Retirement Plans

The Company provides pension benefits to eligible employees through various defined contribution and defined benefit retirement plans sponsored by the Company, which vary for each subsidiary. Plan assets are invested principally in equity securities and fixed maturities.

(a) Defined contribution plans

The Company has qualified defined contribution plans that are managed externally and to which employees and the Company contribute a certain percentage of the employee's pensionable salary each month. The Company's contribution generally vests after an employee has been with the Company for five years. The Company's expenses for its qualified contributory defined contribution retirement plans were $73.5 million, $88.3 million and $87.5 million at December 31, 2017, 2016 and 2015, respectively.

(b) Defined benefit plans

The Company maintains defined benefit plans that cover certain employees as follows:

U.S. Plan

A qualified non-contributory defined benefit pension plan exists to cover a number of U.S. employees. The plan was curtailed in 2002 and was closed to new entrants at that time. Under the terms of the curtailment, existing plan participants were no longer entitled to earn additional defined benefits for future services performed after the curtailment date; however, accrued benefits are eligible for annual cost-of-living increases. This plan also includes a non-qualified supplemental defined benefit plan designed to compensate individuals to the extent that their benefits under the Company's qualified plan are curtailed due to IRS Code limitations. Benefits are based on years of service and compensation, as defined in the plan, during the highest consecutive three years of the employee's last ten years of employment.

In addition, pursuant to agreements entered into by the Company, certain former employees have received benefit type guarantees, not formally a part of any established plan. The liability recorded with respect to these agreements at each of December 31, 2017 and 2016 was $2.4 million and $2.3 million respectively, representing the entire unfunded projected benefit obligations.

U.K. Plans

A contributory defined benefit pension plan exists in the U.K., but has been closed to new entrants since 1996. Benefits are based on length of service and compensation as defined in the trust deed and rules. The pension liability recorded was $2.3 million and $4.1 million at December 31, 2017 and 2016, respectively, representing the entire unfunded projected obligation.

In connection with the Catlin Acquisition in 2015 the Company assumed additional assets and liabilities associated with a further U.K. defined benefit plan within Catlin. This plan has been closed to new members since 1993. The current membership consists only of pensioners and deferred members. Benefits are based on length of service and compensation.

Other European Plans

Certain contributory defined benefit pension plans exist in Germany which are closed to new entrants. Benefits are generally based on length of service and compensation defined in the related agreements.

Other Plans

The Company also acquired certain defined benefit pension liabilities with the acquisition of XL GAPS in 2007. The related balances are not included in the tables below as the liabilities are insured under an annuity type contract.

Funded Status - All Plans

The funded status by geographical region of all the Company's retirement plans at December 31, 2017 and 2016 is as follows:



Funded Status (U.S. dollars in thousands)	2017			2016
U.S.	$	(13,700	)	$	(14,093	)
U.K.	1,606			(2,316		)
Other European	(26,484		)	(26,377		)
Funded status – end of year	$	(38,578	)	$	(42,786	)

The status of all the Company's retirement plans at December 31, 2017, 2016 and 2015 is as follows:



Change in projected benefit obligation (U.S. dollars in thousands)	2017			2016			2015
Projected benefit obligation – beginning of year	$	120,038		$	122,165		$	93,124
Projected benefit obligation assumed due to Catlin Acquisition	—			—			28,414
Service cost (1)	1,296			1,701			1,494
Interest cost	3,620			5,126			4,382
Actuarial (gain) / loss	(958		)	7,948			2,821
Benefits and expenses paid	(5,831		)	(5,977		)	(3,747		)
Foreign currency (gains) / losses	7,531			(10,248		)	(4,047		)
Settlements	(1,270		)	(677		)	(276		)
Projected benefit obligation – end of year	$	124,426		$	120,038		$	122,165

_______________


(1)	Service costs include cost of living adjustments on curtailed plans.



Change in plan assets (U.S. dollars in thousands)	2017			2016			2015
Fair value of plan assets – beginning of year	$	77,252		$	79,402		$	49,281
Fair value of plan assets acquired due to Catlin Acquisition	—			—			33,131
Actual return on plan assets	7,900			8,499			(119		)
Employer contributions	1,588			2,077			1,775
Benefits and expenses paid	(4,769		)	(4,577		)	(3,305		)
Foreign currency gains / (losses)	3,877			(8,149		)	(1,361		)
Fair value of plan assets – end of year	$	85,848		$	77,252		$	79,402
Funded status – end of year	$	(38,578	)	$	(42,786	)	$	(42,763	)
Accrued pension liability	$	38,578		$	42,786		$	42,763

The components of the net benefit cost for the years ended December 31, 2017, 2016 and 2015 are as follows:



Components of net benefit cost (U.S. dollars in thousands)	2017			2016			2015
Service cost	$	1,296		$	1,701		$	1,494
Interest cost	3,620			5,126			4,382
Expected return on plan assets	(3,522		)	(4,357		)	(3,903		)
Amortization of net actuarial loss	2,158			1,705			1,617
Net benefit cost	$	3,552		$	4,175		$	3,590

