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RENAISSANCERE HOLDINGS LTD - Quarter Report: 2012 June (Form 10-Q)

    


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 001-14428
RENAISSANCERE HOLDINGS LTD.
(Exact Name Of Registrant As Specified In Its Charter)
Bermuda
98-014-1974
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
Renaissance House, 12 Crow Lane, Pembroke HM 19 Bermuda
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant’s telephone number)

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 Q  No o

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 Q  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, as defined in Rule 12b-2 of the Act. Large accelerated filer Q, Accelerated filer o, Non-accelerated filer o, Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o  No Q

The number of Common Shares, par value US $1.00 per share, outstanding at July 30, 2012 was 50,537,049.
 
RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
 
 
 
Page
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.


    


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATMENTS
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except per share amounts)
 
June 30,
2012
 
December 31,
2011
Assets
(Unaudited)
 
(Audited)
Fixed maturity investments trading, at fair value
 
 
 
(Amortized cost $4,890,251 and $4,265,929 at June 30, 2012 and December 31, 2011, respectively)
$
4,948,955

 
$
4,291,465

Fixed maturity investments available for sale, at fair value
 
 
 
(Amortized cost $96,647 and $130,669 at June 30, 2012 and December 31, 2011, respectively)
108,102

 
142,052

Short term investments, at fair value
654,912

 
905,477

Equity investments trading, at fair value
55,381

 
50,560

Other investments, at fair value
743,568

 
748,984

Investments in other ventures, under equity method
79,692

 
70,714

Total investments
6,590,610

 
6,209,252

Cash and cash equivalents
264,232

 
216,984

Premiums receivable
971,546

 
471,878

Prepaid reinsurance premiums
278,242

 
58,522

Reinsurance recoverable
198,777

 
404,029

Accrued investment income
35,938

 
33,523

Deferred acquisition costs
106,027

 
43,721

Receivable for investments sold
311,658

 
117,117

Other assets
193,798

 
180,992

Goodwill and other intangible assets
8,690

 
8,894

Total assets
$
8,959,518

 
$
7,744,912

Liabilities, Noncontrolling Interests and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Reserve for claims and claim expenses
$
1,801,247

 
$
1,992,354

Unearned premiums
964,499

 
347,655

Debt
354,293

 
353,620

Reinsurance balances payable
396,669

 
256,883

Payable for investments purchased
519,619

 
303,264

Other liabilities
173,433

 
211,369

Liabilities of discontinued operations held for sale
1,959

 
13,507

Total liabilities
4,211,719

 
3,478,652

Commitments and Contingencies

 

Redeemable noncontrolling interest – DaVinciRe
900,878

 
657,727

Shareholders’ Equity
 
 
 
Preference Shares: $1.00 par value – 22,000,000 shares issued and outstanding at June 30, 2012 (December 31, 2011 – 22,000,000)
550,000

 
550,000

Common shares: $1.00 par value – 50,608,641 shares issued and outstanding at June 30, 2012 (December 31, 2011 – 51,542,955)
50,609

 
51,543

Accumulated other comprehensive income
12,531

 
11,760

Retained earnings
3,229,870

 
2,991,890

Total shareholders’ equity attributable to RenaissanceRe
3,843,010

 
3,605,193

Noncontrolling interest
3,911

 
3,340

Total shareholders’ equity
3,846,921

 
3,608,533

Total liabilities, noncontrolling interests and shareholders’ equity
$
8,959,518

 
$
7,744,912

See accompanying notes to the consolidated financial statements

2
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three and six months ended June 30, 2012 and 2011
(in thousands of United States Dollars, except per share amounts) (Unaudited)
 
Three months ended
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
667,336

 
$
641,563

 
$
1,331,487

 
$
1,252,068

Net premiums written
$
427,630

 
$
427,995

 
$
920,205

 
$
880,570

Increase in unearned premiums
(183,214
)
 
(210,820
)
 
(397,124
)
 
(357,854
)
Net premiums earned
244,416

 
217,175

 
523,081

 
522,716

Net investment income
14,743

 
33,328

 
81,714

 
93,609

Net foreign exchange gains (losses)
2,410

 
(4,521
)
 
