Fair Value Measurements

(a) Fair Value Summary

The following tables set forth the Company’s assets and liabilities that were accounted for at fair value at December 31, 2014 and 2013 by level within the fair value hierarchy. For further information, see Note 2 (b), “Significant Accounting Policies – Fair Value Measurements”:



December 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 December 31, 2014
Assets
Fixed maturities - Available for Sale ("AFS") - Excluding Life Funds Withheld Assets
U.S. Government and Government - Related/Supported	$	—	$	2,171,953	$	—	$	—		$	2,171,953
Corporate (1)	—		8,772,479		5,894		—			8,778,373
Residential mortgage-backed securities – Agency (“RMBS - Agency”)	—		3,726,666		1,910		—			3,728,576
Residential mortgage-backed securities – Non-Agency (“RMBS - Non-Agency”)	—		427,351		—		—			427,351
Commercial mortgage-backed securities (“CMBS”)	—		1,052,544		—		—			1,052,544
Collateralized debt obligations (“CDO”)	—		4,076		687,958		—			692,034
Other asset-backed securities (1)	—		1,060,005		5,288		—			1,065,293
U.S. States and political subdivisions of the States	—		2,021,272		—		—			2,021,272
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	—		4,240,073		—		—			4,240,073
Total fixed maturities - AFS - Excluding Life Funds Withheld Assets, at fair value	$	—	$	23,476,419	$	701,050	$	—		$	24,177,469
Equity securities, at fair value	502,284		366,008		—		—			868,292
Short-term investments, at fair value (1)(2)	—		256,727		—		—			256,727
Total investments AFS - Excluding Life Funds Withheld Assets	$	502,284	$	24,099,154	$	701,050	$	—		$	25,302,488
Fixed maturities - AFS - Life Funds Withheld Assets
U.S. Government and Government - Related/Supported	—		18,724		—		—			18,724
Corporate (1)	—		2,817,980		—		—			2,817,980
RMBS - Agency	—		3,782		—		—			3,782
RMBS - Non-Agency	—		85,335		—		—			85,335
CMBS	—		193,167		—		—			193,167
Other asset-backed securities	—		273,541		—		—			273,541
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	—		1,789,036		—		—			1,789,036
Total fixed maturities - AFS - Life Funds Withheld Assets, at fair value	—		5,181,565		—		—			5,181,565
Total investments - AFS, at fair value	502,284		29,280,719		701,050		—			30,484,053
Fixed maturities - Trading
Corporate (1)	—		1,171		—		—			1,171
Total fixed maturities - Trading, at fair value	—		1,171		—		—			1,171
Cash equivalents (3)	1,103,877		397,955		—		—			1,501,832
Cash equivalents - Life Funds Withheld Assets	460		132,738		—		—			133,198
Other investments (4)	—		708,974		185,083		—			894,057
Other assets (5)	—		122,996		13,663		(696		)	135,963
Total assets accounted for at fair value	$	1,606,621	$	30,644,553	$	899,796	$	(696	)	$	33,150,274
Liabilities
Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable) (6)	$	—	$	450,831	$	—	$	—		$	450,831
Financial instruments sold, but not yet purchased (7)	4,737		25,669		—		—			30,406
Other liabilities (5)	—		7,757		23,427		(696		)	30,488
Total liabilities accounted for at fair value	$	4,737	$	484,257	$	23,427	$	(696	)	$	511,725



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 (1)	—		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	540,331		499,906		—		—			1,040,237
Short-term investments, at fair value (1)(2)	—		454,273		2,015		—			456,288
Total investments available for sale	$	540,331	$	27,677,597	$	778,733	$	—		$	28,996,661
Cash equivalents (3)	834,514		226,636		—		—			1,061,150
Other investments (4)	—		757,110		113,472		—			870,582
Other assets (5)	—		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 (7)	$	—	$	28,861	$	—	$	—		$	28,861
Other liabilities (5)	—		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 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 $79.9 million and $154.6 million and an amortized cost of $68.4 million and $147.7 million at December 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)	Short-term investments consist primarily of Corporate securities and U.S. and Non-U.S. Government and Government-Related/ Supported securities.


(3)	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.

(4)

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 $354.4 million at December 31, 2014 and $294.0 million at December 31, 2013, are carried at amortized cost. For further information, see Note 8, “Other Investments.”

(5)

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 16, “Derivative Instruments."


(6)	Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable) include balances related to the life retrocession embedded derivative, under which all investment results associated with the Life Funds Withheld Assets related the Life Retro Arrangements described in Note 3, "Sale of Life Reinsurance Subsidiary", accrue to the benefit of GCLR.


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

(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 years ended December 31, 2014 and 2013 for all financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3) at December 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 December 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 years ended December 31, 2014 and 2013.



