10-Q 1 tpre-20140930x10q.htm 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-Q
(Mark One)

x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2014

OR

¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

Commission File Number 001-35039
THIRD POINT REINSURANCE LTD.
(Exact name of registrant as specified in its charter)

Bermuda |  | 98-1039994
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

The Waterfront, Chesney House
96 Pitts Bay Road
Pembroke HM 08, Bermuda
+1 441 542-3300
(Address, including Zip Code and Telephone Number, including Area Code of Registrant’s Principal Executive Office)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ¨ | Accelerated filer | ¨
Non-accelerated filer | x | Smaller reporting company | ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The registrant’s common shares began trading on the New York Stock Exchange on August 15, 2013.
As of November 7, 2014, there were 104,031,456 common shares of the registrant’s common shares issued and outstanding, including 706,840 restricted shares.

Third Point Reinsurance Ltd.
INDEX

| Page
Part I. FINANCIAL INFORMATION | 3
Item 1. Financial Statements | 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 49
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 72
Item 4. Controls and Procedures | 75
Part II. OTHER INFORMATION | 76
Item 1. Legal Proceedings | 76
Item 1A. Risk Factors | 76
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 76
Item 3. Defaults Upon Senior Securities | 76
Item 4. Mine Safety Disclosures | 76
Item 5. Other Information | 76
Item 6. Exhibits | 77

PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of September 30, 2014 and December 31, 2013
(expressed in thousands of U.S. dollars, except per share and share amounts)

| September 30, 2014 |  | December 31, 2013
Assets |  |  |
Equity securities, trading, at fair value (cost - $875,503; 2013 - $824,723) | $ | 956,604 |  |  | $ | 954,111 |
Debt securities, trading, at fair value (cost - $615,576; 2013 - $408,754) | 660,677 |  |  | 441,424 |
Other investments, at fair value | 97,765 |  |  | 65,329 |
Total investments in securities and commodities | 1,715,046 |  |  | 1,460,864 |
Cash and cash equivalents | 32,693 |  |  | 31,625 |
Restricted cash and cash equivalents | 261,966 |  |  | 193,577 |
Due from brokers | 182,927 |  |  | 98,386 |
Securities purchased under an agreement to sell | 19,897 |  |  | 38,147 |
Derivative assets, at fair value | 37,260 |  |  | 39,045 |
Interest and dividends receivable | 5,032 |  |  | 2,615 |
Reinsurance balances receivable | 269,747 |  |  | 191,763 |
Deferred acquisition costs, net | 124,373 |  |  | 91,193 |
Unearned premiums ceded | 91 |  |  | — |
Loss and loss adjustment expenses recoverable | 1,412 |  |  | 9,277 |
Other assets | 3,701 |  |  | 3,398 |
Total assets | $ | 2,654,145 |  |  | $ | 2,159,890 |
Liabilities and shareholders' equity |  |  |
Liabilities |  |  |
Accounts payable and accrued expenses | $ | 7,521 |  |  | $ | 9,456 |
Reinsurance balances payable | 21,651 |  |  | 9,081 |
Deposit liabilities | 142,990 |  |  | 120,946 |
Unearned premium reserves | 363,666 |  |  | 265,187 |
Loss and loss adjustment expense reserves | 187,313 |  |  | 134,331 |
Securities sold, not yet purchased, at fair value | 45,667 |  |  | 56,056 |
Due to brokers | 306,927 |  |  | 44,870 |
Derivative liabilities, at fair value | 12,346 |  |  | 8,819 |
Performance fee payable to related party | 21,837 |  |  | — |
Interest and dividends payable | 589 |  |  | 748 |
Total liabilities | 1,110,507 |  |  | 649,494 |
Commitments and contingent liabilities |  |  |
Shareholders' equity |  |  |
Preference shares (par value $0.10; authorized, 30,000,000; none issued) | — |  |  | — |
Common shares (par value $0.10; authorized, 300,000,000; issued and outstanding, 104,031,456 (2013: 103,888,916)) | 10,403 |  |  | 10,389 |
Additional paid-in capital | 1,063,254 |  |  | 1,055,690 |
Retained earnings | 390,656 |  |  | 325,582 |
Shareholders’ equity attributable to shareholders | 1,464,313 |  |  | 1,391,661 |
Non-controlling interests | 79,325 |  |  | 118,735 |
Total shareholders' equity | 1,543,638 |  |  | 1,510,396 |
Total liabilities and shareholders' equity | $ | 2,654,145 |  |  | $ | 2,159,890 |
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of the Condensed Consolidated Financial Statements.

3

THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
For the three and nine months ended September 30, 2014 and 2013
(expressed in thousands of U.S. dollars, except per share and share amounts)

| Three months ended |  | Nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
Revenues |  |  |  |  |  |  |
Gross premiums written | $ | 126,403 |  |  | $ | 45,425 |  |  | $ | 359,498 |  |  | $ | 239,660 |
Gross premiums ceded | (150 | ) |  | — |  |  | (150 | ) |  | (9,975 | )
Net premiums written | 126,253 |  |  | 45,425 |  |  | 359,348 |  |  | 229,685 |
Change in net unearned premium reserves | (17,305 | ) |  | 20,904 |  |  | (98,388 | ) |  | (67,528 | )
Net premiums earned | 108,948 |  |  | 66,329 |  |  | 260,960 |  |  | 162,157 |
Net investment income | 1,552 |  |  | 54,617 |  |  | 92,072 |  |  | 168,804 |
Total revenues | 110,500 |  |  | 120,946 |  |  | 353,032 |  |  | 330,961 |
Expenses |  |  |  |  |  |  |
Loss and loss adjustment expenses incurred, net | 60,115 |  |  | 39,349 |  |  | 150,783 |  |  | 103,679 |
Acquisition costs, net | 38,317 |  |  | 21,117 |  |  | 93,331 |  |  | 49,111 |
General and administrative expenses | 10,124 |  |  | 9,846 |  |  | 29,698 |  |  | 24,071 |
Other expenses | 2,982 |  |  | 1,246 |  |  | 4,789 |  |  | 2,675 |
Total expenses | 111,538 |  |  | 71,558 |  |  | 278,601 |  |  | 179,536 |
Income (loss) before income tax expense | (1,038 | ) |  | 49,388 |  |  | 74,431 |  |  | 151,425 |
Income tax expense | (1,542 | ) |  | — |  |  | (3,917 | ) |  | — |
Income (loss) including non-controlling interests | (2,580 | ) |  | 49,388 |  |  | 70,514 |  |  | 151,425 |
Income (loss) attributable to non-controlling interests | (3,417 | ) |  | (2,818 | ) |  | (5,440 | ) |  | (4,202 | )
Net income (loss) | $ | (5,997 | ) |  | $ | 46,570 |  |  | $ | 65,074 |  |  | $ | 147,223 |
Earnings (loss) per share |  |  |  |  |  |  |
Basic | $ | (0.06 | ) |  | $ | 0.52 |  |  | $ | 0.63 |  |  | $ | 1.77 |
Diluted | $ | (0.06 | ) |  | $ | 0.51 |  |  | $ | 0.61 |  |  | $ | 1.75 |
Weighted average number of common shares used in the determination of earnings (loss) per share |  |  |  |  |  |  |
Basic | 103,295,920 |  |  | 89,620,394 |  |  | 103,275,204 |  |  | 82,630,430 |
Diluted | 103,295,920 |  |  | 90,915,805 |  |  | 106,454,775 |  |  | 83,453,835 |
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of the Condensed Consolidated Financial Statements.

4

THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
For the nine months ended September 30, 2014 and 2013
(expressed in thousands of U.S. dollars, except share amounts)

| 2014 |  | 2013
Common shares |  |  |
Balance, beginning of period | 103,888,916 |  |  | 78,432,132 |
Issuance of common shares | 142,540 |  |  | 25,456,784 |
Balance, end of period | 104,031,456 |  |  | 103,888,916 |
Common shares |  |  |
Balance, beginning of period | $ | 10,389 |  |  | $ | 7,843 |
Issuance of common shares | 14 |  |  | 2,546 |
Balance, end of period | 10,403 |  |  | 10,389 |
Additional paid-in capital |  |  |
Balance, beginning of period | 1,055,690 |  |  | 762,430 |
Issuance of common shares, net | 585 |  |  | 283,460 |
Fair value of Founder and advisor warrants | — |  |  | 3,747 |
Fair value of warrants qualifying as shareholders' equity | — |  |  | (3,747 | )
Share compensation expense | 6,979 |  |  | 7,611 |
Balance, end of period | 1,063,254 |  |  | 1,053,501 |
Retained earnings |  |  |
Balance, beginning of period | 325,582 |  |  | 98,271 |
Net income | 65,074 |  |  | 147,223 |
Balance, end of period | 390,656 |  |  | 245,494 |
Shareholders' equity attributable to shareholders | 1,464,313 |  |  | 1,309,384 |
Non-controlling interests |  |  |
Balance, beginning of period | 118,735 |  |  | 59,777 |
Contributions | 6,151 |  |  | 26,164 |
Distributions | (51,001 | ) |  | (35,129 | )
Income attributable to non-controlling interests | 5,440 |  |  | 4,202 |
Balance, end of period | 79,325 |  |  | 55,014 |
Total shareholders' equity | $ | 1,543,638 |  |  | $ | 1,364,398 |
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of the Condensed Consolidated Financial Statements.

5

THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended September 30, 2014 and 2013
(expressed in thousands of U.S. dollars, except per share and share amounts)

| 2014 |  | 2013
Operating activities |  |  |
Net income | $ | 65,074 |  |  | $ | 147,223 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Share compensation expense | 6,979 |  |  | 7,611 |
Interest expense on deposit liabilities | 3,687 |  |  | — |
Net unrealized loss (gain) on investments and derivatives | 68,107 |  |  | (30,541 | )
Net realized gain on investments and derivatives | (184,133 | ) |  | (176,673 | )
Amortization of premium and accretion of discount, net | 1,031 |  |  | (2,868 | )
Changes in assets and liabilities: |  |  |
Reinsurance balances receivable | (65,718 | ) |  | (57,669 | )
Deferred acquisition costs, net | (33,180 | ) |  | (13,180 | )
Unearned premiums ceded | (91 | ) |  | (2,494 | )
Loss and loss adjustment expenses recoverable | 7,865 |  |  | (6,284 | )
Other assets | (303 | ) |  | (931 | )
Interest and dividends receivable, net | (2,576 | ) |  | (775 | )
Unearned premium reserves | 98,479 |  |  | 70,022 |
Loss and loss adjustment expense reserves | 52,982 |  |  | 76,436 |
Accounts payable and accrued expenses | (1,935 | ) |  | (500 | )
Reinsurance balances payable | 12,133 |  |  | 8,579 |
Performance fee payable to related party | 21,837 |  |  | 40,264 |
Net cash provided by operating activities | 50,238 |  |  | 58,220 |
Investing activities |  |  |
Purchases of investments | (2,150,821 | ) |  | (1,475,391 | )
Proceeds from sales of investments | 1,998,673 |  |  | 1,539,990 |
Purchases of investments to cover short sales | (141,468 | ) |  | (342,282 | )
Proceeds from short sales of investments | 150,098 |  |  | 251,085 |
Change in due to/from brokers, net | 177,516 |  |  | (311,503 | )
Increase in securities purchased under an agreement to sell | 18,250 |  |  | 22,487 |
Non-controlling interest in investment affiliate | (49,415 | ) |  | (33,114 | )
Change in restricted cash and cash equivalents | (68,389 | ) |  | (81,663 | )
Net cash used in investing activities | (65,556 | ) |  | (430,391 | )
Financing activities |  |  |
Proceeds from issuance of common shares, net of costs | 599 |  |  | 286,685 |
Increase in deposit liabilities | 5,782 |  |  | 41,793 |
Non-controlling interest in Catastrophe Fund | 10,023 |  |  | 28,515 |
Non-controlling interest in Catastrophe Fund Manager | (18 | ) |  | (164 | )
Net cash provided by financing activities | 16,386 |  |  | 356,829 |
Net increase (decrease) in cash and cash equivalents | 1,068 |  |  | (15,342 | )
Cash and cash equivalents at beginning of period | 31,625 |  |  | 34,005 |
Cash and cash equivalents at end of period | $ | 32,693 |  |  | $ | 18,663 |
Supplementary information |  |  |
Interest paid in cash | $ | 2,780 |  |  | $ | 3,369 |
Income tax paid in cash | $ | 2,286 |  |  | $ | — |
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of the Condensed Consolidated Financial Statements.

6

Third Point Reinsurance Ltd.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(Expressed in United States Dollars)

1. | Organization

Third Point Reinsurance Ltd. (the “Company”) was incorporated as an exempted company under the laws of Bermuda on October 6, 2011 and, through its wholly-owned subsidiary Third Point Reinsurance Company Ltd. (“Third Point Re”), is a provider of global specialty property and casualty reinsurance products. Third Point Re was incorporated in Bermuda and is registered as a Class 4 insurer under the Insurance Act 1978, as amended, and related regulations (the “Act”). Third Point Re commenced reinsurance operations in January 2012.
On June 15, 2012, Third Point Reinsurance Opportunities Fund Ltd. (the “Catastrophe Fund”), Third Point Reinsurance Investment Management Ltd. (the “Catastrophe Fund Manager”), and Third Point Re Cat Ltd. (the “Catastrophe Reinsurer”) were incorporated in Bermuda. The Company subsequently announced a strategic arrangement with Hiscox Insurance Company (Bermuda) Limited (“Hiscox”) to launch a collateralized catastrophe reinsurance underwriting fund management business. The Catastrophe Fund Manager, a Bermuda exempted company, is the investment manager of the Catastrophe Fund and is 85% owned by Third Point Re and 15% owned by Hiscox. The Catastrophe Fund Manager is responsible for the investment and management of the Catastrophe Fund’s assets. The Catastrophe Fund is an exempted company incorporated in Bermuda and is open to both related party and third party investors. The Catastrophe Fund Manager also acts as manager of the Catastrophe Reinsurer and, in this capacity, is responsible for overseeing the underwriting and investment activities of the Catastrophe Reinsurer. The Catastrophe Reinsurer is a Bermuda exempted company and is licensed as a special purpose insurer under the Act.
On August 2, 2012, the Company established a wholly-owned subsidiary in the United Kingdom, Third Point Re Marketing (UK) Limited (“TPRUK”). On May 20, 2013, TPRUK was licensed as an insurance intermediary by the UK Financial Conduct Authority.
On August 20, 2013, the Company completed an initial public offering (“IPO”) of 24,832,484 common shares at an offering price of $12.50 per share. The net proceeds of the offering were $286.0 million, after deducting offering costs. The Company's common shares are listed on the New York Stock Exchange under the symbol “TPRE”.
These unaudited condensed consolidated financial statements include the results of the Company and its wholly and majority owned subsidiaries (together, the “Company”) and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the U.S. Securities and Exchange Commission on February 28, 2014.
In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company's financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated.
The results for the nine months ended September 30, 2014 are not necessarily indicative of the results expected for the full calendar year.
7

2. | Significant accounting policies

The following is a summary of the significant accounting and reporting policies adopted by the Company:
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The major estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, the loss and loss adjustment expense reserves, estimates of written and earned premiums and fair value of financial instruments.
Cash and restricted cash and cash equivalents
Cash and cash equivalents consist of cash held in banks and other short-term, highly liquid investments with original maturity dates of ninety days or less.
Restricted cash and cash equivalents consist of cash held in trust accounts with the Catastrophe Reinsurer, securing collateralized reinsurance contracts written and cash held with brokers securing letters of credit issued under credit facilities.
Premium revenue recognition
To the extent that the amount of written premium is estimable, the Company estimates the ultimate premiums for the entire contract period and records this estimate at the inception of the contract. For contracts where the full written premium is not estimable at inception, the Company records written premium for the portion of the contract period for which the amount is estimable. These estimates are based primarily on information in the underlying contracts as well as information provided by clients and/or brokers.
Premiums written are earned over the exposure period in proportion to the period of risk covered. Unearned premiums represent the portion of premiums written that relate to the remaining term of the underlying policies in force.
Premiums for retroactive reinsurance contracts are earned at the inception of the contract, as all of the underlying loss events covered by these contracts occurred in the past. Any underwriting profit at inception of a retroactive reinsurance contract is deferred and recognised over the estimated future payout of the loss and loss adjustment expenses reserves. Any underwriting loss at inception of a retroactive reinsurance contract is recognised immediately.
Changes in premium estimates are expected and may result in adjustments in any reporting period. These estimates change over time as additional information regarding the underlying business volume is obtained. Any subsequent adjustments arising on such estimates are recorded in the period in which they are determined.
Reinsurance premiums ceded
From time to time the Company reduces the risk of losses on business written by reinsuring certain risks and exposures with other reinsurers. The Company remains liable to the extent that any retrocessionaire fails to meet its obligations and to the extent that the Company does not hold sufficient security for their unpaid obligations. Ceded premiums are written during the period in which the risks incept and are expensed over the contract period in proportion to the period of risk covered. Unearned premiums ceded consist of the unexpired portion of reinsurance ceded.
Deferred acquisition costs
Acquisition costs consist of commissions, brokerage and excise taxes that are related directly to the successful acquisition of new or renewal reinsurance contracts. These costs are deferred and amortized over the period in which the related
8

premiums are earned. The Company evaluates the recoverability of deferred acquisition costs by determining if the sum of future earned premiums and anticipated investment income is greater than expected future loss and loss adjustment expenses and acquisition costs. If a loss is probable on the unexpired portion of contracts in force, a premium deficiency loss is recognized. As of September 30, 2014, deferred acquisition costs are considered to be fully recoverable and no premium deficiency has been recorded.
Acquisition costs also include profit commissions that are expensed when incurred. Profit commissions are calculated and accrued based on the expected loss experience for contracts and recorded when the current loss estimate indicates that a profit commission is probable under the contract terms.
Loss and loss adjustment expense reserves
The Company’s loss and loss adjustment expense reserves include case reserves and reserves for losses incurred but not yet reported (“IBNR reserves”). Case reserves are established for losses that have been reported, but not yet paid, based on loss reports from brokers and ceding companies. IBNR reserves represent the estimated loss and loss adjustment expenses that have been incurred by insureds and reinsureds but not yet reported to the insurer or reinsurer, including unknown future developments on loss and loss adjustment expenses that are known to the insurer or reinsurer. IBNR reserves are established by management based on actuarially determined estimates of ultimate loss and loss adjustment expenses.
Inherent in the estimate of ultimate loss and loss adjustment expenses are expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. Accordingly, ultimate loss and loss adjustment expenses may differ materially from the amounts recorded in the condensed consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are recorded in the condensed consolidated statements of income (loss) in the period in which they become known.
Deposit liabilities
Certain contracts do not transfer sufficient insurance risk to be deemed reinsurance contracts and are accounted for using the deposit method of accounting. Management exercises judgment in determining whether contracts transfer sufficient risk to be accounted for as reinsurance contracts. Using the deposit method of accounting, a deposit liability, rather than written premium, is initially recorded based upon the consideration received less any explicitly identified premiums or fees. In subsequent periods, the deposit liability is adjusted by calculating the effective yield on the deposit to reflect actual payments to date and future expected payments.
Fair value measurement
The Company determines the fair value of financial instruments in accordance with current accounting guidance, which defines fair value and establishes a three level fair value hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Fair value is defined as the price the Company would receive to sell an asset or would pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Company determines the estimated fair value of each individual security utilizing the highest level inputs available.
The fair value of the Company’s assets and liabilities, which qualify as financial instruments, approximates the carrying amounts presented in the condensed consolidated balance sheets.
Investments
The Company’s investments are classified as “trading securities” and are carried at fair value with changes in fair value included in earnings in the condensed consolidated statements of income (loss).
The fair value of the Company’s investments are based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications, industry recognized pricing vendors and/or internal pricing
9

valuation techniques. Investment transactions are recorded on a trade date basis with balances pending settlement included in due to/from brokers in the condensed consolidated balance sheets.
Realized gains and losses are determined using cost calculated on the specific identification basis. Dividends are recorded on the ex-dividend date. Income and expense are recorded on the accrual basis including interest and premiums amortized and discounts accreted.
Derivatives
Underwriting
The Catastrophe Reinsurer enters into certain contracts for which the potential loss payments are triggered exclusively by reference to a specified index, such as an industry loss. These contracts are accounted for as derivatives. The Company records the fair value of these contracts in derivative liabilities, at fair value, in the condensed consolidated balance sheets. Changes in the fair value of these contracts are recorded in net investment income in the condensed consolidated statements of income (loss).
Investments
Derivative instruments within our separate account managed by our investment manager, Third Point LLC, are recorded in the condensed consolidated balance sheets at fair value, with changes in fair values and realized gains and losses recognized in net investment income in the condensed consolidated statements of income (loss).
Derivatives serve as a key component of the Company’s investment strategy and are utilized primarily to structure the portfolio, or individual investments, and to economically match the investment objectives of the Company. The Company's derivatives do not qualify as hedges for financial reporting purposes and are recorded in the condensed consolidated balance sheets on a gross basis and not offset against any collateral pledged or received. Pursuant to the International Swaps and Derivatives Association ("ISDA") master agreements, securities lending agreements and other derivatives agreements, the Company and its counterparties typically have the ability to net certain payments owed to each other in specified circumstances. In addition, in the event a party to one of the ISDA master agreements, securities lending agreements or other derivatives agreements defaults, or a transaction is otherwise subject to termination, the non-defaulting party generally has the right to set off against payments owed to the defaulting party or collateral held by the non defaulting party.
The Company enters into derivative contracts to manage credit risk, interest rate risk, currency exchange risk, and other exposure risks. The Company uses derivatives in connection with its risk-management activities to economically hedge certain risks and to gain exposure to certain investments. The utilization of derivative contracts also allows for an efficient means by which to trade certain asset classes.
Fair values of derivatives are determined by using quoted market prices, industry recognized pricing vendors and broker quotes when available; otherwise fair values are based on pricing models that consider the time value of money, volatility, and the current market and contractual prices of underlying financial instruments.
Embedded derivatives
Certain of the Company’s deposit and reinsurance contracts contain interest crediting features that vary based on the net investment return on investments managed by Third Point LLC. These contractual features are considered embedded derivatives in accordance with U.S. GAAP. We include the estimated fair value of these embedded derivatives in the condensed consolidated balance sheets with the host contract in order to reflect the expected settlement of these features with the host contract. Prior to 2014, the changes in estimated fair value of these embedded derivatives were recorded in net investment income. As these embedded derivatives have become more prominent, the presentation has been modified and changes in the estimated fair value of embedded derivatives are now recorded in other expenses in the condensed consolidated statements of income (loss). In addition, fixed interest crediting features on these contracts that were recorded in net investment income are now classified in other expenses in the condensed consolidated statements of income (loss). As a result, investment expense of $1.2 million and $2.7 million that was previously
10

