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Investments
 12 Months Ended
Dec. 31, 2013
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments
(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 OTTI recorded in accumulated other comprehensive income (“AOCI”) of the Company’s available for sale (“AFS”) and held to maturity (“HTM”) investments at December 31, 2013 and 2012 were as follows:
 
 
 
Included in AOCI
 
 
 
 
December 31, 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)
$
2,484,193

 
$
51,701

 
$
(34,043
)
 
$
2,501,851

 
$
—

Corporate (4) (5)
10,802,332

 
433,097

 
(109,599
)
 
11,125,830

 
(4,758
)
RMBS – Agency
3,540,101

 
68,098

 
(62,077
)
 
3,546,122

 
—

RMBS – Non-Agency
396,798

 
33,096

 
(31,126
)
 
398,768

 
(74,528
)
CMBS
1,223,313

 
39,255

 
(15,773
)
 
1,246,795

 
(2,753
)
CDO
754,414

 
5,833

 
(42,934
)
 
717,313

 
(2,036
)
Other asset-backed securities (3)
1,210,384

 
40,560

 
(8,840
)
 
1,242,104

 
(2,807
)
U.S. States and political subdivisions of the States
1,821,499

 
55,083

 
(30,770
)
 
1,845,812

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)
4,878,840

 
80,961

 
(84,260
)
 
4,875,541

 
—

Total fixed maturities - AFS
$
27,111,874

 
$
807,684

 
$
(419,422
)
 
$
27,500,136

 
$
(86,882
)
Total short-term investments (2)
455,470

 
962

 
(144
)
 
456,288

 
—

Total equity securities (6)
903,201

 
154,506

 
(17,470
)
 
1,040,237

 
—

Total investments - AFS
$
28,470,545

 
$
963,152

 
$
(437,036
)
 
$
28,996,661

 
$
(86,882
)
Fixed maturities - HTM
 
 
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported (2)
$
10,993

 
$
629

 
$
—

 
$
11,622

 
$
—

Corporate
1,386,863

 
113,179

 
(968
)
 
1,499,074

 
—

RMBS – Non-Agency
66,987

 
4,985

 
—

 
71,972

 
—

CMBS
144,924

 
11,864

 
—

 
156,788

 
—

Other asset-backed securities (3)
106,540

 
6,908

 
—

 
113,448

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)
1,142,388

 
136,585

 
(642
)
 
1,278,331

 
—

Total investments - HTM
$
2,858,695

 
$
274,150

 
$
(1,610
)
 
$
3,131,235

 
$
—

 
____________
(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 includes government-related securities with an amortized cost of $2,241.5 million and fair value of $2,275.6 million and U.S. Agencies with an amortized cost of $267.0 million and fair value of $284.3 million.
(3)
Covered Bonds within Fixed maturities - AFS with an amortized cost of $526.4 million and a fair value of $553.1 million and Covered Bonds within Fixed maturities - HTM with an amortized cost of $8.6 million and a fair value of $8.7 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 $154.6 million and an amortized cost of $147.7 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 $282.2 million and an amortized cost of $286.2 million at December 31, 2013.
(6)
Included within Total equity securities are investments in fixed income funds with a fair value of $87.4 million and an amortized cost of $100.0 million at December 31, 2013.



 
 
 
Included in AOCI
 
 
 
 
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 includes 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 December 31, 2013 and 2012, approximately 2.6% 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 12.4% and 37.7% of the gross unrealized losses in the Company's fixed income securities portfolio at December 31, 2013 and 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 December 31, 2013 and 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.
(U.S. dollars in thousands)
December 31,2013 (1)
 
December 31,2012 (1)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Fixed maturities - AFS
 
 
 
 
 
 
 
