Investments

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

Classification of Fixed Income Securities

During the second quarter of 2014, fixed maturities with a carrying value of $2.8 billion were reclassified from held to maturity ("HTM") to AFS in conjunction with the sale of XLLR as discussed in Note 3(c), “Acquisition and Disposals - Sale of Life Reinsurance Subsidiary." As a result, the Company no longer holds HTM securities. Gross unrealized gains and gross unrealized losses, net of tax, of $424.9 million and nil, respectively, related to these securities were recognized in other comprehensive income on the date of transfer. For certain annuity contracts that are subject to the Life Retro Arrangements, policy benefit reserves were historically increased for the impact of changes in unrealized gains on investments supporting such contracts as if the gains had been realized, with a corresponding entry to other comprehensive income ("Shadow Adjustments"). In conjunction with the sale of XLLR and the related reclassification of securities from HTM to AFS, the Company recorded an additional gross charge of $440.5 million, net of tax, as a reduction of comprehensive income for such Shadow Adjustments on the date of the transfer. See Note 15, "Accumulated Other Comprehensive Income (Loss)," for further information.

All of the reclassified securities are included within the Life Funds Withheld Assets, along with certain other available for sale securities as defined in the sale and purchase agreement. The Life Funds Withheld Assets are managed pursuant to agreed investment guidelines that meet the contractual commitments of the XL ceding companies and applicable laws and regulations. All of the investment results associated with the Life Funds Withheld Assets ultimately accrue to GCLR. Because the Company no longer shares in the risks and rewards of the underlying performance of the Life Funds Withheld Assets, disclosures within the financial statements and accompanying notes included herein separate the Life Funds Withheld Assets from the rest of the Company's investments.

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 AFS investments as of March 31, 2015 and December 31, 2014, were as follows:



March 31, 2015 (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 - Excluding Life Funds Withheld Assets
U.S. Government and Government-Related/Supported	$	3,299,458	$	87,025	$	(8,141	)	$	3,378,342	$	—
Corporate (2)	7,806,607		398,357		(50,326		)	8,154,638		(3,309		)
RMBS – Agency	3,585,638		131,468		(5,772		)	3,711,334		—
RMBS – Non-Agency	368,317		29,770		(17,952		)	380,135		(58,364		)
CMBS	1,010,518		25,603		(3,401		)	1,032,720		(1,801		)
CDO	520,929		1,675		(21,630		)	500,974		(1,648		)
Other asset-backed securities (2)	1,134,928		41,386		(8,947		)	1,167,367		(1,662		)
U.S. States and political subdivisions of the States	1,842,561		131,843		(1,264		)	1,973,140		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	4,010,656		154,829		(71,714		)	4,093,771		—
Total fixed maturities - AFS - Excluding Life Funds Withheld Assets	$	23,579,612	$	1,001,956	$	(189,147	)	$	24,392,421	$	(66,784	)
Total short-term investments - Excluding Life Funds Withheld Assets	$	169,903	$	149	$	(1,190	)	$	168,862	$	—
Total equity securities - Excluding Life Funds Withheld Assets	$	665,682	$	132,731	$	(14,942	)	$	783,471	$	—
Total investments - AFS - Excluding Life Funds Withheld Assets	$	24,415,197	$	1,134,836	$	(205,279	)	$	25,344,754	$	(66,784	)
Fixed maturities - AFS - Life Funds Withheld Assets
U.S. Government and Government-Related/Supported	$	13,163	$	4,450	$	—		$	17,613	$	—
Corporate (2)	2,277,295		468,931		—			2,746,226		—
RMBS – Agency	1,641		489		—			2,130		—
RMBS – Non-Agency	32,880		5,928		—			38,808		—
CMBS	131,830		27,427		—			159,257		—
Other asset-backed securities	209,714		34,426		—			244,140		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	1,123,966		385,839		—			1,509,805		—
Total fixed maturities - AFS - Life Funds Withheld Assets	$	3,790,489	$	927,490	$	—		$	4,717,979	$	—
Total investments - AFS	$	28,205,686	$	2,062,326	$	(205,279	)	$	30,062,733	$	(66,784	)

Fixed maturities - Trading - Life Funds Withheld Assets								Amortized Cost		Fair Value
Corporate								$	136,681	$	137,438
Other asset-backed securities								1,966		1,939
Total investments - Trading - Life Funds Withheld Assets								$	138,647	$	139,377

___________


(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 date an impairment was recorded.