reported in net investment income for the three and nine months ended September 30, 2013, respectively, is now being reported in other expenses to conform to the current year presentation.
Share-based compensation
The Company accounts for its share-based compensation transactions using the fair value of the award at the grant date. Determining the fair value of share purchase options at the grant date requires estimation and judgment. The Company uses an option-pricing model (Black-Scholes) to calculate the fair value of share purchase options.
For share purchase options granted that contain both a service and performance condition, the Company recognizes share compensation expense only for the portion of the options that are considered probable of being exercised. Share compensation for share purchase options considered probable of being exercised is expensed over the service (vesting) period on a graded vesting basis. The probability of share purchase options being exercised is evaluated at each reporting period. When the share purchase options are considered probable of being exercised, the Company records a catch up of share compensation expense from the grant date (service inception date for existing options) to the current reporting period end based on the fair value of the options at the grant date.
The Company measures grant date fair value for restricted share awards based on the price of its common shares at the grant date and the expense is recognised on a straight-line basis over the vesting period.
Warrants
The Company accounts for warrant contracts issued to certain of its founding investors ("Founders") in conjunction with the initial capitalization of the Company by using either the physical settlement or net-share settlement methods. The fair value of these warrants was recorded in equity as additional paid-in capital. The fair value of warrants issued are estimated on the grant date using the Black-Scholes option-pricing model.
The Company accounts for certain warrant contracts issued to an advisor, where services have been received by the Company, in part, in exchange for equity instruments, based on the fair value of such services. The associated cost of these warrants has been recorded as capital raise costs and is included in additional paid in capital in the condensed consolidated statements of shareholders’ equity.
Offering costs
Offering costs incurred in connection with the IPO, which included underwriters’ fees, legal and accounting fees, printing and other fees were deducted from the gross proceeds of the offering. The proceeds from the issuance of shares net of offering costs is included in additional paid in capital in the condensed consolidated statements of shareholders’ equity.
Foreign currency transactions
The Company’s functional currency is the U.S. dollar. Transactions in foreign currencies are recorded in U.S. dollars at the exchange rate in effect on the transaction date. Monetary assets and liabilities in foreign currencies are remeasured at the exchange rates in effect at the reporting date and foreign exchange gains and losses are included in the condensed consolidated statements of income (loss).
Income taxes and uncertain tax positions
Under current Bermuda law, the Company and its Bermuda subsidiaries are not subject to any income or capital gains taxes. In the event that such taxes are imposed, the Company and its Bermuda subsidiaries would be exempted from any such taxes until March 2035 under the Tax Assurance Certificates issued to such entities pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966, as amended.
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The Company has an operating subsidiary in the United Kingdom, TPRUK, which is subject to relevant taxes in that jurisdiction. On July 17, 2013, the United Kingdom government passed the Finance Act 2013, which reduced the corporate income tax rate from 23% to 21% (effective April 1, 2014) and provided for a further reduction in the corporate income tax rate from 21% to 20% (effective April 1, 2015). For the three and nine months ended September 30, 2014, the Company recorded $0.003 million and $0.02 million, respectively, for income taxes relating to TPRUK.
The Company is subject to withholding tax obligations related to dividends, capital gains and interest on certain investments. Prior to the second quarter of 2014, these withholding tax obligations were recorded as deductions to net investment income. As these withholding tax obligations have increased, the Company began presenting the relevant amounts in income tax expense in the condensed consolidated statements of income (loss). As a result, withholding taxes of $1.2 million and $2.2 million have been recorded in income tax expense for the three and nine months ended September 30, 2014, respectively. Withholding taxes of $0.3 million and $0.7 million were previously recorded as deductions to net investment income for the three and nine months ended September 30, 2013, respectively.
As of September 30, 2014, the Company had recorded a $1.7 million provision for uncertain tax positions related to investment transactions in certain foreign countries. The Company has recognized income tax expense related to uncertain tax positions of $0.3 million and $1.7 million for the three and nine months ended September 30, 2014, respectively (2013 - nil).
Non-controlling interests
The Company consolidates the results of entities in which it has a controlling financial interest. The Company records the portion of shareholders’ equity attributable to non-controlling interests as a separate line within shareholders’ equity in the condensed consolidated balance sheets. The Company records the portion of income attributable to non-controlling interests as a separate line within the condensed consolidated statements of income (loss).
Earnings per share
Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. The weighted average number of common shares excludes any dilutive effect of outstanding warrants, options and convertible securities such as unvested restricted shares. Diluted earnings per share is based on the weighted average number of common shares and share equivalents including any dilutive effects of warrants, options and other awards under share plans and are determined using the treasury stock method. U.S. GAAP requires that unvested share awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as ‘‘participating securities”), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. The Company treats its unvested restricted shares as participating securities. In the event of a net loss, the participating securities are excluded from the calculation of both basic and diluted loss per share.
Leases
Leases in which substantially all of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognized in the condensed consolidated statements of income (loss) on a straight-line basis over the term of the lease.
Comprehensive income
The Company has no comprehensive income other than net income disclosed in the condensed consolidated statements of income (loss).
Segment information
Under U.S. GAAP, operating segments are based on the internal information that management uses for allocating resources and assessing performance of the Company. The Company reports two operating segments – Property and
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Casualty Reinsurance and Catastrophe Risk Management. The Company has also identified a corporate function that includes net investment income on capital and certain general and administrative expenses related to corporate activities.
Recently issued accounting standards
Issued and effective as of September 30, 2014
In January 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01). The objective of ASU 2013-01 is to address implementation issues about the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendments clarify that the scope of ASU 2011-11 applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in ASU 2011-11. ASU 2013-01 is effective for interim and annual periods beginning on or after January 1, 2013. The Company adopted ASU 2013-01 effective with its IPO and has included the required disclosures in Note 8 of the notes to the condensed consolidated financial statements.
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (ASU 2013-02). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of other comprehensive income. ASU 2013-02 is effective for periods subsequent to December 15, 2012. The adoption of this guidance had no impact on the Company’s condensed consolidated financial statements.
In June 2013, the FASB issued Accounting Standards Update No. 2013-08, Financial Services - Investment Companies - Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08). The amendments in this update change the assessment of whether an entity is an investment company by developing a new two-tiered approach for that assessment, which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics. The new approach requires an entity to assess all of the characteristics of an investment company and consider its purpose and design to determine whether it is an investment company. ASU 2013-08 is effective prospectively for periods subsequent to December 15, 2013. Early adoption is prohibited. The Company adopted ASU 2013-08 in the first quarter of 2014, and the adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.
Issued but not yet effective as of September 30, 2014
In April 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). ASU 2014-08 changes the requirements for reporting discontinued operations, such that a disposal of a component of the Company's operations is required to be reported as discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on the Company's operations and financial results. ASU 2014-08 is effective for all disposals that occur after January 1, 2015. The Company does not expect this new pronouncement to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 provides a framework, through a five-step process, for recognizing revenue from customers, improves comparability and consistency of recognizing revenue across entities, industries, jurisdictions and capital markets, and requires enhanced disclosures. Certain contracts with customers are specifically excluded from the scope of ASU 2014-09, including amongst others, insurance contracts accounted for under Accounting Standard Codification 944, Financial Services - Insurance. ASU 2014-09 is effective on January 1, 2017 with retrospective adoption required for the comparative periods. The Company is currently evaluating the impact of this guidance, however, it is not expected to have a material impact on the Company's consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to Maturity Transactions, Repurchase Financings, and Disclosures (ASU 2014-11). ASU 2014-11 amends
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the accounting guidance for “repo-to-maturity” transactions and repurchase agreements executed as repurchase financings. In addition, the new standard requires a transferor to disclose more information about certain transactions, including those in which it retains substantially all of the exposure to the economic returns of the underlying transferred asset over the transaction’s term. For repurchase agreements and securities lending agreements accounted for as secured borrowings as of a reporting date, the new standard requires obligors (transferors of collateral) to disaggregate the related gross obligation by class of collateral pledged, and to disclose the remaining contractual maturity of the agreements, and to discuss the potential risks of these arrangements and related collateral pledged, including the risks stemming from a decline in the value of the pledged collateral and how such risks are managed. Additionally, as a result of the new accounting guidance, repo-to-maturity transactions will be reported as secured borrowings. Transferors will also no longer apply the current “linked” accounting model to repurchase agreements executed contemporaneously with the initial transfer of the underlying financial asset with the same counterparty. ASU 2014-11 is effective prospectively for periods subsequent to December 15, 2014. The Company is currently evaluating the impact of this guidance, however, it is not expected to have a material impact on the Company's consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements- Going Concern (ASU 2014-15). ASU 2014-15 requires management to evaluate, for each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. If conditions or events raise substantial doubt about the entity's ability to continue as a going concern, the entity will be required to disclose information that enables the users of the financial statements to understand the principal conditions or events, management's evaluation of the significance of those events or conditions and management's plans that alleviate substantial doubt about the entity's ability to continue as a going concern. ASU 2014-1 becomes effective for the annual period ending after December 15, 2016. The Company does not expect this new guidance to have a material impact on the Company’s condensed consolidated financial statements.

3. | Restricted cash and cash equivalents

Restricted cash and cash equivalents as of September 30, 2014 and December 31, 2013 consisted of the following:

| September 30, 2014 |  | December 31, 2013
| ($ in thousands)
Restricted cash securing collateralized reinsurance contracts written by the Catastrophe Reinsurer | $ | 101,348 |  |  | $ | 93,014 |
Restricted cash securing credit facilities | 160,618 |  |  | 100,563 |
| $ | 261,966 |  |  | $ | 193,577 |

4. | Reinsurance premiums ceded

From time to time, the Company purchases retrocessional coverage for one or more of the following reasons: to manage its overall exposure, to reduce its net liability on individual risks, to obtain additional underwriting capacity and to balance its underwriting portfolio. Additionally, retrocession can be used as a mechanism to share the risks and rewards of business written and therefore can be used as a tool to align the Company’s interests with those of its counterparties. The Company currently has coverage that provides for recovery of a portion of loss and loss adjustment expenses incurred on one crop contract written in 2013 and one new contract entered into in the third quarter of 2014. Premiums ceded for the three and nine months ended September 30, 2014 were $0.2 million, compared to $nil and $10.0 million for three and nine month ended September 30, 2013, respectively. Loss and loss adjustment expenses recoverable from the retrocessionaire are recorded as assets. For the three and nine months ended September 30, 2014, loss and loss adjustment expenses incurred and reported on the condensed consolidated statements of income (loss) are net of loss and loss expenses recovered of $nil and $1.0 million, respectively, compared to $2.1 million and $6.3 million for three and nine months ended September 30, 2013, respectively. Retrocession contracts do not relieve the Company from its obligations to the insureds. Failure of retrocessionaires to honor their obligations could result in losses to the Company. As of September 30, 2014, the Company had loss and loss adjustment expenses recoverable of $1.4 million (December 31, 2013 - $9.3 million) with one retrocessionaire who was rated “A (Excellent)” by A.M. Best Company.
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The Company regularly evaluates the financial condition of its retrocessionaires to assess the ability of the retrocessionaires to honor their obligations.
5. Investments
The Company’s investments are managed by its investment manager, Third Point LLC (“Third Point LLC” or the “Investment Manager”), under a long-term investment management contract. The Company directly owns the investments, which are held in a separate account and managed by Third Point LLC. The following is a summary of the separate account managed by Third Point LLC:

| September 30, 2014 |  | December 31, 2013
Assets | ($ in thousands)
Total investments in securities and commodities | $ | 1,713,000 |  |  | $ | 1,460,864 |
Cash and cash equivalents | 10,003 |  |  | 869 |
Restricted cash and cash equivalents | 160,618 |  |  | 100,563 |
Due from brokers | 182,927 |  |  | 98,386 |
Securities purchased under an agreement to sell | 19,897 |  |  | 38,147 |
Derivative assets | 37,260 |  |  | 39,045 |
Interest and dividends receivable | 5,021 |  |  | 2,604 |
Other assets | 799 |  |  | 933 |
Total assets | 2,129,525 |  |  | 1,741,411 |
Liabilities and non-controlling interest |  |  |
Accounts payable and accrued expenses | 299 |  |  | 1,759 |
Securities sold, not yet purchased, at fair value | 45,667 |  |  | 56,056 |
Due to brokers | 306,927 |  |  | 44,870 |
Derivative liabilities | 12,113 |  |  | 8,819 |
Performance fee payable to related party | 21,837 |  |  | — |
Interest and dividends payable | 589 |  |  | 748 |
Capital contribution received in advance | 10,000 |  |  | — |
Non-controlling interest | 20,302 |  |  | 69,717 |
Total liabilities and non-controlling interest | 417,734 |  |  | 181,969 |
Total net investments managed by Third Point LLC | $ | 1,711,791 |  |  | $ | 1,559,442 |

The Company’s Investment Manager has a formal valuation policy that sets forth the pricing methodology for investments to be used in determining the fair value of each security in the Company’s portfolio. The valuation policy is updated and approved annually by Third Point LLC’s valuation committee (the “Committee”), which is comprised of officers and employees who are senior business management personnel of Third Point LLC. The Committee meets monthly. The Committee’s role is to review and verify the propriety and consistency of the valuation methodology to determine the fair value of investments. The Committee also reviews any due diligence performed and approves any changes to current or potential external pricing vendors.
Investments are carried at fair value. The fair values of investments are estimated using prices obtained from either third-party pricing services or broker quotes. The methodology for valuation is generally determined based on the investment's asset class per the Company's Investment Manager's valuation policy. For investments that the Company is unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from the Company’s Investment Manager.
Securities and commodities listed on a national securities or commodities exchange or quoted on NASDAQ are valued at their last sales price as of the last business day of the period. Listed securities with no reported sales on such date
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and over-the-counter (“OTC”) securities are valued at their last closing bid price if held long by the Company, and last closing ask price if held short by the Company. As of September 30, 2014, securities valued at $445.4 million (December 31, 2013 - $483.2 million), representing 25.4% (December 31, 2013 – 33.1%) of investments in securities and commodities and derivative assets, and $1.5 million (December 31, 2013 - $41.0 million), representing 2.6% (December 31, 2013 – 73.1%) of securities sold, not yet purchased, and derivative liabilities are valued based on broker quotes or other quoted market prices for similar securities.
Private securities are not registered for public sale and are carried at an estimated fair value at the end of the period, as determined by the Company's Investment Manager. Valuation techniques used by the Company's Investment Manager may include market approach, last transaction analysis, liquidation analysis and/or using discounted cash flow models where the significant inputs could include but are not limited to additional rounds of equity financing, financial metrics such as revenue multiples or price-earnings ratio, discount rates and other factors. In addition, the Company or the Company’s Investment Manager may employ third party valuation firms to conduct separate valuations of such private securities. The third party valuation firms provide the Company or the Company’s Investment Manager with a written report documenting their recommended valuation as of the determination date for the specified investments.
As of September 30, 2014, the Company had $2.8 million (December 31, 2013 - $3.3 million) of private securities fair valued by a third party valuation firm using information obtained from the Company's Investment Manager, which represented less than 1.0% (December 31, 2013 - 1.0%) of total investments in securities and commodities and derivative assets. The value at which these securities could be sold or settled with a willing buyer or seller may differ materially from the Company’s estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.
The Company’s free standing derivatives are recorded at fair value, and are included in the condensed consolidated balance sheets in derivative assets and derivative liabilities. The Company values exchange-traded derivatives at their last sales price on the exchange where it is primarily traded. OTC derivatives, which include swap, option, swaption, forward, future and contract for differences, are valued by third party sources when available; otherwise, fair values are obtained from broker quotes that are based on pricing models that consider the time value of money, volatility, and the current market and contractual prices of the underlying financial instruments.
As an extension of its underwriting activities, the Catastrophe Reinsurer may sell derivative instruments that provide reinsurance-like protection to third parties for specific loss events associated with certain lines of business. These derivatives are recorded in the condensed consolidated balance sheets at fair value, with changes in the fair value of these derivatives recorded in net investment income in the condensed consolidated statements of income (loss). These contracts are valued on the basis of models developed by the Company, which approximates fair value.
In the second quarter of 2014, the Catastrophe Reinsurer purchased a catastrophe bond. This catastrophe bond is recorded in the condensed consolidated balance sheet at fair value, with changes in the fair value recorded in net investment income in the condensed consolidated statements of income (loss). This catastrophe bond is valued using the average of the bids from a minimum of two broker-dealers or other market makers.
The Company also has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value with changes in fair value of the embedded derivative reported in net investment income. The Company's embedded derivatives relate to interest crediting features in certain reinsurance and deposit contracts that vary based on the returns on our investments managed by Third Point LLC. The Company determines the fair value of the embedded derivatives using models developed by the Company, which approximates fair value. See discussion of accounting policy for embedded derivatives in Note 2 for additional information.
The Company’s holdings in asset-backed securities (“ABS”) are substantially invested in residential mortgage-backed securities (“RMBS”). The balance of the Company's holdings in ABS is in commercial mortgage-backed securities, collateralized debt obligations and student loan asset-backed securities. These investments are valued using broker quotes or a recognized third-party pricing vendor. All of these classes of ABS are sensitive to changes in interest rates and any resulting change in the rate at which borrowers sell their properties, refinance, or otherwise pre-pay their loans. As an investor in these classes of ABS, the Company may be exposed to the credit risk of underlying borrowers not
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being able to make timely payments on loans or the likelihood of borrowers defaulting on their loans. In addition, the Company may be exposed to significant market and liquidity risks.
The Company values its investments in limited partnerships at fair value, which are estimated based on the Company's share of the net asset value ("NAV") of the limited partnerships as provided by the investment managers of the underlying investment funds. The resulting net gains or net losses are reflected in the condensed consolidated statements of income (loss).
The Company performs several processes to ascertain the reasonableness of the valuation of all of the Company’s investments comprising the Company’s investment portfolio, including securities that are categorized as Level 2 and Level 3 within the fair value hierarchy described below. These processes include i) obtaining and reviewing weekly and monthly investment portfolio reports from the Company's Investment Manager, ii) obtaining and reviewing monthly NAV and investment return reports received directly from the Company’s third-party fund administrator which are compared to the reports noted in (i), and iii) monthly update discussions with the Company’s Investment Manager regarding the investment portfolio, including, their process for reviewing and validating pricing obtained from third-party service providers.
For the nine months ended September 30, 2014 and 2013, there were no changes in the valuation techniques as it relates to the above.
Monetary assets and liabilities denominated in foreign currencies are remeasured at the closing rates of exchange. Transactions during the period are translated at the rate of exchange prevailing on the date of the transaction. The Company does not isolate that portion of the net investment income resulting from changes in foreign exchange rates on investments, dividends and interest from the fluctuations arising from changes in fair values of securities and derivatives held. Periodic payments received or paid on swap agreements are recorded as realized gain or loss on investment transactions. Such fluctuations are included within net investment income in the condensed consolidated statements of income (loss).
U.S. GAAP disclosure requirements establish a framework for measuring fair value, including a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. The three-level hierarchy of inputs is summarized below:

• | Level 1 – Quoted prices available in active markets/exchanges for identical investments as of the reporting date.

• | Level 2 – Observable inputs to the valuation methodology other than unadjusted quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include, but are not limited to, prices quoted for similar assets or liabilities in active markets/exchanges, prices quoted for identical or similar assets or liabilities in markets that are not active and fair values determined through the use of models or other valuation methodologies.

• | Level 3 – Pricing inputs unobservable for the investment and include activities where there is little, if any, market activity for the investment. The inputs applied in the determination of fair value require significant management judgment and estimation.

Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources other than those of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The key inputs for corporate, government and sovereign bond valuation are coupon frequency, coupon rate and underlying bond spread. The key inputs for asset-backed securities are yield, probability of default, loss severity and prepayment.
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Key inputs for over-the-counter (“OTC”) valuations vary based on the type of underlying security on which the contract was written:

• | The key inputs for most OTC option contracts include notional, strike price, maturity, payout structure, current foreign exchange forward and spot rates, current market price of underlying and volatility of underlying.

• | The key inputs for most forward contracts include notional, maturity, forward rate, spot rate, various interest rate curves and discount factor.

• | The key inputs for swap valuation will vary based on the type of underlying on which the contract was written. Generally, the key inputs for most swap contracts include notional, swap period, fixed rate, credit or interest rate curves, current market or spot price of the underlying and the volatility of the underlying.

The following tables present the Company’s investments, categorized by the level of the fair value hierarchy as of September 30, 2014 and December 31, 2013:

| September 30, 2014
| Quoted prices in active markets |  | Significant other observable inputs |  | Significant unobservable inputs |  | Total
| (Level 1) |  | (Level 2) |  | (Level 3) |
Assets | ($ in thousands)
Equity securities | $ | 929,946 |  |  | $ | 18,721 |  |  | $ | — |  |  | $ | 948,667 |
Private common equity securities | — |  |  | 7,937 |  |  | — |  |  | 7,937 |
Total equities | 929,946 |  |  | 26,658 |  |  | — |  |  | 956,604 |
Asset-backed securities | — |  |  | 425,160 |  |  | 2,434 |  |  | 427,594 |
Bank debts | — |  |  | 17,584 |  |  | — |  |  | 17,584 |
Corporate bonds | — |  |  | 103,092 |  |  | 3,964 |  |  | 107,056 |
Municipal bonds | — |  |  | 3,623 |  |  | — |  |  | 3,623 |
Sovereign debt | — |  |  | 104,801 |  |  | 19 |  |  | 104,820 |
Total debt securities | — |  |  | 654,260 |  |  | 6,417 |  |  | 660,677 |
Investments in limited partnerships | — |  |  | 66,799 |  |  | 6,770 |  |  | 73,569 |
Options | 8,112 |  |  | 2,709 |  |  | — |  |  | 10,821 |
Rights and warrants | 271 |  |  | — |  |  | — |  |  | 271 |
Trade claims | — |  |  | 11,058 |  |  | — |  |  | 11,058 |
Catastrophe bond | — |  |  | 2,046 |  |  | — |  |  | 2,046 |
Total other investments | 8,383 |  |  | 82,612 |  |  | 6,770 |  |  | 97,765 |
Derivative assets (free standing) | 170 |  |  | 37,090 |  |  | — |  |  | 37,260 |
Total assets | $ | 938,499 |  |  | $ | 800,620 |  |  | $ | 13,187 |  |  | $ | 1,752,306 |
Liabilities |  |  |  |  |  |  |
Equity securities | $ | 8,682 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,682 |
Sovereign debt | — |  |  | 19,440 |  |  | — |  |  | 19,440 |
Corporate bonds | — |  |  | 4,368 |  |  | — |  |  | 4,368 |
Options | 8,096 |  |  | 5,081 |  |  | — |  |  | 13,177 |
Total securities sold, not yet purchased | 16,778 |  |  | 28,889 |  |  | — |  |  | 45,667 |
Derivative liabilities (free standing) | 121 |  |  | 11,992 |  |  | 233 |  |  | 12,346 |
Derivative liabilities (embedded) | — |  |  | — |  |  | 7,913 |  |  | 7,913 |
Total liabilities | $ | 16,899 |  |  | $ | 40,881 |  |  | $ | 8,146 |  |  | $ | 65,926 |

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| December 31, 2013
| Quoted prices in active markets |  | Significant other observable inputs |  | Significant unobservable inputs |  | Total
| (Level 1) |  | (Level 2) |  | (Level 3) |
Assets | ($ in thousands)
Equity securities | $ | 839,903 |  |  | $ | 17,914 |  |  | $ | — |  |  | $ | 857,817 |
Private common equity securities | — |  |  | 94,282 |  |  | 2,012 |  |  | 96,294 |
Total equities | 839,903 |  |  | 112,196 |  |  | 2,012 |  |  | 954,111 |
Asset-backed securities | — |  |  | 325,133 |  |  | 400 |  |  | 325,533 |
Bank debts | — |  |  | 8,017 |  |  | — |  |  | 8,017 |
Corporate bonds | — |  |  | 82,139 |  |  | 4,610 |  |  | 86,749 |
Municipal bonds | — |  |  | 10,486 |  |  | — |  |  | 10,486 |
Sovereign debt | — |  |  | 10,639 |  |  | — |  |  | 10,639 |
Total debt securities | — |  |  | 436,414 |  |  | 5,010 |  |  | 441,424 |
Investments in limited partnerships | — |  |  | 29,286 |  |  | 5,292 |  |  | 34,578 |
Options | 6,284 |  |  | 6,785 |  |  | — |  |  | 13,069 |
Rights and warrants | 1 |  |  | — |  |  | — |  |  | 1 |
Trade claims | — |  |  | 17,681 |  |  | — |  |  | 17,681 |
Total other investments | 6,285 |  |  | 53,752 |  |  | 5,292 |  |  | 65,329 |
Derivative assets | 321 |  |  | 38,724 |  |  | — |  |  | 39,045 |
Total assets | $ | 846,509 |  |  | $ | 641,086 |  |  | $ | 12,314 |  |  | $ | 1,499,909 |
Liabilities |  |  |  |  |  |  |
Equity securities | $ | 5,207 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,207 |
Sovereign debt | — |  |  | 37,592 |  |  | — |  |  | 37,592 |
Corporate bonds | — |  |  | 3,372 |  |  | — |  |  | 3,372 |
Options | 4,714 |  |  | 5,171 |  |  | — |  |  | 9,885 |
Total securities sold, not yet purchased | 9,921 |  |  | 46,135 |  |  | — |  |  | 56,056 |
Derivative liabilities (free standing) | 441 |  |  | 8,378 |  |  | — |  |  | 8,819 |
Derivative liabilities (embedded) | — |  |  | — |  |  | 4,430 |  |  | 4,430 |
Total liabilities | $ | 10,362 |  |  | $ | 54,513 |  |  | $ | 4,430 |  |  | $ | 69,305 |

During the three months ended September 30, 2014 and 2013, the Company made no reclassifications of assets or liabilities between Levels 1 and 2. During the nine months ended September 30, 2014, the Company reclassified $86.6 million (2013 - nil) of private common equity securities from Level 2 to Level 1 equity securities. This reclassification is the result of the issuer's IPO, with quoted prices having become available in an active market as of the reporting date.
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The following table presents the reconciliation for all investments measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014 and 2013:

| January 1, 2014 |  | Transfers in to (out of) Level 3 |  | Purchases |  | Sales |  | Realized and Unrealized Gains(Losses) (1) |  | September 30, 2014
| ($ in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |
Private common equity securities | $ | 2,012 |  |  | $ | (2,300 | ) |  | $ | — |  |  | $ | — |  |  | $ | 288 |  |  | $ | — |
Asset-backed securities | 400 |  |  | (2,151 | ) |  | 4,093 |  |  | (1,921 | ) |  | 2,013 |  |  | 2,434 |
Corporate bonds | 4,610 |  |  | (811 | ) |  | 821 |  |  | (484 | ) |  | (172 | ) |  | 3,964 |
Sovereign Debt | — |  |  | (11 | ) |  | 30 |  |  | — |  |  | — |  |  | 19 |
Investments in limited partnerships | 5,292 |  |  | — |  |  | 1,579 |  |  | — |  |  | (101 | ) |  | 6,770 |
Total assets | $ | 12,314 |  |  | $ | (5,273 | ) |  | $ | 6,523 |  |  | $ | (2,405 | ) |  | $ | 2,028 |  |  | $ | 13,187 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities (free standing) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1,013 | ) |  | $ | 780 |  |  | $ | (233 | )
Derivative liabilities (embedded) | (4,430 | ) |  | — |  |  | — |  |  | (3,046 | ) |  | (437 | ) |  | (7,913 | )
Total liabilities | $ | (4,430 | ) |  | $ | — |  |  | $ | — |  |  | $ | (4,059 | ) |  | $ | 343 |  |  | $ | (8,146 | )
| July 1, 2014 |  | Transfers in to (out of) Level 3 |  | Purchases |  | Sales |  | Realized and Unrealized Gains(Losses) (1) |  | September 30, 2014
| ($ in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |
Private common equity securities | $ | 2,300 |  |  | $ | (2,300 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Asset-backed securities | 2,441 |  |  | (520 | ) |  | 288 |  |  | (18 | ) |  | 243 |  |  | 2,434 |
Corporate bonds | 5,153 |  |  | (811 | ) |  | — |  |  | (152 | ) |  | (226 | ) |  | 3,964 |
Sovereign Debt | 30 |  |  | (11 | ) |  | — |  |  | — |  |  | — |  |  | 19 |
Investment in limited partnership | 5,771 |  |  | — |  |  | 1,525 |  |  | — |  |  | (526 | ) |  | 6,770 |
Total assets | $ | 15,695 |  |  | $ | (3,642 | ) |  | $ | 1,813 |  |  | $ | (170 | ) |  | $ | (509 | ) |  | $ | 13,187 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities (free standing) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1,013 | ) |  | $ | 780 |  |  | $ | (233 | )
Derivative liabilities (embedded) | (5,538 | ) |  | — |  |  | — |  |  | (2,264 | ) |  | (111 | ) |  | (7,913 | )
Total liabilities | $ | (5,538 | ) |  | $ | — |  |  | $ | — |  |  | $ | (3,277 | ) |  | $ | 669 |  |  | $ | (8,146 | )

20

| January 1, 2013 |  | Transfers in to (out of) Level 3 |  | Purchases |  | Sales |  | Realized and Unrealized Gains(Losses) (1) |  | September 30, 2013
| ($ in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |  |
Private common equity securities | $ | 2,757 |  |  | $ | (1,905 | ) |  | $ | 2,032 |  |  | $ | (1,795 | ) |  | $ | 828 |  |  | $ | 1,917 |
Asset-backed securities | — |  |  | 196 |  |  | 196 |  |  | — |  |  | (249 | ) |  | 143 |
Bank debt | 54 |  |  | (54 | ) |  | — |  |  | — |  |  | — |  |  | — |
Corporate bonds | 1,046 |  |  | (1,302 | ) |  | 4,287 |  |  | (1,311 | ) |  | 1,795 |  |  | 4,515 |
Investment in limited partnership | — |  |  | — |  |  | 1,959 |  |  | (342 | ) |  | (71 | ) |  | 1,546 |
Total assets | $ | 3,857 |  |  | $ | (3,065 | ) |  | $ | 8,474 |  |  | $ | (3,448 | ) |  | $ | 2,303 |  |  | $ | 8,121 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities (free standing) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (4,335 | ) |  | $ | 3,167 |  |  | $ | (1,168 | )
Derivative liabilities (embedded) | (2,510 | ) |  | — |  |  | — |  |  | (1,460 | ) |  | (310 | ) |  | (4,280 | )
Total liabilities | $ | (2,510 | ) |  | $ | — |  |  | $ | — |  |  | $ | (5,795 | ) |  | $ | 2,857 |  |  | $ | (5,448 | )
| July 1, 2013 |  | Transfers in to (out of) Level 3 |  | Purchases |  | Sales |  | Realized and Unrealized Gains(Losses) (1) |  | September 30, 2013
| ($ in thousands)
Assets |  |  |  |  |  |  |  |  |  |  |
Private common equity securities | $ | 3,473 |  |  | $ | (1,906 | ) |  | $ | 379 |  |  | $ | — |  |  | $ | (29 | ) |  | $ | 1,917 |
Asset-backed securities | 194 |  |  | (112 | ) |  | 47 |  |  | — |  |  | 14 |  |  | 143 |
Corporate bonds | 4,304 |  |  | — |  |  | 303 |  |  | (192 | ) |  | 100 |  |  | 4,515 |
Investment in limited partnership | 903 |  |  | — |  |  | 671 |  |  | — |  |  | (28 | ) |  | 1,546 |
Total assets | $ | 8,874 |  |  | $ | (2,018 | ) |  | $ | 1,400 |  |  | $ | (192 | ) |  | $ | 57 |  |  | $ | 8,121 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities (free standing) | $ | (2,240 | ) |  | $ | — |  |  | $ | — |  |  | $ | (990 | ) |  | $ | 2,062 |  |  | $ | (1,168 | )
Derivative liabilities (embedded) | (4,180 | ) |  | — |  |  | — |  |  | — |  |  | (100 | ) |  | (4,280 | )
Total liabilities | $ | (6,420 | ) |  | $ | — |  |  | $ | — |  |  | $ | (990 | ) |  | $ | 1,962 |  |  | $ | (5,448 | )

