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 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 March 31, 2014 and December 31, 2013, were as follows:



March 31, 2014 (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)	$	2,282,321	$	59,678	$	(22,947	)	$	2,319,052	$	—
Corporate (3) (4)	10,697,760		490,229		(79,484		)	11,108,505		(4,758		)
RMBS – Agency	3,186,504		74,788		(38,809		)	3,222,483		—
RMBS – Non-Agency	389,181		36,836		(24,624		)	401,393		(71,999		)
CMBS	1,172,597		36,282		(10,567		)	1,198,312		(2,662		)
CDO	758,469		3,649		(37,058		)	725,060		(1,936		)
Other asset-backed securities (5)	1,156,561		46,219		(6,468		)	1,196,312		(2,117		)
U.S. States and political subdivisions of the States	1,832,247		84,695		(14,491		)	1,902,451		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)	5,009,524		110,972		(54,240		)	5,066,256		—
Total fixed maturities - AFS	$	26,485,164	$	943,348	$	(288,688	)	$	27,139,824	$	(83,472	)
Total short-term investments (2)	$	382,509	$	181	$	(577	)	$	382,113	$	—
Total equity securities (6)	$	907,952	$	166,197	$	(18,756	)	$	1,055,393	$	—
Total investments - AFS	$	27,775,625	$	1,109,726	$	(308,021	)	$	28,577,330	$	(83,472	)
Fixed maturities - HTM
U.S. Government and Government-Related/Supported (2)	$	11,052	$	918	$	—		$	11,970	$	—
Corporate	1,376,931		135,909		(190		)	1,512,650		—
RMBS – Non-Agency	67,037		6,743		—			73,780		—
CMBS	145,005		15,215		—			160,220		—
Other asset-backed securities (5)	106,514		9,437		—			115,951		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)	1,147,948		186,656		—			1,334,604		—
Total investments - HTM	$	2,854,487	$	354,878	$	(190	)	$	3,209,175	$	—

___________


(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 $2,301.8 million and fair value of $2,365.0 million and U.S. Agencies with an amortized cost of $238.0 million and fair value of $261.5 million.

(3)

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 $154.7 million and an amortized cost of $146.2 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.


(4)	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 $279.8 million and an amortized cost of $281.3 million.


(5)	Covered Bonds within Fixed maturities - AFS with an amortized cost of $508.3 million and a fair value of $537.5 million and Covered Bonds within Fixed maturities - HTM with an amortized cost of $8.6 million and a fair value of $8.9 million are included within Other asset-backed securities to align the Company's classification to market indices.


(6)	Included within Total equity securities are investments in fixed income funds with a fair value of $89.1 million and an amortized cost of $100.9 million.



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 (3) (4)	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 (5)	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 (5)	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)

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.


(4)	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.


(5)	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.


(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 March 31, 2014 and December 31, 2013, approximately 2.5% and 2.6%, 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 15.0% and 12.4% of the gross unrealized losses in the Company's fixed income securities portfolio at March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013 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.



	March 31, 2014 (1)				December 31, 2013 (1)
(U.S. dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Fixed maturities - AFS
Due less than one year	$	2,209,571	$	2,222,523	$	2,052,251	$	2,060,365
Due after 1 through 5 years	10,037,689		10,290,224		10,075,087		10,305,986
Due after 5 through 10 years	5,263,018		5,400,185		5,474,120		5,507,450
Due after 10 years	2,311,574		2,483,332		2,385,406		2,475,233
	$	19,821,852	$	20,396,264	$	19,986,864	$	20,349,034
RMBS – Agency	3,186,504		3,222,483		3,540,101		3,546,122
RMBS – Non-Agency	389,181		401,393		396,798		398,768
CMBS	1,172,597		1,198,312		1,223,313		1,246,795
CDO	758,469		725,060		754,414		717,313
Other asset-backed securities	1,156,561		1,196,312		1,210,384		1,242,104
Total mortgage and asset-backed securities	$	6,663,312	$	6,743,560	$	7,125,010	$	7,151,102
Total fixed maturities - AFS	$	26,485,164	$	27,139,824	$	27,111,874	$	27,500,136
Fixed maturities - HTM
Due less than one year	$	67,170	$	68,553	$	65,651	$	66,766
Due after 1 through 5 years	268,264		285,906		240,802		255,322
Due after 5 through 10 years	558,210		626,387		455,633		492,095
Due after 10 years	1,642,287		1,878,378		1,778,158		1,974,844
	$	2,535,931	$	2,859,224	$	2,540,244	$	2,789,027
RMBS – Non-Agency	67,037		73,780		66,987		71,972
CMBS	145,005		160,220		144,924		156,788
Other asset-backed securities	106,514		115,951		106,540		113,448
Total mortgage and asset-backed securities	$	318,556	$	349,951	$	318,451	$	342,208
Total fixed maturities - HTM	$	2,854,487	$	3,209,175	$	2,858,695	$	3,131,235

