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Investments | 9 Months Ended
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Sep. 30, 2011
Investments |
Investments |
NOTE 8. | INVESTMENTS
Fixed Maturity Investments Trading The following table summarizes the fair value of fixed maturity investments trading:
(in thousands of U.S. dollars) |  | September 30, 2011 |  |  | December 31, 2010 |
U.S. treasuries |  | $ | 428,865 |  |  | $ | 761,461 |
Agencies |  |  | 127,063 |  |  |  | 216,963 |
Non-U.S. government (Sovereign debt) |  |  | 390,637 |  |  |  | 157,867 |
FDIC guaranteed corporate |  |  | 183,314 |  |  |  | 388,468 |
Non-U.S. government-backed corporate |  |  | 594,573 |  |  |  | 356,119 |
Corporate |  |  | 1,273,432 |  |  |  | 1,476,029 |
Agency mortgage-backed |  |  | 347,387 |  |  |  | 383,403 |
Non-agency mortgage-backed |  |  | 80,503 |  |  |  | 5,765 |
Commercial mortgage-backed |  |  | 247,509 |  |  |  | 125,705 |
Asset-backed |  |  | 14,386 |  |  |  | — |
Total fixed maturity investments trading, at fair value |  | $ | 3,687,669 |  |  | $ | 3,871,780 |
Fixed Maturity Investments Available For Sale The following table summarizes the amortized cost, fair value and related unrealized gains and losses and non-credit other-than-temporary impairments of fixed maturity investments available for sale:
|  |  |  |  | Included in Accumulated Other Comprehensive Income |  |  |  |  |  |  |
September 30, 2011 |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |  |  | Non-Credit Other-Than- Temporary Impairments (1) |
(in thousands of U.S. dollars) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-U.S. government (Sovereign debt) |  | $ | 10,685 |  |  | $ | 998 |  |  | $ | (32 | ) |  | $ | 11,651 |  |  | $ | — |
Non-U.S. government-backed corporate |  |  | 313 |  |  |  | 11 |  |  |  | — |  |  |  | 324 |  |  |  | — |
Corporate |  |  | 20,308 |  |  |  | 1,297 |  |  |  | (595 | ) |  |  | 21,010 |  |  |  | (147 | )
Agency mortgage-backed |  |  | 15,184 |  |  |  | 1,243 |  |  |  | — |  |  |  | 16,427 |  |  |  | — |
Non-agency mortgage-backed |  |  | 22,027 |  |  |  | 2,097 |  |  |  | (86 | ) |  |  | 24,038 |  |  |  | (1,901 | )
Commercial mortgage-backed |  |  | 65,774 |  |  |  | 5,537 |  |  |  | (15 | ) |  |  | 71,296 |  |  |  | — |
Asset-backed |  |  | 4,992 |  |  |  | 231 |  |  |  | — |  |  |  | 5,223 |  |  |  | — |
Total fixed maturity investments available for sale |  | $ | 139,283 |  |  | $ | 11,414 |  |  | $ | (728 | ) |  | $ | 149,969 |  |  | $ | (2,048 | )
(1) | Represents the non-credit component of other-than-temporary impairments recognized in accumulated other comprehensive income since the adoption of guidance related to the recognition and presentation of other-than-temporary impairments under FASB ASC Topic Investments - Debt and Equity Securities, during the second quarter of 2009, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
|  |  |  |  | Included in Accumulated Other Comprehensive Income |  |  |  |  |  |  |
December 31, 2010 |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |  |  | Non-Credit Other-Than- Temporary Impairments (1) |
(in thousands of U.S. dollars) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-U.S. government (Sovereign debt) |  | $ | 23,836 |  |  | $ | 2,830 |  |  | $ | (146 | ) |  | $ | 26,520 |  |  | $ | — |