(1) Total net change in realized and unrealized gain (loss) recorded on Level 3 financial instruments are included in net investment income in the condensed consolidated statements of income (loss).
Total unrealized loss related to fair value assets using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 was $0.4 million (2013 - gains of $1.8 million).
For assets and liabilities that were transferred into Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred into Level 3 at the beginning of the period; similarly, for assets and liabilities that were transferred out of Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred out of Level 3 at the beginning of the period. The Company did not hold Level 3 investments where quantitative unobservable inputs are produced by the Company itself when estimating fair value.
21

6. Securities purchased under an agreement to sell
The Company may enter into repurchase and reverse repurchase agreements with financial institutions in which the financial institution agrees to resell or repurchase and the Company agrees to repurchase or resell such securities at a mutually agreed price upon maturity. As of September 30, 2014, the Company held outstanding reverse repurchase agreements valued at $19.9 million (December 31, 2013 - $38.1 million). As of September 30, 2014, the total value of securities received as collateral by the Company was $19.4 million (December 31, 2013 - $37.6 million). As the Company held only reverse repurchase agreements as of September 30, 2014, these positions are not impacted by master netting agreements. Interest expense and income related to these transactions are included in interest payable and receivable in the condensed consolidated balance sheets. For the three months ended September 30, 2014, there was a foreign currency loss of $2.4 million (2013 – gain of $1.2 million) on reverse repurchase agreements included in net investment income in the condensed consolidated statements of income (loss). For the nine months ended September 30, 2014, there was a foreign currency loss of $2.6 million (2013 - gain of $1.3 million) on reverse repurchase agreements included in net investment income in the condensed consolidated statements of income (loss). Generally, reverse repurchase agreements mature within 30 to 90 days.
7. Due from/to brokers
The Company holds substantially all of its investments through its prime brokers pursuant to various agreements between the Company and each prime broker. The brokerage arrangements differ from broker to broker, but generally cash and investments in securities and commodities balances are available as collateral against investment in securities sold, not yet purchased and derivative positions, if required.
Margin debt balances are collateralized by cash held by the prime brokers and certain of the Company’s securities. Margin interest was paid either at the daily broker call rate or based on LIBOR.
Due from/to brokers include cash balances maintained with the Company’s prime brokers, receivables and payables from unsettled trades and proceeds from securities sold, not yet purchased. In addition, due from and to brokers includes cash collateral received and posted from OTC and repurchase agreement counterparties. As of September 30, 2014, the Company’s due from/to brokers includes a total non-U.S. currency payable balance of $14.4 million (December 31, 2013 - $268.5 million).
8. Derivatives
The following tables identify the listing currency, fair value and notional amounts of derivative instruments included in the condensed consolidated balance sheets, categorized by primary underlying risk. Balances are presented on a gross basis.
22

| As of September 30, 2014
| Listing currency (1) |  | Fair Value |  | Notional Amounts (2)
Derivative Assets by Primary Underlying Risk | ($ in thousands)
Credit |  |  |  |  |
Credit Default Swaps - Protection Purchased | USD |  | $ | 9,110 |  |  | $ | 106,908 |
Credit Default Swaps - Protection Sold | USD |  | 158 |  |  | 2,318 |
Equity Price |  |  |  |  |
Contracts for Differences - Long Contracts | GBP/USD |  | 5,145 |  |  | 40,331 |
Contracts for Differences - Short Contracts | NOK |  | 3 |  |  | 2,580 |
Total Return Swaps - Long Contracts | MXN/USD |  | 11,888 |  |  | 179,657 |
Total Return Swaps - Short Contracts | USD |  | 290 |  |  | 3,950 |
Interest Rates |  |  |  |  |
Interest Rate Swaps | EUR |  | 250 |  |  | 194,906 |
Interest Rate Swaptions | USD |  | 624 |  |  | 511,971 |
Treasury Futures - Short Contracts | USD |  | 170 |  |  | 9,929 |
Foreign Currency Exchange Rates |  |  |  |  |
Foreign Currency Forward | AUD/CAD/EUR/GBP/JPY/TRY |  | 5,501 |  |  | 319,597 |
Foreign Currency Options - Purchased | JPY/KRW/SAR |  | 4,121 |  |  | 192,944 |
Total Derivative Assets |  |  | $ | 37,260 |  |  | $ | 1,565,091 |
| Listing currency (1) |  | Fair Value |  | Notional Amounts (2)
Derivative Liabilities by Primary Underlying Risk | ($ in thousands)
Commodity Price |  |  |  |  |
Commodity Future Options - Short | USD |  | $ | 80 |  |  | $ | 120,080 |
Credit |  |  |  |  |
Credit Default Swaps - Protection Purchased | EUR/USD |  | 2,240 |  |  | 64,465 |
Credit Default Swaps - Protection Sold | USD |  | 1,503 |  |  | 5,437 |
Equity Price |  |  |  |  |
Contracts for Differences - Long Contracts | EUR/GBP |  | 5,418 |  |  | 57,363 |
Total Return Swaps - Long Contracts | USD |  | — |  |  | 365 |
Total Return Swaps - Short Contracts | USD |  | 129 |  |  | 1,532 |
Interest Rates |  |  |  |  |
Bond Futures - Short Contracts | JPY |  | 41 |  |  | 41,211 |
Interest Rate Swaps | EUR |  | 621 |  |  | 194,035 |
Interest Rate Swaptions | USD |  | 142 |  |  | 354,139 |
Foreign Currency Exchange Rates |  |  |  |  |
Foreign Currency Options - Sold | JPY/KRW |  | 1,939 |  |  | 100,950 |
Catastrophe Risk Derivatives | USD |  | 233 |  |  | 6,000 |
Total Derivative Liabilities (free standing) |  |  | $ | 12,346 |  |  | $ | 945,577 |
Embedded derivative liabilities in reinsurance contracts (3) | USD |  | $ | 3,173 |  |  | $ | 15,000 |
Embedded derivative liabilities in deposit contracts (4) | USD |  | 4,740 |  |  | 75,000 |
Total Derivative Liabilities (embedded) |  |  | $ | 7,913 |  |  | $ | 90,000 |

(1) AUD = Australian Dollar, CAD = Canadian Dollar, EUR = Euro, GBP = British Pound, HKD = Hong Kong Dollar, JPY = Japanese Yen, KRW = South Korean Won, MXN = Mexican Peso, NOK = Norwegian Krone, SAR = Saudi Arabian Riyal, TRY = Turkish Lira, USD = US Dollar
(2) The absolute notional exposure represents the Company's derivative activity as of September 30, 2014, which is representative of the volume of derivatives held during the period.
(3) The fair value of embedded derivatives in reinsurance contracts is included in reinsurance balances payable in the condensed consolidated balance sheet.
(4) The fair value of embedded derivatives in deposit contracts is included in deposit liabilities in the condensed consolidated balance sheet.
23

| As of December 31, 2013
| Listing currency (1) |  | Fair Value |  | Notional Amounts (2)
Derivative Assets by Primary Underlying Risk | ($ in thousands)
Commodity Price |  |  |  |  |
Commodity Future Options - Purchased | USD |  | $ | 256 |  |  | $ | 12,325 |
Credit |  |  |  |  |
Credit Default Swaps - Protection Purchased | USD |  | 15,397 |  |  | 109,520 |
Credit Default Swaps - Protection Sold | USD |  | 1,157 |  |  | 9,557 |
Equity Price |  |  |  |  |
Contracts for Differences - Long Contracts | CHF/EUR/GBP/USD |  | 10,549 |  |  | 62,847 |
Contracts for Differences - Short Contracts | NOK |  | 67 |  |  | 2,758 |
Total Return Swaps - Long Contracts | BRL/JPY/USD |  | 2,950 |  |  | 68,044 |
Total Return Swaps - Short Contracts | USD |  | 3 |  |  | 290 |
Interest Rates |  |  |  |  |
Bond Futures - Short Contracts | JPY |  | 212 |  |  | 40,847 |
Interest Rate Swaps | EUR |  | 182 |  |  | 212,594 |
Interest Rate Swaptions | EUR/JPY/USD |  | 1,269 |  |  | 54,884 |
Treasury Futures - Short Contracts | USD |  | 108 |  |  | 6,544 |
Foreign Currency Exchange Rates |  |  |  |  |
Foreign Currency Forward | AUD/CAD/JPY/TRY |  | 1,332 |  |  | 59,925 |
Foreign Currency Options - Purchased | USD |  | 5,563 |  |  | 240,062 |
Total Derivative Assets |  |  | $ | 39,045 |  |  | $ | 880,197 |
| Listing currency (1) |  | Fair Value |  | Notional Amounts (2)
Derivative Liabilities by Primary Underlying Risk | ($ in thousands)
Commodity Price |  |  |  |  |
Commodity Future Options - Sold | USD |  | $ | 148 |  |  | $ | 35,484 |
Credit |  |  |  |  |
Credit Default Swaps - Protection Purchased | EUR/USD |  | 2,634 |  |  | 59,446 |
Credit Default Swaps - Protection Sold | USD |  | 348 |  |  | 875 |
Equity Price |  |  |  |  |
Contracts for Differences - Long Contracts | EUR |  | 66 |  |  | 14,607 |
Contracts for Differences - Short Contracts | DKK |  | 425 |  |  | 7,253 |
Total Return Swaps - Long Contracts | BRL/JPY/USD |  | 1,385 |  |  | 24,807 |
Total Return Swaps - Short Contracts | USD |  | 140 |  |  | 5,037 |
Index |  |  |  |  |
Index Futures - Short Contracts | USD |  | 441 |  |  | 8,888 |
Interest Rates |  |  |  |  |
Interest Rate Swaps | EUR/USD |  | 821 |  |  | 465,560 |
Interest Rate Swaptions | USD/JPY |  | 174 |  |  | 99,587 |
Foreign Currency Exchange Rates |  |  |  |  |
Foreign Currency Forward | EUR/GBP |  | 709 |  |  | 189,030 |
Foreign Currency Options - Sold | USD |  | 1,528 |  |  | 178,476 |
Total Derivative Liabilities |  |  | $ | 8,819 |  |  | $ | 1,089,050 |
Embedded derivative liabilities in deposit contracts (3) | USD |  | $ | 4,430 |  |  | $ | 75,000 |
Total Derivative Liabilities (embedded) |  |  | $ | 4,430 |  |  | $ | 75,000 |

(1) AUD = Australian dollar, BRL = Brazilian real, CAD = Canadian dollar, CHF = Swiss franc, DKK = Danish krone EUR = Euro, GBP = British pound, JPY = Japanese yen, NOK = Norwegian krone, TRY=Turkish lira, USD = US dollar
(2) The absolute notional exposure represents the Company's derivative activity as of December 31, 2013, which is representative of the volume of derivatives held during the period.
(3) The fair value of embedded derivatives in deposit contracts is included in deposit liabilities in the condensed consolidated balance sheet.
(4) The fair value of embedded derivatives in deposit contracts is included in deposit liabilities in the condensed consolidated balance sheet.
24

The following tables set forth, by major risk type, the Company’s realized and unrealized gains (losses) relating to derivatives for the three and nine months ended September 30, 2014 and 2013. Realized and unrealized gains (losses) related to free standing derivatives are included in net investment income in the condensed consolidated statements of income (loss). Realized and unrealized gains (losses) related to embedded derivatives are included in other expenses in the condensed consolidated statements of income (loss).

| For the three months ended
| September 30, 2014 |  | September 30, 2013
Free standing Derivatives - Primary Underlying Risk | Realized Gain (Loss) |  | Unrealized Gain (Loss)* |  | Realized Gain (Loss) |  | Unrealized Gain (Loss)*
Commodity Price | ($ in thousands)
Commodities Futures - Short Contracts | $ | (6 | ) |  | $ | (80 | ) |  | $ | (273 | ) |  | $ | — |
Commodity Future Options - Purchased | — |  |  | — |  |  | (25 | ) |  | (44 | )
Credit |  |  |  |  |  |  |
Credit Default Swaps - Protection Purchased | (1,479 | ) |  | 2,843 |  |  | 346 |  |  | (1,751 | )
Credit Default Swaps - Protection Sold | 1,081 |  |  | (1,181 | ) |  | (1,337 | ) |  | 3,774 |
Equity Price |  |  |  |  |  |  |
Contracts for Differences - Long Contracts | (1,397 | ) |  | (5,837 | ) |  | (1,984 | ) |  | 5,229 |
Contracts for Differences - Short Contracts | (1,396 | ) |  | 310 |  |  | 11 |  |  | (183 | )
Total Return Swaps - Long Contracts | 2,488 |  |  | 9,990 |  |  | 1,712 |  |  | 3,665 |
Total Return Swaps - Short Contracts | (1,112 | ) |  | 795 |  |  | (836 | ) |  | (664 | )
Index |  |  |  |  |  |  |
Index Futures - Long Contracts | (840 | ) |  | — |  |  | — |  |  | — |
Index Futures - Short Contracts | 79 |  |  | 369 |  |  | — |  |  | — |
Interest Rates |  |  |  |  |  |  |
Bond Futures - Short Contracts | (273 | ) |  | 101 |  |  | (320 | ) |  | (382 | )
Interest Rate Swaps | 107 |  |  | (82 | ) |  | 723 |  |  | (896 | )
Interest Rate Swaptions | (42 | ) |  | (272 | ) |  | (75 | ) |  | 218 |
Treasury Futures - Short Contracts | (399 | ) |  | 191 |  |  | 73 |  |  | (195 | )
Foreign Currency Exchange Rates |  |  |  |  |  |  |
Foreign Currency Forward | 5,037 |  |  | 7,417 |  |  | 1,223 |  |  | (5,750 | )
Foreign Currency Options - Purchased | 256 |  |  | 1,539 |  |  | (1,794 | ) |  | (1,493 | )
Foreign Currency Options - Sold | (78 | ) |  | (463 | ) |  | 352 |  |  | (636 | )
Reinsurance contract derivatives | — |  |  | 780 |  |  | — |  |  | 2,062 |
| $ | 2,026 |  |  | $ | 16,420 |  |  | $ | (2,204 | ) |  | $ | 2,954 |
Embedded Derivatives |  |  |  |  |  |  |  |  |  |  |
Embedded derivatives in reinsurance contracts | $ | — |  |  | $ | (21 | ) |  | $ | — |  |  | $ | — |
Embedded derivatives in deposit contracts | — |  |  | (90 | ) |  | — |  |  | (100 | )
| $ | — |  |  | $ | (111 | ) |  | $ | — |  |  | $ | (100 | )

25

| For the nine months ended
| September 30, 2014 |  | September 30, 2013
Free standing Derivatives - Primary Underlying Risk | Realized Gain (Loss) |  | Unrealized Gain (Loss)* |  | Realized Gain (Loss) |  | Unrealized Gain (Loss)*
Commodity Price | ($ in thousands)
Commodities Futures - Long Contracts | $ | — |  |  | $ | — |  |  | $ | (2,455 | ) |  | $ | — |
Commodities Futures - Short Contracts | (6 | ) |  | (80 | ) |  | 290 |  |  | (212 | )
Commodity Future Options - Purchased | (271 | ) |  | (5 | ) |  | (166 | ) |  | (45 | )
Commodity Future Options - Sold | 316 |  |  | (168 | ) |  |  |  |  |  |
Credit |  |  |  |  |  |  |  |  |  |  |
Credit Default Swaps - Protection Purchased | (3,793 | ) |  | (678 | ) |  | (8,469 | ) |  | 3,579 |
Credit Default Swaps - Protection Sold | 1,266 |  |  | (977 | ) |  | 6,814 |  |  | (4,017 | )
Equity Price |  |  |  |  |  |  |  |  |  |  |
Contracts for Differences - Long Contracts | 3,639 |  |  | (12,972 | ) |  | 6,706 |  |  | 987 |
Contracts for Differences - Short Contracts | (3,734 | ) |  | 361 |  |  | 1,000 |  |  | 254 |
Total Return Swaps - Long Contracts | 12,279 |  |  | 10,323 |  |  | 2,717 |  |  | 2,732 |
Total Return Swaps - Short Contracts | (588 | ) |  | 298 |  |  | 418 |  |  | (500 | )
Index |  |  |  |  |  |  |  |  |  |  |
Index Futures - Long Contracts | (840 | ) |  | — |  |  | — |  |  | — |
Index Futures - Short Contracts | (253 | ) |  | 441 |  |  | 19 |  |  | — |
Interest Rates |  |  |  |  |  |  |  |  |  |  |
Bond Futures - Short Contracts | (817 | ) |  | (253 | ) |  | 242 |  |  | (630 | )
Interest Rate Swaps | (350 | ) |  | 267 |  |  | 1,352 |  |  | (409 | )
Interest Rate Swaptions | 487 |  |  | (1,848 | ) |  | (244 | ) |  | 251 |
Treasury Futures - Short Contracts | (1,040 | ) |  | 62 |  |  | 508 |  |  | (625 | )
Foreign Currency Exchange Rates |  |  |  |  |  |  |  |  |  |  |
Foreign Currency Forward | 5,256 |  |  | 4,877 |  |  | 7,533 |  |  | (3,756 | )
Foreign Currency Options - Purchased | (1,484 | ) |  | (613 | ) |  | 6,823 |  |  | (1,031 | )
Foreign Currency Options - Sold | 608 |  |  | (78 | ) |  | (2,844 | ) |  | (848 | )
Reinsurance contract derivatives | — |  |  | 780 |  |  | — |  |  | 3,167 |
| $ | 10,675 |  |  | $ | (263 | ) |  | $ | 20,244 |  |  | $ | (1,103 | )
Embedded Derivatives |  |  |  |  |  |  |  |  |  |  |
Embedded derivatives in reinsurance contracts | $ | — |  |  | $ | (127 | ) |  | $ | — |  |  | $ | — |
Embedded derivatives in deposit contracts | — |  |  | (310 | ) |  | — |  |  | (310 | )
Total Derivative Liabilities (embedded) | $ | — |  |  | $ | (437 | ) |  | $ | — |  |  | $ | (310 | )

* Unrealized gain (loss) relates to derivatives still held at reporting date.
The Company’s ISDA agreements with its counterparties provide for various termination events including decline in the NAV of the Company’s investments over a certain period, key-man provisions, document delivery schedules, and Employment Retirement Income Security Act and bankruptcy provisions. Upon the triggering of a termination event, a counterparty may avail itself of various remedies including, but not limited to, waiver of the termination event, request for additional collateral, renegotiation of the ISDA agreement, or immediate settlement of positions.
The Company obtains/provides collateral from/to various counterparties for OTC derivative contracts in accordance with bilateral collateral agreements. As of September 30, 2014, the Company posted collateral in the form of cash of $60.4 million (December 31, 2013 - $35.4 million) to certain counterparties to cover collateral requirements for open OTC derivatives.
26

The Company does not offset its derivative instruments and presents all amounts in the condensed consolidated balance sheets on a gross basis. The Company has pledged cash collateral to counterparties to support the current value of amounts due to the counterparties based on the value of the underlying security. As of September 30, 2014 and December 31, 2013, the gross and net amounts of derivative instruments that are subject to enforceable master netting arrangements or similar agreements were as follows:

|  | Gross Amounts not offset in the condensed consolidated balance sheet
September 30, 2014 Counterparty |  | Gross Amounts of Assets Presented in the condensed consolidated balance sheet |  | Financial Instruments |  | Cash Collateral Received |  | Net Amount
|  | ($ in thousands)
Counterparty 1 |  | $ | 493 |  |  | $ | 493 |  |  | $ | — |  |  | $ | — |
Counterparty 2 |  | 1,262 |  |  | 1,262 |  |  | — |  |  | — |
Counterparty 3 |  | 16,935 |  |  | 3,135 |  |  | — |  |  | 13,800 |
Counterparty 4 |  | 857 |  |  | 857 |  |  | — |  |  | — |
Counterparty 5 |  | 4,078 |  |  | 630 |  |  | — |  |  | 3,448 |
Counterparty 6 |  | 9,820 |  |  | 1,014 |  |  | 4,039 |  |  | 4,767 |
Counterparty 7 |  | 408 |  |  | 151 |  |  | — |  |  | 257 |
Counterparty 8 |  | — |  |  | — |  |  | — |  |  | — |
Counterparty 9 |  | 3,407 |  |  | 384 |  |  | — |  |  | 3,023 |
Total |  | $ | 37,260 |  |  | $ | 7,926 |  |  | $ | 4,039 |  |  | $ | 25,295 |
|  | Gross Amounts not offset in the condensed consolidated balance sheet
September 30, 2014 Counterparty |  | Gross Amounts of Liabilities Presented in the condensed consolidated balance sheet |  | Financial Instruments |  | Cash Collateral Pledged |  | Net Amount
|  | ($ in thousands)
Counterparty 1 |  | $ | 1,149 |  |  | $ | 493 |  |  | $ | 656 |  |  | $ | — |
Counterparty 2 |  | 3,788 |  |  | 1,262 |  |  | 2,526 |  |  | — |
Counterparty 3 |  | 3,135 |  |  | 3,135 |  |  | — |  |  | — |
Counterparty 4 |  | 1,132 |  |  | 857 |  |  | 275 |  |  | — |
Counterparty 5 |  | 630 |  |  | 630 |  |  | — |  |  | — |
Counterparty 6 |  | 1,014 |  |  | 1,014 |  |  | — |  |  | — |
Counterparty 7 |  | 151 |  |  | 151 |  |  | — |  |  | — |
Counterparty 8 |  | 730 |  |  | — |  |  | 730 |  |  | — |
Counterparty 9 |  | 384 |  |  | 384 |  |  | — |  |  | — |
Total |  | $ | 12,113 |  |  | $ | 7,926 |  |  | $ | 4,187 |  |  | $ | — |

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|  | Gross Amounts not offset in the condensed consolidated balance sheet
December 31, 2013 Counterparty |  | Gross Amounts of Assets Presented in the condensed consolidated balance sheet |  | Financial Instruments |  | Cash Collateral Received |  | Net Amount
|  | ($ in thousands)
Counterparty 1 |  | $ | 1,128 |  |  | $ | 1,041 |  |  | $ | — |  |  | $ | 87 |
Counterparty 2 |  | 4,998 |  |  | 400 |  |  | 1,629 |  |  | 2,969 |
Counterparty 3 |  | 16,066 |  |  | 3,509 |  |  | — |  |  | 12,557 |
Counterparty 4 |  | 1,351 |  |  | 1,351 |  |  | — |  |  | — |
Counterparty 5 |  | 3,198 |  |  | 1,054 |  |  | — |  |  | 2,144 |
Counterparty 6 |  | 12,234 |  |  | 492 |  |  | 10,465 |  |  | 1,277 |
Counterparty 7 |  | 2 |  |  | 2 |  |  | — |  |  | — |
Counterparty 8 |  | — |  |  | — |  |  | — |  |  | — |
Counterparty 9 |  | 68 |  |  | 68 |  |  | — |  |  | — |
Total |  | $ | 39,045 |  |  | $ | 7,917 |  |  | $ | 12,094 |  |  | $ | 19,034 |
|  | Gross Amounts not offset in the condensed consolidated balance sheet
December 31, 2013 Counterparty |  | Gross Amounts of Liabilities Presented in the condensed consolidated balance sheet |  | Financial Instruments |  | Cash Collateral Pledged |  | Net Amount
|  | ($ in thousands)
Counterparty 1 |  | $ | 1,041 |  |  | $ | 1,041 |  |  | $ | — |  |  | $ | — |
Counterparty 2 |  | 400 |  |  | 400 |  |  | — |  |  | — |
Counterparty 3 |  | 3,509 |  |  | 3,509 |  |  | — |  |  | — |
Counterparty 4 |  | 1,360 |  |  | 1,351 |  |  | 9 |  |  | — |
Counterparty 5 |  | 1,054 |  |  | 1,054 |  |  | — |  |  | — |
Counterparty 6 |  | 492 |  |  | 492 |  |  | — |  |  | — |
Counterparty 7 |  | 59 |  |  | 2 |  |  | 57 |  |  | — |
Counterparty 8 |  | — |  |  | — |  |  | — |  |  | — |
Counterparty 9 |  | 904 |  |  | 68 |  |  | 836 |  |  | — |
Total |  | $ | 8,819 |  |  | $ | 7,917 |  |  | $ | 902 |  |  | $ | — |

9. Loss and loss adjustment expense reserves
As of September 30, 2014 and December 31, 2013, loss and loss adjustment expense reserves in the condensed consolidated balance sheets was comprised of the following:

| September 30, 2014 |  | December 31, 2013
| ($ in thousands)
Case loss and loss adjustment expense reserves | $ | 50,868 |  |  | $ | 34,307 |
Incurred but not reported loss and loss adjustment expense reserves | 136,445 |  |  | 100,024 |
| $ | 187,313 |  |  | $ | 134,331 |

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The following table represents the activity in the reserve for losses and loss adjustment expenses for the nine months ended September 30, 2014 and 2013:

| September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Gross reserves for loss and loss adjustment expenses, beginning of period | $ | 134,331 |  |  | $ | 67,271 |
Less: loss and loss adjustment expenses recoverable, beginning of period | (9,277 | ) |  | — |
Net reserves for loss and loss adjustment expenses, beginning of period | 125,054 |  |  | 67,271 |
Increase (decrease) in net loss and loss adjustment expenses incurred in respect of losses occurring in: |  |  |
Current year | 149,325 |  |  | 107,279 |
Prior years' | 1,458 |  |  | (3,600 | )
Total incurred loss and loss adjustment expenses | 150,783 |  |  | 103,679 |
Net loss and loss adjustment expenses paid in respect of losses occurring in: |  |  |
Current year | (41,538 | ) |  | (14,951 | )
Prior years' | (48,398 | ) |  | (18,576 | )
Total net paid losses | (89,936 | ) |  | (33,527 | )
Net reserve for loss and loss adjustment expenses, end of period | 185,901 |  |  | 137,423 |
Plus: loss and loss adjustment expenses recoverable, end of period | 1,412 |  |  | 6,284 |
Gross reserve for loss and loss adjustment expenses, end of period | $ | 187,313 |  |  | $ | 143,707 |

