8 million net asset 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

22


would result in an increase in the expected profit and ultimate fair value of this assumed reinsurance contract.
Level 3 - At June 30, 2017, the Company had a $10.3 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 June 30, 2017 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.

23


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.
 
 
 
 
 
  
Other assets
and
(liabilities)
 
 
Balance - April 1, 2017
$
(12,135
)
 
 
Total realized and unrealized gains
 
 
 
Included in other income
2,319

 
 
Purchases
314

 
 
Balance - June 30, 2017
$
(9,502
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Other assets
and
(liabilities)
 
 
Balance - January 1, 2017
$
(13,004
)
 
 
Total realized and unrealized gains
 
 
 
Included in other income
3,390

 
 
Purchases
112

 
 
Balance - June 30, 2017
$
(9,502
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
  
Fixed maturity
investments
trading
 
Other assets  and (liabilities)
 
Total
 
 
Balance - April 1, 2016
$
7,500

 
$
(4,724
)
 
$
2,776

 
 
Total realized and unrealized gains
 
 
 
 
 
 
 
Included in other income
—

 
2,092

 
2,092

 
 
Purchases
—

 
(48
)
 
(48
)
 
 
Settlements
(7,500
)
 
—

 
(7,500
)
 
 
Balance - June 30, 2016
$
—

 
$
(2,680
)
 
$
(2,680
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 realized and unrealized (losses) gains
 
 
 
 
 
 
 
Included in net investment income
(118
)
 
—

 
(118
)
 
 
Included in other income
—

 
3,792

 
3,792

 
 
Purchases
—

 
(573
)
 
(573
)
 
 
Settlements
(7,500
)
 
—

 
(7,500
)
 
 
Balance - June 30, 2016
$
—

 
$
(2,680
)
 
$
(2,680
)
 
 
 
 
 
 
 
 
 

24


Financial Instruments Disclosed, But Not Carried, at Fair Value
The Company uses various financial instruments in the normal course of its business. The Company’s insurance contracts are excluded from the fair value of financial instruments accounting guidance, unless the Company elects the fair value option, and therefore, are not included in the amounts discussed herein. The carrying values of cash and cash equivalents, accrued investment income, receivables for investments sold, certain other assets, payables for investments purchased, certain other liabilities, and other financial instruments not included herein approximated their fair values.
Debt
Included on the Company’s consolidated balance sheet at June 30, 2017 were debt obligations of $988.9 million (December 31, 2016 - $948.7 million). At June 30, 2017, the fair value of the Company’s debt obligations was $1,021.3 million (December 31, 2016 – $964.8 million).
The fair value of the Company’s debt obligations is determined using indicative market pricing obtained from third-party service providers, which the Company considers Level 2 in the fair value hierarchy. There have been no changes during the period in the Company’s valuation technique used to determine the fair value of the Company’s debt obligations.
The Fair Value Option for Financial Assets and Financial Liabilities
The Company has elected to account for certain financial assets and financial liabilities at fair value using the guidance under FASB ASC Topic Financial Instruments as the Company believes it represents the most meaningful measurement basis for these assets and liabilities. Below is a summary of the balances the Company has elected to account for at fair value:
 
 
 
 
 
 
 
 
June 30,
2017
 
December 31,
2016
 
 
Other investments
$
561,212

 
$
549,805

 
 
Other assets
$
5,756

 
$
4,379

 
 
Other liabilities
$
15,258

 
$
17,383

 
 
 
 
 
 
 
Included in net investment income for the three and six months ended June 30, 2017 were net unrealized gains of $5.6 million and $12.5 million related to the changes in fair value of other investments (2016 – losses of $5.8 million and $3.2 million). Included in other income for the three and six months ended June 30, 2017 were net unrealized gains of $Nil and $Nil related to the changes in the fair value of other assets and liabilities (2016 - $Nil and $Nil).
Measuring the Fair Value of Other Investments Using Net Asset Valuations
The table below shows the Company’s portfolio of other investments measured using net asset valuations as a practical expedient:
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2017
Fair Value
 
Unfunded
Commitments
 
Redemption Frequency
 
Redemption
Notice Period (Minimum Days)
 
Redemption
Notice Period (Maximum Days)
 
 
Private equity partnerships
$
194,331

 
$
310,367

 
See below
 
See below
 
See below
 
 
Senior secured bank loan funds
17,321

 
26,102

 
See below
 
See below
 
See below
 
 
Hedge funds
1,207

 
—

 
See below
 
See below
 
See below
 
 
Total other investments measured using net asset valuations
$
212,859

 
$
336,469

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity partnerships – The Company’s investments in private equity partnerships included alternative asset limited partnerships (or similar corporate structures) that invest in certain private equity asset classes, including U.S. and global leveraged buyouts, mezzanine investments, distressed securities, real estate, and oil, gas and power. The Company generally has no right to redeem its interest in any of these private equity