____________

(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 values of $279.8 million and $282.2 million at March 31, 2014 and December 31, 2013, respectively. These securities are reflected in the table based on their call date and have net unrealized losses of $1.6 million and $4.0 million at March 31, 2014 and December 31, 2013, 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 that 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 March 31, 2014 and December 31, 2013, the Company had $15.6 billion and $15.5 billion in pledged assets, respectively.

(b) Gross Unrealized Losses

The following is an analysis of how long the AFS and HTM securities at March 31, 2014 and December 31, 2013 had been in a continual unrealized loss position:



	Less than 12 months					Equal to or greater than 12 months
March 31, 2014 (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	$	1,184,414	$	(21,102	)	$	29,951	$	(1,862	)
Corporate	2,097,447		(36,002		)	452,530		(43,503		)
RMBS – Agency	991,462		(28,596		)	145,427		(10,213		)
RMBS – Non-Agency	6,412		(195		)	232,860		(24,429		)
CMBS	188,965		(3,671		)	107,903		(6,896		)
CDO	126,159		(544		)	557,163		(36,514		)
Other asset-backed securities	73,704		(1,136		)	80,190		(5,332		)
U.S. States and political subdivisions of the States	238,854		(7,318		)	112,668		(7,173		)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	1,444,095		(31,908		)	433,789		(22,871		)
Total fixed maturities and short-term investments - AFS	$	6,351,512	$	(130,472	)	$	2,152,481	$	(158,793	)
Total equity securities	$	187,067	$	(18,756	)	$	—	$	—
Fixed maturities -HTM
Corporate	$	11,347	$	(171	)	$	595	$	(19	)
Total fixed maturities - HTM	$	11,347	$	(171	)	$	595	$	(19	)



	Less than 12 months					Equal to or greater than 12 months
December 31, 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	$	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	)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	—		—			11,894		(642		)
Total fixed maturities - HTM	$	46,034	$	(941	)	$	12,536	$	(669	)

The Company had gross unrealized losses totaling $308.0 million on 1,912 securities out of a total of 7,848 held at March 31, 2014 in its AFS portfolio and $0.2 million on 2 securities out of a total of 201 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 March 31, 2014, the Company had structured credit securities with gross unrealized losses of $11.3 million, which had a fair value of $4.8 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, $10.7 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 March 31,
(U.S. dollars in thousands)	2014			2013
Gross realized gains	$	51,213		$	73,171
Gross realized losses on investments sold	(28,257		)	(32,024		)
OTTI on investments, net of amounts transferred to other comprehensive income	(3,727		)	(4,638		)
Net realized gains (losses) on investments	$	19,229		$	36,509

The main components of the net impairment charges of $3.7 million for the three months ended March 31, 2014 were:


▪	$2.2 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.


▪	$1.5 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	Three months ended March 31,
(U.S. dollars in thousands)	2014			2013
Opening balance at beginning of indicated period	$	174,805		$	268,708
Credit loss impairment recognized in the current period on securities not previously impaired	12			500
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(3,348		)	(6,475		)
Credit loss impairments previously recognized on securities impaired to fair value during the period	—			—
Additional credit loss impairments recognized in the current period on securities previously impaired	2,261			2,304
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(2,347		)	(4,971		)
Balance at March 31,	$	171,383		$	260,066

During the three months ended March 31, 2014 and 2013, the $3.3 million and $6.5 million, respectively, of credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, includes $2.7 million and $5.8 million, respectively, of non-Agency RMBS.