The $1.5 million increase in prior years' reserves for the nine months ended September 30, 2014 reflects $0.9 million of net adverse reserve development and $0.6 million of additional reserves for loss and loss adjustment expenses resulting from premium increases on certain contracts. The changes in loss and loss adjustment expense reserves related to premium estimate changes were accompanied by similar changes in the premium earned for those contracts, resulting in minimal impact to net underwriting income in both periods. The $3.6 million decrease in prior years' reserves recorded in the nine months ended September 30, 2013 related primarily to one crop contract, which was accompanied by an equal decrease in the premium written and earned for that contract, resulting in a minimal impact to underwriting income.
10. Management, performance and Founders fees
The Company and Third Point Re are party to a Joint Venture and Investment Management Agreement (the “Investment Agreement”) with Third Point LLC and Third Point Advisors LLC under which Third Point LLC manages certain jointly held assets.
Pursuant to the Investment Agreement, Third Point Advisors LLC receives an annual performance fee allocation equal to 20% of the net investment income of the Company’s share of the investment assets managed by Third Point LLC, subject to a loss carry-forward provision. Additionally, a total management fee equal to 2% annually of the Company’s share of the investment assets managed by Third Point LLC is paid to Third Point LLC and certain of the Founders. Management fees are paid monthly, in arrears, whereas performance fees are paid annually, in arrears.
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Investment fee expenses related to the Investment Agreement, which are included in net investment income in the condensed consolidated statements of income (loss) for the three and nine months ended September 30, 2014 and 2013 are as follows:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Management fees - Third Point LLC | $ | 1,290 |  |  | $ | 978 |  |  | $ | 3,718 |  |  | $ | 2,497 |
Management fees - Founders | 7,315 |  |  | 5,545 |  |  | 21,075 |  |  | 14,149 |
Performance fees - Third Point Advisors LLC | (165 | ) |  | 13,035 |  |  | 21,837 |  |  | 41,104 |
| $ | 8,440 |  |  | $ | 19,558 |  |  | $ | 46,630 |  |  | $ | 57,750 |

As of September 30, 2014, $21.8 million related to performance fees due under the Investment Agreement was included in performance fee payable to related party in the condensed consolidated balance sheets. As of December 31, 2013, $63.0 million related to the performance fee payable to Third Point Advisors LLC was included in non-controlling interests. Since the performance fee allocation is based on annual performance, in accordance with the Investment Agreement, the performance fees are included in total liabilities until the performance fee is determined at year end and allocated to Third Point Advisors LLC's capital account.
11. Deposit contracts
Deposit liability contracts each contain a fixed interest crediting rate, which ranges from 2.5% to 3.0%. Certain deposit contracts also contain a variable interest crediting feature based on actual investment returns realized by the Company that can increase the overall effective interest crediting rate on those contracts to 6.1% to 6.5%. These variable interest crediting features are considered embedded derivatives. We include the estimated fair value of these embedded derivatives with the host deposit liability contracts. Changes in the estimated fair value of these embedded derivatives are recorded in other expenses in the condensed consolidated statements of income (loss).
The following table represents activity in the deposit liabilities for the nine months ended September 30, 2014 and the year ended December 31, 2013:

| September 30, 2014 |  | December 31, 2013
| ($ in thousands)
Balance, beginning of period | $ | 120,946 |  |  | $ | 50,446 |
Consideration received | 6,132 |  |  | 66,369 |
Consideration receivable | 12,266 |  |  | — |
Net investment expense allocation and change in fair value of embedded derivatives | 3,996 |  |  | 4,731 |
Payments | (350 | ) |  | (600 | )
Balance, end of period | $ | 142,990 |  |  | $ | 120,946 |

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12. General and administrative expenses
General and administrative expenses for the three and nine months ended September 30, 2014 and 2013 are as follows:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Payroll and related | $ | 4,184 |  |  | $ | 3,382 |  |  | $ | 12,409 |  |  | $ | 10,086 |
Share compensation expenses | 2,481 |  |  | 4,143 |  |  | 6,979 |  |  | 7,611 |
Legal and accounting | 1,462 |  |  | 905 |  |  | 3,559 |  |  | 1,900 |
Travel and entertainment | 672 |  |  | 548 |  |  | 2,247 |  |  | 1,618 |
IT related | 329 |  |  | 320 |  |  | 1,121 |  |  | 904 |
Corporate insurance | 273 |  |  | 275 |  |  | 862 |  |  | 487 |
Credit facility fees | 200 |  |  | 84 |  |  | 606 |  |  | 444 |
Director and board costs | 193 |  |  | 28 |  |  | 489 |  |  | 86 |
Occupancy | 124 |  |  | 123 |  |  | 409 |  |  | 348 |
Other general and administrative expenses | 206 |  |  | 38 |  |  | 1,017 |  |  | 587 |
| $ | 10,124 |  |  | $ | 9,846 |  |  | $ | 29,698 |  |  | $ | 24,071 |

13. Net investment income
Net investment income for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
Net investment income by type | ($ in thousands)
Net realized gains on investments and investment derivatives | $ | 53,378 |  |  | $ | 63,778 |  |  | $ | 184,686 |  |  | $ | 176,673 |
Net unrealized gains (losses) on investments and investment derivatives | (62,448 | ) |  | 7,404 |  |  | (67,407 | ) |  | 31,709 |
Net realized gain (loss) on foreign currencies | 13,125 |  |  | (1,353 | ) |  | 4,851 |  |  | 4,364 |
Dividend and interest income | 6,628 |  |  | 4,287 |  |  | 22,405 |  |  | 15,587 |
Dividends paid on securities sold, not yet purchased | — |  |  | (171 | ) |  | (34 | ) |  | (607 | )
Management and performance fees | (8,440 | ) |  | (19,558 | ) |  | (46,630 | ) |  | (57,750 | )
Other expenses | (1,573 | ) |  | (1,860 | ) |  | (6,743 | ) |  | (4,383 | )
Net investment income on investments managed by Third Point LLC | 670 |  |  | 52,527 |  |  | 91,128 |  |  | 165,593 |
Investment income on cash held by the Catastrophe Reinsurer and Catastrophe Fund | 27 |  |  | 28 |  |  | 84 |  |  | 44 |
Net gain on catastrophe bond held by Catastrophe Reinsurer | 75 |  |  | — |  |  | 80 |  |  | — |
Net gain on reinsurance contract derivatives written by the Catastrophe Reinsurer | 780 |  |  | 2,062 |  |  | 780 |  |  | 3,167 |
| $ | 1,552 |  |  | $ | 54,617 |  |  | $ | 92,072 |  |  | $ | 168,804 |

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| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
Net investment income by asset class | ($ in thousands)
Net investment gains on equity securities | $ | 6,282 |  |  | $ | 60,042 |  |  | $ | 56,927 |  |  | $ | 167,364 |
Net investment gains (losses) on debt securities | (5,435 | ) |  | 14,950 |  |  | 81,540 |  |  | 57,549 |
Net investment gains (loss) on other investments | (25,807 | ) |  | (4,595 | ) |  | (30,787 | ) |  | (1,517 | )
Net investment gains on investment derivatives | 18,446 |  |  | 751 |  |  | 10,412 |  |  | 19,143 |
Net investment gains (losses) on securities sold, not yet purchased | 4,861 |  |  | 5,857 |  |  | 20,245 |  |  | (16,017 | )
Net investment income (loss) on cash, including foreign exchange gains (losses) | 15,095 |  |  | (2,906 | ) |  | 5,921 |  |  | 2,243 |
Net investment gains (losses) on securities purchased under and agreement to resell | (2,381 | ) |  | 1,207 |  |  | (2,592 | ) |  | 1,228 |
Management and performance fees | (8,440 | ) |  | (19,558 | ) |  | (46,630 | ) |  | (57,750 | )
Other investment expenses | (1,069 | ) |  | (1,131 | ) |  | (2,964 | ) |  | (3,439 | )
| $ | 1,552 |  |  | $ | 54,617 |  |  | $ | 92,072 |  |  | $ | 168,804 |

14. Other expenses
Other expenses for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

|  | For the three months ended |  | For the nine months ended
|  | September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
|  | ($ in thousands)
Deposit liabilities and reinsurance contracts investment expense |  | $ | 2,871 |  |  | $ | 1,146 |  |  | $ | 4,352 |  |  | $ | 2,365 |
Change in fair value of embedded derivatives in deposit and reinsurance contracts (1) |  | 111 |  |  | 100 |  |  | 437 |  |  | 310 |
|  | $ | 2,982 |  |  | $ | 1,246 |  |  | $ | 4,789 |  |  | $ | 2,675 |

(1) See discussion of accounting policy for embedded derivatives in Note 2 for additional information.
15. Share capital
Authorized and issued
The Company's authorized share capital of $33.0 million is comprised of 300,000,000 common shares with a par value of $0.10 each and 30,000,000 preference shares with a par value of $0.10 each. As of September 30, 2014, 104,031,456 common shares (December 31, 2013 - 103,888,916) were issued and outstanding. No preference shares have been issued to date.
On August 20, 2013, the Company completed an IPO of 24,832,484 common shares at a purchase price of $12.50 per share. The net proceeds of the offering were $286.0 million, after deducting offering costs.
Warrants
The Company’s Founders and an advisor provided insurance industry expertise, resources and relationships to ensure that the Company would be fully operational with key management in place in time for the January 2012 underwriting season. In consideration of these commitments, the Company reserved for issuance to the Founders and an advisor warrants to purchase, in the aggregate, up to 4.0% (Founders 3.5% and an advisor 0.5%) of the diluted shares (up to a
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maximum of $1 billion of subscribed shares) provided that the Founders and the advisor will not be issued any warrants for common shares issued in consideration for any capital raised by the Company in excess of $1 billion. The following is a summary of warrants as of September 30, 2014:

| Exercise price |  | Authorized and issued |  | Aggregate fair value of warrants
| ($ in thousands, except for share and per share amounts)
Founders | $ | 10.00 |  |  | 4,069,768 |  |  | $ | 15,203 |
Advisor | $ | 10.00 |  |  | 581,395 |  |  | 2,171 |
|  |  | 4,651,163 |  |  | $ | 17,374 |

The warrants were subject to a performance condition that was met as a result of the IPO. Prior to the IPO, 3,648,006 of the warrants outstanding had met the performance condition. After the IPO, the remaining 1,003,157 warrants met the performance condition. These amounts have been recorded as a component of capital raise costs in additional paid in capital resulting in no net impact to total shareholders’ equity.
The warrants expire 10 years from the date of issuance, December 22, 2011, and will be exercisable at a price per share of $10.00, which is equal to the price per share paid by investors in the initial capitalization of the Company.
16. Share-based compensation
On July 15, 2013, the Third Point Reinsurance Ltd. 2013 Omnibus Incentive Plan (“Omnibus Plan”) was approved by the Board of Directors and subsequently on August 2, 2013 by the shareholders of the Company. An aggregate of 21,627,906 common shares were made available under the Omnibus Plan. This number of shares includes the shares available under the Third Point Reinsurance Ltd. Share Incentive Plan ("Share Incentive Plan"). Awards under the Omnibus Plan may be made in the form of performance awards, restricted shares, restricted share units, share options, share appreciation rights and other share-based awards.
As of September 30, 2014, 10,215,455 (December 31, 2013 - 10,613,975) of the Company's common shares were available for future issuance under the equity incentive compensation plans.
Share based compensation expense of $2.5 million for the three months ended September 30, 2014 (2013 - $4.1 million) was included in general and administrative expenses. Share based compensation expense of $7.0 million for the nine months ended September 30, 2014 (2013 - $7.6 million) was included in general and administrative expenses.
As of September 30, 2014, the Company had $18.8 million (December 31, 2013 - $23.8 million) of unamortized share compensation expense that is expected to be amortized over a weighted average period of 1.7 years (December 31, 2013 - 2.0 years).

(a) | Management and director options

The share options issued to management under the Share Incentive Plan prior to the IPO are subject to a service condition and a performance condition. The service condition will be met with respect to 20% of the management options on each of the first five anniversary dates following the grant date of the management options. The performance condition with respect to the management options was met as a result of the IPO. Prior to the IPO, 8,572,594 of the management options outstanding had met the performance condition. After the IPO, the remaining 2,357,633 management options had met the performance condition.
The director options contain only a service condition that will be met with respect to 20% of the director options on each of the five anniversary dates following the grant date of the director options. On November 6, 2013, the director options were modified so that a total of 60% of the outstanding options vested on that date and the remaining 40% of the director options were forfeited. These forfeited options were replaced with restricted share awards.
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The management and director options activity for the nine months ended September 30, 2014 and the year ended December 31, 2013 were as follows:

| Number of options |  | Weighted average exercise price
Balance as of January 1, 2013 | 10,956,838 |  |  | $ | 13.20 |
Granted - employees | 348,836 |  |  | 14.09 |
Forfeited | (324,599 | ) |  | 13.20 |
Balance as of December 31, 2013 | 10,981,075 |  |  | 13.23 |
Granted - employees | 348,836 |  |  | 18.25 |
Exercised | (60,000 | ) |  | 10.00 |
Balance as of September 30, 2014 | 11,269,911 |  |  | $ | 13.40 |

The fair value of share options issued were estimated on the grant date using the Black-Scholes option-pricing model. The share price used for purposes of determining the fair value of share options that were granted in the nine months ended September 30, 2014 was $15.05. The estimated share price used for purposes of determining the fair value of share options that were granted in the second quarter of 2013 (prior to the IPO) was $10.89. The volatility assumption used was 23.1% (2013 - 22.0%). The other assumptions used in the option-pricing model were as follows: risk free interest rate of 2.2% (2013 - 1.2%), expected life of 6.5 years (2013 - 6.5 years) and a 0.0% dividend yield (2013 - 0.0%). As of September 30, 2014, the weighted average remaining contractual term for options outstanding was 7.4 years (2013 - 6.5 years).
The following table summarizes information about the Company’s management and director share options outstanding as of September 30, 2014:

| Options outstanding | Options exercisable
Range of exercise prices | Number of options |  | Weighted average exercise price |  | Number of options |  | Weighted average exercise price
$10.00-$10.89 | 6,528,647 |  |  | $10.03 |  | 2,226,787 |  |  | $10.02
$15.05-$16.89 | 2,405,516 |  |  | $15.94 |  | 782,262 |  |  | $16.02
$20.00-$25.05 | 2,335,748 |  |  | $20.21 |  | 782,262 |  |  | $20.02
| 11,269,911 |  |  | $13.40 |  | 3,791,311 |  |  | $13.22

For the three months ended September 30, 2014, the Company recorded $1.7 million (2013 - $3.7 million) of share compensation expense related to share options. For the nine months ended September 30, 2014, the Company recorded $5.1 million (2013 - $6.5 million) of share compensation expense related to share options.
The aggregate intrinsic value of options outstanding and options exercisable as of September 30, 2014 was $29.4 million and $10.1 million, respectively (December 31, 2013 - $61.5 million and $17.6 million, respectively).

(b) | Restricted shares

Restricted shares vest either ratably or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment or service and transferability.
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Restricted share award activity for the nine months ended September 30, 2014 and year ended December 31, 2013 was as follows:

| Number of non- vested restricted shares |  | Weighted average grant date fair value
Balance as of January 1, 2013 | 619,300 |  |  | $ | 10.00 |
Granted | 37,856 |  |  | 15.22 |
Balance as of December 31, 2013 | 657,156 |  |  | 10.25 |
Granted | 49,684 |  |  | 15.39 |
Balance as of September 30, 2014 | 706,840 |  |  | $ | 10.66 |

For the three months ended September 30, 2014, the Company issued 40,070 (2013 - nil) restricted shares to directors. For the nine months ended September 30, 2014, the Company issued 9,614 (2013 - 5,000) restricted shares to employees and 40,070 (2013 - nil) to directors. The restricted shares issued to employees in 2014 will vest after three years from the date of issuance, subject to the grantee's continued service with the Company. The restricted shares issued in 2013 to employees vest two years from the date of grant.
The restricted shares issued to directors in 2014 will vest on December 31, 2014, subject to the grantee's continued service with the Company. The restricted shares issued in 2013 to directors vest on December 31, 2014 subject to the grantee's continued service with the Company.
For the three months ended September 30, 2014, the Company recorded $0.8 million (2013 - $0.4 million) compensation expense related to restricted share awards. For the nine months ended September 30, 2014, the Company recorded $1.8 million (2013 - $1.1 million) compensation expense related to restricted share awards.
17. Non-controlling interests
Non-controlling interests represent the portion of equity in consolidated subsidiaries not attributable, directly or indirectly, to the Company. The ownership interests in consolidated subsidiaries held by parties other than the Company have been presented in the condensed consolidated balance sheets, as a separate component of shareholders’ equity. Non-controlling interests as of September 30, 2014 and December 31, 2013 are as follows:

| September 30, 2014 |  | December 31, 2013
| ($ in thousands)
Catastrophe Fund | $ | 59,277 |  |  | $ | 49,254 |
Catastrophe Fund Manager | (254 | ) |  | (236 | )
Joint Venture - Third Point Advisors LLC share | 20,302 |  |  | 69,717 |
| $ | 79,325 |  |  | $ | 118,735 |

Income (loss) attributable to non-controlling interests for the three and nine months ended September 30, 2014 and 2013 was:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Catastrophe Fund | $ | 3,253 |  |  | $ | 2,434 |  |  | $ | 3,872 |  |  | $ | 3,191 |
Catastrophe Fund Manager | 72 |  |  | (2 | ) |  | (18 | ) |  | (164 | )
Joint Venture - Third Point Advisors LLC share | 92 |  |  | 386 |  |  | 1,586 |  |  | 1,175 |
| $ | 3,417 |  |  | $ | 2,818 |  |  | $ | 5,440 |  |  | $ | 4,202 |

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As of September 30, 2014, the following entities were consolidated in accordance with the voting model per ASC 810: Consolidation:
• Third Point Reinsurance Opportunities Fund Ltd.
• Third Point Re Cat Ltd.
• Third Point Reinsurance Investment Management Ltd.
As of September 30, 2014, the following entities were consolidated in accordance with the variable interest model as per ASC 810: Consolidation:
• Investment Joint Venture

a) | Third Point Reinsurance Opportunities Fund Ltd. and Third Point Re Cat Ltd.

As of September 30, 2014, Third Point Re's investment in the Catastrophe Fund was $58.6 million (December 31, 2013 - $54.8 million), representing approximately 49.9% (December 31, 2013 - 53.0%) of the Catastrophe Fund’s issued, non-voting, participating share capital. The objective of the Catastrophe Fund is to achieve positive uncorrelated investment returns by investing, through the Catastrophe Reinsurer, in a portfolio of collateralized reinsurance transactions and other insurance-linked investments, including catastrophe bonds and industry loss warranties.
The Catastrophe Fund Manager holds 100% of the authorized and issued voting, nonparticipating shares of the Catastrophe Fund, while the Catastrophe Fund’s investors, including Third Point Re, hold 100% of issued non-voting, participating shares.
Furthermore, 100% of the authorized and issued voting, non-participating share capital of the Catastrophe Reinsurer and 100% of the issued non-voting, participating share capital of the Catastrophe Reinsurer is held by the Catastrophe Fund.

b) | Third Point Reinsurance Investment Management Ltd. (the “Catastrophe Fund Manager”)

The Catastrophe Fund Manager has been consolidated as part of the Company with Hiscox’s 15% interest in the Catastrophe Fund Manager recorded as a non-controlling interest. The Catastrophe Fund Manager acts as manager for both the Catastrophe Fund and the Catastrophe Reinsurer and in that capacity is responsible for overseeing:

• | The investment activities of the Catastrophe Fund, and

• | The underwriting activities of the Catastrophe Reinsurer.

The Catastrophe Fund Manager does not participate in the profits or losses of either the Catastrophe Fund or the Catastrophe Reinsurer; however, the Catastrophe Fund Manager does receive management and performance fees for its services.

c) | Investment in Joint Venture

The joint venture created through the Investment Agreement (Note 10) has been considered a variable interest entity in accordance with U.S. GAAP. Since the Company was deemed to be the primary beneficiary, the Company has consolidated the joint venture and has recorded Third Point Advisors LLC’s minority interest as a non-controlling interest in the condensed consolidated statements of shareholders’ equity.
For the nine months ended September 30, 2014, $51.0 million (2013 - $35.1 million) was distributed to Third Point Advisors LLC and reduced the amount of the non-controlling interest.
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As of September 30, 2014, the following entities were not consolidated as per ASC 810: Consolidation:

• | TP Lux Holdco LP

• | Third Point Hellenic Recovery US Feeder Fund, L.P.

a) | TP Lux Holdco LP

Third Point Re is a limited partner in TP Lux Holdco LP (the “Cayman HoldCo”), which is an affiliate of the Investment Manager. The Cayman HoldCo was formed as a limited partnership under the laws of the Cayman Islands and invests and holds debt and equity interests in TP Lux HoldCo S.a.r.l, a Luxembourg private limited liability company (the “LuxCo”) established under the laws of the Grand-Duchy of Luxembourg, which is also an affiliate of the Investment Manager.
LuxCo's principal objective is to act as a collective investment vehicle to purchase Euro debt and equity investments. Third Point Re invests in the Cayman HoldCo alongside other investment funds managed by the Investment Manager. As of September 30, 2014, Third Point Re held a 10.5% (December 31, 2013 - 10.0%) interest in the Cayman Holdco. Third Point Re accounts for its investment in the limited partnership under the variable interest model, in which Third Point Re is not the primary beneficiary, at fair value in the condensed consolidated balance sheets and records changes in fair value in the condensed consolidated statements of income (loss).
As of September 30, 2014, the estimated fair value of the investment in the limited partnership was $66.8 million (December 31, 2013 - $29.3 million). The valuation policy with respect to this investment in a limited partnership is further described in Note 5. Third Point Re's maximum exposure to loss as a result of its involvement with this investment is limited to the carrying value of the investment.
b) Third Point Hellenic Recovery US Feeder Fund, L.P.
Third Point Re is a limited partner in Third Point Hellenic Recovery US Feeder Fund, L.P. (“Hellenic Fund”), which is an affiliate of the Investment Manager. The Hellenic Fund was formed as a limited partnership under the laws of the Cayman Islands and invests and holds debt and equity interests.
Third Point Re committed $11.4 million to the Hellenic Fund, of which $1.6 million was called and $0.7 million was distributed during the nine months ended September 30, 2014.
As of September 30, 2014, Third Point Re held less than a 2.0% (December 31, 2013 - 2.0%) interest in the Hellenic Fund. Third Point Re accounts for its investment in limited partnership under the variable interest model, in which Third Point Re is not the primary beneficiary, at fair value in the condensed consolidated balance sheets and records the change in the fair value in the condensed consolidated statements of income (loss).
As of September 30, 2014, the estimated fair value of the investment in the limited partnership was $6.8 million (December 31, 2013 - $5.3 million). The valuation policy with respect to this investment in a limited partnership is further described in Note 5. Third Point Re's maximum exposure to loss as a result of its involvement with this investment is limited to the carrying value of the investment.
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18. Earnings (loss) per share
The following sets forth the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2014 and 2013:

|  |  | For the three months ended |  | For the nine months ended
|  |  | September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
Weighted-average number of common shares outstanding: |  |  |  |  |  |  |  |
| Basic number of common shares outstanding |  | 103,295,920 |  |  | 89,620,394 |  |  | 103,275,204 |  |  | 82,630,430 |
| Dilutive effect of options |  | — |  |  | 294,434 |  |  | 1,494,711 |  |  | — |
| Dilutive effect of warrants |  | — |  |  | 1,000,977 |  |  | 1,684,860 |  |  | 823,405 |
| Diluted number of common shares outstanding |  | 103,295,920 |  |  | 90,915,805 |  |  | 106,454,775 |  |  | 83,453,835 |
Basic net income (loss) per common share: |  |  |  |  |  |  |  |
| Net income (loss) |  | $ | (5,997 | ) |  | $ | 46,570 |  |  | $ | 65,074 |  |  | $ | 147,223 |
| Net income allocated to participating shares |  | — |  |  | (322 | ) |  | (420 | ) |  | (1,099 | )
| Net income (loss) available to common shareholders |  | $ | (5,997 | ) |  | $ | 46,248 |  |  | $ | 64,654 |  |  | $ | 146,124 |
| Basic net income (loss) per common share |  | $ | (0.06 | ) |  | $ | 0.52 |  |  | $ | 0.63 |  |  | $ | 1.77 |
Diluted net income (loss) per common share: |  |  |  |  |  |  |  |
| Net income (Loss) |  | $ | (5,997 | ) |  | $ | 46,570 |  |  | $ | 65,074 |  |  | $ | 147,223 |
| Net income allocated to participating securities |  | — |  |  | (318 | ) |  | (408 | ) |  | (1,089 | )
| Net income (loss) available to common shareholders |  | $ | (5,997 | ) |  | $ | 46,252 |  |  | $ | 64,666 |  |  | $ | 146,134 |
| Diluted net income (loss) per common share |  | $ | (0.06 | ) |  | $ | 0.51 |  |  | $ | 0.61 |  |  | $ | 1.75 |

For the three months ended September 30, 2014, options of 11,327,302 and warrants of 4,651,163 were excluded from the computation of diluted loss per share. As a result of the net loss in the three months ended September 30, 2014, no allocation of the net loss has been made to participating shares in the calculation of diluted net loss per common share. For the three months ended September 30, 2013, anti-dilutive options of 3,887,829 were excluded from the computation of diluted earnings per share.
For the nine months ended September 30, 2014 and 2013, anti-dilutive options of 4,553,159 and 3,579,271, respectively, were excluded from the computation of diluted earnings per share.
19. Related party transactions
In addition to the transactions disclosed in Notes 5, 10 and 17 to these condensed consolidated financial statements, the following transactions are classified as related party transactions, as each counterparty has either a direct or indirect shareholding in the Company or the Company has an investment with such counterparty.

a) | Pine Brook Road Partners, LLC and Narragansett Bay Insurance Company

Third Point Re entered into a quota share reinsurance agreement with Narragansett Bay Insurance Company (“Narragansett Bay”) effective December 31, 2012, which was renewed on December 31, 2013. The Company recorded $5.3 million (2013 - $4.6 million) of net premiums earned related to these contracts for the nine months ended September 30, 2014. Pine Brook Road Partners, LLC ("Pine Brook") is the manager of various investment funds, one of which owns approximately 12.0% (December 31, 2013 - 12.0%) of the Company's outstanding common shares. Pine Brook is also the manager of an investment fund that owns common shares in Narragansett Bay.
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b) | Third Point Loan L.L.C.