(2)

Included 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 $74.8 million and an amortized cost of $63.8 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.



December 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 - Excluding Life Funds Withheld Assets
U.S. Government and Government-Related/Supported	$	2,100,851	$	77,889	$	(6,787	)	$	2,171,953	$	—
Corporate (2)	8,462,130		365,805		(49,562		)	8,778,373		(3,309		)
RMBS – Agency	3,625,171		114,188		(10,783		)	3,728,576		—
RMBS – Non-Agency	404,398		41,108		(18,155		)	427,351		(67,918		)
CMBS	1,033,819		23,987		(5,262		)	1,052,544		(2,033		)
CDO	717,544		1,659		(27,169		)	692,034		(1,663		)
Other asset-backed securities (2)	1,028,528		42,810		(6,045		)	1,065,293		(1,797		)
U.S. States and political subdivisions of the States	1,892,566		129,910		(1,204		)	2,021,272		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	4,162,425		139,484		(61,836		)	4,240,073		—
Total fixed maturities - AFS - Excluding Life Funds Withheld Assets	$	23,427,432	$	936,840	$	(186,803	)	$	24,177,469	$	(76,720	)
Total short-term investments - Excluding Life Funds Withheld Assets	$	257,221	$	49	$	(543	)	$	256,727	$	—
Total equity securities - Excluding Life Funds Withheld Assets	$	763,833	$	130,689	$	(26,230	)	$	868,292	$	—
Total investments - AFS - Excluding Life Funds Withheld Assets	$	24,448,486	$	1,067,578	$	(213,576	)	$	25,302,488	$	(76,720	)
Fixed maturities - AFS - Life Funds Withheld Assets
U.S. Government and Government-Related/Supported	$	14,866	$	3,858	$	—		$	18,724	$	—
Corporate (2)	2,407,849		410,131		—			2,817,980		—
RMBS – Agency	3,301		481		—			3,782		—
RMBS – Non-Agency	71,075		14,260		—			85,335		—
CMBS	168,886		24,281		—			193,167		—
Other asset-backed securities	238,168		35,373		—			273,541		—
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	1,397,194		391,842		—			1,789,036		—
Total fixed maturities - AFS - Life Funds Withheld Assets	$	4,301,339	$	880,226	$	—		$	5,181,565	$	—
Total investments - AFS	$	28,749,825	$	1,947,804	$	(213,576	)	$	30,484,053	$	(76,720	)

Fixed maturities - Trading - Life Funds Withheld Assets								Amortized Cost		Fair Value
Corporate								$	1,180	$	1,171
Total investments - Trading - Life Funds Withheld Assets								$	1,180	$	1,171

____________


(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 date an impairment was recorded.

(2)

Included 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 $79.9 million and an amortized cost of $68.4 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.

As of March 31, 2015 and December 31, 2014, approximately 2.8% and 3.0%, respectively, of the Company's fixed income investment portfolio at fair value, excluding Life Funds Withheld Assets, was invested in securities that were below investment grade or not rated. Approximately 23.1% and 24.9% of the gross unrealized losses in the Company's fixed income investment portfolio, excluding Life Funds Withheld Assets, as of March 31, 2015 and December 31, 2014, respectively, related to securities that were below investment grade or not rated.