950

 
(3,861
)
Equity in earnings (losses) of other ventures
6,846

 
5,128

 
12,316

 
(18,625
)
Other income (loss)
11,289

 
(5,167
)
 
(27,805
)
 
44,978

Net realized and unrealized gains on investments
31,003

 
34,979

 
77,116

 
29,765

Total other-than-temporary impairments
(234
)
 
—

 
(395
)
 
—

Portion recognized in other comprehensive income, before taxes
25

 
—

 
52

 
—

Net other-than-temporary impairments
(209
)
 
—

 
(343
)
 
—

Total revenues
310,498

 
280,922

 
667,029

 
668,582

Expenses
 
 
 
 
 
 
 
Net claims and claim expenses incurred
49,551

 
151,261

 
65,103

 
779,798

Acquisition expenses
25,608

 
13,883

 
49,719

 
46,218

Operational expenses
41,407

 
42,299

 
83,790

 
84,129

Corporate expenses
4,067

 
4,011

 
8,878

 
6,075

Interest expense
5,716

 
5,730

 
11,434

 
11,925

Total expenses
126,349

 
217,184

 
218,924

 
928,145

Income (loss) from continuing operations before taxes
184,149

 
63,738

 
448,105

 
(259,563
)
Income tax (expense) benefit
(898
)
 
1,773

 
(861
)
 
1,825

Income (loss) from continuing operations
183,251

 
65,511

 
447,244

 
(257,738
)
Income (loss) from discontinued operations
1,393

 
(10,094
)
 
1,220

 
(11,620
)
Net income (loss)
184,644

 
55,417

 
448,464

 
(269,358
)
Net (income) loss attributable to noncontrolling interests
(33,624
)
 
(21,903
)
 
(87,265
)
 
63,589

Net income (loss) attributable to RenaissanceRe
151,020

 
33,514

 
361,199

 
(205,769
)
Dividends on preference shares
(8,750
)
 
(8,750
)
 
(17,500
)
 
(17,500
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders
$
142,270

 
$
24,764

 
$
343,699

 
$
(223,269
)
Income (loss) from continuing operations available (attributable) to RenaissanceRe common shareholders per common share – basic
$
2.75

 
$
0.68

 
$
6.70

 
$
(4.16
)
Income (loss) from discontinued operations available (attributable) to RenaissanceRe common shareholders per common share – basic
0.03

 
(0.20
)
 
0.02

 
(0.23
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – basic
$
2.78

 
$
0.48

 
$
6.72

 
$
(4.39
)
Income (loss) from continuing operations available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
2.72

 
$
0.68

 
$
6.61

 
$
(4.16
)
Income (loss) from discontinued operations available (attributable) to RenaissanceRe common shareholders per common share – diluted
0.03

 
(0.20
)
 
0.02

 
(0.23
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
2.75

 
$
0.48

 
$
6.63

 
$
(4.39
)
Dividends per common share
$
0.27

 
$
0.26

 
$
0.54

 
$
0.52

See accompanying notes to the consolidated financial statements

3
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three and six months ended June 30, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
 
Three months ended
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Comprehensive income (loss)
 
 
 
 
 
 
 
Net income (loss)
$
184,644

 
$
55,417

 
$
448,464

 
$
(269,358
)
Change in net unrealized gains on investments
(432
)
 
(1,817
)
 
823

 
(1,798
)
Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(25
)
 
—

 
(52
)
 
—

Comprehensive income (loss)
184,187

 
53,600

 
449,235

 
(271,156
)
Net (income) loss attributable to noncontrolling interests
(33,624
)
 
(21,903
)
 
(87,265
)
 
63,589

Change in net unrealized gains on fixed maturity investments available for sale attributable to noncontrolling interests
—

 
3

 
—

 
6

Comprehensive (income) loss attributable to noncontrolling interests
(33,624
)
 
(21,900
)
 
(87,265
)
 
63,595

Comprehensive income (loss) attributable to RenaissanceRe
$
150,563

 
$
31,700

 
$
361,970

 
$
(207,561
)
Disclosure regarding net unrealized gains
 
 
 
 
 
 
 
Total realized and net unrealized holding gains on investments and net other-than-temporary impairments
$
105

