(a) Fixed Maturities, Short-Term Investments and Equity Securities

Amortized Cost and Fair Value Summary

The cost (amortized cost for fixed maturities and short-term investments), fair value, gross unrealized gains and gross unrealized (losses), including, other-than-temporary impairments (“OTTI”) recorded in accumulated other comprehensive income (“AOCI”) of the Company’s available for sale (“AFS”) and held to maturity (“HTM”) investments at September 30, 2013 and December 31, 2012 were as follows:



September 30, 2013 (U.S. dollars in thousands)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-credit Related OTTI (1)
Fixed maturities - AFS
U.S. Government and Government-Related/Supported (2)	$	2,128,375	$	66,604	$	(18,990	)	$	2,175,989	$	—
Corporate (4) (5)	10,395,005		470,327		(106,000		)	10,759,332		(7,945		)
RMBS – Agency	4,032,158		85,282		(48,358		)	4,069,082		—
RMBS – Non-Agency	407,789		30,786		(39,176		)	399,399		(76,138		)
CMBS	1,166,285		44,867		(13,271		)	1,197,881		(2,856		)
CDO	754,897		7,074		(49,823		)	712,148		(2,106		)
Other asset-backed securities (3)	1,122,958		38,343		(10,166		)	1,151,135		(2,932		)
U.S. States and political subdivisions of the States	1,784,621		61,561		(28,084		)	1,818,098		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)	4,980,055		90,713		(71,390		)	4,999,378		—
Total fixed maturities - AFS	$	26,772,143	$	895,557	$	(385,258	)	$	27,282,442	$	(91,977	)
Total short-term investments (2)	$	271,465	$	1,300	$	(60	)	$	272,705	$	—
Total equity securities (6)	$	878,679	$	113,075	$	(17,021	)	$	974,733	$	—
Total investments - AFS	$	27,922,287	$	1,009,932	$	(402,339	)	$	28,529,880	$	(91,977	)
Fixed maturities - HTM
U.S. Government and Government-Related/Supported (2)	$	10,712	$	946	$	—		$	11,658	$	—
Corporate	1,370,391		137,326		(1,436		)	1,506,281		—
RMBS – Non-Agency	65,542		5,580		—			71,122		—
CMBS	141,884		14,298		—			156,182		—
Other asset-backed securities (3)	104,624		9,074		—			113,698		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)	1,108,958		150,391		(1,350		)	1,257,999		—
Total investments - HTM	$	2,802,111	$	317,615	$	(2,786	)	$	3,116,940	$	—

___________


(1)	Represents the non-credit component of OTTI losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.


(2)	U.S. Government and Government-Related/Supported, Non-U.S. Sovereign Government, Provincials, Supranationals and Government-Related/Supported and Total short-term investments include government-related securities with an amortized cost of $2,373.4 million and fair value of $2,414.7 million and U.S. Agencies with an amortized cost of $268.7 million and fair value of $290.6 million.


(3)	Covered Bonds within Fixed maturities - AFS with an amortized cost of $531.4 million and a fair value of $560.7 million and Covered Bonds within Fixed maturities - HTM with an amortized cost of $8.3 million and a fair value of $8.3 million are included within Other asset-backed securities to align the Company's classification to market indices.

(4)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes have a fair value of $150.9 million and an amortized cost of $150.6 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.


(5)	Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities have a fair value of $271.5 million and an amortized cost of $280.2 million at September 30, 2013.


(6)	Included within Total equity securities are investments in fixed income funds with a fair value of $89.7 million and an amortized cost of $100.0 million at September 30, 2013.