Contractual Maturities Summary

The contractual maturities of AFS fixed income securities at March 31, 2015 and December 31, 2014 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, 2015				December 31, 2014
(U.S. dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Fixed maturities - AFS - Excluding Life Funds Withheld Assets
Due less than one year	$	1,770,647	$	1,781,224	$	1,972,224	$	1,980,429
Due after 1 through 5 years	9,698,659		9,923,517		8,919,037		9,113,651
Due after 5 through 10 years	4,049,907		4,226,001		4,232,396		4,412,569
Due after 10 years	1,440,069		1,669,149		1,494,315		1,705,022
	$	16,959,282	$	17,599,891	$	16,617,972	$	17,211,671
RMBS – Agency	3,585,638		3,711,334		3,625,171		3,728,576
RMBS – Non-Agency	368,317		380,135		404,398		427,351
CMBS	1,010,518		1,032,720		1,033,819		1,052,544
CDO	520,929		500,974		717,544		692,034
Other asset-backed securities	1,134,928		1,167,367		1,028,528		1,065,293
Total mortgage and asset-backed securities	$	6,620,330	$	6,792,530	$	6,809,460	$	6,965,798
Total fixed maturities - AFS - Excluding Life Funds Withheld Assets	$	23,579,612	$	24,392,421	$	23,427,432	$	24,177,469
Fixed maturities - AFS - Life Funds Withheld Assets
Due less than one year	$	97,637	$	107,530	$	117,048	$	125,326
Due after 1 through 5 years	626,869		676,507		638,526		685,787
Due after 5 through 10 years	798,923		933,986		1,004,698		1,165,348
Due after 10 years	1,890,995		2,555,621		2,059,637		2,649,279
	$	3,414,424	$	4,273,644	$	3,819,909	$	4,625,740
RMBS – Agency	1,641		2,130		3,301		3,782
RMBS – Non-Agency	32,880		38,808		71,075		85,335
CMBS	131,830		159,257		168,886		193,167
Other asset-backed securities	209,714		244,140		238,168		273,541
Total mortgage and asset-backed securities	$	376,065	$	444,335	$	481,430	$	555,825
Total fixed maturities - AFS - Life Funds Withheld Assets	$	3,790,489	$	4,717,979	$	4,301,339	$	5,181,565
Total fixed maturities - AFS	$	27,370,101	$	29,110,400	$	27,728,771	$	29,359,034
Fixed maturities - Trading - Life Funds Withheld Assets
Due less than one year	$	—	$	—	$	—	$	—
Due after 1 through 5 years	64,739		64,733		—		—
Due after 5 through 10 years	5,188		5,131		1,180		1,171
Due after 10 years	66,754		67,574		—		—
	$	136,681	$	137,438	$	1,180	$	1,171
Other asset-backed securities	1,966		1,939		—		—
Total mortgage and asset-backed securities	$	1,966	$	1,939	$	—	$	—
Total fixed maturities - Trading - Life Funds Withheld Assets	$	138,647	$	139,377	$	1,180	$	1,171

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 loss impairment 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. As of March 31, 2015, the Company had $15.4 billion in pledged assets which includes $1.0 billion of cash, cash equivalents and U.S. government securities held in escrow in relation to the Acquisition and the associated Bridge Facility. See "Note 3(a), "Acquisition and Disposals - Catlin Acquisition," for further information on the Bridge Facility. At December 31, 2014, the Company had $15.2 billion in pledged assets.

(b) Gross Unrealized Losses

The following is an analysis of how long the AFS securities as of March 31, 2015 and December 31, 2014 had been in a continual unrealized loss position:



	Less than 12 months					Equal to or greater than 12 months
March 31, 2015 (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	$	249,646	$	(3,541	)	$	143,891	$	(4,619	)
Corporate	688,725		(40,874		)	190,397		(9,730		)
RMBS – Agency	177,627		(914		)	279,354		(4,858		)
RMBS – Non-Agency	51,876		(1,815		)	188,932		(16,137		)
CMBS	120,862		(393		)	109,324		(3,008		)
CDO	92,517		(294		)	346,372		(21,336		)
Other asset-backed securities	92,193		(6,219		)	37,357		(2,728		)
U.S. States and political subdivisions of the States	55,707		(695		)	15,310		(569		)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	681,300		(39,085		)	322,974		(33,522		)
Total fixed maturities and short-term investments - AFS	$	2,210,453	$	(93,830	)	$	1,633,911	$	(96,507	)
Total equity securities	$	119,625	$	(14,942	)	$	—	$	—



	Less than 12 months					Equal to or greater than 12 months
December 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	$	251,091	$	(1,196	)	$	342,890	$	(5,603	)
Corporate	1,337,470		(33,881		)	424,221		(15,754		)
RMBS – Agency	134,535		(220		)	512,652		(10,563		)
RMBS – Non-Agency	45,378		(1,358		)	202,700		(16,797		)
CMBS	78,356		(385		)	169,065		(4,877		)
CDO	249,803		(2,666		)	414,516		(24,503		)
Other asset-backed securities	143,044		(2,813		)	57,544		(3,232		)
U.S. States and political subdivisions of the States	32,187		(210		)	63,695		(994		)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported	624,346		(19,043		)	558,422		(43,251		)
Total fixed maturities and short-term investments - AFS	$	2,896,210	$	(61,772	)	$	2,745,705	$	(125,574	)
Total equity securities	$	191,193	$	(26,230	)	$	—	$	—

The Company had gross unrealized losses totaling $205.3 million on 1,347 securities out of a total of 7,586 held as of March 31, 2015 in its AFS - Excluding Life Funds Withheld Assets portfolio, which either 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. As of March 31, 2015, the AFS - Excluding Life Funds Withheld Assets portfolio included structured credit securities with gross unrealized losses of $9.0 million, which had a fair value of $6.1 million, and a cumulative fair value decline of greater than 50% of amortized cost. All of these securities are mortgage and asset-backed securities.

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)	2015			2014
Net realized gains (losses) on investments - excluding Life Funds Withheld Assets:
Gross realized gains	$	62,300		$	51,213
Gross realized losses on investments sold	(47,122		)	(28,257		)
OTTI on investments, net of amounts transferred to other comprehensive income	(10,576		)	(3,727		)
	$	4,602		$	19,229
Net realized gains (losses) on investments and net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets:
Gross realized gains	$	53,128		$	—
Gross realized losses on investments sold	(390		)	—
OTTI on investments, net of amounts transferred to other comprehensive income	(5,209		)	—
Net unrealized gains (losses) on trading securities	$	760		$	—
	$	48,289		$	—
Total net realized gains (losses) on investments	$	52,891		$	19,229

The significant components of the net impairment charges of $10.6 million for investments excluding Life Funds Withheld Assets for the three months ended March 31, 2015 were:


▪	$7.6 million related to certain high yield securities which we no longer intend to hold for a period sufficient to recover their fair value to amortized cost.


•	$0.3 million related to certain equities that were in a loss position for more than 11 months.


•	$0.1 million for structured securities, principally non-Agency RMBS, where we 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.


•	$2.6 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 for which a portion of the OTTI loss was recognized in OCI, as of the dates or for the periods indicated and the corresponding changes in such amounts.



Credit Loss Impairments	Three months ended March 31,
(U.S. dollars in thousands)	2015			2014
Opening balance as of beginning of indicated period	$	131,942		$	174,805
Credit loss impairment recognized in the current period on securities not previously impaired	7,560			12
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period	(28,539		)	(3,348		)
Additional credit loss impairments recognized in the current period on securities previously impaired	141			2,261
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(2,646		)	(2,347		)
Balance as of March 31,	$	108,458		$	171,383

During the three months ended March 31, 2015 and 2014, the $28.5 million and $3.3 million, respectively, credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, included $27.3 million and $2.7 million, respectively, of non-Agency RMBS.