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Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures Abstract  
Fair value disclosures

3. 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, 2012 and December 31, 2011 by level within the fair value hierarchy. For further information, see Note 2 (b), “Significant Accounting Policies – Fair Value Measurements”

  Quoted Prices Significant Significant    
   in Active Other Other Collateral   
  Markets for Observable  Unobservable  and Balance at
December 31, 2012 Identical Assets Inputs Inputs Counterparty December 31,
(U.S. dollars in thousands) (Level 1) (Level 2) (Level 3) Netting 2012
Assets               
U.S. Government and Government - Related/Supported $- $2,034,617 $- $- $2,034,617
Corporate (1) (2)  -  10,451,902  30,098  -  10,482,000
Residential mortgage-backed securities – Agency ("RMBS - Agency")   -  5,223,488  32,005  -  5,255,493
Residential mortgage-backed securities – Non-Agency ("RMBS - Non-Agency")  -  647,617  116  -  647,733
Commercial mortgage-backed securities ("CMBS")  -  1,051,904  25,347  -  1,077,251
Collateralized debt obligations ("CDO")  -  8,080  701,736  -  709,816
Other asset-backed securities (2)  -  1,452,583  18,128  -  1,470,711
U.S. States and political subdivisions of the States  -  1,911,017  -  -  1,911,017
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported  -  4,258,282  -  -  4,258,282
Total fixed maturities, at fair value $- $27,039,490 $807,430 $- $27,846,920
Equity securities, at fair value (3)  253,957  395,402  -  -  649,359
Short-term investments, at fair value (4)  -  322,703  -  -  322,703
Total investments available for sale $253,957 $27,757,595 $807,430 $- $28,818,982
Cash equivalents (5)  1,596,376  408,292  -  -  2,004,668
Other investments (6)  -  792,483  115,272  -  907,755
Other assets (7)  -  17,837  -  12,130  29,967
Total assets accounted for at fair value $1,850,333 $28,976,207 $922,702 $12,130 $31,761,372
                
Liabilities               
Financial instruments sold, but not yet purchased (8) $- $26,235 $- $- $26,235
Other liabilities (7)  -  23,376  36,247  -  59,623
Total liabilities accounted for at fair value $- $49,611 $36,247 $- $85,858

  Quoted Prices Significant Significant    
   in Active Other Other Collateral   
  Markets for Observable  Unobservable  and Balance at
December 31, 2011 Identical Assets Inputs Inputs Counterparty December 31,
(U.S. dollars in thousands) (Level 1) (Level 2) (Level 3) Netting 2011
Assets               
U.S. Government and Government - Related/Supported $- $1,990,983 $- $- $1,990,983
Corporate (1) (2)  -  10,084,804  23,818  -  10,108,622
RMBS – Agency  -  5,347,365  32,041  -  5,379,406
RMBS – Non-Agency  -  641,815  -  -  641,815
CMBS  -  974,835  -  -  974,835
CDO  -  7,751  650,851  -  658,602
Other asset-backed securities (2)  -  1,323,697  16,552  -  1,340,249
U.S. States and political subdivisions of the States  -  1,797,378  -  -  1,797,378
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported  -  3,298,135  -  -  3,298,135
Total fixed maturities, at fair value (2) $- $25,466,763 $723,262 $- $26,190,025
Equity securities, at fair value (3)  239,175  229,022  -  -  468,197
Short-term investments, at fair value (4)  -  359,063  -  -  359,063
Total investments available for sale $239,175 $26,054,848 $723,262 $- $27,017,285
Cash equivalents (5)  1,686,101  1,068,264  -  -  2,754,365
Other investments (6)  -  547,598  113,959  -  661,557
Other assets (7)  -  143,622  -  (77,888)  65,734
Total assets accounted for at fair value $1,925,276 $27,814,332 $837,221 $(77,888) $30,498,941
                
Liabilities               
Financial instruments sold, but not yet purchased (8) $- $20,844 $- $- $20,844
Other liabilities (7)  -  16,871  42,644  (809)  58,706
Total liabilities accounted for at fair value $- $37,715 $42,644 $(809) $79,550

_______________

(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, which are in a gross unrealized loss position, had a fair value of $194.3 million and $266.0 million and an amortized cost of $194.8 million and $297.7 million at December 31, 2012 and December 31, 2011, 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 issued by financial institutions (“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 December 31, 2012, Covered Bonds within Total fixed maturities with a fair value of $647.1 million are included within Other asset-backed securities to align the Company's classification to market indices. At December 31, 2011, Covered Bonds within Total fixed maturities with a fair value of $353.9 million were reclassified from Corporate to Other asset-backed securities to conform to current period presentation.

(3)       Included within Equity securities are investments in fixed income funds with a fair value of $101.9 million and $91.6 million at December 31, 2012 and December 31, 2011, 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 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 $312.1 million at December 31, 2012 and $323.7 million at December 31, 2011, are carried at amortized cost. For further details regarding the nature of Other investments and related features see Note 7, “Other Investments,” to the Consolidated Financial Statements.

(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 Company often enters into different types of derivative contracts with a single counterparty and these contracts are covered under a netting agreement. In addition, at December 31, 2012 the Company paid net cash collateral related to these derivative positions of $12.1 million. The assets related to the net collateral paid were recorded as Other assets within the balance sheet. At December 31, 2011, the Company held net cash collateral of $77.1 million. The collateral balance was included within Cash and cash equivalents and the corresponding liability to return the collateral has been offset against the derivative asset within the balance sheet as appropriate under the netting agreement. The fair values of the individual derivative contracts are reported gross in their respective levels based on the fair value hierarchy.