 
$
1,292

 
$
2,529

 
$
902

Net realized gains on fixed maturity investments available for sale
(746
)
 
(3,106
)
 
(2,049
)
 
(2,694
)
Net other-than-temporary impairments recognized in earnings
209

 
—

 
343

 
—

Change in net unrealized gains on investments
$
(432
)
 
$
(1,814
)
 
$
823

 
$
(1,792
)
 





See accompanying notes to the consolidated financial statements

4
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the six months ended June 30, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
 
Six months ended
 
June 30,
2012
 
June 30,
2011
Preference shares
 
 
 
Balance – January 1
$
550,000

 
$
550,000

Balance – June 30
550,000

 
550,000

Common shares
 
 
 
Balance – January 1
51,543

 
54,110

Repurchase of shares
(1,229
)
 
(2,655
)
Exercise of options and issuance of restricted stock awards
295

 
298

Balance – June 30
50,609

 
51,753

Additional paid-in capital
 
 
 
Balance – January 1
—

 
—

Repurchase of shares
(12,350
)
 
546

Change in redeemable noncontrolling interest
7,056

 
(143
)
Exercise of options and issuance of restricted stock awards
5,294

 
5,365

Balance – June 30
—

 
5,768

Accumulated other comprehensive income
 
 
 
Balance – January 1
11,760

 
19,823

Change in net unrealized gains on investments
823

 
(1,792
)
Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(52
)
 
—

Balance – June 30
12,531

 
18,031

Retained earnings
 
 
 
Balance – January 1
2,991,890

 
3,312,392

Net income (loss)
448,464

 
(269,358
)
Net (income) loss attributable to noncontrolling interests
(87,265
)
 
63,589

Repurchase of shares
(78,046
)
 
(172,683
)
Dividends on common shares
(27,673
)
 
(26,721
)
Dividends on preference shares
(17,500
)
 
(17,500
)
Balance – June 30
3,229,870

 
2,889,719

Noncontrolling interest
3,911

 
3,430

Total shareholders’ equity
$
3,846,921

 
$
3,518,701

 











See accompanying notes to the consolidated financial statements

5
    


RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 2012 and 2011
(in thousands of United States Dollars) (Unaudited)
 
Six months ended
 
June 30,
2012
 
June 30,
2011
Cash flows provided by operating activities
 
 
 
Net income (loss)
$
448,464

 
$
(269,358
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Amortization, accretion and depreciation
28,785

 
17,249

Equity in undistributed (earnings) losses of other ventures
(8,868
)
 
21,355

Net realized and unrealized gains on investments
(77,116
)
 
(29,765
)
Net other-than-temporary impairments
343

 
—

Net unrealized gains included in net investment income
(23,821
)
 
(22,270
)
Net unrealized gains included in other income (loss)
(2,987
)
 
(63,141
)
Change in:
 
 
 
Premiums receivable
(499,668
)
 
(611,439
)
Prepaid reinsurance premiums
(219,720
)
 
(185,033
)
Reinsurance recoverable
205,252

 
(231,534
)
Deferred acquisition costs
(62,306
)
 
(55,210
)
Reserve for claims and claim expenses
(191,107
)
 
912,885

Unearned premiums
616,844

 
544,756

Reinsurance balances payable
139,786

 
85,128

Other
(50,104
)
 
(82,627
)
Net cash provided by operating activities
303,777

 
30,996

Cash flows (used in) provided by investing activities
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
4,792,702

 
2,879,215

Purchases of fixed maturity investments trading
(5,312,902
)
 
(2,811,678
)
Proceeds from sales and maturities of fixed maturity investments available for sale
37,530

 
48,135

Purchases of fixed maturity investments available for sale
—

 
(4,078
)
Purchases of equity investments trading
—

 
(32,676
)
Net sales of short term investments
183,605

 
50,852

Net sales (purchases) of other investments
18,681

 
(23,881
)
Net purchases of investments in other ventures
—

 
(21,000
)
Net (purchases) sales of other assets
(166
)
 
46,984

Net proceeds from sale of discontinued operations held for sale
—

 
269,520

Net cash (used in) provided by investing activities
(280,550
)
 