Non-U.S. government-backed corporate |  |  | 1,332 |  |  |  | 53 |  |  |  | — |  |  |  | 1,385 |  |  |  | — |
Corporate |  |  | 33,018 |  |  |  | 3,768 |  |  |  | (404 | ) |  |  | 36,382 |  |  |  | (1,818 | )
Agency mortgage-backed |  |  | 17,159 |  |  |  | 1,245 |  |  |  | — |  |  |  | 18,404 |  |  |  | — |
Non-agency mortgage-backed |  |  | 24,972 |  |  |  | 3,452 |  |  |  | (40 | ) |  |  | 28,384 |  |  |  | (2,063 | )
Commercial mortgage-backed |  |  | 86,194 |  |  |  | 7,570 |  |  |  | (29 | ) |  |  | 93,735 |  |  |  | — |
Asset-backed |  |  | 39,038 |  |  |  | 1,124 |  |  |  | (55 | ) |  |  | 40,107 |  |  |  | (598 | )
Total fixed maturity investments available for sale |  | $ | 225,549 |  |  | $ | 20,042 |  |  | $ | (674 | ) |  | $ | 244,917 |  |  | $ | (4,479 | )
(1) | Represents the non-credit component of other-than-temporary impairments recognized in accumulated other comprehensive income since the adoption of guidance related to the recognition and presentation of other-than-temporary impairments under FASB ASC Topic Investments - Debt and Equity Securities, during the second quarter of 2009, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
Contractual maturities of fixed maturity investments are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|  | Trading |  |  | Available for Sale |  |  | Total Fixed Maturity Investments |
September 30, 2011 |  | Amortized Cost |  |  | Fair Value |  |  | Amortized Cost |  |  | Fair Value |  |  | Amortized Cost |  |  | Fair Value |
(in thousands of U.S. dollars) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Due in less than one year |  | $ | 167,947 |  |  | $ | 168,432 |  |  | $ | 174 |  |  | $ | 125 |  |  | $ | 168,121 |  |  | $ | 168,557 |
Due after one through five years |  |  | 1,876,919 |  |  |  | 1,880,559 |  |  |  | 11,869 |  |  |  | 12,857 |  |  |  | 1,888,788 |  |  |  | 1,893,416 |
Due after five through ten years |  |  | 815,283 |  |  |  | 817,714 |  |  |  | 13,172 |  |  |  | 13,482 |  |  |  | 828,455 |  |  |  | 831,196 |
Due after ten years |  |  | 127,583 |  |  |  | 131,180 |  |  |  | 6,090 |  |  |  | 6,520 |  |  |  | 133,673 |  |  |  | 137,700 |
Mortgage-backed |  |  | 669,592 |  |  |  | 675,399 |  |  |  | 102,985 |  |  |  | 111,761 |  |  |  | 772,577 |  |  |  | 787,160 |
Asset-backed |  |  | 14,404 |  |  |  | 14,385 |  |  |  | 4,993 |  |  |  | 5,224 |  |  |  | 19,397 |  |  |  | 19,609 |
Total |  | $ | 3,671,728 |  |  | $ | 3,687,669 |  |  | $ | 139,283 |  |  | $ | 149,969 |  |  | $ | 3,811,011 |  |  | $ | 3,837,638 |
Equity Investments Trading The following table summarizes the fair value of equity investments trading:
(in thousands of U.S. dollars) |  | September 30, 2011 |  |  | December 31, 2010 |
Financial institution securities |  | $ | 45,607 |  |  | $ | — |
Pledged Investments At September 30, 2011, $895.5 million of cash and investments at fair value were on deposit with, or in trust accounts for the benefit of various counterparties, including with respect to the Company's principal letter of credit facility. Of this amount, $78.9 million is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities. Net Investment (Loss) Income The components of net investment (loss) income are as follows:
Three months ended September 30, |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |
Fixed maturity investments |  | $ | 11,435 |  |  | $ | 35,219 |
Short term investments |  |  | 281 |  |  |  | 635 |
Equity investments trading |  |  | 171 |  |  |  | — |
Other investments |  |  |  |  |  |  |  |
Hedge funds and private equity investments |  |  | (25,702 | ) |  |  | 7,491 |
Other |  |  | (11,665 | ) |  |  | 18,979 |
Cash and cash equivalents |  |  | 66 |  |  |  | 74 |
|  |  | (25,414 | ) |  |  | 62,398 |
Investment expenses |  |  | (2,526 | ) |  |  | (2,828 | )
Net investment (loss) income |  | $ | (27,940 | ) |  | $ | 59,570 |
Nine months ended September 30, |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |
Fixed maturity investments |  | $ | 63,774 |  |  | $ | 92,108 |
Short term investments |  |  | 1,309 |  |  |  | 1,803 |
Equity investments trading |  |  | 297 |  |  |  | — |
Other investments |  |  |  |  |  |  |  |
Hedge funds and private equity investments |  |  | 6,035 |  |  |  | 33,215 |
Other |  |  | 2,000 |  |  |  | 32,013 |
Cash and cash equivalents |  |  | 152 |  |  |  | 157 |
|  |  | 73,567 |  |  |  | 159,296 |
Investment expenses |  |  | (7,898 | ) |  |  | (7,844 | )
Net investment income |  | $ | 65,669 |  |  | $ | 151,452 |
The Company's net realized and unrealized gains on investments and net other-than-temporary impairments are as follows:
Three months ended September 30, |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |
Gross realized gains |  | $ | 38,054 |  |  | $ | 30,959 |
Gross realized losses |  |  | (6,099 | ) |  |  | (748 | )
Net realized gains on fixed maturity investments |  |  | 31,955 |  |  |  | 30,211 |
Net unrealized (losses) gains on fixed maturity investments trading |  |  | (13,007 | ) |  |  | 62,131 |
Net unrealized losses on equity investments trading |  |  | (1,965 | ) |  |  | — |
Net realized and unrealized gains on investments |  | $ | 16,983 |  |  | $ | 92,342 |
Total other-than-temporary impairments |  | $ | (498 | ) |  | $ | — |
Portion recognized in other comprehensive income, before taxes |  |  | 49 |  |  |  | — |
Net other-than-temporary impairments |  | $ | (449 | ) |  | $ | — |
Nine months ended September 30, |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |
Gross realized gains |  | $ | 64,046 |  |  | $ | 108,560 |
Gross realized losses |  |  | (22,872 | ) |  |  | (11,880 | )
Net realized gains on fixed maturity investments |  |  | 41,174 |  |  |  | 96,680 |
Net unrealized gains on fixed maturity investments trading |  |  | 7,963 |  |  |  | 113,913 |
Net unrealized losses on equity investments trading |  |  | (2,389 | ) |  |  | — |
Net realized and unrealized gains on investments |  | $ | 46,748 |  |  | $ | 210,593 |
Total other-than-temporary impairments |  | $ | (498 | ) |  | $ | (831 | )
Portion recognized in other comprehensive income, before taxes |  |  | 49 |  |  |  | 2 |
Net other-than-temporary impairments |  | $ | (449 | ) |  | $ | (829 | )
The following tables provide an analysis of the length of time the Company's fixed maturity investments available for sale in an unrealized loss have been in a continual unrealized loss position.
