Fair Value Measurements

Fair value is defined as the amount that would be received for the sale of an asset or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The fair values for available for sale investments are generally sourced from third parties. The fair value of fixed income securities is based upon quoted market values where available, “evaluated bid” prices provided by third party pricing services (“pricing services”) where quoted market values are not available, or by reference to broker quotes where pricing services do not provide coverage for a particular security. While the Company receives values for the majority of the investment securities it holds from pricing services, it is ultimately management’s responsibility to determine whether the values received and recorded in the financial statements are representative of appropriate fair value measurements.

The Company performs regular reviews of the prices received from its third party valuation sources to assess if the prices represent a reasonable estimate of the fair value. This process is completed by investment and accounting personnel who are independent of those responsible for obtaining the valuations. The approaches taken by the Company include, but are not limited to, annual reviews of the controls of the external parties responsible for sourcing valuations, which are subjected to automated tolerance checks, quarterly reviews of the valuation sources and dates, and monthly reconciliations between the valuations provided by our external parties and valuations provided by our third party investment managers at a portfolio level.

Where broker quotes are the primary source of the valuations, sufficient information regarding the specific inputs utilized by the brokers is generally not available to support a Level 2 classification. The Company obtains the majority of broker quoted values from third party investment managers who perform independent verifications of these valuations using pricing matrices based upon information gathered by market traders. In addition, for the majority of these securities, the Company compares the broker quotes to independent valuations obtained from third party pricing vendors, which may also consist of broker quotes, to assess if the prices received represent a reasonable estimate of the fair value.

For further information, see Item 8, Note 2(b), “Significant Accounting Policies - Fair Value Measurements,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

(a) Fair Value Summary

The following tables set forth the Company’s assets and liabilities that were accounted for at fair value at March 31, 2014 and December 31, 2013 by level within the fair value hierarchy:



March 31, 2014 (U.S. dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Collateral and Counterparty Netting		Balance at March 31, 2014
Assets
U.S. Government and Government - Related/Supported	$	—	$	2,319,052	$	—	$	—	$	2,319,052
Corporate (1)	—		11,104,123		4,382		—		11,108,505
Residential mortgage-backed securities – Agency (“RMBS - Agency”)	—		3,213,555		8,928		—		3,222,483
Residential mortgage-backed securities – Non-Agency (“RMBS - Non-Agency”)	—		401,382		11		—		401,393
Commercial mortgage-backed securities (“CMBS”)	—		1,192,386		5,926		—		1,198,312
Collateralized debt obligations (“CDO”)	—		6,233		718,827		—		725,060
Other asset-backed securities (2)	—		1,185,639		10,673		—		1,196,312
U.S. States and political subdivisions of the States	—		1,902,451		—		—		1,902,451
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	—		5,066,256		—		—		5,066,256
Total fixed maturities, at fair value	$	—	$	26,391,077	$	748,747	$	—	$	27,139,824
Equity securities, at fair value (3)	549,454		505,939		—		—		1,055,393
Short-term investments, at fair value (1)(4)	—		382,113		—		—		382,113
Total investments available for sale	$	549,454	$	27,279,129	$	748,747	$	—	$	28,577,330
Cash equivalents (5)	1,270,563		485,486		—		—		1,756,049
Other investments (6)	—		813,757		116,418		—		930,175
Other assets (7)	—		8,858		—		—		8,858
Total assets accounted for at fair value	$	1,820,017	$	28,587,230	$	865,165	$	—	$	31,272,412
Liabilities
Financial instruments sold, but not yet purchased (8)	$	—	$	30,896	$	—	$	—	$	30,896
Other liabilities (7)	—		28,871		32,496		—		61,367
Total liabilities accounted for at fair value	$	—	$	59,767	$	32,496	$	—	$	92,263