401,393

Cash flows provided by (used in) financing activities
 
 
 
Dividends paid – RenaissanceRe common shares
(27,673
)
 
(26,721
)
Dividends paid – preference shares
(17,500
)
 
(17,500
)
RenaissanceRe common share repurchases
(90,111
)
 
(174,792
)
Net repayment of debt
—

 
(200,000
)
Net third party DaVinciRe share transactions
160,864

 
(56,708
)
Net cash provided by (used in) financing activities
25,580

 
(475,721
)
Effect of exchange rate changes on foreign currency cash
(1,559
)
 
3,331

Net increase (decrease) in cash and cash equivalents
47,248

 
(40,001
)
Cash and cash equivalents, beginning of period
216,984

 
277,738

Cash and cash equivalents, end of period
$
264,232

 
$
237,737


See accompanying notes to the consolidated financial statements

6
    


RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(unless otherwise noted, amounts in tables expressed in thousands of United States (“U.S.”) dollars, except per share amounts and percentages) (Unaudited)
NOTE 1. ORGANIZATION
This report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
RenaissanceRe Holdings Ltd. (“RenaissanceRe”) was formed under the laws of Bermuda on June 7, 1993. Together with its wholly owned and majority-owned subsidiaries and DaVinciRe (as defined below), which are collectively referred to herein as the “Company”, RenaissanceRe provides reinsurance and insurance coverages and related services to a broad range of customers.
•
Renaissance Reinsurance Ltd. (“Renaissance Reinsurance”), the Company’s principal reinsurance subsidiary, provides property catastrophe and specialty reinsurance coverages to insurers and reinsurers on a worldwide basis.
•
The Company also manages property catastrophe and specialty reinsurance business written on behalf of joint ventures, which principally include Top Layer Reinsurance Ltd. (“Top Layer Re”), recorded under the equity method of accounting, and DaVinci Reinsurance Ltd. (“DaVinci”). Because the Company owns a noncontrolling equity interest in, but controls a majority of the outstanding voting power of DaVinci's parent, DaVinciRe Holdings Ltd. (“DaVinciRe”), the results of DaVinci and DaVinciRe are consolidated in the Company’s financial statements. Redeemable noncontrolling interest – DaVinciRe represents the interests of external parties with respect to the net loss (income) and shareholders’ equity of DaVinciRe. Renaissance Underwriting Managers, Ltd. (“RUM”), a wholly owned subsidiary, acts as exclusive underwriting manager for these joint ventures in return for fee-based income and profit participation.
•
RenaissanceRe Syndicate 1458 (“Syndicate 1458”) is the Company’s Lloyd’s syndicate which was licensed to start writing certain lines of insurance and reinsurance business effective June 1, 2009. RenaissanceRe Corporate Capital (UK) Limited (“RenaissanceRe CCL”), a wholly owned subsidiary of the Company, is Syndicate 1458’s sole corporate member and RenaissanceRe Syndicate Management Ltd. (“RSML”), a wholly owned subsidiary of the Company from November 2, 2009, is the managing agent for Syndicate 1458.
•
The Company, through Renaissance Trading Ltd. (“Renaissance Trading”) and RenRe Energy Advisors Ltd. (“REAL”), transacts certain derivative-based risk management products primarily to address weather and energy risk and engages in hedging and trading activities related to those transactions.
•
On November 18, 2010, the Company entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) with QBE Holdings, Inc. (“QBE”) to sell substantially all of its U.S.-based insurance operations including its U.S. property and casualty business underwritten through managing general agents, its crop insurance business underwritten through Agro National Inc. (“Agro National”), its commercial property insurance operations and its claims operations. At December 31, 2010, the Company classified the assets and liabilities associated with this transaction as held for sale. The financial results for these operations have been presented in the Company's consolidated financial statements as “discontinued operations” for all periods presented. On March 4, 2011, the Company and QBE closed the transaction contemplated by the Stock Purchase Agreement. Refer to “Note 3. Discontinued Operations,” for more information.