Third Point Loan L.L.C. (“Loan LLC”) serves as nominee of Third Point Re and other affiliated investment management clients of the Investment Manager for certain investments. Loan LLC has appointed the Investment Manager as its true and lawful agent and attorney. As of September 30, 2014, Loan LLC held $55.2 million (December 31, 2013 - $147.2 million) of Third Point Re’s investments, which are included in investments in securities and commodities and in derivative contracts in the condensed consolidated balance sheets. Third Point Re’s pro rata interest in the underlying investments registered in the name of Loan LLC and the related income and expense are reflected accordingly in the condensed consolidated balance sheets and the condensed consolidated statements of income (loss).
20. Financial instruments with off-balance sheet risk or concentrations of credit risk
Off-balance sheet risk
In the normal course of business, the Company trades various financial instruments and engages in various investment activities with off-balance sheet risk. These financial instruments include securities sold, not yet purchased, forwards, futures, options, swaptions, swaps and contracts for differences. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at specified future dates. Each of these financial instruments contains varying degrees of off-balance sheet risk whereby changes in the fair values of the securities underlying the financial instruments or fluctuations in interest rates and index values may exceed the amounts recognized in the condensed consolidated balance sheets.
Securities sold, not yet purchased are recorded as liabilities in the condensed consolidated balance sheets and have market risk to the extent that the Company, in satisfying its obligations, may be required to purchase securities at a higher value than that recorded in the condensed consolidated balance sheets. The Company’s investments in securities and commodities and amounts due from brokers are partially restricted until the Company satisfies the obligation to deliver securities sold, not yet purchased.
Forward and futures contracts are a commitment to purchase or sell financial instruments, currencies or commodities at a future date at a negotiated rate. Forward and futures contracts expose the Company to market risks to the extent that adverse changes occur to the underlying financial instruments such as currency rates or equity index fluctuations.
Option contracts give the purchaser the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price. The premium received by the Company upon writing an option contract is recorded as a liability, marked to market on a daily basis and is included in securities sold, not yet purchased in the condensed consolidated balance sheets. In writing an option, the Company bears the market risk of an unfavorable change in the financial instrument underlying the written option. Exercise of an option written by the Company could result in the Company selling or buying a financial instrument at a price different from the current fair value.
In the normal course of trading activities in its investment portfolio, the Company trades and holds certain derivative contracts, such as written options, which constitute guarantees. The maximum payout for written put options is limited to the number of contracts written and the related strike prices and the maximum payout for written call options is dependent upon the market price of the underlying security at the date of a payout event. As of September 30, 2014, the investment portfolio had a maximum payout amount of approximately $875.6 million (December 31, 2013 - $689.5 million) relating to written put option contracts with expiration ranging from one month to 10 months from the balance sheet date. The maximum payout amount could be offset by the subsequent sale, if any, of assets obtained via the settlement of a payout event. The fair value of these written put options as of September 30, 2014 is $8.0 million (December 31, 2013 - $2.6 million) and is included in securities sold, not yet purchased in the condensed consolidated balance sheets.
Swaption contracts give the Company the right, but not the obligation, to enter into a specified interest-rate swap within a specified period of time. The Company’s market and counterparty credit risk is limited to the premium paid to enter into the swaption contract and net unrealized gains.
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Total return swaps, contracts for differences, index swaps, and interest rate swaps that involve the exchange of cash flows between the Company and counterparties are based on the change in the fair value of a particular equity, index, or interest rate on a specified notional holding. The use of these contracts exposes the Company to market risks equivalent to actually holding securities of the notional value but typically involve little capital commitment relative to the exposure achieved. The gains or losses of the Company may therefore be magnified on the capital commitment.
Credit derivatives
Credit default swaps protect the buyer against the loss of principal on one or more underlying bonds, loans, or mortgages in the event the issuer suffers a credit event. Typical credit events include failure to pay or restructuring of obligations, bankruptcy, dissolution or insolvency of the underlying issuer. The buyer of the protection pays an initial and/or a periodic premium to the seller and receives protection for the period of the contract. If there is not a credit event, as defined in the contract, the buyer receives no payments from the seller. If there is a credit event, the buyer receives a payment from the seller of protection as calculated by the contract between the two parties.
The Company may also enter into index and/or basket credit default swaps where the credit derivative may reference a basket of single-name credit default swaps or a broad-based index. Generally, in the event of a default on one of the underlying names, the buyer will receive a pro-rata portion of the total notional amount of the credit default index or basket contract from the seller. When the Company purchases single-name, index and basket credit default swaps, the Company is exposed to counterparty nonperformance.
Upon selling credit default swap protection, the Company may expose itself to the risk of loss from related credit events specified in the contract. Credit spreads of the underlying together with the period of expiration is indicative of the likelihood of a credit event under the credit default swap contract and the Company’s risk of loss. Higher credit spreads and shorter expiration dates are indicative of a higher likelihood of a credit event resulting in the Company’s payment to the buyer of protection. Lower credit spreads and longer expiration dates would indicate the opposite and lowers the likelihood the Company needs to pay the buyer of protection. As of September 30, 2014, there was no cash collateral received specifically related to written credit default swaps as collateral is based on the net exposure associated with all derivative instruments subject to applicable netting agreements with counterparties and may not be specific to any individual derivative contract.
The following table sets forth certain information related to the Company’s written credit derivatives as of September 30, 2014 and December 31, 2013:

September 30, 2014 |  | Maximum Payout/ Notional Amount (by period of expiration) |  | Fair Value of Written Credit Derivatives (2)
Credit Spreads on underlying (basis points) |  | 0-5 years |  | 5 years or Greater Expiring Through 2047 |  | Total Written Credit Default Swaps (1) |  | Asset |  | Liability |  | Net Asset/(Liability)
|  | ($ in thousands)
Single name (0 - 250) |  | $ | — |  |  | $ | 5,437 |  |  | $ | 5,437 |  |  | $ | — |  |  | $ | 1,503 |  |  | $ | (1,503 | )
Single name (251-500) |  | — |  |  | 2,318 |  |  | 2,318 |  |  | 158 |  |  | — |  |  | 158 |
|  | $ | — |  |  | $ | 7,755 |  |  | $ | 7,755 |  |  | $ | 158 |  |  | $ | 1,503 |  |  | $ | (1,345 | )

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December 31, 2013 |  | Maximum Payout/ Notional Amount (by period of expiration) |  | Fair Value of Written Credit Derivatives (2)
Credit Spreads on underlying (basis points) |  | 0-5 years |  | 5 years or Greater Expiring Through 2046 |  | Total Written Credit Default Swaps (1) |  | Asset |  | Liability |  | Net Asset/(Liability)
|  | ($ in thousands)
Single name (0 - 250) |  | $ | 368 |  |  | $ | — |  |  | $ | 368 |  |  | $ | — |  |  | $ | (104 | ) |  | $ | (104 | )
Single name (251-500) |  | 9,514 |  |  | — |  |  | 9,514 |  |  | 1,136 |  |  | — |  |  | 1,136 |
Index (0-250) |  | — |  |  | 550 |  |  | 550 |  |  | 21 |  |  | (244 | ) |  | (223 | )
|  | $ | 9,882 |  |  | $ | 550 |  |  | $ | 10,432 |  |  | $ | 1,157 |  |  | $ | (348 | ) |  | $ | 809 |

(1) | As of September 30, 2014 and December 31, 2013, the Company did not hold any offsetting buy protection credit derivatives with the same underlying reference obligation.

(2) | Fair value amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting.

Concentrations of credit risk
In addition to off-balance sheet risks related to specific financial instruments, the Company may be subject to concentration of credit risk with particular counterparties. Substantially all securities transactions of the Company are cleared by several major securities firms. The Company had substantially all such individual counterparty concentration with these brokers or their affiliates as of September 30, 2014. However, the Company reduces its credit risk with counterparties by entering into master netting agreements. Therefore, assets represent the Company’s greater unrealized gains less unrealized losses for derivative contracts in which the Company has master netting agreements. Similarly, liabilities represent the Company’s greater unrealized losses less unrealized gains for derivative contracts in which the joint venture created through the Investment Agreement (Note 10) has master netting agreements. Furthermore, the Company obtains collateral from counterparties to reduce its exposure to counterparty credit risk.
The Company’s maximum exposure to credit risk associated with counterparty nonperformance on derivative contracts is limited to the net unrealized gains by counterparty inherent in such contracts which are recognized in the condensed consolidated balance sheets. As of September 30, 2014, the Company’s maximum counterparty credit risk exposure was $25.3 million (December 31, 2013 - $19.0 million).
21. Commitments and Contingencies
Letters of credit
As of September 30, 2014, the Company had entered into the following letter of credit facilities, which automatically renew annually unless terminated by either party in accordance with the required notice period:

| Facility |  | Renewal date |  | Notice period (Unused Facility Portion)
| ($ in thousands) |  |  |  |
BNP Paribas | $ | 100,000 |  |  | February 15, 2015 |  | 60 days prior to termination date
Citibank (1) | 250,000 |  |  | January 23, 2015 |  | 90 days prior to termination date
J.P. Morgan | 50,000 |  |  | August 22, 2015 |  | 60 days prior to termination date
| $ | 400,000 |  |  |  |  |

(1) Effective July 9, 2014, we increased our Citibank facility from $150 million to $250 million. All other terms of the facility remained the same.
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As of September 30, 2014, $160.1 million (December 31, 2013 - $127.3 million) of letters of credit, representing 40.0% (December 31, 2013 – 42.4%) of the total available facilities, had been drawn upon.
Under the facilities, the Company provides collateral that may consist of equity securities, repurchase agreements and cash and cash equivalents. As of September 30, 2014, cash and cash equivalents with a fair value of $160.6 million (December 31, 2013 - $100.6 million) were pledged as security against the letters of credit issued. These amounts are included in restricted cash and cash equivalents in the condensed consolidated balance sheets. Each of the facilities contain customary events of default and restrictive covenants, including but not limited to, limitations on liens on collateral, transactions with affiliates, mergers and sales of assets, as well as solvency and maintenance of certain minimum pledged equity requirements, A.M. Best Company rating of “A-” or higher, and restricts issuance of any debt without the consent of the letter of credit provider. Additionally, if an event of default exists, as defined in the letter of credit facilities, the Company will be prohibited from paying dividends. The Company was in compliance with all of the covenants as of September 30, 2014.
Investments
Loan and other participation interests purchased by the Company, such as bank debt, may include revolving credit arrangements or other financing commitments obligating the Company to advance additional amounts on demand. As of September 30, 2014, the Company had one unfunded capital commitment of $5.5 million related to its investment in the Hellenic Fund (see Note 17 for additional information).
In the normal course of business, the Company, as part of its investment strategy, enters into contracts that contain a variety of indemnifications and warranties. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. Thus, no amounts have been accrued related to such indemnifications. The Company also indemnifies Third Point Advisors LLC, Third Point LLC and its employees from and against any loss or expense, including, without limitation any judgment, settlement, legal fees and other costs. Any expenses related to this indemnification are reflected in net investment income in the condensed consolidated statements of income (loss).
Litigation
From time to time in the normal course of business, the Company may be involved in formal and informal dispute resolution procedures, which may include arbitration or litigation, the outcomes of which determine the rights and obligations under the Company's reinsurance contracts and other contractual agreements. In some disputes, the Company may seek to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company may resist attempts by others to collect funds or enforce alleged rights. While the final outcome of legal disputes that may arise cannot be predicted with certainty, the Company is not currently involved in any formal or informal dispute resolution procedures.
22. Segment reporting
The determination of the Company’s business segments is based on the manner in which management monitors the performance of its operations. The Company reports two operating segments - Property and Casualty Reinsurance and Catastrophe Risk Management. The Company has also identified a corporate function that includes net investment income on capital and certain general and administrative expenses related to corporate activities.
Effective January 1, 2014, the Company modified the presentation of its operating segments to allocate net investment income from float to the property and casualty reinsurance segment. The property and casualty reinsurance operations generate excess cash flows, or float, which the Company tracks in managing the business. The Company considers net investment income on float in evaluating the overall contribution of the property and casualty reinsurance segment. Prior period segment results have been adjusted to conform to this presentation.
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The following is a summary of the Company’s operating segments results for the three and nine months ended September 30, 2014 and 2013:

| Three months ended September 30, 2014
| Property and Casualty Reinsurance (6) |  | Catastrophe Risk Management |  | Corporate |  | Total
Revenues | ($ in thousands)
Gross premiums written | $ | 124,931 |  |  | $ | 1,472 |  |  | $ | — |  |  | $ | 126,403 |
Gross premiums ceded | (150 | ) |  | — |  |  | — |  |  | (150 | )
Net premiums written | 124,781 |  |  | 1,472 |  |  | — |  |  | 126,253 |
Change in net unearned premium reserves | (23,294 | ) |  | 5,989 |  |  | — |  |  | (17,305 | )
Net premiums earned | 101,487 |  |  | 7,461 |  |  | — |  |  | 108,948 |
Expenses |  |  |  |  |  |  |
Loss and loss adjustment expenses incurred, net | 60,121 |  |  | (6 | ) |  | — |  |  | 60,115 |
Acquisition costs, net | 37,571 |  |  | 746 |  |  | — |  |  | 38,317 |
General and administrative expenses | 5,556 |  |  | 648 |  |  | 3,920 |  |  | 10,124 |
Total expenses | 103,248 |  |  | 1,388 |  |  | 3,920 |  |  | 108,556 |
Net underwriting loss | (1,761 | ) |  | n/a |  | n/a |  | n/a
Net investment income (loss) | (137 | ) |  | 881 |  |  | 808 |  |  | 1,552 |
Other expenses | (2,982 | ) |  | — |  |  | — |  |  | (2,982 | )
Income tax expense | — |  |  | — |  |  | (1,542 | ) |  | (1,542 | )
Segment income (loss) including non-controlling interests | (4,880 | ) |  | 6,954 |  |  | (4,654 | ) |  | (2,580 | )
Segment income attributable to non-controlling interests | — |  |  | (3,325 | ) |  | (92 | ) |  | (3,417 | )
Segment income (loss) | $ | (4,880 | ) |  | $ | 3,629 |  |  | $ | (4,746 | ) |  | $ | (5,997 | )
Property and Casualty Reinsurance - Underwriting Ratios: |  |  |  |  |  |
Loss ratio (1) | 59.2 | % |  |  |  |  |  |
Acquisition cost ratio (2) | 37.0 | % |  |  |  |  |  |
Composite ratio (3) | 96.2 | % |  |  |  |  |  |
General and administrative expense ratio (4) | 5.5 | % |  |  |  |  |  |
Combined ratio (5) | 101.7 | % |  |  |  |  |  |

(1) | Loss ratio is calculated by dividing loss and loss adjustment expenses incurred, net by net premiums earned.

(2) | Acquisition cost ratio is calculated by dividing acquisition costs, net by net premiums earned.

(3) | Composite ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net and acquisition costs, net by net premiums earned.

(4) | General and administrative expense ratio is calculated by dividing general and administrative expenses related to underwriting activities by net premiums earned.

(5) | Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net, acquisition costs, net and general and administrative expenses related to underwriting activities by net premiums earned.

(6) | Effective January 1, 2014, the Company modified the presentation of its operating segments to allocate net investment income from float to the Property and Casualty Reinsurance segment. Prior period segment results have been adjusted to conform to this presentation.

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| Three Months Ended September 30, 2013
| Property and Casualty Reinsurance (6) |  | Catastrophe Risk Management |  | Corporate |  | Total
Revenues | ($ in thousands)
Gross premiums written | $ | 43,714 |  |  | $ | 1,711 |  |  | $ | — |  |  | $ | 45,425 |
Gross premiums ceded | — |  |  | — |  |  | — |  |  | — |
Net premiums written | 43,714 |  |  | 1,711 |  |  | — |  |  | 45,425 |
Change in net unearned premium reserves | 18,051 |  |  | 2,853 |  |  | — |  |  | 20,904 |
Net premiums earned | 61,765 |  |  | 4,564 |  |  | — |  |  | 66,329 |
Expenses |  |  |  |  |  |  |
Loss and loss adjustment expenses incurred, net | 39,349 |  |  | — |  |  | — |  |  | 39,349 |
Acquisition costs, net | 20,541 |  |  | 576 |  |  | — |  |  | 21,117 |
General and administrative expenses | 6,739 |  |  | 949 |  |  | 2,158 |  |  | 9,846 |
Total expenses | 66,629 |  |  | 1,525 |  |  | 2,158 |  |  | 70,312 |
Net underwriting loss | (4,864 | ) |  | n/a |  | n/a |  | n/a
Net investment income | 7,072 |  |  | 2,089 |  |  | 45,456 |  |  | 54,617 |
Other expenses | (1,246 | ) |  | — |  |  | — |  |  | (1,246 | )
Segment income including non-controlling interests | 962 |  |  | 5,128 |  |  | 43,298 |  |  | 49,388 |
Segment income attributable to non-controlling interests | — |  |  | (2,432 | ) |  | (386 | ) |  | (2,818 | )
Segment income | $ | 962 |  |  | $ | 2,696 |  |  | $ | 42,912 |  |  | $ | 46,570 |
Property and Casualty Reinsurance - Underwriting Ratios: |  |  |  |  |  |
Loss ratio (1) | 63.7 | % |  |  |  |  |  |
Acquisition cost ratio (2) | 33.3 | % |  |  |  |  |  |
Composite ratio (3) | 97.0 | % |  |  |  |  |  |
General and administrative expense ratio (4) | 10.9 | % |  |  |  |  |  |
Combined ratio (5) | 107.9 | % |  |  |  |  |  |

(1) | Loss ratio is calculated by dividing loss and loss adjustment expenses incurred, net by net premiums earned.

(2) | Acquisition cost ratio is calculated by dividing acquisition costs, net by net premiums earned.

(3) | Composite ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net and acquisition costs, net by net premiums earned.

(4) | General and administrative expense ratio is calculated by dividing general and administrative expenses related to underwriting activities by net premiums earned.

(5) | Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net, acquisition costs, net and general and administrative expenses related to underwriting activities by net premiums earned.

(6) | Effective January 1, 2014, the Company modified the presentation of its operating segments to allocate net investment income from float to the Property and Casualty Reinsurance segment. Prior period segment results have been adjusted to conform to this presentation.

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| Nine months ended September 30, 2014
| Property and Casualty Reinsurance (6) |  | Catastrophe Risk Management |  | Corporate |  | Total
Revenues | ($ in thousands)
Gross premiums written | $ | 347,495 |  |  | $ | 12,003 |  |  | $ | — |  |  | $ | 359,498 |
Gross premiums ceded | (150 | ) |  | — |  |  | — |  |  | (150 | )
Net premiums written | 347,345 |  |  | 12,003 |  |  | — |  |  | 359,348 |
Change in net unearned premium reserves | (96,069 | ) |  | (2,319 | ) |  | — |  |  | (98,388 | )
Net premiums earned | 251,276 |  |  | 9,684 |  |  | — |  |  | 260,960 |
Expenses |  |  |  |  |  |  |
Loss and loss adjustment expenses incurred, net | 150,789 |  |  | (6 | ) |  | — |  |  | 150,783 |
Acquisition costs, net | 92,477 |  |  | 854 |  |  | — |  |  | 93,331 |
General and administrative expenses | 17,020 |  |  | 2,160 |  |  | 10,518 |  |  | 29,698 |
Total expenses | 260,286 |  |  | 3,008 |  |  | 10,518 |  |  | 273,812 |
Net underwriting loss | (9,010 | ) |  | n/a |  | n/a |  | n/a
Net investment income | 13,458 |  |  | 943 |  |  | 77,671 |  |  | 92,072 |
Other expenses | (4,789 | ) |  | — |  |  | — |  |  | (4,789 | )
Income tax expense | — |  |  | — |  |  | (3,917 | ) |  | (3,917 | )
Segment income (loss) including non-controlling interests | (341 | ) |  | 7,619 |  |  | 63,236 |  |  | 70,514 |
Segment income attributable to non-controlling interests | — |  |  | (3,854 | ) |  | (1,586 | ) |  | (5,440 | )
Segment income (loss) | $ | (341 | ) |  | $ | 3,765 |  |  | $ | 61,650 |  |  | $ | 65,074 |
Property and Casualty Reinsurance - Underwriting Ratios: |  |  |  |  |  |
Loss ratio (1) | 60.0 | % |  |  |  |  |  |
Acquisition cost ratio (2) | 36.8 | % |  |  |  |  |  |
Composite ratio (3) | 96.8 | % |  |  |  |  |  |
General and administrative expense ratio (4) | 6.8 | % |  |  |  |  |  |
Combined ratio (5) | 103.6 | % |  |  |  |  |  |

(1) | Loss ratio is calculated by dividing loss and loss adjustment expenses incurred, net by net premiums earned.

(2) | Acquisition cost ratio is calculated by dividing acquisition costs, net by net premiums earned.

(3) | Composite ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net and acquisition costs, net by net premiums earned.

(4) | General and administrative expense ratio is calculated by dividing general and administrative expenses related to underwriting activities by net premiums earned.

(5) | Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net, acquisition costs, net and general and administrative expenses related to underwriting activities by net premiums earned.

(6) | Effective January 1, 2014, the Company modified the presentation of its operating segments to allocate net investment income from float to the Property and Casualty Reinsurance segment. Prior period segment results have been adjusted to conform to this presentation.

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| Nine months ended September 30, 2013
| Property and Casualty Reinsurance (6) |  | Catastrophe Risk Management |  | Corporate |  | Total
Revenues | ($ in thousands)
Gross premiums written | $ | 231,229 |  |  | $ | 8,431 |  |  | $ | — |  |  | $ | 239,660 |
Gross premiums ceded | (9,975 | ) |  | — |  |  | — |  |  | (9,975 | )
Net premiums written | 221,254 |  |  | 8,431 |  |  | — |  |  | 229,685 |
Change in net unearned premium reserves | (65,408 | ) |  | (2,120 | ) |  | — |  |  | (67,528 | )
Net premiums earned | 155,846 |  |  | 6,311 |  |  | — |  |  | 162,157 |
Expenses |  |  |  |  |  |  |
Loss and loss adjustment expenses incurred, net | 103,291 |  |  | 388 |  |  | — |  |  | 103,679 |
Acquisition costs, net | 48,353 |  |  | 758 |  |  | — |  |  | 49,111 |
General and administrative expenses | 16,265 |  |  | 2,721 |  |  | 5,085 |  |  | 24,071 |
Total expenses | 167,909 |  |  | 3,867 |  |  | 5,085 |  |  | 176,861 |
Net underwriting loss | (12,063 | ) |  | n/a |  | n/a |  | n/a
Net investment income | 15,128 |  |  | 3,210 |  |  | 150,466 |  |  | 168,804 |
Other expenses | (2,675 | ) |  | — |  |  | — |  |  | (2,675 | )
Segment income including non-controlling interests | 390 |  |  | 5,654 |  |  | 145,381 |  |  | 151,425 |
Segment income attributable to non-controlling interests | — |  |  | (3,027 | ) |  | (1,175 | ) |  | (4,202 | )
Segment income | $ | 390 |  |  | $ | 2,627 |  |  | $ | 144,206 |  |  | $ | 147,223 |
Property and Casualty Reinsurance - Underwriting Ratios: |  |  |  |  |  |
Loss ratio (1) | 66.3 | % |  |  |  |  |  |
Acquisition cost ratio (2) | 31.0 | % |  |  |  |  |  |
Composite ratio (3) | 97.3 | % |  |  |  |  |  |
General and administrative expense ratio (4) | 10.4 | % |  |  |  |  |  |
Combined ratio (5) | 107.7 | % |  |  |  |  |  |

(1) | Loss ratio is calculated by dividing loss and loss adjustment expenses incurred, net by net premiums earned.

(2) | Acquisition cost ratio is calculated by dividing acquisition costs, net by net premiums earned.

(3) | Composite ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net and acquisition costs, net by net premiums earned.

(4) | General and administrative expense ratio is calculated by dividing general and administrative expenses related to underwriting activities by net premiums earned.

(5) | Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net, acquisition costs, net and general and administrative expenses related to underwriting activities by net premiums earned.

(6) | Effective January 1, 2014, the Company modified the presentation of its operating segments to allocate net investment income from float to the Property and Casualty Reinsurance segment. Prior period segment results have been adjusted to conform to this presentation.