December 31, 2012 (U.S. dollars in thousands)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-credit Related OTTI (1)
Fixed maturities - AFS
U.S. Government and Government-Related/Supported (2)	$	1,906,044	$	131,860	$	(3,287	)	$	2,034,617	$	—
Corporate (4) (5)	9,837,962		723,028		(78,990		)	10,482,000		(11,453		)
RMBS – Agency	5,054,097		206,931		(5,535		)	5,255,493		—
RMBS – Non-Agency	678,469		46,132		(76,868		)	647,733		(93,259		)
CMBS	1,010,794		70,745		(4,288		)	1,077,251		(2,962		)
CDO	784,999		11,973		(87,156		)	709,816		(4,872		)
Other asset-backed securities (3)	1,426,483		59,663		(15,435		)	1,470,711		(6,530		)
U.S. States and political subdivisions of the States	1,767,669		146,294		(2,946		)	1,911,017		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)	4,078,289		188,186		(8,193		)	4,258,282		—
Total fixed maturities - AFS	$	26,544,806	$	1,584,812	$	(282,698	)	$	27,846,920	$	(119,076	)
Total short-term investments (2)	$	322,563	$	192	$	(52	)	$	322,703	$	—
Total equity securities (6)	$	617,486	$	31,935	$	(62	)	$	649,359	$	—
Total investments - AFS	$	27,484,855	$	1,616,939	$	(282,812	)	$	28,818,982	$	(119,076	)
Fixed maturities - HTM
U.S. Government and Government-Related/Supported (2)	$	10,788	$	1,651	$	—		$	12,439	$	—
Corporate	1,425,320		190,871		(794		)	1,615,397		—
RMBS – Non-Agency	83,205		10,502		—			93,707		—
CMBS	12,751		2,048		—			14,799		—
Other asset-backed securities (3)	222,340		29,287		(167		)	251,460		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)	1,060,043		216,679		(1,720		)	1,275,002		—
Total investments - HTM	$	2,814,447	$	451,038	$	(2,681	)	$	3,262,804	$	—

____________


(1)	Represents the non-credit component of OTTI losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.


(2)	U.S. Government and Government-Related/Supported, Non-U.S. Sovereign Government, Provincials, Supranationals and Government-Related/Supported and Total short-term investments include government-related securities with an amortized cost of $1,912.7 million and fair value of $1,988.5 million and U.S. Agencies with an amortized cost of $404.3 million and fair value of $446.7 million.


(3)	Covered Bonds within Fixed maturities - AFS with an amortized cost of $605.4 million and a fair value of $647.1 million and Covered Bonds within Fixed maturities - HTM with an amortized cost of $8.4 million and a fair value of $8.6 million are included within Other asset-backed securities to align the Company's classification to market indices.

(4)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes have a fair value of $194.3 million and an amortized cost of $194.8 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.


(5)	Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities have a fair value of $308.5 million and an amortized cost of $327.6 million at December 31, 2012.


(6)	Included within Total equity securities are investments in fixed income funds with a fair value of $101.9 million and an amortized cost of $100.0 million at December 31, 2012.

At September 30, 2013 and December 31, 2012, approximately 2.5% and 2.9%, respectively, of the Company's fixed income investment portfolio at fair value was invested in securities that were below investment grade or not rated. Approximately 16.7% and 37.7% of the gross unrealized losses in the Company's fixed income securities portfolio at September 30, 2013 and December 31, 2012, respectively, related to securities that were below investment grade or not rated.

Contractual Maturities Summary

The contractual maturities of AFS and HTM fixed income securities at September 30, 2013 and December 31, 2012 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	September 30, 2013 (1)				December 31, 2012 (1)
(U.S. dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Fixed maturities - AFS
Due less than one year	$	2,105,725	$	2,121,331	$	1,939,803	$	1,952,250
Due after 1 through 5 years	9,337,994		9,589,870		8,521,090		8,877,512
Due after 5 through 10 years	5,434,814		5,516,467		4,701,391		5,065,158
Due after 10 years	2,409,523		2,525,129		2,427,680		2,790,996
	$	19,288,056	$	19,752,797	$	17,589,964	$	18,685,916
RMBS – Agency	4,032,158		4,069,082		5,054,097		5,255,493
RMBS – Non-Agency	407,789		399,399		678,469		647,733
CMBS	1,166,285		1,197,881		1,010,794		1,077,251
CDO	754,897		712,148		784,999		709,816
Other asset-backed securities	1,122,958		1,151,135		1,426,483		1,470,711
Total mortgage and asset-backed securities	$	7,484,087	$	7,529,645	$	8,954,842	$	9,161,004
Total fixed maturities - AFS	$	26,772,143	$	27,282,442	$	26,544,806	$	27,846,920
Fixed maturities - HTM
Due less than one year	$	68,015	$	69,473	$	36,515	$	37,580
Due after 1 through 5 years	202,799		215,912		195,121		205,562
Due after 5 through 10 years	344,228		374,388		377,541		420,008
Due after 10 years	1,875,019		2,116,165		1,886,974		2,239,688
	$	2,490,061	$	2,775,938	$	2,496,151	$	2,902,838
RMBS – Non-Agency	65,542		71,122		83,205		93,707
CMBS	141,884		156,182		12,751		14,799
Other asset-backed securities	104,624		113,698		222,340		251,460
Total mortgage and asset-backed securities	$	312,050	$	341,002	$	318,296	$	359,966
Total fixed maturities - HTM	$	2,802,111	$	3,116,940	$	2,814,447	$	3,262,804