December 31, 2013 (U.S. dollars in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Collateral and Counterparty Netting			Balance at December 31, 2013
Assets
U.S. Government and Government - Related/Supported	$	—	$	2,501,851	$	—	$	—		$	2,501,851
Corporate (1)	—		11,094,257		31,573		—			11,125,830
RMBS – Agency	—		3,535,649		10,473		—			3,546,122
RMBS – Non-Agency	—		398,759		9		—			398,768
CMBS	—		1,234,262		12,533		—			1,246,795
CDO	—		7,060		710,253		—			717,313
Other asset-backed securities (2)	—		1,230,227		11,877		—			1,242,104
U.S. States and political subdivisions of the States	—		1,845,812		—		—			1,845,812
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	—		4,875,541		—		—			4,875,541
Total fixed maturities, at fair value	$	—	$	26,723,418	$	776,718	$	—		$	27,500,136
Equity securities, at fair value (3)	540,331		499,906		—		—			1,040,237
Short-term investments, at fair value (1)(4)	—		454,273		2,015		—			456,288
Total investments available for sale	$	540,331	$	27,677,597	$	778,733	$	—		$	28,996,661
Cash equivalents (5)	834,514		226,636		—		—			1,061,150
Other investments (6)	—		757,110		113,472		—			870,582
Other assets (7)	—		27,487		—		(1,342		)	26,145
Total assets accounted for at fair value	$	1,374,845	$	28,688,830	$	892,205	$	(1,342	)	$	30,954,538
Liabilities
Financial instruments sold, but not yet purchased (8)	$	—	$	28,861	$	—	$	—		$	28,861
Other liabilities (7)	—		76,375		29,110		(1,342		)	104,143
Total liabilities accounted for at fair value	$	—	$	105,236	$	29,110	$	(1,342	)	$	133,004

____________

(1)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes had a fair value of $154.7 million and $154.6 million and an amortized cost of $146.2 million and $147.7 million at March 31, 2014 and December 31, 2013, respectively. 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.


(2)	The Company invests in covered bonds (“Covered Bonds”). Covered Bonds are senior secured debt instruments issued by financial institutions and backed by over-collateralized pools of public sector or mortgage loans. At March 31, 2014 and December 31, 2013, Covered Bonds with a fair value of $537.5 million and $553.1 million, respectively, are included within Other asset-backed securities.


(3)	Included within Equity securities are investments in fixed income funds with a fair value of $89.1 million and $87.4 million at March 31, 2014 and December 31, 2013, respectively.


(4)	Short-term investments consist primarily of Corporate securities and U.S. and Non-U.S. Government and Government-Related/ Supported securities.


(5)	Cash equivalents balances subject to fair value measurement include certificates of deposit and money market funds. Operating cash balances are not subject to recurring fair value measurement guidance.

(6)

The Other investments balance excludes certain structured transactions including certain investments in project finance transactions, a payment obligation and liquidity financing provided to a structured credit vehicle as a part of a third party medium term note facility. These investments, which totaled $288.0 million at March 31, 2014 and $294.0 million at December 31, 2013, are carried at amortized cost. For further information, see Item 8, Note 7, “Other Investments,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

(7)

Other assets and other liabilities include derivative instruments. The derivative balances included in each category are reported on a gross basis by level with a netting adjustment presented separately in the Collateral and Counterparty Netting column. The fair values of the individual derivative contracts are reported gross in their respective levels based on the fair value hierarchy. For further details regarding derivative fair values and associated collateral received or paid see Note 6, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements.


(8)	Financial instruments sold, but not yet purchased, represent “short sales” and are included within “Payable for investments purchased” on the balance sheet.

(b) Level 3 Assets and Liabilities

The tables below present additional information about assets and liabilities measured at fair value on a recurring basis and for which Level 3 inputs were utilized to determine fair value. The tables present a reconciliation of the beginning and ending balances for the three months ended March 31, 2014 and 2013 for all financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3) at March 31, 2014 and 2013, respectively. The tables do not include gains or losses that were reported in Level 3 in prior periods for assets that were transferred out of Level 3 prior to March 31, 2014 and 2013. Gains and losses for assets and liabilities classified within Level 3 in the table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, it should be noted that the following tables do not take into consideration the effect of offsetting Level 1 and 2 financial instruments entered into by the Company that are either economically hedged by certain exposures to the Level 3 positions or that hedge the exposures in Level 3 positions.

In general, Level 3 assets include securities for which values were obtained from brokers where either significant inputs were utilized in determining the values that were difficult to corroborate with observable market data, or sufficient information regarding the specific inputs utilized by the broker was not available to support a Level 2 classification. Transfers into or out of Level 3 primarily arise as a result of the valuations utilized by the Company changing between either those provided by independent pricing services that do not contain significant unobservable inputs and other valuations sourced from brokers that are considered Level 3.