(U.S. dollars in thousands)	Level 3 Assets and Liabilities – Year Ended December 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)	199			5			1			3			3,781
Movement in unrealized gains (losses)	(128		)	(18		)	1			(3		)	11,604
Purchases and issuances	3,759			120			—			1,376			185,710
Sales	—			—			—			—			(48,313		)
Settlements	(6,543		)	(3,205		)	(11		)	(12,533		)	(175,077		)
Transfers into Level 3	766			—			—			—			—
Transfers out of Level 3	(23,732		)	(5,465		)	—			(1,376		)	—
Fixed maturities to short-term investments classification change	—			—			—			—			—
Balance, end of period	$	5,894		$	1,910		$	—		$	—		$	687,958
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	60		$	(12	)	$	—		$	—		$	14,432



(U.S. dollars in thousands)	Level 3 Assets and Liabilities – Year Ended December 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)	(7		)	—		—			12,676			—
Movement in unrealized gains (losses)	65			—		(15		)	538			19,346
Purchases and issuances	5,182			—		—			59,401			—
Sales	—			—		—			—			—
Settlements	(5,705		)	—		(2,000		)	(25,498		)	—
Transfers into Level 3	—			—		—			24,494			—
Transfers out of Level 3	(6,124		)	—		—						—
Fixed maturities to short-term investments classification change	—			—		—			—			—
Balance, end of period	$	5,288		$	—	$	—		$	185,083		$	(9,764	)
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	57		$	—	$	—		$	13,212		$	19,346



(U.S. dollars in thousands)	Level 3 Assets and Liabilities – Year Ended December 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)	4			10			(1		)	3			4,364
Movement in unrealized gains (losses)	766			(23		)	(1		)	(68		)	37,916
Purchases and issuances	10,691			—			3,326			—			136,035
Sales	(71		)	(535		)	—			—			(48,226		)
Settlements	(7,274		)	(3,349		)	(105		)	(12,749		)	(121,572		)
Transfers into Level 3	—			—			—			—			—
Transfers out of Level 3	(2,641		)	(17,635		)	(3,326		)	—			—
Fixed maturities to short-term investments classification change	—			—			—			—			—
Balance, end of period	$	31,573		$	10,473		$	9		$	12,533		$	710,253
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	845		$	(27	)	$	(1	)	$	(65	)	$	39,259



(U.S. dollars in thousands)	Level 3 Assets and Liabilities – Year Ended December 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)	848			—		(17		)	7,545			—
Movement in unrealized gains (losses)	1,691			—		15			4,095			7,137
Purchases and issuances	21,686			—		2,017			18,340			—
Sales	(15,711		)	—		—			(1,237		)	—
Settlements	(8,259		)	—		—			(30,543		)	—
Transfers into Level 3	—			—		—			—			—
Transfers out of Level 3	(6,506		)	—		—			—			—
Fixed maturities to short-term investments classification change	—			—		—			—			—
Balance, end of period	$	11,877		$	—	$	2,015		$	113,472		$	(29,110	)
Movement in total gains (losses) above relating to instruments still held at the reporting date	$	(515	)	$	—	$	(2	)	$	10,750		$	7,137

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 Note 8, “Other Investments,” for further details.

(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.

The calculation of the change in fair value of the embedded derivative associated with the Life Retro Arrangements includes the interest income, realized and unrealized gains and losses on Life Funds Withheld Assets and certain related expenses related to the Life Funds Withheld Assets. The fair value of the embedded derivative is included in “Funds withheld on life retrocession arrangements, net of future policy benefit reserves recoverable” on the consolidated balance sheets. The fair value of the embedded derivative is considered a Level 2 valuation.

(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 December 31, 2014 and 2013. All of these fair value 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.



(U.S. dollars in thousands)	2014				2013
(U.S. dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Fixed maturities, held to maturity	$	—	$	—	$	2,858,695	$	3,131,235
Other investments – structured transactions and other	354,382		371,625		294,048		296,799
Financial Assets	$	354,382	$	371,625	$	3,152,743	$	3,428,034
Deposit liabilities	$	1,245,367	$	1,543,761	$	1,509,243	$	1,718,394
Notes payable and debt	1,662,580		1,897,854		2,263,203		2,429,412
Financial Liabilities	$	2,907,947	$	3,441,615	$	3,772,446	$	4,147,806

As described in Note 3, "Sale of Life Reinsurance Subsidiary," certain fixed maturities were reclassified from held to maturity to available for sale. See also Note 6, "Investments," for further information.

The Company historically participated in structured transactions. Remaining structured transactions include cash loans supporting project finance transactions, a 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 29.5 basis points and 56.7 basis points at December 31, 2014 and 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.