____________

(1)

Included in the table above are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions, at their fair value of $271.5 million and $308.5 million at September 30, 2013 and December 31, 2012, respectively. These securities are reflected in the table based on their call date and have net unrealized losses of $8.8 million and $19.1 million at September 30, 2013 and December 31, 2012, respectively.

OTTI Considerations

Under final authoritative accounting guidance, a debt security for which amortized cost exceeds fair value is deemed to be other-than-temporarily impaired if it meets either of the following conditions: (a) the Company intends to sell, or it is more likely than not that the Company will be required to sell, the security before a recovery in value, or (b) the Company does not expect to recover the entire amortized cost basis of the security. Other than in a situation in which the Company has the intent to sell a debt security or more likely than not will be required to sell a debt security, the amount of the OTTI related to a credit loss on the security is recognized in earnings, and the amount of the OTTI related to other factors (e.g., interest rates, market conditions, etc.) is recorded as a component of OCI. The net amount recognized in earnings (“credit loss impairment”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment (“NPV”). The remaining difference between the security's NPV and its fair value is recognized in OCI. Subsequent changes in the fair value of these securities are included in OCI unless a further impairment is deemed to have occurred.

In the scenario where the Company has the intent to sell a security in which its amortized cost exceeds its fair value, or it is more likely than not it will be required to sell such a security, the entire difference between the security's amortized cost and its fair value is recognized in earnings.

The determination of credit losses is based on detailed analyses of underlying cash flows and other considerations. Such analyses require the use of certain assumptions to develop the estimated performance of underlying collateral. Key assumptions used include, but are not limited to, items such as RMBS default rates based on collateral duration in arrears, severity of losses on default by collateral class, collateral reinvestment rates and expected future general corporate default rates.

Factors considered for all securities on a quarterly basis in determining that a gross unrealized loss is not other-than-temporarily impaired include management's consideration of current and near term liquidity needs and other available sources of funds, an evaluation of the factors and time necessary for recovery and an assessment of whether the Company has the intention to sell or considers it more likely than not that it will be forced to sell a security.

Pledged Assets

Certain of the Company's invested assets are held in trust and pledged in support of insurance and reinsurance liabilities as well as credit facilities. Such pledges are largely required by the Company's operating subsidiaries that are “non-admitted” under U.S. state insurance regulations, in order for the U.S. cedant to receive statutory credit for reinsurance. Also, certain deposit liabilities and annuity contracts require the use of pledged assets. At September 30, 2013 and December 31, 2012, the Company had $16.0 billion and $16.9 billion in pledged assets, respectively.

(b) Gross Unrealized Losses

The following is an analysis of how long the AFS and HTM securities at September 30, 2013 and December 31, 2012 had been in a continual unrealized loss position:



	Less than 12 months					Equal to or greater than 12 months
September 30, 2013 (U.S. dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturities and short-term investments - AFS
U.S. Government and Government-Related/Supported	$	731,583	$	(18,079	)	$	21,489	$	(929	)
Corporate	1,962,868		(51,810		)	478,878		(54,190		)
RMBS – Agency	1,457,826		(36,568		)	164,046		(11,790		)
RMBS – Non-Agency	29,777		(1,257		)	244,218		(37,919		)
CMBS	287,314		(9,216		)	38,653		(4,055		)
CDO	29,541		(175		)	622,338		(49,648		)
Other asset-backed securities	222,044		(1,821		)	96,251		(8,345		)
U.S. States and political subdivisions of the States	457,908		(27,384		)	8,812		(700		)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	1,886,303		(59,159		)	153,802		(12,273		)
Total fixed maturities and short-term investments - AFS	$	7,065,164	$	(205,469	)	$	1,828,487	$	(179,849	)
Total equity securities	$	216,631	$	(17,021	)	$	—	$	—
Fixed maturities -HTM
Corporate	$	32,424	$	(1,410	)	$	632	$	(26	)
Other asset-backed securities	—		—			—		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	—		—			10,847		(1,350		)
Total fixed maturities - HTM	$	32,424	$	(1,410	)	$	11,479	$	(1,376	)



	Less than 12 months					Equal to or greater than 12 months
December 31, 2012 (U.S. dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturities and short-term investments - AFS
U.S. Government and Government-Related/Supported	$	307,879	$	(2,847	)	$	9,951	$	(471	)
Corporate	476,454		(10,603		)	607,796		(68,387		)
RMBS – Agency	578,823		(4,541		)	11,135		(994		)
RMBS – Non-Agency	6,674		(450		)	448,555		(76,418		)
CMBS	92,899		(666		)	23,580		(3,622		)
CDO	243		(1		)	694,351		(87,155		)
Other asset-backed securities	111,431		(531		)	93,388		(14,904		)
U.S. States and political subdivisions of the States	77,273		(1,407		)	12,851		(1,539		)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	355,409		(1,378		)	131,884		(6,836		)
Total fixed maturities and short-term investments - AFS	$	2,007,085	$	(22,424	)	$	2,033,491	$	(260,326	)
Total equity securities	$	615	$	(62	)	$	—	$	—
Fixed maturities -HTM
Corporate	$	4,568	$	(31	)	$	23,005	$	(763	)
Other asset-backed securities	1,239		(167		)	—		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	—		—			10,518		(1,720		)
Total fixed maturities - HTM	$	5,807	$	(198	)	$	33,523	$	(2,483	)

The Company had gross unrealized losses totaling $402.3 million on 2,037 securities out of a total of 7,602 held at September 30, 2013 in its AFS portfolio and $2.8 million on 5 securities out of a total of 204 held in its HTM portfolio, which it considers to be temporarily impaired or with respect to which it reflects non-credit losses on other-than-temporarily impaired assets. Individual security positions comprising this balance have been evaluated by management to determine the severity of these impairments and whether they should be considered other-than-temporary. Management believes it is more likely than not that the issuer will be able to fund sufficient principal and interest payments to support the current amortized cost.

Management, in its assessment of whether securities in a gross unrealized loss position are temporarily impaired, as described above, considers the significance of the impairments. At September 30, 2013, the Company had structured credit securities with gross unrealized losses of $13.0 million, which had a fair value of $4.2 million, and a cumulative fair value decline of greater than 50% of amortized cost. All of these securities are mortgage and asset-backed securities. These greater than 50% impaired securities include gross unrealized losses of $0.7 million on non-Agency RMBS, $11.7 million on CDOs and $0.5 million on CMBS holdings.

The following represents an analysis of net realized gains (losses) on investments:



Net Realized Gains (Losses) on Investments	Three months ended September 30,						Nine months ended September 30,
(U.S. dollars in thousands)	2013			2012			2013			2012
Gross realized gains	$	22,517		$	33,136		$	160,555		$	153,757
Gross realized losses on investments sold	(21,288		)	(26,000		)	(74,822		)	(89,054		)
OTTI on investments, net of amounts transferred to other comprehensive income	(3,187		)	(12,629		)	(10,214		)	(61,787		)
Net realized gains (losses) on investments	$	(1,958	)	$	(5,493	)	$	75,519		$	2,916

The main components of the net impairment charges of $3.2 million for the three months ended September 30, 2013 were:


▪	$2.1 million for structured securities, principally non-Agency RMBS, where management determined that the likely recovery on these securities was below the carrying value and, accordingly, recorded an impairment of the securities to the discounted value of the cash flows expected to be received on these securities.