There were no significant transfers between Level 1 and Level 2 during the three months ended March 31, 2014 and 2013.



	Level 3 Assets and Liabilities -Three Months Ended March 31, 2014
(U.S. dollars in thousands)	Corporate			RMBS - Agency			RMBS - Non Agency			CMBS			CDO
Balance, beginning of period	$	31,573		$	10,473		$	9		$	12,533		$	710,253
Realized gains (losses)	120			(1		)	—			2			1,581
Movement in unrealized gains (losses)	(2		)	1			2			(3		)	3,681
Purchases and issuances	1,434			—			—			—			27,814
Sales	—			—			—			—			(9,931		)
Settlements	(5,114		)	(573		)	—			(6,606		)	(14,571		)
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	(23,629		)	(972		)	—			—			—
Fixed maturities to short-term investments classification change	—			—			—			—			—
Balance, end of period	$	4,382		$	8,928		$	11		$	5,926		$	718,827
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	148		$	—		$	2		$	—		$	4,969

	Level 3 Assets and Liabilities -Three Months Ended March 31, 2014
(U.S. dollars in thousands)	Other asset- backed securities			Non-US Sovereign Government, Provincial, Supranational and Government Related/Supported			Short-term investments			Other investments			Derivative Contracts - Net
Balance, beginning of period	$	11,877		$	—		$	2,015		$	113,472		$	(29,110	)
Realized gains (losses)	(15		)	—			—			3,566			—
Movement in unrealized gains (losses)	62			—			(15		)	1,494			(3,386		)
Purchases and issuances	—			—			—			11,089			—
Sales	—			—			—			—			—
Settlements	(1,251		)	—			(2,000		)	(13,203		)	—
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—
Fixed maturities to short-term investments classification change	—			—			—			—			—
Balance, end of period	$	10,673		$	—		$	—		$	116,418		$	(32,496	)
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	46		$	—		$	—		$	5,061		$	(3,386	)



	Level 3 Assets and Liabilities -Three Months Ended March 31, 2013
(U.S. dollars in thousands)	Corporate			RMBS - Agency			RMBS - Non Agency			CMBS			CDO
Balance, beginning of period	$	30,098		$	32,005		$	116		$	25,347		$	701,736
Realized gains (losses)	(2		)	13			—			—			356
Movement in unrealized gains (losses)	204			(18		)	—			1			21,255
Purchases and issuances	10,621			—			—			—			—
Sales	—			(535		)	—			—			—
Settlements	(106		)	(893		)	(13		)	(336		)	(20,443		)
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			(11,465		)	—			—			—
Fixed maturities to short-term investments classification change	—			—			—			—			—
Balance, end of period	$	40,815		$	19,107		$	103		$	25,012		$	702,904
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	202		$	(5	)	$	—		$	1		$	20,892

	Level 3 Assets and Liabilities -Three Months Ended March 31, 2013
(U.S. dollars in thousands)	Other asset- backed securities			Non-US Sovereign Government, Provincial, Supranational and Government Related/Supported			Short-term investments			Other investments			Derivative Contracts - Net
Balance, beginning of period	$	18,128		$	—		$	—		$	115,272		$	(36,247	)
Realized gains (losses)	51			—			—			2,915			—
Movement in unrealized gains (losses)	1,475			—			—			(1,902		)	3,697
Purchases and issuances	21,686			—			2,017			1,905			—
Sales	—			—			—			—			—
Settlements	(5,453		)	—			—			(4,868		)	—
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	—			—			—			—			—
Fixed maturities to short-term investments classification change	—			—			—			—			—
Balance, end of period	$	35,887		$	—		$	2,017		$	113,322		$	(32,550	)
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	7		$	—		$	—		$	1,013		$	3,697

The Company’s Level 3 assets consist primarily of CDOs, for which non-binding broker quotes are the primary source of the valuations. Sufficient information regarding the specific inputs utilized by the brokers was not available to support a Level 2 classification. The Company obtains the majority of broker quotes for these CDOs from third party investment managers who perform independent verifications of these valuations using pricing matrices based upon information gathered by market traders. In addition, for the majority of these securities, the Company compares the broker quotes to independent valuations obtained from third party pricing vendors, which may also consist of broker quotes, to assess if the prices received represent a reasonable estimate of the fair value. Although the Company does not have access to the specific unobservable inputs that may have been used in the fair value measurements of the CDO securities provided by brokers, we would expect that the significant inputs considered are prepayment rates, probability of default, loss severity in the event of default, recovery rates, liquidity premium and reinvestment rates. Significant increases (decreases) in any of those inputs in isolation could result in a significantly different fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

The remainder of the Level 3 assets relate primarily to private investment funds and certain derivative positions as described below.