For the three months ended September 30, 2014, three contracts each contributed greater than 10.0% of total gross premiums written. These three contracts contributed 60.5%, 31.8% and 14.1%, respectively, of total gross premiums written for the three months ended September 30, 2014. For the three months ended September 30, 2013, four contracts each contributed greater than 10% of total gross premiums written. These four contracts contributed 61.0%, 22.0%, 13.1% and 12.3%, respectively, of total gross premiums written for the three months ended September 30, 2013.
For the nine months ended September 30, 2014, three contracts each contributed greater than 10.0% of total gross premiums written. These three contracts contributed 29.2%, 12.4% and 11.2%, respectively, of total gross premiums written for the nine months ended September 30, 2014. For the nine months ended September 30, 2013, four contracts contributed greater than 10% of total gross premiums written. These four contracts contributed 18.8%, 14.6%, 11.6% and 11.5%, respectively, of total gross premiums written for the nine months ended September 30, 2013.
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The following table provides a breakdown of the Company’s gross premiums written by line of business for the
three and nine months ended September 30, 2014 and 2013:

| For the three months ended
| September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Property | $ | (2,810 | ) |  | (2.2 | )% |  | $ | (1,603 | ) |  | (3.5 | )%
Casualty | 128,469 |  |  | 101.6 | % |  | 9,426 |  |  | 20.7 | %
Specialty | (728 | ) |  | (0.6 | )% |  | 35,891 |  |  | 79.0 | %
Total property and casualty reinsurance | 124,931 |  |  | 98.8 | % |  | 43,714 |  |  | 96.2 | %
Catastrophe risk management | 1,472 |  |  | 1.2 | % |  | 1,711 |  |  | 3.8 | %
| $ | 126,403 |  |  | 100.0 | % |  | $ | 45,425 |  |  | 100.0 | %

| For the nine months ended
| September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Property | $ | 78,577 |  |  | 21.9 | % |  | $ | 26,635 |  |  | 11.1 | %
Casualty | 244,235 |  |  | 67.9 | % |  | 111,021 |  |  | 46.4 | %
Specialty | 24,683 |  |  | 6.9 | % |  | 93,573 |  |  | 39.0 | %
Total property and casualty reinsurance | 347,495 |  |  | 96.7 | % |  | 231,229 |  |  | 96.5 | %
Catastrophe risk management | 12,003 |  |  | 3.3 | % |  | 8,431 |  |  | 3.5 | %
| $ | 359,498 |  |  | 100.0 | % |  | $ | 239,660 |  |  | 100.0 | %

The following table provides a breakdown of the Company’s gross premiums written by prospective and retroactive reinsurance contracts for the three and nine months ended September 30, 2014 and 2013:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Prospective | $ | 126,403 |  |  | 100.0 | % |  | $ | 27,981 |  |  | 61.6 | % |  | $ | 356,822 |  |  | 99.3 | % |  | $ | 199,916 |  |  | 83.4 | %
Retroactive | — |  |  | — | % |  | 17,444 |  |  | 38.4 | % |  | 2,676 |  |  | 0.7 | % |  | 39,744 |  |  | 16.6 | %
| $ | 126,403 |  |  | 100.0 | % |  | $ | 45,425 |  |  | 100.0 | % |  | $ | 359,498 |  |  | 100.0 | % |  | $ | 239,660 |  |  | 100.0 | %

The Company records the gross premium written and earned at the inception of the contract for retroactive reinsurance contracts.
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Substantially all of the Company's business is sourced through reinsurance brokers. The following table provides a breakdown of the Company's gross premiums written from brokers for the nine months ended September 30, 2014 and 2013:

| 2014 |  | 2013
| ($ in thousands)
Guy Carpenter & Company, LLC | $ | 91,567 |  |  | 25.5 | % |  | $ | (11,927 | ) |  | (5.0 | )%
Willis Re | 55,589 |  |  | 15.5 | % |  | 13,421 |  |  | 5.6 | %
Aon Benfield - a division of Aon plc | 54,072 |  |  | 15.0 | % |  | 91,349 |  |  | 38.2 | %
Advocate Reinsurance Partners, LLC | 51,002 |  |  | 14.2 | % |  | 26,000 |  |  | 10.8 | %
Stonehill Reinsurance Partners, LLC | 44,744 |  |  | 12.4 | % |  | — |  |  | — | %
TigerRisk Partners LLC | 13,852 |  |  | 3.9 | % |  | 10,472 |  |  | 4.4 | %
BMS Intermediaries | — |  |  | — | % |  | 46,095 |  |  | 19.2 | %
Other brokers | 3,203 |  |  | 0.9 | % |  | 7,545 |  |  | 3.1 | %
Total broker placed | 314,029 |  |  | 87.4 | % |  | 182,955 |  |  | 76.3 | %
Direct placements | 45,469 |  |  | 12.6 | % |  | 56,705 |  |  | 23.7 | %
| $ | 359,498 |  |  | 100.0 | % |  | $ | 239,660 |  |  | 100.0 | %

The following table provides a breakdown of the Company’s gross premiums written by domicile of the ceding companies for the three and nine months September 30, 2014 and 2013:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| ($ in thousands)
United States | $ | 85,686 |  |  | 67.7 | % |  | $ | 7,665 |  |  | 16.9 | % |  | $ | 288,420 |  |  | 80.3 | % |  | $ | 151,314 |  |  | 63.1 | %
United Kingdom | (812 | ) |  | (0.6 | )% |  | — |  |  | — | % |  | 24,600 |  |  | 6.8 | % |  | — |  |  | — | %
Bermuda | 41,529 |  |  | 32.9 | % |  | 37,760 |  |  | 83.1 | % |  | 46,478 |  |  | 12.9 | % |  | 86,946 |  |  | 36.3 | %
Other | — |  |  | — | % |  | — |  |  | — | % |  | — |  |  | — | % |  | 1,400 |  |  | 0.6 | %
| $ | 126,403 |  |  | 100.0 | % |  | $ | 45,425 |  |  | 100.0 | % |  | $ | 359,498 |  |  | 100.0 | % |  | $ | 239,660 |  |  | 100.0 | %

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our unaudited condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q.
The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors" and ”Special Note Regarding Forward-Looking Statements" . Our actual results may differ materially from those contained in or implied by any forward looking statements.
Special Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals and expectations concerning our market position, international expansion, future operations, margins, profitability, future efficiencies, capital expenditures, liquidity and capital resources and other financial and operating information. When used in this discussion, the words “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,” “continues,” “could,” “will,” “future” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this Quarterly Report on Form 10-Q.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance that these expectations will prove to have been correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the following:

• | limited historical information about us;

• | operational structure currently is being developed;

• | fluctuation in results of operations;

• | more established competitors;

• | losses exceeding reserves;

• | downgrades or withdrawal of ratings by rating agencies;

• | dependence on key executives;

• | dependence on letter of credit facilities that may not be available on commercially acceptable terms;

• | potential inability to pay dividends;

• | unavailability of capital in the future;

• | dependence on clients' evaluations of risks associated with such clients' insurance underwriting;

• | suspension or revocation of our reinsurance license;

• | potentially being deemed an investment company under U.S. federal securities law;

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• | potential characterization of Third Point Reinsurance Ltd. and/or Third Point Reinsurance Company Ltd. as a passive foreign investment company;

• | dependence on Third Point LLC to implement our investment strategy;

• | termination by Third Point LLC of our investment management agreement;

• | risks associated with our investment strategy being greater than those faced by competitors;

• | increased regulation or scrutiny of alternative investment advisers affecting our reputation;

• | potentially becoming subject to United States federal income taxation;

• | potentially becoming subject to U.S. withholding and information reporting requirements under the Foreign Account Tax Compliance Act; and

• | other risks and factors listed under “Risk Factors” in our most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Any one of these factors or a combination of these factors could materially affect our financial condition or future results of operations and could influence whether any forward-looking statements contained in this report ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and you should not place undue reliance on them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition, while we do, from time to time, communicate with security analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, shareholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not our responsibility.
Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” and the “Company,” as used in this report, refer to Third Point Reinsurance Ltd. and its directly and indirectly owned subsidiaries, including Third Point Reinsurance Company Ltd. ("Third Point Re"), as a combined entity, except where otherwise stated or where it is clear that the terms mean only Third Point Reinsurance Ltd. exclusive of its subsidiaries. Third Point Reinsurance Investment Management Ltd. is referred to as the “Catastrophe Fund Manager,” Third Point Reinsurance Opportunities Fund Ltd. as the “Catastrophe Fund” and Third Point Re Cat Ltd. as the “Catastrophe Reinsurer.”
Overview
We are a Bermuda-based specialty property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us from our competitors. Our objective is to deliver attractive equity returns to shareholders by combining profitable reinsurance underwriting with our investment manager Third Point LLC’s superior investment management.
We manage our business on the basis of two operating segments: Property and Casualty Reinsurance and Catastrophe Risk Management. We also have a corporate function that includes our net investment income on capital and certain general and administrative expenses related to corporate activities.
Property and Casualty Reinsurance
We provide reinsurance products to insurance and reinsurance companies, government entities, and other risk bearing vehicles. Contracts can be written on an excess of loss basis or quota share basis, although the majority of contracts written to date have been on a quota share basis. In addition, we write contracts on both a prospective basis and a retroactive basis. Prospective reinsurance contracts cover losses incurred as a result of future insurable events. Retroactive reinsurance contracts cover the potential for changes in estimates of loss and loss adjustment expense reserves related to loss events that have occurred in the past. Retroactive reinsurance contracts can be an attractive type
50

of contract for us as they can generate an underwriting profit should the ultimate loss and loss adjustment expenses settle for less than the initial estimate of reserves and the premiums received at the inception of the contract generate insurance float. The product lines that we currently underwrite for this operating segment are: property, casualty and specialty. We assume a limited amount of catastrophe risk within the property and casualty segment, primarily through multi-line reinsurance contracts. All excess of loss property catastrophe reinsurance is written through the Catastrophe Fund.
Insurance float is an important aspect of our property and casualty reinsurance operation. In an insurance or reinsurance operation, float arises because premiums from reinsurance contracts and consideration received for deposit accounted contracts are collected before losses are paid on reinsurance contracts and proceeds are returned on deposit accounting contracts. In some instances, the interval between cash receipts and payments can extend over many years. During this time interval, we invest the cash received and seek to generate investment returns. Although float can be calculated using numbers determined under U.S. GAAP, float is a non-GAAP financial measure and, therefore, there is no comparable U.S. GAAP measure.
We believe that our property and casualty reinsurance segment will contribute to our results by both generating underwriting income as well as generating float.
Catastrophe Risk Management
In contrast to many reinsurers with whom we compete, we have elected to limit our underwriting of property catastrophe exposures. We write excess of loss catastrophe reinsurance exclusively through the Catastrophe Fund, which is a separately capitalized reinsurance fund vehicle. On June 15, 2012, we established the Catastrophe Fund, the Catastrophe Fund Manager and the Catastrophe Reinsurer, in partnership with Hiscox. Our partnership with Hiscox is governed by a shareholders’ agreement that provides for certain matters relating to governance of the Catastrophe Fund Manager and restrictions on the transfers of its shares. Our investment in and management of the Catastrophe Fund allows us to provide a product that is important to most of our reinsurance clients and to earn fee income over time. Because the Catastrophe Fund is capitalized in part by investments from unrelated parties, our financial exposure to the higher volatility and liquidity risks associated with property catastrophe losses is limited to our investment in the Catastrophe Fund, which as of September 30, 2014 was $58.6 million (December 31, 2013 - $54.8 million). We anticipate that our property catastrophe exposures will consistently remain relatively low when compared to many other reinsurers with whom we compete. There are no additional guarantees and no recourse to us beyond our investment.
The Catastrophe Fund Manager is a property catastrophe fund management company, which began writing catastrophe risk through the Catastrophe Fund and related Catastrophe Reinsurer on January 1, 2013. The Catastrophe Fund Manager receives fee income in the form of management fees and performance fees from the Catastrophe Fund. We own 85% of the Catastrophe Fund Manager and Hiscox owns the remaining 15%. We consolidate the Catastrophe Fund Manager’s results in our consolidated results with a non-controlling interest recorded for the 15% Hiscox ownership. The objective of the Catastrophe Fund is to achieve positive uncorrelated investment returns by transacting, through the Catastrophe Reinsurer, in a portfolio of collateralized reinsurance treaties and other insurance-linked securities, including catastrophe bonds and industry loss warranties. The Catastrophe Reinsurer is a Bermuda based special purpose insurer authorized to write collateralized property catastrophe reinsurance business. The Catastrophe Fund owns 100% of the voting, non-participating, common shares and 100% of the non-voting, participating, preferred shares of the Catastrophe Reinsurer.
As of September 30, 2014, the Catastrophe Fund had a net asset value ("NAV") of $117.9 million (December 31, 2013 - $104.0 million). Market conditions have been challenging due to the recent launch of several similar funds and a decrease in catastrophe reinsurance pricing. Given current market conditions, we expect to limit the size of the Catastrophe Fund to ensure we can continue to profitably deploy the funds under management until market conditions improve.
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Investment Management
Our investment strategy is implemented by our investment manager, Third Point LLC, under a long-term investment management contract. We directly own the investments that are held in a separate account and managed by Third Point LLC on substantially the same basis as Third Point LLC’s main hedge funds.
Limited Operating History and Comparability of Results
We were incorporated on October 6, 2011 and completed our initial capitalization on December 22, 2011. We began underwriting business on January 1, 2012. We completed an initial public offering of common shares on August 20, 2013 (the "IPO"). As a result, we have a limited operating history and are exposed to volatility in our results of operations. Period to period comparisons of our results of operations may not be meaningful.
In addition, the amount of premiums written may vary from year to year and from period to period as a result of several factors, including changes in market conditions and our view of the long-term profit potential of individual lines of business.
Key Performance Indicators
We believe that by combining a disciplined and opportunistic approach to reinsurance underwriting with investment results from the active management of our investment portfolio, we will be able to generate attractive returns for our shareholders. The key financial measures that we believe are most meaningful in analyzing our performance are: net underwriting income (loss) for our property and casualty reinsurance segment, combined ratio for our property and casualty reinsurance segment, net investment income, net investment return on investments managed by Third Point LLC, book value per share, diluted book value per share, growth in diluted book value per share and return on beginning shareholders’ equity.
Non-GAAP Financial Measures
We have included financial measures that are not calculated under standards or rules that comprise accounting principles generally accepted in the United States (GAAP). Such measures, including net underwriting income (loss), combined ratio, book value per share, diluted book value per share and return on beginning shareholders' equity, are referred to as non-GAAP measures. These non-GAAP measures may be defined or calculated differently by other companies. We believe these measures allow for a more complete understanding of the underlying business. These measures are used to monitor our results and should not be viewed as a substitute for those determined in accordance with GAAP. Reconciliations of such measures to the most comparable GAAP figures are referenced below.
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The table below shows the key performance indicators for our consolidated business as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| (In thousands, except for per share data and ratios)
Key underwriting metrics for Property and Casualty Reinsurance segment: |  |  |  |  |  |  |
Net underwriting loss (1) | $ | (1,761 | ) |  | $ | (4,864 | ) |  | $ | (9,010 | ) |  | $ | (12,063 | )
Combined ratio (1) | 101.7 | % |  | 107.9 | % |  | 103.6 | % |  | 107.7 | %
Key investment return metrics: |  |  |  |  |  |  |
Net investment income | $ | 1,552 |  |  | $ | 54,617 |  |  | $ | 92,072 |  |  | $ | 168,804 |
Net investment return on investments managed by Third Point LLC | (0.04 | )% |  | 4.3 | % |  | 5.5 | % |  | 16.9 | %
Key shareholders' value creation metrics: |  |  |  |  |  |
Book value per share (2) (4) | $ | 14.17 |  |  | $ | 13.48 |  |  | $ | 14.17 |  |  | $ | 13.48 |
Diluted book value per share (2) (4) | $ | 13.68 |  |  | $ | 13.12 |  |  | $ | 13.68 |  |  | $ | 13.12 |
Growth in diluted book value per share (2) | (0.3 | )% |  | 2.3 | % |  | 4.3 | % |  | 13.4 | %
Return on beginning shareholders' equity (3) | (0.4 | )% |  | 4.2 | % |  | 4.7 | % |  | 16.1 | %
(1) Net underwriting loss and combined ratio are Non-GAAP financial measures. See Note 22 of the accompanying condensed consolidated financial statements for calculation of net underwriting loss and combined ratio.
(2) Book value per share and diluted book value per share are Non-GAAP financial measures. See reconciliation below for calculation of book value per share and diluted book value per share.
(3) Return on beginning shareholders’ equity is a Non-GAAP financial measure. See reconciliation below for calculation of return on beginning shareholders’ equity.
(4) Prior year comparative represents amounts as of December 31, 2013.

Net Underwriting Income (Loss) for Property and Casualty Reinsurance Segment
One way that we evaluate the performance of our property and casualty reinsurance results is by measuring net underwriting income or loss. We do not measure performance based on the amount of gross premiums written. Net underwriting income or loss is calculated from net premiums earned, less net loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to the underwriting activities.
Combined Ratio for Property and Casualty Reinsurance Segment
The combined ratio compares the amount of net premiums earned to the amount incurred in claims and underwriting related expenses. This ratio is a key indicator of a reinsurance company’s profitability. It is calculated by dividing net premiums earned by the sum of loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities. A combined ratio greater than 100% means that loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities exceeded net premiums earned.
Net Investment Income
Net investment income is an important measure that affects overall profitability. Net investment income is affected by the performance of Third Point LLC as our exclusive investment manager and the amount of investable cash, or float, generated by our reinsurance operation. Pursuant to the investment management agreement, Third Point LLC is required to manage our investment portfolio on substantially the same basis as its main hedge funds, subject to certain conditions set forth in our investment guidelines. These conditions include limitations on investing in private securities, a limitation on portfolio leverage, and a limitation on portfolio concentration in individual securities. The investment management agreement allows us to withdraw cash from our investment account with Third Point LLC at any time with three days’ notice to pay claims and with five days’ notice to pay expenses.
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We track excess cash flows generated by our property and casualty reinsurance operation, or float, in a separate account, which allows us to also track the net investment income generated on the float. We believe that net investment income generated on float is an important consideration in evaluating the overall contribution of our property and casualty reinsurance operation to our consolidated results. It is also explicitly considered as part of the evaluation of management’s performance for purposes of incentive compensation.
Net investment income for the three and nine months ended September 30, 2014 and 2013 was comprised of the following:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Net investment income on float | $ | (138 | ) |  | $ | 7,072 |  |  | $ | 13,457 |  |  | $ | 15,128 |
Net investment income on capital | 808 |  |  | 45,455 |  |  | 77,671 |  |  | 150,465 |
Net investment income on investments managed by Third Point LLC | 670 |  |  | 52,527 |  |  | 91,128 |  |  | 165,593 |
Investment income on cash held by the Catastrophe Reinsurer and Catastrophe Fund | 27 |  |  | 28 |  |  | 84 |  |  | 44 |
Net gain on reinsurance contract derivatives written by the Catastrophe Reinsurer | 780 |  |  | 2,062 |  |  | 780 |  |  | 3,167 |
Net gain on catastrophe bond held by the Catastrophe Reinsurer | 75 |  |  | — |  |  | 80 |  |  | — |
| $ | 1,552 |  |  | $ | 54,617 |  |  | $ | 92,072 |  |  | $ | 168,804 |

Net Investment Return on Investments Managed by Third Point LLC
The net investment return on investments managed by Third Point LLC is the percentage change in value of a dollar invested over the reporting period on our investment assets managed by Third Point LLC, net of non-controlling interest. The stated return is net of withholding taxes, which are presented as a component of income tax expense in our condensed consolidated statements of income (loss). Net investment return is the key indicator by which we measure the performance of Third Point LLC, our investment manager.
Return on Beginning Shareholders’ Equity
Return on beginning shareholders’ equity as presented is a non-GAAP financial measure. Return on beginning shareholders’ equity is calculated by dividing net income (loss) by the beginning shareholders’ equity attributable to shareholders and is a commonly used calculation to measure profitability. For the three and nine months ended September 30, 2013, we have adjusted the beginning shareholders' equity for the impact of the issuance of shares in our IPO on a weighted average basis. These adjustments lower the stated returns on beginning shareholders' equity.
Return on beginning shareholders' equity for the three and nine months ended September 30, 2014 and 2013 was calculated as follows:

| For the three months ended |  | For the nine months ended
| September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Net income (loss) | $ | (5,997 | ) |  | $ | 46,570 |  |  | $ | 65,074 |  |  | $ | 147,223 |
Shareholders' equity attributable to shareholders - beginning of period | 1,467,229 |  |  | 972,665 |  |  | 1,391,661 |  |  | 868,544 |
Impact of weighting related to shareholders' equity from IPO | — |  |  | 128,860 |  |  | — |  |  | 43,111 |
Adjusted shareholders' equity attributable to shareholders - beginning of period | $ | 1,467,229 |  |  | $ | 1,101,525 |  |  | $ | 1,391,661 |  |  | $ | 911,655 |
Return on beginning shareholders' equity | (0.4 | )% |  | 4.2 | % |  | 4.7 | % |  | 16.1 | %

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Book Value Per Share and Diluted Book Value Per Share
We believe that long-term growth in diluted book value per share is the most important measure of our financial performance. Book value per share as used by our management is a non-GAAP measure, as it is calculated after deducting the impact of non-controlling interests. Diluted book value per share is also a non-GAAP measure and represents book value per share reduced for the impact from dilution of all in-the-money share options issued, warrants and unvested restricted shares outstanding as of any period end.
For the three months ended September 30, 2014, book value per share decreased by $0.04 per share, or (0.3)%, to $14.17 per share from $14.21 per share as of June 30, 2014. For the three months ended September 30, 2014, diluted book value per share decreased by $0.04 per share, or (0.3)%, to $13.68 per share from $13.72 per share as of June 30, 2014.
For the nine months ended September 30, 2014, book value per share increased by $0.69 per share, or 5.1%, to $14.17 per share from $13.48 per share as of December 31, 2013. For the nine months ended September 30, 2014, diluted book value per share increased by $0.56 per share, or 4.3%, to $13.68 per share from $13.12 per share as of December 31, 2013.
The decrease in basic and diluted book value per share for the three months ended September 30, 2014 was primarily due to the net loss in the period. The increase in basic and diluted book value per share for the nine months ended September 30, 2014 was primarily due to net income in the period. The growth in diluted book value per share was also impacted by warrants and share compensation issued to our Founders, employees, directors and an advisor, including the additional warrants and options that became exercisable as a result of meeting the performance condition after the IPO. The number of shares underlying options included in the calculation of diluted book value per share as of September 30, 2014 was lower than the amount included as of December 31, 2013 because the exercise price of certain outstanding options was higher than our share price as of September 30, 2014.
The following table sets forth the computation of basic and diluted book value per share as of September 30, 2014 and December 31, 2013:

| September 30, 2014 |  | December 31, 2013
Basic and diluted book value per share numerator: | (In thousands, except share and per share amounts)
Total shareholders' equity | $ | 1,543,638 |  |  | $ | 1,510,396 |
Less: Non-controlling interests | (79,325 | ) |  | (118,735 | )
Shareholders' equity attributable to shareholders | 1,464,313 |  |  | 1,391,661 |
Effect of dilutive warrants issued to Founders and an advisor | 46,512 |  |  | 46,512 |
Effect of dilutive share options issued to directors and employees | 65,473 |  |  | 101,274 |
Diluted book value per share numerator: | $ | 1,576,298 |  |  | $ | 1,539,447 |
Basic and diluted book value per share denominator: |
Issued and outstanding shares | 103,324,616 |  |  | 103,264,616 |
Effect of dilutive warrants issued to Founders and an advisor | 4,651,163 |  |  | 4,651,163 |
Effect of dilutive share options issued to directors and employees | 6,528,647 |  |  | 8,784,861 |
Effect of dilutive restricted shares issued to directors and employees | 706,840 |  |  | 657,156 |
Diluted book value per share denominator: | 115,211,266 |  |  | 117,357,796 |
Basic book value per share | $ | 14.17 |  |  | $ | 13.48 |
Diluted book value per share | $ | 13.68 |  |  | $ | 13.12 |

Revenues
We derive our revenues from two principal sources:

• | premiums from property and casualty reinsurance business assumed; and

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• | income from investments.

Premiums from our property and casualty reinsurance business assumed are directly related to the number, type and pricing of contracts we write. Premiums are earned over the contract period in proportion to the period of risk covered, which is typically 12 to 24 months.
Income from our investments is primarily comprised of interest income, dividends, and net realized and unrealized gains on investment securities included in our investment portfolio.
Expenses
Our expenses consist primarily of the following:

• | loss and loss adjustment expenses;

• | acquisition costs;

• | investment-related expenses;

• | general and administrative expenses; and

• | income tax expenses.