▪	$1.1 million related to medium term notes backed primarily by European investment grade credit. On certain notes, management concluded that expected future returns on the underlying assets were not sufficient to support the previously reported amortized cost.

The following table sets forth the amount of credit loss impairments on fixed income securities held by the Company as of the dates or the periods indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.



Credit Loss Impairments	Three months ended September 30,						Nine months ended September 30,
(U.S. dollars in thousands)	2013			2012			2013			2012
Opening balance at beginning of indicated period	$	202,862		$	299,720		$	268,707		$	333,379
Credit loss impairment recognized in the current period on securities not previously impaired	242			2,805			769			8,683
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(17,341		)	(33,114		)	(78,960		)	(87,092		)
Credit loss impairments previously recognized on securities impaired to fair value during the period	—			—			—			(12,891		)
Additional credit loss impairments recognized in the current period on securities previously impaired	2,942			4,834			7,242			41,716
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(2,222		)	(2,773		)	(11,275		)	(12,323		)
Balance at September 30,	$	186,483		$	271,472		$	186,483		$	271,472

During the three months ended September 30, 2013 and 2012, the $17.3 million and $33.1 million, respectively, of credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, includes $3.1 million and $11.6 million, respectively, of non-Agency RMBS.

During the nine months ended September 30, 2013 and 2012, the $79.0 million and $87.1 million, respectively, of credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, includes $63.3 million and $38.3 million, respectively, of non-Agency RMBS.

(d) Investments in affiliates

Investment Fund Consolidation

In May 2012, the Company invested $25.0 million to obtain an approximate 94% interest in Five Oaks Investment Corp. (“Five Oaks”), a newly formed private investment company. Five Oaks is a mortgage real estate investment trust that is focused on investing in, financing and managing a leveraged portfolio of agency and non-agency residential mortgage-backed securities, residential mortgage loans and other mortgage-related investments. At December 31, 2012, the Company had consolidated Five Oaks, resulting in the recording within its balance sheet of: RMBS securities at their fair value of $81.0 million (amortized cost: $77.3 million) within Fixed maturities, $8.4 million of derivatives, $6.0 million of Cash and cash equivalents, $63.4 million of liabilities related to obligations under repurchase agreements within Other liabilities, and $1.8 million of Non-controlling interest in equity of consolidated subsidiaries. $66.3 million of securities held by Five Oaks and consolidated by the Company were pledged as collateral under the repurchase agreements. The repurchase agreements did not provide the counterparties any recourse to assets of the Company aside from its investment in Five Oaks. Amounts recorded within the Company's consolidated statement of income related to Five Oaks were immaterial during the year ended December 31, 2012.

In March 2013, Five Oaks completed an Initial Public Offering (“IPO”) of approximately 4.0 million of its common shares for gross proceeds of approximately $61.0 million and, concurrently with its IPO, Five Oaks sold to the Company an additional 1.67 million shares for $25.0 million in a private placement. Following these transactions, and the receipt of 8,175 shares of Five Oaks distributed to the Company in respect of its investment in Oak Circle Capital Partners LLC (“Oak Circle”), the investment management company that provides portfolio management and other administrative services to Five Oaks, the Company's ownership interest in Five Oaks was reduced to 43.8%, which no longer represented a controlling financial interest. Accordingly, the Five Oaks investment was deconsolidated by the Company at the closing date of the Five Oaks IPO. The investment is accounted for under the equity method and carried as a strategic operating affiliate at September 30, 2013. We generally record the income related to strategic operating affiliates on a three-month lag based upon the availability of the information provided by the investees. A loss of $1.5 million was recorded upon deconsolidation within Realized investment gains (losses) based upon the difference between the fair value of the Company's retained interest in Five Oaks subsequent to the additional share sales and the Company's carrying value of Five Oaks' net assets at the closing date of the Five Oaks IPO. In addition, in September 2012 the Company received warrants that were priced at the time of the IPO. The warrants allow the Company to purchase an additional 3.125 million shares at $15.75 per share, which would result in a total additional investment of $49.2 million by the Company should it exercise the warrants in full in the future. The warrants expire in September 2019.

In March 2012, the Company purchased an equity interest in Oak Circle. The Company's investment in Oak Circle is included in investment manager affiliates.