(d) Other investments

Included within the Other investments component of the Company’s Level 3 valuations are private investments and alternative fund investments where the Company is not deemed to have significant influence over the investee. The fair value of these investments is based upon net asset values received from the investment manager or general partner of the respective entity. The nature of the underlying investments held by the investee that form the basis of the net asset value include assets such as private business ventures and are such that significant Level 3 inputs are utilized in the determination of the individual underlying holding values and, accordingly, the fair value of the Company’s investment in each entity is classified within Level 3. The Company has not adjusted the net asset values received; however, management incorporates factors such as the most recent financial information received, annual audited financial statements and the values at which capital transactions with the investee take place when applying judgment regarding whether any adjustments should be made to the net asset value in recording the fair value of each position. Investments in alternative funds included in Other investments utilize strategies including arbitrage, directional, event driven and multi-style. These funds potentially have lockup and gate provisions which may limit redemption liquidity. For further details regarding the nature of Other investments and related features see Item 8, Note 7, “Other Investments,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

(e) Derivative instruments

Derivative instruments recorded within Other liabilities and classified within Level 3 include credit derivatives sold providing protection on senior tranches of structured finance transactions where the value is obtained directly from the investment bank counterparty and sufficient information regarding the inputs utilized in such valuation was not obtained to support a Level 2 classification and guaranteed minimum income benefits embedded within one reinsurance contract. The majority of inputs utilized in the valuations of these types of derivative contracts are considered Level 1 or Level 2; however, each valuation includes at least one Level 3 input that was significant to the valuation and, accordingly, the values are disclosed within Level 3.

(f) Financial Instruments Not Carried at Fair Value

Authoritative guidance over disclosures about the fair value of financial instruments requires additional disclosure of fair value information for financial instruments not carried at fair value in both interim and annual reporting periods. Certain financial instruments, particularly insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents, accrued investment income, net receivable from investments sold, other assets, net payable for investments purchased, other liabilities and other financial instruments not included below approximated their fair values. The following table includes financial instruments for which the carrying value differs from the estimated fair values at March 31, 2014 and December 31, 2013. All of these fair values estimates are considered Level 2 fair value measurements. The fair values for fixed maturities held to maturity are provided by third party pricing vendors and significant valuation inputs for all other items included were based upon market data obtained from sources independent of the Company, and are subject to the same control environment previously described.



	March 31, 2014				December 31, 2013
(U.S. dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Fixed maturities, held to maturity	$	2,854,487	$	3,209,175	$	2,858,695	$	3,131,235
Other investments - structured transactions	288,047		306,989		294,048		296,799
Financial Assets	$	3,142,534	$	3,516,164	$	3,152,743	$	3,428,034
Deposit liabilities	$	1,497,599	$	1,739,163	$	1,509,243	$	1,718,394
Notes payable and debt	2,262,824		2,483,414		2,263,203		2,429,412
Financial Liabilities	$	3,760,423	$	4,222,577	$	3,772,446	$	4,147,806

The Company historically participated in structured transactions. Remaining structured transactions include cash loans supporting project finance transactions, liquidity facility financing provided to structured project deals and an investment in a payment obligation with an insurance company. These transactions are carried at amortized cost. The fair value of these investments held by the Company is determined through use of internal models utilizing reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

Deposit liabilities include obligations under structured insurance and reinsurance transactions. For purposes of fair value disclosures, the Company determined the estimated fair value of the deposit liabilities by assuming a discount rate equal to the appropriate U.S. Treasury rate plus 54.8 basis points and 56.7 basis points at March 31, 2014 and December 31, 2013, respectively. The discount rate incorporates the Company’s own credit risk into the determination of estimated fair value.

The fair values of the Company’s notes payable and debt outstanding were determined based on quoted market prices.

There are no significant concentrations of credit risk within the Company’s financial instruments as defined in the authoritative guidance over disclosures of fair value of financial instruments not carried at fair value, which excludes certain financial instruments, particularly insurance contracts.