Due less than one year
$
2,052,251

 
$
2,060,365

 
$
1,939,803

 
$
1,952,250

Due after 1 through 5 years
10,075,087

 
10,305,986

 
8,521,090

 
8,877,512

Due after 5 through 10 years
5,474,120

 
5,507,450

 
4,701,391

 
5,065,158

Due after 10 years
2,385,406

 
2,475,233

 
2,427,680

 
2,790,996

 
$
19,986,864

 
$
20,349,034

 
$
17,589,964

 
$
18,685,916

RMBS – Agency
$
3,540,101

 
$
3,546,122

 
$
5,054,097

 
$
5,255,493

RMBS – Non-Agency
396,798

 
398,768

 
678,469

 
647,733

CMBS
1,223,313

 
1,246,795

 
1,010,794

 
1,077,251

CDO
754,414

 
717,313

 
784,999

 
709,816

Other asset-backed securities
1,210,384

 
1,242,104

 
1,426,483

 
1,470,711

Total mortgage and asset-backed securities
$
7,125,010

 
$
7,151,102

 
$
8,954,842

 
$
9,161,004

Total fixed maturities - AFS
$
27,111,874

 
$
27,500,136

 
$
26,544,806

 
$
27,846,920

Fixed maturities - HTM
 
 
 
 
 
 
 
Due less than one year
$
65,651

 
$
66,766

 
$
36,515

 
$
37,580

Due after 1 through 5 years
240,802

 
255,322

 
195,121

 
205,562

Due after 5 through 10 years
455,633

 
492,095

 
377,541

 
420,008

Due after 10 years
1,778,158

 
1,974,844

 
1,886,974

 
2,239,688

 
$
2,540,244

 
$
2,789,027

 
$
2,496,151

 
$
2,902,838

RMBS – Non-Agency
66,987

 
71,972

 
83,205

 
93,707

CMBS
144,924

 
156,788

 
12,751

 
14,799

Other asset-backed securities
106,540

 
113,448

 
222,340

 
251,460

Total mortgage and asset-backed securities
$
318,451

 
$
342,208

 
$
318,296

 
$
359,966

Total fixed maturities - HTM
$
2,858,695

 
$
3,131,235

 
$
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 $282.2 million and $308.5 million at December 31, 2013 and December 31, 2012, respectively. These securities are reflected in the table based on their call date and have net unrealized losses of $4.0 million and $19.1 million at December 31, 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 December 31, 2013 and 2012, the Company had $15.5 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 December 31, 2013 and 2012 had been in a continual unrealized loss position:
December 31, 2013
(U.S. dollars in thousands)
Less than 12 months
 
Equal to or greater
than 12 months
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Fixed maturities and short-term investments - AFS
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported
$
1,333,704

 
$
(30,474
)
 
$
44,158

 
$
(3,614
)
Corporate
2,756,235

 
(59,497
)
 
513,106

 
(50,160
)
RMBS – Agency
1,485,261

 
(50,362
)
 
169,704

 
(11,715
)
RMBS – Non-Agency
14,204

 
(604
)
 
240,946

 
(30,522
)
CMBS
432,820

 
(6,816
)
 
107,192

 
(8,957
)
CDO
58,239

 
(217
)
 
574,613

 
(42,717
)
Other asset-backed securities
196,639

 
(2,149
)
 
96,528

 
(6,691
)
U.S. States and political subdivisions of the States
463,974

 
(23,124
)
 
64,324

 
(7,646
)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
2,130,792

 
(56,866
)
 
306,873

 
(27,435
)
Total fixed maturities and short-term investments - AFS
$
8,871,868

 
$
(230,109
)
 
$
2,117,444

 
$
(189,457
)
Total equity securities
$
155,453

 
$
(17,470
)
 
$
—

 
$
—

Fixed maturities -HTM
 
 
 
 
 
 
 
Corporate
$
46,034

 
$
(941
)
 
$
642

 
$
(27
)
Other asset-backed securities
—

 
—

 
—

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
—

 
—

 
11,894

 
(642
)
Total fixed maturities - HTM
$
46,034

 
$
(941
)
 
$
12,536

 
$
(669
)

December 31, 2012
(U.S. dollars in thousands)
Less than 12 months
 
Equal to or greater
than 12 months
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 $437.0 million on 2,286 securities out of a total of 7,930 held at December 31, 2013 in its AFS portfolio and $1.6 million on 4 securities out of a total of 203 held in its HTM portfolio, which it considers to be temporarily impaired or with respect to which 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 December 31, 2013, the Company had structured credit securities with gross unrealized losses of $12.2 million, which had a fair value of $4.1 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 $0.2 million on non-Agency RMBS, $11.4 million on CDOs and $0.5 million on CMBS holdings.
(c) Net Investment Income
Net investment income for the years ended December 31 is derived from the following sources:
(U.S. dollars in thousands)
2013
 