|  | Less than 12 Months |  |  | 12 Months or Greater |  |  | Total |
September 30, 2011 |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
(in thousands of U.S. dollars) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-U.S. government (Sovereign debt) |  | $ | 1,442 |  |  | $ | (30 | ) |  | $ | 44 |  |  | $ | (2 | ) |  | $ | 1,486 |  |  | $ | (32 | )
Corporate |  |  | 6,887 |  |  |  | (334 | ) |  |  | 572 |  |  |  | (261 | ) |  |  | 7,459 |  |  |  | (595 | )
Non-agency mortgage-backed |  |  | 4,238 |  |  |  | (33 | ) |  |  | 850 |  |  |  | (53 | ) |  |  | 5,088 |  |  |  | (86 | )
Commercial mortgage-backed |  |  | 3,374 |  |  |  | (13 | ) |  |  | 470 |  |  |  | (2 | ) |  |  | 3,844 |  |  |  | (15 | )
Total |  | $ | 15,941 |  |  | $ | (410 | ) |  | $ | 1,936 |  |  | $ | (318 | ) |  | $ | 17,877 |  |  | $ | (728 | )
|  | Less than 12 Months |  |  | 12 Months or Greater |  |  | Total |
December 31, 2010 |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
(in thousands of U.S. dollars) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-U.S. government (Sovereign debt) |  | $ | 2,363 |  |  | $ | (129 | ) |  | $ | 291 |  |  | $ | (17 | ) |  | $ | 2,654 |  |  | $ | (146 | )
Corporate |  |  | 2,581 |  |  |  | (285 | ) |  |  | 801 |  |  |  | (119 | ) |  |  | 3,382 |  |  |  | (404 | )
Non-agency mortgage-backed |  |  | — |  |  |  | — |  |  |  | 1,645 |  |  |  | (40 | ) |  |  | 1,645 |  |  |  | (40 | )
Commercial mortgage-backed |  |  | 2,199 |  |  |  | (29 | ) |  |  | — |  |  |  | — |  |  |  | 2,199 |  |  |  | (29 | )
Asset-backed |  |  | 3,172 |  |  |  | (39 | ) |  |  | 3,196 |  |  |  | (16 | ) |  |  | 6,368 |  |  |  | (55 | )
Total |  | $ | 10,315 |  |  | $ | (482 | ) |  | $ | 5,933 |  |  | $ | (192 | ) |  | $ | 16,248 |  |  | $ | (674 | )
At September 30, 2011, the Company held 24 fixed maturity investments available for sale securities that were in an unrealized loss position for twelve months or greater. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. The Company performed reviews of its investments for the nine months ended September 30, 2011 and 2010, respectively, in order to determine whether declines in the fair value below the amortized cost basis of its fixed maturity investments available for sale were considered other-than-temporary in accordance with the applicable guidance, as discussed below. Other-Than-Temporary Impairment Process The Company's process for assessing whether declines in the fair value of its fixed maturity investments available for sale represent impairments that are other-than-temporary includes reviewing each fixed maturity investment available for sale that is impaired and determining: (i) if the Company has the intent to sell the debt security or (ii) if it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery; and (iii) whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the security are less than the amortized cost basis of the security. In assessing the Company's intent to sell securities, the Company's procedures may include actions such as discussing planned sales with its third party investment managers, reviewing sales that have occurred shortly after the balance sheet date, and consideration of other qualitative factors that may be indicative of the Company's intent to sell or hold the relevant securities. For the nine months ended September 30, 2011, the Company recognized $Nil of other-than-temporary impairments due to the Company's intent to sell securities as of September 30, 2011 (September 30, 2010 - $Nil). In assessing whether it is more likely than not that the Company will be required to sell a security before its anticipated recovery, the Company considers various factors including its future cash flow forecasts and requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short term investments, fixed maturity investments trading and fixed maturity investments available for sale in an unrealized gain position, and other relevant factors. For the nine months ended September 30, 2011, the Company recognized $Nil of other-than-temporary impairments due to required sales (September 30, 2010 - $Nil). In evaluating credit losses, the Company considers a variety of factors in the assessment of a security including: (i) the time period during which there has been a significant decline below cost; (ii) the extent of the decline below cost and par; (iii) the potential for the security to recover in value; (iv) an analysis of the financial condition of the issuer; (v) the rating of the issuer; (vi) the implied rating of the issuer based on an analysis of option adjusted spreads; (vii) the absolute level of the option adjusted spread for the issuer; and (viii) an analysis of the collateral structure and credit support of the security, if applicable. Once the Company determines that it is possible that a credit loss may exist for a security, the Company performs a detailed review of the cash flows expected to be collected from the issuer. The Company estimates expected cash flows by applying estimated default probabilities and recovery rates to the contractual cash flows of the issuer, with such default