(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 year ended December 31, 2012 and 2011 for all financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3) at December 31, 2012 and 2011, 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, 2012 and 2011. 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 observable inputs, or 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, 2012 and 2011.

                
 Level 3 Assets and Liabilities - Year Ended December 31, 2012
(U.S. dollars in thousands)  Corporate  RMBS - Agency  RMBS - Non Agency  CMBS  CDO
Balance, beginning of period $23,818 $32,041 $- $- $650,851
Realized gains (losses)  4  (15)  -  -  (894)
Movement in unrealized gains (losses)  100  27  -  20  109,282
Purchases and issuances  10,278  -  -  25,546  -
Sales and settlements  (282)  (6,307)  -  (219)  (57,032)
Transfers into Level 3  819  21,249  116  -  -
Transfers out of Level 3  (4,639)  (14,990)  -  -  (471)
Balance, end of period $30,098 $32,005 $116 $25,347 $701,736
Movement in total gains (losses) above relating to instruments still held at the reporting date $122 $10 $- $20 $104,474
                
                
 Level 3 Assets and Liabilities - Year Ended December 31, 2012
(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 $16,552 $- $- $113,959 $(42,644)
Realized gains (losses)  6,768  -  -  5,083  -
Movement in unrealized gains (losses)  (2,784)  -  -  7,802  6,397
Purchases and issuances  8,753  -  -  7,375  -
Sales and settlements  (16,094)  -  -  (18,637)  -
Transfers into Level 3  4,933  -  -  5  -
Transfers out of Level 3  -  -  -  (315)  -
Balance, end of period $18,128 $- $- $115,272 $(36,247)
Movement in total gains (losses) above relating to instruments still held at the reporting date $(154) $- $- $5,038 $6,397

                
 Level 3 Assets and Liabilities - Year Ended December 31, 2011
(U.S. dollars in thousands)  Corporate  RMBS - Agency  RMBS - Non Agency  CMBS  CDO
Balance, beginning of period $36,866 $30,255 $4,964 $1,623 $721,572
Realized gains (losses)  (276)  (11)  -  -  (3,458)
Movement in unrealized gains (losses)  92  (145)  -  -  2,404
Purchases and issuances  14,840  6,176  -  -  2,379
Sales and settlements  (10,049)  (4,186)  -  -  (68,165)
Transfers into Level 3  2,105  2,655  -  -  1,886
Transfers out of Level 3  (19,760)  (2,703)  (4,964)  (1,623)  (5,767)
Balance, end of period $23,818 $32,041 $- $- $650,851
Movement in total gains (losses) above relating to instruments still held at the reporting date $92 $(156) $- $- $(6,431)
                
                
 Level 3 Assets and Liabilities - Year Ended December 31, 2011
(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 $24,650 $3,667 $- $133,717 $(39,195)
Realized gains (losses)  (849)  -  -  11,592  -
Movement in unrealized gains (losses)  6,896  -  -  14,108  (3,173)
Purchases and issuances  -  -  -  12,177  -
Sales and settlements  (9,114)  -  -  (57,635)  (276)
Transfers into Level 3  -  -  -  -  -
Transfers out of Level 3  (5,031)  (3,667)  -  -  -
Balance, end of period $16,552 $- $- $113,959 $(42,644)
Movement in total gains (losses) above relating to instruments still held at the reporting date $12,334 $- $- $23,391 $(3,173)

(c) Fixed maturities and short-term investments

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 to primarily to private equity investments 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 over which the Company is not deemed to have significant influence. 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 7, “Other Investments,” for further details.

(e) Derivative instruments

Derivative instruments recorded within Other liabilities and classified within Level 3 include credit derivatives that provide 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 (“GMIB”) 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) Non-recurring Fair Value Measurement

During the year ended December 31, 2011, the Company recorded a non-recurring fair value measurement relating to a goodwill impairment charge. This was a Level 3 fair value measurement as it reflected the Company's own assumptions about the assumptions that market participants would use in valuing the carried goodwill and was determined using a combination of discounted cash flow analysis and market value multiple based methodologies. See Note 8, “Goodwill and Other Intangible Assets,” for further information.

(g) 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, 2012 and 2011. 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.

  December 31, 2012 December 31, 2011
   Carrying  Fair  Carrying  Fair
(U.S. dollars in thousands) Value  Value  Value  Value
 Fixed maturities, held to maturity$2,814,447 $3,262,804 $2,668,978 $2,895,688
 Other investments - structured transactions.  312,122  293,813  323,705  297,124
Financial Assets $3,126,569 $3,556,617 $2,992,683 $3,192,812
             
 Deposit liabilities$1,551,398 $1,878,499 $1,608,108 $1,809,812
 Notes payable and debt 1,672,778  1,918,134  2,275,327  2,340,148
Financial Liabilities$3,224,176 $3,796,633 $3,883,435 $4,149,960

The Company historically participated in structured transactions. Remaining structured transactions include cash loans supporting project finance transactions, providing liquidity facility financing 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 100.3 basis points at December 31, 2012 and the appropriate U.S. Treasury rate plus 161.8 basis points at December 31, 2011. 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.