2012
 
2011
Fixed maturities, short term investments and cash equivalents
982,275

 
1,046,255

 
1,178,038

Equity securities and other investments
35,388

 
29,807

 
17,804

Funds withheld
12,783

 
12,090

 
12,240

Total gross investment income
1,030,446

 
1,088,152

 
1,208,082

Investment expenses
(72,730
)
 
(75,804
)
 
(70,313
)
Net investment income
957,716

 
1,012,348

 
1,137,769



(d) Net Realized Gains (Losses)
The following represents an analysis of net realized gains (losses) and the change in unrealized gains (losses) on investments for the years ended December 31:
(U.S. dollars in thousands)
2013
 
2012
 
2011
Net realized gains (losses):
 
 
 
 
 
Fixed maturities, short term investments, cash and cash equivalents:
 
 
 
 
 
Gross realized gains
$
129,479

 
$
163,328

 
$
185,530

Gross realized losses on investments sold
(84,703
)
 
(107,033
)
 
(225,360
)
OTTI on investments, net of amounts transferred to other comprehensive income
(16,282
)
 
(74,245
)
 
(159,435
)
Net realized gains (losses)
$
28,494

 
$
(17,950
)
 
$
(199,265
)
Equity securities:
 
 
 
 
 
Gross realized gains
$
29,402

 
$
42,009

 
$
2,194

Gross realized losses on investments sold
(3,185
)
 
(7,121
)
 
(4,264
)
OTTI on investments, net of amounts transferred to other comprehensive income
(17
)
 
(3,746
)
 
—

Net realized gains (losses)
$
26,200

 
$
31,142

 
$
(2,070
)
Other investments:
 
 
 
 
 
Gross realized gains
$
46,934

 
$
11,610

 
$
18,505

Gross realized losses on investments sold
(13,851
)
 
(7,983
)
 
(4,792
)
OTTI on investments, net of amounts transferred to other comprehensive income
—

 
(2,721
)
 
(737
)
Net realized gains (losses)
$
33,083

 
$
906

 
$
12,976

Net realized gains (losses) on investments
$
87,777

 
$
14,098

 
$
(188,359
)
Net realized and unrealized gains (losses) on investment related derivative instruments
6,367

 
(1,228
)
 
(22,981
)
Net realized gains (losses) on investments and net realized and unrealized gains (losses) on investment related derivative instruments
$
94,144

 
$
12,870

 
$
(211,340
)
Change in unrealized gains (losses):
 
 
 
 
 
Fixed maturities – AFS
$
(913,174
)
 
$
884,259

 
$
598,542

Fixed maturities – HTM
(175,817
)
 
221,647

 
212,419

Equity securities
105,163

 
44,361

 
(40,518
)
Affiliates and other investments
26,636

 
46,163

 
25,269

Net change in unrealized gains (losses) on investments
$
(957,192
)
 
$
1,196,430

 
$
795,712

Total net realized gains (losses) on investments, net realized and unrealized gains (losses) on investment related derivative instruments, and net change in unrealized gains (losses) on investments
$
(863,048
)
 
$
1,209,300

 
$
584,372


The significant components of the net impairment charges of $16.3 million for the year ended December 31, 2013 were:
•
$7.7 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.
•
$4.3 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.
•
$4.3 million related to foreign exchange losses.
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
(U.S. dollars in thousands)
2013
 
2012
Opening balance at beginning of indicated period
$
268,708

 
$
333,379

Credit loss impairment recognized in the current period on securities not previously impaired
806

 
13,000

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period
(92,167
)
 
(114,056
)
Credit loss impairments previously recognized on securities impaired to fair value during the period
—

 
(271
)
Additional credit loss impairments recognized in the current period on securities previously impaired
11,182

 
52,869

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
(13,724
)
 
(16,213
)
Closing balance at end of indicated period
$
174,805

 
$
268,708


During the year ended December 31, 2013 and 2012, the $92.2 million and $114.1 million, respectively, of credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, includes $66.1 million and $56.9 million, respectively, of non-Agency RMBS.