25


partnerships in advance of dissolution of the applicable private equity partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the liquidation of the underlying assets of the respective private equity partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 7 to 10 years from inception of the respective limited partnership.
Senior secured bank loan funds – At June 30, 2017, the Company had $17.3 million invested in closed end funds which invest primarily in loans. The Company has no right to redeem its investment in these funds. It is estimated that the majority of the underlying assets in these closed end funds would liquidate over 4 to 5 years from inception of the applicable fund.
Hedge funds – The Company invests in hedge funds that pursue multiple strategies. The Company’s investments in hedge funds at June 30, 2017 were $1.2 million of so called “side pocket” investments which are not redeemable at the option of the shareholder. The Company will retain its interest in the side pocket investments until the underlying investments attributable to such side pockets are liquidated, realized or deemed realized at the discretion of the fund manager.
NOTE 5.    REINSURANCE
The Company purchases reinsurance and other protection to manage its risk portfolio and to reduce its exposure to large losses. The Company currently has in place contracts that provide for recovery of a portion of certain claims and claim expenses, generally in excess of various retentions or on a proportional basis. In addition to loss recoveries, certain of the Company’s ceded reinsurance contracts provide for payments of additional premiums, for reinstatement premiums and for lost no-claims bonuses, which are incurred when losses are ceded to the respective reinsurance contracts. The Company remains liable to the extent that any reinsurance company fails to meet its obligations.
The following table sets forth the effect of reinsurance and retrocessional activity on premiums written and earned and on net claims and claim expenses incurred:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Six months ended
 
 
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
 
 
Premiums written
 
 
 
 
 
 
 
 
 
Direct
$
67,805

 
$
57,541

 
$
141,213

 
$
100,717

 
 
Assumed
759,610

 
701,587

 
1,608,292

 
1,520,544

 
 
Ceded
(271,670
)
 
(239,212
)
 
(649,624
)
 
(589,670
)
 
 
Net premiums written
$
555,745

 
$
519,916

 
$
1,099,881

 
$
1,031,591

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Direct
$
56,357

 
$
37,936

 
$
114,525

 
$
71,076

 
 
Assumed
520,347

 
464,540

 
1,019,346

 
921,181

 
 
Ceded
(194,439
)
 
(151,074
)
 
(385,561
)
 
(287,249
)
 
 
Net premiums earned
$
382,265

 
$
351,402

 
$
748,310

 
$
705,008

 
 
Claims and claim expenses
 
 
 
 
 
 
 
 
 
Gross claims and claim expenses incurred
$
189,903

 
$
224,852

 
$
441,707

 
$
386,850

 
 
Claims and claim expenses recovered
(47,316
)
 
(57,102
)
 
(106,039
)
 
(92,495
)
 
 
Net claims and claim expenses incurred
$
142,587

 
$
167,750

 
$
335,668

 
$
294,355

 
 
 
 
 
 
 
 
 
 
 
NOTE 6.     RESERVE FOR CLAIMS AND CLAIM EXPENSES
The Company believes the most significant accounting judgment made by management is its estimate of claims and claim expense reserves. Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts the

26


Company sells. The Company establishes its claims and claim expense reserves by taking claims reported to the Company by insureds and ceding companies, but which have not yet been paid (“case reserves”), adding estimates for the anticipated cost of claims incurred but not yet reported to the Company, or incurred but not enough reported to the Company (collectively referred to as “IBNR”) and, if deemed necessary, adding costs for additional case reserves which represent the Company’s estimates for claims related to specific contracts previously reported to the Company which it believes may not be adequately estimated by the client as of that date, or adequately covered in the application of IBNR.
The following table summarizes the Company’s claims and claim expense reserves by segment, allocated between case reserves, additional case reserves and IBNR:
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2017
Case
Reserves
 
Additional
Case Reserves
 
IBNR
 
Total
 
 
Property
$
221,898

 
$
167,510

 
$
216,163

 
$
605,571

 
 
Casualty and Specialty
635,834

 
111,021

 
1,619,915

 
2,366,770

 
 
Other
2,532

 
—

 
14,933

 
17,465

 
 
Total
$
860,264

 
$
278,531

 
$
1,851,011

 
$
2,989,806

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
 
Property
$
214,954

 
$
186,308

 
$
226,512

 
$
627,774

 
 
Casualty and Specialty
591,705

 
105,419

 
1,498,002

 
2,195,126

 
 
Other
6,935

 
—

 
18,459

 
25,394

 
 
Total
$
813,594

 
$
291,727

 
$
1,742,973

 
$
2,848,294

 
 
 
 
 
 
 
 
 
 
 
Activity in the liability for unpaid claims and claim expenses is summarized as follows:
 
 
 
 
 
 
 
Six months ended June 30,
2017
 
2016
 
 
Net reserves as of January 1
$
2,568,730

 
$
2,632,519

 
 
Net incurred related to:
 
 
 
 
 
Current year
351,766