Loss and loss adjustment expenses are a function of the amount and type of reinsurance contracts we write and loss experience of the underlying coverage. Loss and loss adjustment expenses are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Depending on the nature of the contract, loss and loss adjustment expenses may be paid over a number of years.
Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to our writing reinsurance contracts and are presented net of commissions ceded under reinsurance contracts. We amortize deferred acquisition costs over the related contract term in the same proportion that the premiums are earned.
Investment-related expenses primarily consist of management fees we pay to our investment manager, Third Point LLC, and certain of our Founders, pursuant to the investment management agreement and performance fees we pay to Third Point Advisors LLC. A 2% management fee calculated on assets under management is paid monthly in arrears to Third Point LLC and certain of our Founders, and a performance fee equal to 20% of the net investment income is paid annually in arrears to Third Point Advisors LLC. We include these expenses in net investment income in our condensed consolidated statements of income.
General and administrative expenses consist primarily of salaries, benefits and related payroll costs, including costs associated with our incentive compensation plan, share compensation expenses, legal and accounting fees, travel and client entertainment, fees relating to our letter of credit facilities, information technology, occupancy and other general operating expenses.
Critical Accounting Policies and Estimates
See Note 2 of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of our significant accounting and reporting policies.
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions. We believe the accounting policies that require the most significant judgments and estimations by management are: (1) premium revenue recognition including evaluation of risk transfer, (2) loss and loss adjustment expense reserves, and (3) fair value measurements related to our investments. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.
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Premium Revenue Recognition including evaluation of Risk Transfer
For each contract that we write, we estimate the ultimate premiums for the entire contract period and record this estimate at the inception of the contract, to the extent the amount of written premium is estimable. For contracts where the full written premium is not estimable at inception, we record written premium for the portion of the contract period for which the amount is estimable. These estimates are based primarily on information in the underlying contracts as well as information provided by our clients and/or brokers. See Note 2 of the notes to our condensed consolidated financial statements for additional information on premium revenue recognition.
Changes in premium estimates are expected and may result in adjustments in any reporting period. These estimates change over time as additional information regarding the underlying business volume is obtained. Along with uncertainty regarding the underlying business volume, our contracts also contain a number of contractual features that can significantly impact the amount of premium that we ultimately recognize. These include commutation provisions, multi-year contracts with cancellation provisions and provisions to return premium at the expiration of the contract in certain circumstances. In certain contracts, these provisions can be exercised by the client, in some cases provisions can be exercised by us and in other cases by mutual consent. In addition, we write a small number of large contracts and the majority of our property and casualty reinsurance segment premiums written to date has been quota share business. As a result, we may be subject to greater volatility around our premium estimates compared to other property and casualty companies. We continuously monitor the premium estimate of each of our contracts considering the cash premiums received, reported premiums, discussions with our clients regarding their premium projections as well as evaluating the potential impact of contractual features. Any subsequent adjustments arising on such estimates are recorded in the period in which they are determined.
Changes in premium estimates do not necessarily result in a direct impact to net income (loss) or shareholders’ equity since changes in premium estimates do not necessarily impact the amount of net premiums earned at the time of the premium estimate change and would generally be offset by pro rata changes in acquisition costs and net loss and loss adjustment expenses.
During the three months ended September 30, 2014, we recorded $(8.8) million (2013 - $(7.5) million) of changes in premium estimates on prior years' contracts. During the nine months ended September 30, 2014, we recorded $(5.9) million (2013 - $(28.6) million) of changes in premium estimates on prior years' contracts. There was minimal impact on net income (loss) from these changes in premium estimates for the three and nine months ended September 30, 2014 and 2013. The 2014 changes in premium estimates were primarily due to clients writing less business than initially expected. The 2013 changes in premium estimates were primarily due to return premiums on contracts that expired in 2013 and that included a contractual provision to return the unearned premiums at expiration.
Determining whether or not a reinsurance contract meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to reporting premiums written and is based, in part, on the use of actuarial and pricing models and assumptions and evaluating contractual features that could impact the determination of whether a contract meets risk transfer. If we determine that a reinsurance contract does not transfer sufficient risk, we use deposit accounting. See Note 11 of the notes to our condensed consolidated financial statements for additional information on deposit contracts entered into to date.
Loss and Loss Adjustment Expense Reserves
Our loss and loss adjustment expense reserves include case reserves and reserves for losses incurred but not yet reported (“IBNR reserves”). Case reserves are established for losses that have been reported, but not yet paid, based on loss reports from brokers and ceding companies. IBNR reserves represent the estimated loss and loss adjustment expenses that have been incurred by insureds and reinsureds but not yet reported to the insurer or reinsurer, including unknown future developments on loss and loss adjustment expenses which are known to us. IBNR reserves are established by management based on actuarially determined estimates of ultimate loss and loss adjustment expenses.
Inherent in the estimate of ultimate loss and loss adjustment expenses are expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. Accordingly, ultimate loss and loss adjustment expenses may differ materially from the amounts recorded in the financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as
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necessary. Such adjustments, if any, are recorded in the condensed consolidated statement of income (loss) in the period in which they become known.
We perform an actuarial projection of our reserves quarterly and have a third-party actuarial review performed annually. All reserves are estimated on an individual contract basis; there is no aggregation of contracts for projection of ultimate loss or reserves.
We initially reserve every individual contract to the expected loss and loss expense ratio in the pricing analysis. As loss information is received from the cedents, we incorporate other actuarial methods in our projection of ultimate losses and, hence, reserves. In our pricing analysis, we typically utilize a significant amount of information unique to the individual client and, when necessary, supplement the analysis with industry data. Industry data primarily takes the form of paid and incurred development patterns from statutory financial statements and statistical agencies. For our actuarial reserve projections, the relevant information we receive from our reinsurance clients include premium estimates, paid loss and loss adjustment expenses and case reserves. We review the data for reasonableness and research any anomalies. On each contract, we compare the expected paid and incurred amounts at each quarter-end with actual amounts reported. We also compare premiums received with projected premium receipts at each quarter end.
There is a time lag between when a covered loss event occurs and when it is actually reported to our cedents. The actuarial methods that we use to estimate losses have been designed to address this lag in loss reporting. There is also a time lag between reinsurance clients paying claims, establishing case reserves and re-estimating their reserves, and notifying us of the payments and/or new or revised case reserves. This reporting lag is typically 60 to 90 days after the end of a reporting period, but can be longer in some cases. We use techniques that adjust for this type of lag. While it would be unusual to have lags that extend beyond 90 days, our actuarial techniques are designed to adjust for such a circumstance.
The principal actuarial methods (and associated key assumptions) we use to perform our quarterly loss reserve analysis may include one or more of the following methods:
A Priori Loss Ratio Method. To estimate ultimate losses under the a priori loss ratio method, we multiply earned premiums by an expected loss ratio. The expected loss ratio is selected as part of the pricing and utilizes individual client data, supplemented by industry data where necessary. This method is often useful when there is limited historical data due to few losses being incurred.
Paid Loss Development Method. This method estimates ultimate losses by calculating past paid loss development factors and applying them to exposure periods with further expected paid loss development. The paid loss development method assumes that losses are paid at a rate consistent with the historical rate of payment. It provides an objective test of reported loss projections because paid losses contain no reserve estimates. For some lines of business, claim payments are made slowly and it may take many years for claims to be fully reported and settled.
Incurred Loss Development Method. This method estimates ultimate losses by using past incurred loss development factors and applying them to exposure periods with further expected incurred loss development. Since incurred losses include payments and case reserves, changes in both of these amounts are incorporated in this method. This approach provides a larger volume of data to estimate ultimate losses than paid loss methods. Thus, incurred loss patterns may be less varied than paid loss patterns, especially for coverages that have historically been paid out over a long period of time but for which claims are incurred relatively early and case loss reserve estimates established.
Bornhuetter-Ferguson Paid and Incurred Loss Methods. These methods are a weighted average of the a priori loss ratio and the relevant development factor method. The weighting between the two methods depends on the maturity of the business. This means that for the more recent years a greater weight is placed on the a priori loss ratio, while for the more mature years a greater weight is placed on the development factor methods. These methods avoid some of the distortions that could result from a large development factor being applied to a small base of paid or incurred losses to calculate ultimate losses. This method will react slowly if actual paid or incurred loss experience develops differently than historical paid or incurred loss experience because of major changes in rate levels, retentions or deductibles, the forms and conditions of coverage, the types of risks covered or a variety of other factors.
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IBNR to Outstanding Ratio Method. This method is used in selected cases typically for very mature years that still have open claims. This method assumes that the estimated future loss development is indicated by the current level of case reserves.
Key to the projection of ultimate loss is the amount of credibility or weight assigned to each actuarial method. Each method has advantages and disadvantages, and those can change depending on numerous factors including the reliability of the underlying data. For most actuaries, the selection and weighting of the projection methods is a highly subjective process. In order to achieve a desirable amount of consistency from study to study and between contracts, we have implemented a weighting scheme that incorporates numerous “rules” for the weighting of actuarial methods. These rules attempt to effectively codify the judgmental process used for selecting weights for the various methods. There can be extenuating circumstances where the rules would be modified for a specific reinsurance contract; examples would include a large market event or new information on historical years that may cause us to increase our a priori loss ratio.
As part of our quarterly reserving process, loss-sensitive contingent expenses (e.g., profit commissions, sliding-scale ceding commissions, etc.) are calculated on an individual contract basis. These expense calculations are based on the updated ultimate loss estimates derived from our quarterly reserving process.
Our reserving methodologies use a loss reserving model that calculates a point estimate for our ultimate losses. Although we believe that our assumptions and methodologies are reasonable, we cannot be certain that our ultimate payments will not vary, potentially materially, from the estimates that we have made.
We do not produce a range of IBNR reserves. However, a 10% increase in IBNR reserves would translate into a 0.9% decrease in total shareholders’ equity as of September 30, 2014 and a 0.6% decrease in total shareholders’ equity as of December 31, 2013.
Fair value measurements
Our investments are managed by Third Point LLC and are carried at fair value. Our investment manager, Third Point LLC, has a formal valuation policy that sets forth the pricing methodology for investments to be used in determining the fair value of each security in our portfolio. The valuation policy is updated and approved at least on an annual basis by Third Point LLC’s valuation committee (the “Committee”), which is comprised of officers and employees who are senior business management personnel of Third Point LLC. The Committee meets on a monthly basis. The Committee’s role is to review and verify the propriety and consistency of the valuation methodology to determine the fair value of investments. The Committee also reviews any due diligence performed and approves any changes to current or potential external pricing vendors.
Securities and commodities listed on a national securities or commodities exchange or quoted on NASDAQ are valued at their last sales price as of the last business day of the period. Listed securities with no reported sales on such date and over-the-counter (“OTC”) securities are valued at their last closing bid price if held long by us, and last closing ask price if held short by us.
Private securities are not registered for public sale and are carried at an estimated fair value at the end of the period, as determined by Third Point LLC. Valuation techniques, used by Third Point LLC, may include market approach, last transaction analysis, liquidation analysis and/or using discounted cash flow models where the significant inputs could include but are not limited to additional rounds of equity financing, financial metrics such as revenue multiples or price-earnings ratio, discount rates and other factors. In addition, we or Third Point LLC may employ third party valuation firms to conduct separate valuations of such private securities. The third party valuation firms provide us or Third Point LLC with a written report documenting their recommended valuation as of the determination date for the specified investments.
Due to the inherent uncertainty of valuation for private securities, the estimated fair value may differ materially from the values that would have been used had a ready market existed for these investments. The value at which these securities could actually be sold or settled with a willing buyer or seller may differ from our estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.
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Our derivatives are recorded at fair value. Third Point LLC values exchange-traded derivative contracts at their last sales price on the exchange where it is primarily traded. OTC derivatives, which include swap, option, swaption, forward, future and contract for differences, are valued by industry recognized pricing vendors when available; otherwise, fair values are obtained from broker quotes that are based on pricing models that consider the time value of money, volatility, and the current market and contractual prices of the underlying financial instruments.
As an extension of our underwriting activities, the Catastrophe Reinsurer has sold derivative instruments that provide reinsurance-like protection to third parties for specific loss events associated with certain lines of business. These derivatives are recorded in the condensed consolidated balance sheets at fair value, with changes in the fair value of these derivatives recorded in net investment income in the condensed consolidated statements of income (loss). These contracts are valued on the basis of models developed by us, which approximates fair value.
In the second quarter of 2014, the Catastrophe Reinsurer purchased a catastrophe bond. This catastrophe bond is recorded in the condensed consolidated balance sheet at fair value, with changes in the fair value recorded in net investment income in the condensed consolidated statements of income (loss). This catastrophe bond is valued using the average of the bids from a minimum of two broker-dealers or other market makers.
We also have derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value with changes in fair value of the embedded derivative reported in net income (loss). Our embedded derivatives relate to interest crediting features in certain reinsurance and deposit contracts that vary based on the returns on our investments managed by Third Point LLC. We determine the fair value of the embedded derivatives using models developed internally, which approximates fair value.
Our holdings in asset-backed securities (“ABS”) are substantially invested in residential mortgage-backed securities (“RMBS”). The balance of our holdings in ABS was in commercial mortgage-backed securities, collateralized debt obligations and student loan asset-backed securities. These investments are valued using dealer quotes or recognised third-party pricing vendors. All of these classes of ABS are sensitive to changes in interest rates and any resulting change in the rate at which borrowers sell their properties, refinance, or otherwise pre-pay their loans. As an investor in these classes of ABS, we may be exposed to the credit risk of underlying borrowers not being able to make timely payments on loans or the likelihood of borrowers defaulting on their loans. In addition, we may be exposed to significant market and liquidity risks.
We value our investments in affiliated investment funds at fair value, which is an amount equal to the sum of the capital account in the limited partnership generally determined from financial information provided by the investment manager of the investment funds. The resulting net gains or net losses are reflected in the condensed consolidated statements of income (loss).
The fair values of investments are estimated using prices obtained from third-party pricing services, whe n available. However, situations may arise where we believe that the fair value provided by the third-party pricing service does not represent current market conditions. In those situations, Third Point LLC may use dealer quotes to value the investments. For securities that we are unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from Third Point LLC.
We perform several processes to ascertain the reasonableness of the valuation of all of our investments comprising our investment portfolio, including securities that are categorized as Level 2 and Level 3 within the fair value hierarchy. These processes include (i) obtaining and reviewing weekly and monthly investment portfolio reports from Third Point LLC, (ii) obtaining and reviewing monthly NAV and investment return reports received directly from our third-party fund administrator which are compared to the reports noted in (i), and (iii) monthly update discussions with Third Point LLC regarding the investment portfolio, including, their process for reviewing and validating pricing obtained from outside service providers.
For the nine months ended September 30, 2014 and 2013, there were no changes in the valuation techniques as they relate to the above.
Monetary assets and liabilities denominated in foreign currencies are remeasured at the closing rates of exchange as of September 30, 2014. Transactions during the period are translated at the rate of exchange prevailing on the date
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of the transaction. We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments, dividends and interest from the fluctuations arising from changes in fair values of securities and derivatives held. Periodic payments received or paid on swap agreements are recorded as realized gain or loss on investment transactions. Such fluctuations are included within net investment income in the condensed consolidated statement of income (loss).
U.S. GAAP disclosure requirements establish a framework for measuring fair value, including a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The key inputs for corporate, government and sovereign bond valuation are coupon frequency, coupon rate and underlying bond spread. The key inputs for asset-backed securities are yield, probability of default, loss severity and prepayment.
See Note 5 to the notes to our condensed consolidated financial statements for additional information on the framework for measuring fair value established by U.S. GAAP disclosure requirements.
Business Outlook
The reinsurance markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, as defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been impacted by several factors, including industry losses, the impact of catastrophes, changes in legal and regulatory guidelines, new entrants, investment results including interest rate levels and the credit ratings and financial strength of competitors.
While management believes pricing remains adequate for the types of business on which we focus, there is significant underwriting capacity currently available. As a result, we believe market conditions will remain challenging in the near term and may worsen. The segment with the greatest pricing pressure is property catastrophe reinsurance due to an influx of capacity from collateralized reinsurance and other insurance-linked securities vehicles and the absence of significant catastrophe events during 2013 and 2014 to date. We believe that pricing for property catastrophe reinsurance treaties that renewed in 2014 dropped by more than 10% on average. Pricing for other types of traditional reinsurance, which are less attractive to collateralized reinsurance vehicles due to their longer loss development and claims payment periods, is also under pressure but not to the same degree as property catastrophe reinsurance. However, new capital targeting these longer tail lines of business is entering the market through the formation of new rated vehicles with similar business models to ours.
Our direct exposure to falling property catastrophe prices is contained within the Catastrophe Fund and limited to our $58.6 million (December 31, 2013 - $54.8 million) investment in the Catastrophe Fund and the contingent profit commission we receive from managing the Catastrophe Fund, which had assets under management of $117.9 million as of September 30, 2014 (December 31, 2013 - $104.0 million). The expected overall impact on our results, however, is tempered by the Catastrophe Fund’s portfolio construction and focus on smaller, regional companies, which have experienced more modest price decreases. Given current market conditions, we expect to limit the size of the Catastrophe Fund to ensure we can continue to profitably deploy the funds under management until market conditions improve.
In non-catastrophe lines of business, we focus on segments and clients where we believe we benefit from relatively more attractive pricing opportunities due to the strength of our relationships, the tailored nature of our reinsurance solutions or an acute need for reinsurance capital as result of a client’s growth or historically poor performance. Most of our senior management team have spent decades within the reinsurance market and as they cultivate their relationships with intermediaries and reinsurance buyers, we are seeing an increased flow of submissions
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in the lines and types of reinsurance that we target. Although we are typically presented by brokers with proposed structures on syndicated deals, we seek to customize the proposed solution for the client while improving our risk and return profile and establishing our position as the lead reinsurer in the transaction. We also look for non-syndicated opportunities where a highly customized solution is needed. These may take the form of loss portfolio transfers or adverse development reserve covers where clients seek capital relief and enhanced investment returns on the reserves.
Consolidated Results of Operations—Three and nine months ended September 30, 2014 and 2013.
For the three months ended September 30, 2014, our net income decreased by $52.6 million, or 112.9%, to a net loss of $6.0 million, compared to net income of $46.6 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, our net income decreased by $82.1 million, or 55.8%, to $65.1 million, compared to net income of $147.2 million for the nine months ended September 30, 2013.
The changes in net income (loss) for the three and nine months ended September 30, 2014 compared to the prior year periods were primarily due to the following:

• | For the three months ended September 30, 2014, we recorded net investment income of $1.6 million compared to $54.6 million for the three months ended September 30, 2013. The return on investments managed by Third Point LLC was (0.04)% for the three months ended September 30, 2014 compared to 4.3% for the three months ended September 30, 2013. For the nine months ended September 30, 2014, we recorded net investment income of $92.1 million compared to $168.8 million for the nine months ended September 30, 2013. The return on investments managed by Third Point LLC was 5.5% for the nine months ended September 30, 2014 compared to 16.9% for the nine months ended September 30, 2013.

• | The net underwriting loss from our property and casualty reinsurance segment for the three months ended September 30, 2014 was $1.8 million, compared to a net underwriting loss of $4.9 million for the three months ended September 30, 2013. The net underwriting loss from our property and casualty reinsurance segment for the nine months ended September 30, 2014 was $9.0 million, compared to a net underwriting loss of $12.1 million for the nine months ended September 30, 2013. The combined ratio for the three months ended September 30, 2014 was 101.7% compared to 107.9% for the three months ended September 30, 2013. The combined ratio for the nine months ended September 30, 2014 was 103.6% compared to 107.7% for the nine months ended September 30, 2013. The combined ratios improved in each case primarily due to a lower general and administrative expense ratio compared to the prior year periods on proportionately higher net premiums earned.

• | Our Catastrophe Risk Management segment contributed net income of $3.6 million for the three months ended September 30, 2014 compared to net income of $2.7 million for the three months ended September 30, 2013. This segment contributed net income of $3.8 million for the nine months ended September 30, 2014 compared to net income of $2.6 million for the nine months ended September 30, 2013.

Segment Results - Three and nine months ended September 30, 2014 and 2013
The determination of our business segments is based on the manner in which management monitors the performance of our operations. Our business currently comprises two operating segments—Property and Casualty Reinsurance and Catastrophe Risk Management. We have also identified a corporate function that includes net investment income on capital and general and administrative expenses related to our corporate activities.
Effective January 1, 2014, we modified the presentation of our operating segments to allocate net investment income from float to the property and casualty reinsurance segment. The property and casualty reinsurance operations generate excess cash flows, or float, which the Company tracks in managing the business. The Company considers net investment income on float in evaluating the overall contribution of the property and casualty reinsurance segment. Prior period segment results have been adjusted to conform to this presentation.
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Property and Casualty Reinsurance
Gross premiums written. Gross premiums written increased by $81.2 million, or 185.8%, to $124.9 million for the three months ended September 30, 2014 from $43.7 million for three months ended September 30, 2013. Gross premiums written increased by $116.3 million, or 50.3%, to $347.5 million for the nine months ended September 30, 2014 from $231.2 million for nine months ended September 30, 2013.
We began underwriting on January 1, 2012 and continue to cultivate our underwriting relationships with intermediaries and reinsurance buyers and, as a result, submission flow remains strong. We write a small number of large contracts so individual renewals or new business can have a significant impact on premiums recognized in a period. In addition, our contracts are subject to significant judgment in the amount of premiums that we expect to recognize. Changes in premium estimates are recorded in the period they are determined and can be significant. We also offer customized solutions to our clients, including adverse development covers, on which we will not have a regular renewal opportunity. Furthermore, we record gross premiums written and earned for adverse development covers, which are considered retroactive reinsurance contracts, at the inception of the contract. This premium recognition policy can further distort the comparability of premiums earned in a period and trends.
As a result of these factors, we may experience volatility in the amount of gross premiums written and earned and period to period comparisons may not be meaningful.
The following table provides a breakdown of our property and casualty reinsurance segment’s gross premiums written by line of business for the three and nine months ended September 30, 2014 and 2013:

| For the three months ended
| September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Property | $ | (2,810 | ) |  | (2.2 | )% |  | $ | (1,603 | ) |  | (3.7 | )%
Casualty | 128,469 |  |  | 102.8 | % |  | 9,426 |  |  | 21.6 | %
Specialty | (728 | ) |  | (0.6 | )% |  | 35,891 |  |  | 82.1 | %
| $ | 124,931 |  |  | 100.0 | % |  | $ | 43,714 |  |  | 100.0 | %
| For the nine months ended
| September 30, 2014 |  | September 30, 2013
| ($ in thousands)
Property | $ | 78,577 |  |  | 22.6 | % |  | $ | 26,635 |  |  | 11.5 | %
Casualty | 244,235 |  |  | 70.3 | % |  | 111,021 |  |  | 48.0 | %
Specialty | 24,683 |  |  | 7.1 | % |  | 93,573 |  |  | 40.5 | %
| $ | 347,495 |  |  | 100.0 | % |  | $ | 231,229 |  |  | 100.0 | %

The increase in gross premiums written for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was affected by the following factors:
Factors resulting in increases:

• | We wrote $58.0 million of new casualty business for the three months ended September 30, 2014.

• | We accounted for $76.5 million of premiums due to one contract that was canceled and re-written in the three months ended September 30, 2014 with an increased participation and extended coverage period.

Factors resulting in decreases:

• | We accounted for $27.7 million of premiums on one contract in the three months ended September 30, 2013 that did not renew in the three months ended September 30, 2014 because the contract was not subject to renewal.

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• | We accounted for $24.3 million of premiums in the three months ended September 30, 2013 that did not have a comparable renewal date in the current year period.

• | Changes in premium estimates related to prior years' contracts were $(8.8) million for the three months ended September 30, 2014 compared to $(7.5) million for the three months ended September 30, 2013. The changes in premium estimates in the three months ended September 30, 2014 were primarily due to clients writing less business than expected at inception of the applicable contracts.

The increase in gross premiums written for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was affected by the following factors:
Factors resulting in increases:

• | We wrote $132.3 million of new business for the nine months ended September 30, 2014, consisting of $92.1 million of new casualty business, $24.6 million of new specialty business and $15.6 million of new property business.

• | We accounted for $76.5 million of premiums due to one contract that was canceled and re-written in the three months ended September 30, 2014 with an increased participation and extended coverage period.

• | Changes in renewal premiums during the nine months ended September 30, 2014 resulted in increased premiums of $26.6 million. The increase was primarily related to contracts with respect to which we increased our participations compared to the prior year.

• | Changes in premium estimates related to prior years' contracts were $(5.9) million for the nine months ended September 30, 2014 compared to $(28.6) million for the nine months ended September 30, 2013. The changes in premium estimates in the nine months ended September 30, 2104 were primarily due to clients writing less business than initially expected whereas the 2013 changes in premium estimates were primarily due to return premiums on expired contracts that included a contractual provision to return the unearned premiums at expiration.

Factors resulting in decreases:

• | We did not renew contracts accounting for $83.6 million of premiums for the nine months ended September 30, 2013, $42.3 million of which was not renewed as a result of pricing and other changes in reinsurance contract structure, terms and conditions and $41.3 million of which was not subject to renewal.

• | We accounted for $58.3 million of premium in the nine months ended September 30, 2013 that did not renew in the nine months ended September 30, 2014, primarily due to multi-year contracts written which were not subject to renewal in the comparable current year period.

Premiums ceded. Premiums ceded for the three and nine months ended September 30, 2014 were $0.2 million. We purchased one retrocessional protection in the three months ended September 30, 2014 to limit our catastrophe risk on one contract. The 2013 premiums ceded of $10.0 million related to the purchase of retrocessional protection related to our one assumed crop contract that did not renew in 2014.
Net premiums earned. Net premiums earned for the three months ended September 30, 2014 increased $39.7 million, or 64.3%, to $101.5 million from $61.8 million for the three months ended September 30, 2013. Net premiums earned for the nine months ended September 30, 2014 increased $95.4 million, or 61.2%, to $251.3 million from $155.8 million for the nine months ended September 30, 2013. The increase for the three and nine months ended September 30, 2014 reflects net premiums earned on a larger in-force underwriting portfolio, including new business written, compared to the three and nine months ended September 30, 2013.
Net loss and loss adjustment expenses. Net loss and loss adjustment expenses for the three months ended September 30, 2014 were $60.1 million, or 59.2% of net premiums earned, compared to $39.3 million, or 63.7% of net premiums earned for the three months ended September 30, 2013. Net loss and loss adjustment expenses for the nine months ended September 30, 2014 was $150.8 million, or 60.0% of net premiums earned, compared to $103.3 million, or 66.3% of net premiums earned, for the nine months ended September 30, 2013.
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The reinsurance contracts that we write have a wide range of initial loss ratio estimates. As a result, our net loss and loss expense ratio can vary significantly from period to period depending on the mix of business. For example, our property quota share contracts have a lower initial loss ratio compared to other casualty and specialty lines of business. In general, our contracts have similar expected composite ratios (combined ratio before general and administrative expenses); contracts with higher initial loss ratio estimates have lower acquisition cost ratios and contracts with lower initial loss ratios have higher acquisition cost ratios. Retroactive reinsurance contracts have a higher initial loss ratio since the premiums are generally based on the net loss and loss adjustment expense reserves and do not include acquisition related and other expenses. In addition, we record the gross premiums written and earned and the net losses as incurred for retroactive reinsurance contracts at the inception of the contract, which can also impact the mix of premiums earned in a particular period.
We recorded $0.2 million of net favorable prior years' reserve development for the three months ended September 30, 2014 primarily due to favorable loss experience on certain property and auto contracts. There was insignificant net reserve development for the three months ended September 30, 2013.
We recorded $0.9 million of net adverse prior years' reserve development for the nine months ended September 30, 2014 . The net adverse prior years' reserve development was primarily due to net adverse development of $2.5 million on our crop contract partially offset by favorable development on a variety of contracts in our property and auto lines of business. We did not renew our crop contract in 2014. There was insignificant net reserve development for the nine months ended September 30, 2013.
For the nine months ended September 30, 2014, we also recorded an increase of $0.6 million in loss and loss adjustment expense reserves due to increases in premium estimates on prior year contracts. For the nine months ended September 30, 2013, we recorded a decrease of $3.9 million in loss and loss adjustment expense reserves due to decreases in premium estimates on prior years' contracts primarily related to one crop contract. The loss and loss adjustment expense reserves and premium adjustments generally offset resulting in minimal impact to net underwriting loss for the three and nine months ended September 30, 2014 and 2013.
Acquisition costs. Acquisition costs include commissions, brokerage and excise taxes. Acquisition costs are presented net of commissions ceded under reinsurance contracts. Acquisition costs for the three months ended September 30, 2014 were $37.6 million, or 37.0% of net premiums earned, compared to $20.5 million, or 33.3% of net premiums earned, for the three months ended September 30, 2013. Acquisition costs for the nine months ended September 30, 2014 were $92.5 million, or 36.8% of net premiums earned, compared to $48.4 million, or 31.0% of net premiums earned, for the nine months ended September 30, 2013. The acquisition cost ratio for the three and nine months ended September 30, 2014 was higher than the prior year periods due to a change in business mix.
The reinsurance contracts that we write have a wide range of acquisition cost ratios. As a result, our acquisition cost ratio can vary significantly from period to period depending on the mix of business. For example, our property quota share contracts have a higher initial acquisition cost ratio compared to other casualty and specialty lines of business due to inuring catastrophe reinsurance which increases the acquisition cost ratio on those contracts. Our property quota share contracts are structured to limit the amount of property catastrophe exposure we assume. As a result, inuring catastrophe reinsurance for the property catastrophe exposure reduces the amount of premium we assume relative to the acquisition costs or is an additional component of the acquisition costs. In general, our contracts have similar expected composite ratios (combined ratio before general and administrative expenses); therefore, contracts with higher initial loss ratio estimates have lower acquisition cost ratios and contracts with lower initial loss ratios have higher acquisition cost ratios. Retroactive reinsurance contracts generally have a low initial acquisition cost ratio. In addition, we record the gross premiums written and earned for retroactive reinsurance contracts at the inception of the contract, which can also impact the mix of premiums earned in a particular period. Furthermore, a number of our contracts have a sliding scale or profit commission feature that will vary depending on the expected loss expense for the contract. As a result, changes in estimates of loss and loss adjustment expenses on a contract can result in changes in the sliding scale commissions and a contract's overall acquisition cost ratio.
General and administrative expenses. General and administrative expenses for the three months ended September 30, 2014 were $5.6 million, or 5.5% of net premiums earned, compared to $6.7 million, or 10.9% of net premiums earned, for the three months ended September 30, 2013. The decrease in general and administrative expenses
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for the three months ended September 30, 2014 compared to prior year was primarily due to lower stock compensation expenses incurred in the current year period compared to prior year. Stock compensation expense was higher in the three months ended September 30, 2013 as a result of the performance condition having been met as a result of the IPO. The general and administrative expense ratio is lower due to lower general administrative expenses and proportionately higher net premiums earned compared to the prior year period.
General and administrative expenses for the nine months ended September 30, 2014 were $17.0 million, or 6.8% of net premiums earned, compared to $16.3 million, or 10.4% of net premiums earned, for the nine months ended September 30, 2013. The increase in general and administrative expenses for the nine months ended September 30, 2014 compared to the prior year period was primarily due to increased headcount and related employee costs partially offset by lower stock compensation expense as a result of the IPO in the prior year period. Although general and administrative expenses increased compared to the prior year period, the general and administrative expense ratio is lower due to proportionately higher net premiums earned compared to the prior year period.
Other expenses. Other expenses consist of deposit liabilities and reinsurance contracts investment expense and changes in fair value of embedded derivatives in deposit and reinsurance contracts. Other expenses for the three months ended September 30, 2014 were $3.0 million compared to $1.2 million for the three months ended September 30, 2013. Other expenses for the nine months ended September 30, 2014 were $4.8 million compared to $2.7 million for the nine months ended September 30, 2013. The increase in other expenses in the current year periods compared to prior year periods is primarily due to an increase in one deposit liability contract due to an increase in the underlying estimate of loss reserves for the contract.
Catastrophe Risk Management
The Catastrophe Reinsurer wrote no business before January 1, 2013. From January 1, 2013, the underwriting results of the Catastrophe Reinsurer as well as results of the Catastrophe Fund, the entities for which the Catastrophe Fund Manager underwrites and manages catastrophe risk, are captured with the Catastrophe Fund Manager in this segment.
Gross premiums written. Gross premiums written were $1.5 million for the three months ended September 30, 2014 compared to $1.7 million for the three months ended September 30, 2013. Gross premiums written were $12.0 million for the nine months ended September 30, 2014 compared to $8.4 million for the nine months ended September 30, 2013.
Net premiums earned. Net premiums earned were $7.5 million for the three months ended September 30, 2014 compared to $4.6 million for the three months ended September 30, 2013. Net premiums earned were $9.7 million for the nine months ended September 30, 2014 compared to $6.3 million for the nine months ended September 30, 2013.
Net investment income. Net investment income was $0.9 million for the three months ended September 30, 2014 compared to $2.1 million for the three months ended September 30, 2013. Net investment income was $0.9 million for the nine months ended September 30, 2014 compared to $3.2 million for the nine months ended September 30, 2013. The net investment income for the three and nine months ended September 30, 2013 included $2.1 million and $3.2 million, respectively, related to gains on derivative reinsurance contracts written by the Catastrophe Reinsurer.
Net loss and loss adjustment expenses. There were no property catastrophe losses impacting our contracts for the three and nine months ended September 30, 2014. Net loss and loss adjustment expenses were $nil and $0.4 million for the three and nine months ended September 30, 2013, respectively, related to tornadoes, hail and severe thunderstorms that occurred in the United States in 2013.
Acquisition costs. Acquisition costs include commissions, brokerage and excise taxes. Acquisition costs for the three months ended September 30, 2014 were $0.7 million compared to $0.6 million for the three months ended September 30, 2013. Acquisition costs for the nine months ended September 30, 2014 were $0.9 million compared to $0.8 million for the nine months ended September 30, 2013.
General and administrative expenses. General and administrative expenses for the three months ended September 30, 2014 were $0.6 million compared to $0.9 million for the three months ended September 30, 2013. General and administrative expenses for the nine months ended September 30, 2014 were $2.2 million compared to
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$2.7 million for the nine months ended September 30, 2013. General and administrative expenses consist of costs associated with the employee leasing agreement, catastrophe loss modeling and legal and accounting expenses.
Investment results
For the three months ended September 30, 2014, we recorded net investment income of $1.6 million, compared to $54.6 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, we recorded net investment income of $92.1 million, compared to $168.8 million for the nine months ended September 30, 2013.
The primary driver of our net investment income is the returns generated by our separate account managed by our investment manager, Third Point LLC. The return on investments managed by Third Point LLC was (0.04)% and 5.5% for the three and nine months ended September 30, 2014, respectively, compared to the S&P 500 index's return of 1.1% and 8.3%, respectively. In the previous year, our investment return was 4.3% and 16.9% for the three and nine months ended September 30, 2013, respectively, while the S&P 500 index increased by 5.2% and 19.8%, respectively. The following is a summary of the net investment return on investments managed by Third Point LLC by investment strategy:

| For the three months ended September 30, |  | For the nine months ended September 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Long/short equities | 0.3 | % |  | 3.5 | % |  | 2.0 | % |  | 11.9 | %
Asset-backed securities | 0.5 | % |  | 0.2 | % |  | 2.8 | % |  | 3.1 | %
Corporate credit | (0.7 | )% |  | 0.4 | % |  | 1.1 | % |  | 1.0 | %
Macro and other | (0.1 | )% |  | 0.2 | % |  | (0.4 | )% |  | 0.9 | %
| (0.04 | )% |  | 4.3 | % |  | 5.5 | % |  | 16.9 | %
S&P 500 | 1.1 | % |  | 5.2 | % |  | 8.3 | % |  | 19.8 | %

The net investment results for the quarter ended September 30, 2014 reflect modest gains in our equities and asset-backed securities offset by losses in corporate credit primarily from losses in a single investment. Performance in the investment portfolio for the nine month period was driven primarily by positive returns in equities as well as both the corporate and structured credit portfolios. Net investment income for nine months ended September 30, 2014 also benefited from higher average investments managed by Third Point LLC compared to the prior year periods due to the net proceeds generated by Third Point Re’s IPO, float contributed by its reinsurance operations and net investment income. We mark to market our entire investment portfolio managed by Third Point LLC and, therefore, our investment results can vary significantly from period to period.
All of our assets managed by Third Point LLC are held in a separate account and managed under an investment management agreement whereby Third Point Advisors LLC, an affiliate of Third Point LLC, has a non-controlling interest in the assets held in the separate account. The value of the non-controlling interest is equal to the amounts invested by Third Point Advisors LLC, plus performance fees paid by us to Third Point Advisors LLC and investment gains and losses thereon.
Our investment manager, Third Point LLC, manages several funds and may manage other client accounts besides ours, some of which have, or may have, objectives and investment portfolio compositions similar to ours. Because of the similarity or potential similarity of our investment portfolio to these others, and because, as a matter of ordinary course, Third Point LLC provides its clients, including us, and investors in its main hedge funds with results of their respective investment portfolios following the last day of each month, those other clients or investors indirectly may have material nonpublic information regarding our investment portfolio. To address this issue, and to comply with Regulation FD, we will continue to post on our website under the heading Investment Portfolio Returns located in the Investors section of the website, following the close of trading on the New York Stock Exchange on the last business day of each month, our preliminary monthly investment results for that month, with additional information regarding
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our monthly investment results to be posted following the close of trading on the New York Stock Exchange on the first business day of the following month.
General and administrative expenses related to corporate activities
General and administrative expenses allocated to our corporate function include allocations of payroll and related costs for certain executives and non-underwriting staff that spend a portion of their time on corporate activities. We also allocate a portion of overhead and other related costs based on a headcount analysis. For the three months ended September 30, 2014, general and administrative expenses allocated to the corporate function were $3.9 million compared to $2.2 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, general and administrative expenses allocated to the corporate function were $10.5 million compared to $5.1 million for the nine months ended September 30, 2013. The increase compared to the prior year periods was primarily due to payroll and related expenses as a result of increased headcount and increased legal and other professional advisor expenses as a result of our operating as a public company.
Liquidity and Capital Resources
Our investment portfolio is concentrated in tradeable securities and is marked to market each day. Pursuant to our investment guidelines as specified in our Investment Management Agreement with Third Point LLC, at least 60% of our portfolio must be invested in securities of publicly traded companies and governments of OECD high income countries, asset-backed securities, cash, cash equivalents and gold and other precious metals. We can liquidate all or a portion of our investment portfolio at any time with not less than three days’ notice to pay claims on our reinsurance contracts, and with not less than five days’ notice to pay for expenses, and on not less than 30 days’ notice in order to satisfy a requirement of A.M. Best. Since we do not write excess of loss property catastrophe contracts or other types of reinsurance contracts that are typically subject to sudden, acute, liquidity demands, we believe the liquidity provided by our investment portfolio will be sufficient to satisfy all liquidity requirements.
General
Third Point Reinsurance Ltd. is a holding company and has no substantial operations of its own and has moderate cash needs, most of which are related to the payment of corporate expenses. Its assets consist primarily of its investments in subsidiaries. Third Point Reinsurance Ltd.’s ability to pay dividends or return capital to shareholders will depend upon the availability of dividends or other statutorily permissible distributions from those subsidiaries.
We and our Bermuda subsidiaries are subject to Bermuda regulatory constraints that affect our ability to pay dividends. Under the Companies Act, as amended, a Bermuda company may declare or pay a dividend out of distributable reserves only if it has reasonable grounds for believing that it is, or would after the payment, be able to pay its liabilities as they become due and if the realizable value of its assets would thereby not be less than its liabilities. Under the Insurance Act, Third Point Re, as a Class 4 insurer, is prohibited from declaring or paying a dividend if it is in breach of its minimum solvency margin (“MSM”), enhanced capital ratio (“ECR”) or minimum liquidity ratio or if the declaration or payment of such dividend would cause such a breach. Where Third Point Re, as a Class 4 insurer, fails to meet its MSM or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the Bermuda Monetary Authority ("BMA").
In addition, Third Point Re, as a Class 4 insurer, is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files (at least seven days before payment of such dividends) with the BMA an affidavit signed by at least two directors (one of whom must be a Bermuda resident director if any of the insurer’s directors are resident in Bermuda) and the principal representative stating that it will continue to meet its solvency margin and minimum liquidity ratio.
As of September 30, 2014, Third Point Re could pay dividends in to the Company of approximately $326.1 million without providing an affidavit to the BMA.
As of September 30, 2014, Third Point Re was rated A- (Excellent) with a stable outlook by A.M. Best. Insurer financial strength ratings are based upon factors relevant to policyholders. The rating reflects A.M. Best's opinion of
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Third Point Re's financial strength, managerial experience, operating performance and ability to meet its obligations and is not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our common shares. Third Point Re's A.M. Best rating could be revised or revoked at the sole discretion of the rating agency. A downgrade to Third Point Re's rating below A- (Excellent) or a withdrawal could severely limit and/or prevent us from writing any new reinsurance contracts, which would significantly and negatively impact our business.
Liquidity and Cash Flows
Our sources of funds primarily consist of premiums written, investment income and proceeds from sales and redemptions of investments. Cash is used primarily to pay loss and loss adjustment expenses, reinsurance premiums, acquisition costs and general and administrative expenses and to purchase investments.
Our cash flows from operations generally represent the difference between: (l) premiums collected and investment earnings realized and (2) loss and loss expenses paid, reinsurance purchased and underwriting and other expenses paid. Excluding investment earnings realized from our operating cash flows results in net cash provided by underwriting activities. Cash flows from operations may differ substantially from net income (loss) and may be volatile from period to period depending on the underwriting opportunities available. Due to the nature of our underwriting portfolio, the potential for large claim payments can be substantial and unpredictable and may need to be made within relatively short periods of time. Claims payments can also be made several months or years after premiums are collected.
Cash flows provided by operating activities for the nine months ended September 30, 2014 were $50.2 million compared to cash provided by operating activities of $58.2 million for the nine months ended September 30, 2013. Generally, in a given period, if the net premiums collected are higher than claim payments, acquisition costs and general and administrative expenses paid, cash is generated from our underwriting activities. Excess cash generated by our underwriting activities, or float, is invested by our investment manager, Third Point LLC, as it becomes available.
Cash flows used in investing activities for the nine months ended September 30, 2014 were $65.6 million compared to cash flows used in investment activities of $430.4 million for the nine months ended September 30, 2013. The cash flows used in investment activities primarily reflects investment activities related to our separate account managed by Third Point LLC. The cash flows used in investing activities for the nine months ended September 30, 2013 reflects the investment of the net proceeds from our IPO and the investment of float generated by our reinsurance operations.
Cash flows provided by financing activities for the nine months ended September 30, 2014 were $16.4 million compared to $356.8 million for the nine months ended September 30, 2013. The cash flows from financing activities for the nine months ended September 30, 2014 consisted primarily of an increase in the non-controlling interest in the Catastrophe Fund and an increase in deposit liabilities. The cash flows from financing activities for the nine months ended September 30, 2013 relate primarily to the net proceeds generated by our IPO and an increase in deposit liabilities. The cash flows from financing activities for the nine months ended September 30, 2012 consisted of the receipt of subscriptions receivable, net of costs.
For the period from inception until September 30, 2014, we have had sufficient cash flow from proceeds of our initial capitalization and IPO and from operations to meet our liquidity requirements. We expect that projected operating and capital expenditure requirements for at least the next twelve months will be met by our balance of cash, cash flows generated from underwriting activities and investment income. We may incur indebtedness in the future if we determine that it would be an efficient part of our capital structure.
In addition, we expect that our current capital position and cash flows from operations will provide us with the financial flexibility to execute our strategic objectives. Our ability to generate cash, however, is subject to our performance, general economic conditions, industry trends and other factors. To the extent that existing cash and cash equivalents, investment returns and operating cash flow are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing shareholders may occur. If we raise cash through the issuance of additional indebtedness, we may be subject to additional contractual restrictions on our business. There is no assurance that we would be able to raise the additional funds on favorable terms or at all.
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We do not believe that inflation has had a material effect on our consolidated results of operations to date. The effects of inflation are considered implicitly in pricing our reinsurance contracts. Loss reserves are established to recognize likely loss settlements at the date payment is made. Those reserves inherently recognize the effects of inflation. However, the actual effects of inflation on our results cannot be accurately known until claims are ultimately resolved.
Cash and restricted cash and cash equivalents
Cash and cash equivalents consist of cash held in banks and other short-term, highly liquid investments with original maturity dates of ninety days or less.
Restricted cash and cash equivalents consist of cash held in trust accounts with the Catastrophe Reinsurer, securing collateralized reinsurance contracts written and cash held with brokers securing letters of credit issued under credit facilities.
Letter of Credit Facilities
As of September 30, 2014, we had entered into the following letter of credit facilities, which automatically renew annually unless terminated by either party in accordance with the required notice period:

| Facility |  | Renewal date |  | Notice period (Unused Facility Portion)
| ($ in thousands) |  |  |  |
BNP Paribas | $ | 100,000 |  |  | February 15, 2015 |  | 60 days prior to termination date
Citibank (1) | 250,000 |  |  | January 23, 2015 |  | 90 days prior to termination date
J.P. Morgan | 50,000 |  |  | August 22, 2015 |  | 60 days prior to termination date
| $ | 400,000 |  |  |  |  |

(1) Effective July 9, 2014, we increased our Citibank facility from $150 million to $250 million. All other terms of the facility remained the same.
As of September 30, 2014, $160.1 million (December 31, 2013 - $127.3 million) of letters of credit, representing 40.0% of the total available facilities, had been drawn upon (December 31, 2013 – 42.4% (based on total available facilities of $300 million)). See Note 21 to the notes to our condensed consolidated financial statements for additional information on the letter of credit facilities.
Financial Condition
Shareholders’ equity
As of September 30, 2014, total shareholders’ equity was $1,543.6 million compared to $1,510.4 million as of December 31, 2013. This increase was primarily due to net income of $65.1 million offset by distributions of non-controlling interests of $51.0 million related to the investment joint venture.
Investments
As of September 30, 2014, total cash and net investments managed by Third Point LLC at fair value was $1,711.8 million compared to $1,559.4 million as of December 31, 2013. The increase was due to float $65.0 million generated by our reinsurance operations and net investment income for the nine months ended September 30, 2014.
Contractual Obligations
There have been no material changes to our contractual obligations from our most recent Annual Report on Form 10-K, as filed with the SEC.
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Off-Balance Sheet Commitments and Arrangements
We have no obligations, assets or liabilities, other than those derivatives in our investment portfolio and disclosed in the notes to our condensed consolidated financial statements, which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe we are principally exposed to the following types of market risk:

• | equity price risk;

• | foreign currency risk;

• | interest rate risk;

• | commodity price risk;

• | credit risk; and

• | political risk.

Equity Price Risk
Our investment manager, Third Point LLC, continually tracks the performance and exposures of our entire investment portfolio, each strategy and sector, and selective individual securities. A particular focus is placed on “beta” exposure, which is the portion of the portfolio that is directly correlated to risks and movements of the equity market as a whole (usually represented by the S&P 500 index) as opposed to idiosyncratic risks and factors associated with a specific position. Further, the performance of our investment portfolio has historically been compared to several market indices, including the S&P 500, CS/Tremont Event Driven Index, HFRI Event Driven Index, and others.
As of September 30, 2014, our investment portfolio included long and short equity securities, along with certain equity-based derivative instruments, the carrying values of which are primarily based on quoted market prices. Generally, market prices of common equity securities are subject to fluctuation, which could cause the amount to be realized upon the closing of the position to differ significantly from their current reported value. This risk is partly mitigated by the presence of both long and short equity securities in our investment portfolio. As of September 30, 2014, a 10% decline in the value of all equity and equity-linked derivatives would result in a loss of $109.9 million (December 31, 2013 - $111.5 million), or 6.3% (December 31, 2013 - 7.1%) in the fair value of our total net investments managed by Third Point LLC.
Computations of the prospective effects of hypothetical equity price changes are based on numerous assumptions, including the maintenance of the existing level and composition of investment securities and should not be relied on as indicative of future results.
Foreign Currency Risk
Investments
Third Point LLC continually measures foreign currency exposures in our investment portfolio and compares current exposures to historical movement within the relevant currencies. Within the typical course of business, Third Point LLC may decide to hedge foreign currency risk within our investment portfolio by using short-term forward contracts; however, from time to time Third Point LLC may determine not to hedge based on its views of the likely movements of the underlying currency.
We are exposed to foreign currency risk through cash, forwards, options and investments in securities denominated in foreign currencies. Foreign currency exchange rate risk is the potential for adverse changes in the U.S. dollar value of investments (long and short) and foreign currency derivative instruments, which we employ from both a speculative and risk management perspective, due to a change in the exchange rate of the foreign currency in which cash and financial instruments are denominated. As of September 30, 2014, our total net short exposure to foreign denominated securities represented 1.8% (December 31, 2013 - net short exposure of 6.2%) of our investment portfolio including cash and cash equivalents, was $31.9 million (December 31, 2013 - net short exposure $97.7 million).
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The following table summarizes the net impact that a 10% increase and decrease in the value of the U.S. dollar against select foreign currencies would have had on the value of our investment portfolio as of September 30, 2014 and December 31, 2013:

September 30, 2014 | 10% increase in U.S. dollar |  | 10% decrease in U.S. dollar
Foreign Currency | Change in fair value |  | Change in fair value as % of investment portfolio |  | Change in fair value |  | Change in fair value as % of investment portfolio
| ($ in thousands)
Euro | $ | 733 |  |  | — | % |  | $ | (733 | ) |  | — | %
Japanese Yen | 12 |  |  | — | % |  | (12 | ) |  | — | %
British Pounds | (46 | ) |  | — | % |  | 46 |  |  | — | %
Other | 2,664 |  |  | 0.20 | % |  | (2,664 | ) |  | (0.20 | )%
Total | $ | 3,363 |  |  | 0.20 | % |  | $ | (3,363 | ) |  | (0.20 | )%

December 31, 2013 | 10% increase in U.S. dollar |  | 10% decrease in U.S. dollar
Foreign Currency | Change in fair value |  | Change in fair value as % of investment portfolio |  | Change in fair value |  | Change in fair value as % of investment portfolio
| ($ in thousands)
Euro | $ | 8,873 |  |  | 0.56 | % |  | $ | (8,873 | ) |  | (0.56 | )%
Japanese Yen | 341 |  |  | 0.02 | % |  | (341 | ) |  | (0.02 | )%
British Pound | 783 |  |  | 0.05 | % |  | (783 | ) |  | (0.05 | )%
Other | 631 |  |  | 0.04 | % |  | (631 | ) |  | (0.04 | )%
Total | $ | 10,628 |  |  | 0.67 | % |  | $ | (10,628 | ) |  | (0.67 | )%

Reinsurance contracts
We also have foreign currency exposure related to non-U.S. dollar denominated reinsurance contracts. We wrote non-U.S. dollar denominated reinsurance contracts for the first time in the nine months ended September 30, 2014. Of our gross premiums written for the nine months ended September 30, 2014, $19.5 million, or 5.4%, were written in currencies other than the U.S. dollar. For these contracts, non-U.S. dollar assets generally offset liabilities in the same non-U.S. dollar currencies resulting in minimal net exposure.
Interest Rate Risk
Our investment portfolio includes interest rate sensitive securities, such as corporate and sovereign debt instruments, asset-backed securities (“ABS”), and interest rate options. One key market risk exposure for any debt instrument is interest rate risk. As interest rates rise, the market value of our long fixed-income portfolio falls, and the opposite is also true as interest rates fall. Additionally, some of our corporate and sovereign debt instruments, ABS and derivative investments may also be credit sensitive and their value may indirectly fluctuate with changes in interest rates.
The effects of interest rate movement have historically not had a material impact on the performance of our investment portfolio managed by Third Point LLC. However, our investment manager monitors the potential effects of interest rate shifts by performing stress tests against the portfolio composition using a proprietary in-house risk system.
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The following table summarizes the impact that a 100 basis point increase or decrease in interest rates would have on the value of our investment portfolio as of September 30, 2014 and December 31, 2013:

| 100 basis point increase in interest rates |  | 100 basis point decrease in interest rates
September 30, 2014 | Change in fair value |  | Change in fair value as % of investment portfolio |  | Change in fair value |  | Change in fair value as % of investment portfolio
| ($ in thousands)
Corporate and Sovereign Debt Instruments | $ | (13,031 | ) |  | (0.70 | )% |  | $ | 14,874 |  |  | 0.80 | %
Asset Backed Securities(1) | (11,204 | ) |  | (0.60 | )% |  | 13,324 |  |  | 0.80 | %
Net exposure to interest rate risk | $ | (24,235 | ) |  | (1.30 | )% |  | $ | 28,198 |  |  | 1.60 | %

December 31, 2013 | 100 basis point increase in interest rates |  | 100 basis point decrease in interest rates
| Change in fair value |  | Change in fair value as % of investment portfolio |  | Change in fair value |  | Change in fair value as % of investment portfolio
| ($ in thousands)
Corporate and Sovereign Debt Instruments | $ | (1,434 | ) |  | (0.09 | )% |  | $ | 2,364 |  |  | 0.15 | %
Asset Backed Securities(1) | (9,240 | ) |  | (0.59 | )% |  | 9,471 |  |  | 0.60 | %
Net exposure to interest rate risk | $ | (10,674 | ) |  | (0.68 | )% |  | $ | 11,835 |  |  | 0.75 | %

(1) | Includes instruments for which durations were available on September 30, 2014 and December 31, 2013. Includes a convexity adjustment if convexity is available. Not included are mortgage hedges, which would reduce the impact of rate changes.

For the purposes of the above tables, the hypothetical impact of changes in interest rates on debt instruments, ABS, and interest rate options was determined based on the interest rates and credit spreads applicable to each instrument individually. We and our investment manager periodically monitor our net exposure to interest rate risk and generally do not expect changes in interest rates to have a materially adverse impact on our operations.
Commodity Price Risk
In managing our investment portfolio, Third Point LLC periodically monitors and actively trades to take advantage of, and/or seeks to minimize any damage from, fluctuations in commodity prices. As our investment manager, Third Point LLC may choose to opportunistically make a long or short investment in a commodity or in a security directly impacted by the price of a commodity as a response to market developments.
From time to time, we invest in commodities or commodities exposures in the form of derivative contracts from both a speculative and risk management perspective. Generally, market prices of commodities are subject to fluctuation. As of December 31, 2013, a 10% decline in the price of each of these commodities and commodity-linked securities would have resulted in a loss of $0.3 million in total net investments managed by Third Point LLC. As of September 30, 2014, our investment portfolio did not have any commodity exposures.
Credit Risk
We are exposed to credit risk from our clients relating to balances receivable under our reinsurance contracts, including premiums receivable, and the possibility that counterparties may default on their obligations to us. The risk of counterparty default is partially mitigated by the fact that any amount owed to us from a reinsurance counterparty is netted against any claims related losses we would pay in the future. We monitor the collectability of these balances on a regular basis.
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We are also exposed to credit risk through our investment activities related to our separate account managed by Third Point LLC. Third Point LLC typically performs intensive fundamental analysis on the broader markets, credit spreads, security-specific information, and the underlying issuers of debt securities that are contained in our investment portfolio.
In addition, the securities, commodities, and cash in our investment portfolio are held with several prime brokers, subjecting us to the related credit risk from the possibility that one or more of them may default on their obligations to us. Our investment manager closely and regularly monitors the concentration of credit risk with each broker and if necessary, transfers cash or securities among brokers to diversify and mitigate our credit risk.
We also have credit risk exposure in several reinsurance contracts where we explicitly cover credit risk of a company that writes credit risk insurance.
Political Risk
We are exposed to political risk to the extent that our investment manager trades securities that are listed on various U.S. and foreign exchanges and markets. The governments in any of these jurisdictions could impose restrictions, regulations or other measures, which may have a material impact on our investment strategy and underwriting operations.
In managing our investment portfolio, Third Point LLC routinely monitors and assesses relative levels of risks associated with local political and market conditions and focuses its investments primarily in countries in which it believes the rule of law is respected and followed, thereby affording more predictable outcomes of investments in that country.
We also have political risk exposure in several reinsurance contracts where we explicitly cover political risk of a company that writes political risk insurance.
Recent Accounting Pronouncements
Refer to Note 2 to our condensed consolidated financial statements for the nine months ended September 30, 2014 included in Item 1 of this Quarterly Report on Form 10-Q for details of recently issued accounting standards.
Under Section 102(b) of the Jumpstart Our Business Startups Act, an “emerging growth company” such as Third Point Reinsurance Ltd. can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Pursuant to Section 107(b) of the Jumpstart Our Business Startups Act, we have irrevocably elected to “opt out” of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2014. Based upon this evaluation, our Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2014.
(b) Changes in Internal Control over Financial Reporting
There have been no material changes to our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. Legal Proceedings
We are not currently involved in any litigation or arbitration proceedings. We anticipate that, similar to the rest of the reinsurance industry, we will be subject to litigation and arbitration from time to time in the ordinary course of business.
If we are subject to disputes in the ordinary course of our business we anticipate engaging in discussions with the parties to the applicable contract to seek to resolve the matter. If such discussions are unsuccessful, we anticipate invoking the dispute resolution provisions of the relevant contract, which typically provide for the parties to submit to arbitration or litigation, as applicable, to resolve the dispute.
ITEM 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our Form 10-K filed with the Securities and Exchange Commission on February 28, 2014.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
a) Not applicable
b) Not applicable
c) Not applicable
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable
ITEM 5. Other Information
a) None
b) None
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ITEM 6. Exhibits

31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS | XBRL Instance Document
101.SCH | XBRL Taxonomy Extension Schema Document
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document

* | This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| Third Point Reinsurance Ltd.
Date: November 7, 2014 |
| /s/ John R. Berger
| John R. Berger
| Chairman of the Board, Chief Executive Officer and Chief Underwriting Officer
| (Principal Executive Officer)
| /s/ J. Robert Bredahl
| J. Robert Bredahl
| Chief Financial Officer and Chief Operating Officer
| (Principal Financial Officer)
| /s/ Christopher S. Coleman
| Christopher S. Coleman
| Chief Accounting Officer
| (Principal Accounting Officer)

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