Assumptions - All Plans

Several assumptions and statistical variables are used in the models to calculate the expenses and liability related to the plans. The Company, in consultation with its actuaries, determines assumptions about the discount rate, the expected rate of return on plan assets and the rate of compensation increase. The table below includes disclosure of these rates on a weighted-average basis, for the years ended December 31, 2017 and 2016 as indicated:



	2017						2016
	U.S. Plans		U.K. Plans		Other European Plans		U.S. Plans		U.K. Plans		Other European Plans
Net Benefit Cost – Weighted-average assumptions
Discount rate	4.04	%	2.56	%	2.00	%	4.25	%	2.74	%	1.33	%
Expected long-term rate of return on plan assets	6.00	%	2.57	%	N/A		6.00	%	2.77	%	N/A
Rate of compensation increase	N/A		3.51	%	2.50	%	N/A		3.62	%	2.50	%
Benefit Obligation – Weighted-average assumptions
Discount rate	3.49	%	2.56	%	2.00	%	4.04	%	2.76	%	1.33	%
Rate of compensation increase	N/A		3.51	%	2.50	%	N/A		3.62	%	2.50	%

The expected long-term rate of return assumption is determined by adding expected inflation to the expected long-term real rates of various asset classes taking into account expected volatility and correlation between the various asset classes.

Plan Assets - All Plans

The U.S. Plan assets at December 31, 2017 and 2016 consist of three mutual funds. The first fund seeks long-term capital appreciation by investing in both other equity mutual funds and direct equity securities, with a focus on companies in the U.S., other developed countries and emerging markets. While the fund primarily invests in large companies, it may have exposure to companies in all market capitalization ranges.

The second fund invests primarily in U.S. government, U.S. government agency, and investment grade corporate bonds. The fund employs a high total investment return through a combination of current income and capital appreciation.

The third fund seeks to outperform longer-duration benchmarks without excess volatility through investing primarily in long-duration, investment-grade corporate and sovereign bonds.

The fair value of the U.S. Plan assets at December 31, 2017 and 2016 was $42.7 million and $38.7 million, respectively. As the investments of the retirement plan are mutual funds, they fall within Level 1 in the fair value hierarchy. The inputs and methodologies used in determining the fair value of these assets are consistent with those used to measure our assets as set out in Note 8, "Fair Value Measurements."

The U.K. pension plan assets, including those acquired as part of the Catlin Acquisition, are held in a separate trustee-administered fund to meet long term liabilities to past and present employees. The table below shows the composition of the plans' assets and the fair value of each major category of plan assets at December 31, 2017 and 2016, as well as the potential returns of the different asset classes. The totals of the asset values held in various externally managed portfolios are provided by third party pricing vendors. There is no significant concentration of risk within plan assets. The assets in the plans and the expected rates of return were as follows:



(U.S. dollars in thousands, except percentages)	Expected Return on Assets for 2017		Fair Value at December 31, 2017		Expected Return on Assets for 2016		Fair Value at December 31, 2016
Equities and growth funds	5.6	%	$	11,035	5.7	%	$	9,122
Gilts	1.9	%	15,785		2.4	%	15,459
Corporate bonds	2.6	%	16,021		3.3	%	13,850
Other (cash)	0.5	%	320		0.5	%	89
Total market fair value of assets			$	43,161			$	38,520

As the remaining other European plans are unfunded, they held no plan assets at December 31, 2017 and 2016.

Funding / Expected Cash Flows - U.S. Plan

Under the U.S. defined benefit plans, the Company's policy is to make annual contributions to the plan that are deductible for federal income tax purposes and that meet the minimum funding standards required by law. The contribution level is determined by utilizing the projected unit credit cost method and different actuarial assumptions than those used for pension expense purposes. The Company's funding policy provides that contributions to the plan shall be at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended by the Pension Protection Act of 2006. During the fiscal year beginning January 1, 2018, the U.S. defined benefit plans expect to make contributions of $1.4 million.

The estimated future benefit payments with respect to the U.S. defined benefit pension plans are as follows:



(U.S. dollars in thousands)	Retirement Plan		Benefits Equalization Plan		Total
2018	$	1,106	$	354	$	1,460
2019	$	1,248	$	452	$	1,700
2020	$	1,397	$	469	$	1,866
2021	$	1,690	$	504	$	2,194
2022	$	1,800	$	536	$	2,336
2023-2027	$	11,560	$	2,939	$	14,499

Funding - U.K. Plans

The Company's U.K. plan administered for employees who joined prior to the Catlin Acquisition is subject to triennial funding valuations, the most recent of which was conducted as of June 30, 2015 and was reported in 2016. The $1.0 million deficit (calculated on a realistic basis) is being funded over a 4-year period.

With respect to the U.K. plan assumed as part of the Catlin Acquisition, the most recent funding valuation was prepared as at October 1, 2016. No contributions were required following that valuation. During 2018, it is expected that no contributions will be paid to the plan.