and recovery rates reflecting long-term historical averages adjusted to reflect current credit, economic and market conditions, giving due consideration to collateral and credit support, if applicable, and discounting the expected cash flows at the purchase yield on the security. In instances in which a determination is made that an impairment exists but the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, the impairment is separated into: (i) the amount of the total other-than-temporary impairment related to the credit loss; and (ii) the amount of the total other-than-temporary impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income. For the nine months ended September 30, 2011 and 2010, the Company recognized $0.4 million and $0.8 million of credit related other-than-temporary impairments, respectively, which were recognized in earnings and $49 thousand and $2 thousand, respectively, related to other factors. The following table provides a rollforward of the amount of other-than-temporary impairments related to credit losses recognized in earnings for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income:
|  |  | 0,0000 |  |  |  | 0,0000 |
Three months ended September 30, |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |
Balance - July 1 |  | $ | 2,629 |  |  | $ | 3,598 |
Additions: |  |  |  |  |  |  |  |
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized |  |  | 30 |  |  |  | — |
Amount related to credit loss for which an other-than-temporary impairment was previously recognized |  |  | 134 |  |  |  | — |
Reductions: |  |  |  |  |  |  |  |
Securities sold during the period |  |  | (2,256 | ) |  |  | — |
Securities for which the amount previously recognized in other comprehensive income was recognized in earnings, because the Company intends to sell the security or is more likely than not the Company will be required to sell the security |  |  | — |  |  |  | — |
Increases in cash flows expected to be collected that are recognized over the remaining life of the security |  |  | — |  |  |  | — |
Balance - September 30 |  | $ | 537 |  |  | $ | 3,598 |
|  |  | 0,0000 |  |  |  | 0,0000 |
Nine months ended September 30, |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |
Balance - January 1 |  | $ | 3,098 |  |  | $ | 9,987 |
Additions: |  |  |  |  |  |  |  |
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized |  |  | 30 |  |  |  | — |
Amount related to credit loss for which an other-than-temporary impairment was previously recognized |  |  | 134 |  |  |  | 70 |
Reductions: |  |  |  |  |  |  |  |
Securities sold during the period |  |  | (2,725 | ) |  |  | (6,459 | )
Securities for which the amount previously recognized in other comprehensive income was recognized in earnings, because the Company intends to sell the security or is more likely than not the Company will be required to sell the security |  |  | — |  |  |  | — |
Increases in cash flows expected to be collected that are recognized over the remaining life of the security |  |  | — |  |  |  | — |
Balance - September 30 |  | $ | 537 |  |  | $ | 3,598 |

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- Definition Tabular disclosure of investments in certain debt and equity securities (and certain other trading assets) which include all debt and equity securities (other than those equity securities accounted for under the equity or cost methods of accounting) with readily determinable fair values. Other trading assets include assets that are carried on the balance sheet at fair value and held for trading purposes. A debt security represents a creditor relationship with an enterprise that is in the form of a security. Debt securities include, among other items, US Treasury securities, US government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. An equity security represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices. Equity securities include, among other things, common stock, certain preferred stock, warrant rights, call options, and put options, but do not include convertible debt. An entity may opt to provide the reader with additional narrative text to better understand the nature of investments in debt and equity securities (and other trading assets). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27405-111563 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6379141&loc=d3e15032-111544 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Glossary Equity Security -URI http://asc.fasb.org/extlink&oid=6511694 -Topic 320 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27161-111563 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Glossary Debt Security -URI http://asc.fasb.org/extlink&oid=6509901 -Topic 320 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 115 -Paragraph 3, 19, 20, 21, 22, 137 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27232-111563 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27357-111563 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6957658&loc=d3e62557-112803 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27290-111563 + Details
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