7
    


NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to our significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2011.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited 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 from these statements. Except as discussed in “Note 3. Discontinued Operations,” and unless otherwise noted, the notes to the consolidated financial statements reflect the Company's continuing operations.
Certain comparative information has been reclassified to conform to the current presentation. Because of the seasonality of the Company's business, the results of operations and cash flows for any interim period will not necessarily be indicative of the results of operations and cash flows for the full fiscal year or subsequent quarters.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The major estimates reflected in the Company’s consolidated financial statements include, but are not limited to, the reserve for claims and claim expenses, reinsurance recoverables, including allowances for reinsurance recoverables deemed uncollectible, estimates of written and earned premiums, fair value, including the fair value of investments, financial instruments and derivatives, impairment charges and the Company’s deferred tax valuation allowance.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”), which amends FASB ASC Topic Financial Services - Insurance. ASU 2010-26 modifies the definition of the types of costs that can be capitalized in relation to the acquisition of new and renewal insurance contracts. The amended guidance requires costs to be incremental or directly related to the successful acquisition of new or renewal contracts in order to be capitalized as a deferred acquisition cost. Capitalized costs would include incremental direct costs, such as commissions paid to brokers. Additionally, the portion of employee salaries and benefits directly related to time spent for acquired contracts would be capitalized. Costs that fall outside the revised definition must be expensed when incurred. ASU 2010-26 became effective for fiscal periods beginning on or after December 15, 2011, and as a result, the Company adopted ASU 2010-26 effective January 1, 2012. The adoption of ASU 2010-26 did not have a material impact on the Company's consolidated statements of operations and financial condition.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends FASB ASC Topic Fair Value Measurement. ASU 2011-04 was issued to provide largely identical guidance about fair value measurement and disclosure requirements with the International Accounting Standards Board's new International Financial Reporting Standards (“IFRS”) 13, Fair Value Measurement. ASU

8
    


2011-04 does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under GAAP and requires enhanced disclosures covering all transfers between Levels 1 and 2 of the fair value hierarchy. Additional disclosures covering Level 3 assets are also required. ASU 2011-04 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and as a result, the Company adopted ASU 2011-04 effective January 1, 2012. The adoption of ASU 2011-04 did not have a material impact on the Company's consolidated statements of operations and financial condition. The additional disclosures required by ASU 2011-04 have been provided in "Note 5. Fair Value Measurements" of the Company's Notes to Consolidated Financial Statements.
Presentation of Comprehensive Income
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends FASB ASC Topic Comprehensive Income. ASU 2011-05 increases the prominence of items reported in other comprehensive income and eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity. ASU 2011-05 requires that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retroactive application required. The Company adopted ASU 2010-26 effective January 1, 2012 and it did not have a material impact on the Company's consolidated statements of operations and financial condition.
NOTE 3. DISCONTINUED OPERATIONS
U.S.-Based Insurance Operations
On November 18, 2010, the Company entered into a Stock Purchase Agreement with QBE to sell substantially all of its U.S.-based insurance operations, including its U.S. property and casualty business underwritten through managing general agents, its crop insurance business underwritten through Agro National, its commercial property insurance operations and its claims operations.  At December 31, 2010, the Company classified the assets and liabilities associated with this transaction as held for sale and the assets and liabilities were recorded at the lower of the carrying value or fair value less costs to sell. The financial results for these operations have been presented as discontinued operations in the Company's consolidated statements of operations for all periods presented.
Consideration for the transaction was book value at December 31, 2010, for the aforementioned businesses, payable in cash at closing and subject to adjustment for certain tax and other items. The transaction closed on March 4, 2011 and net consideration of $269.5 million was received by the Company.
Pursuant to the Stock Purchase Agreement, the Company was subject to a post-closing review following December 31, 2011 of the net reserve for claims and claim expenses for loss events occurring on or prior to December 31, 2010 (the “Reserve Collar”). Subsequent to the post-closing review, the Company was liable to pay, or otherwise reimburse QBE amounts up to $10.0 million for net adverse development on prior accident years net claims and claim expenses. Conversely, if prior accident years net claims and claim expenses experienced net favorable development, QBE was liable to pay, or otherwise reimburse the Company amounts up to $10.0 million.
During 2011, the Company recognized a $10.0 million liability and corresponding expense in liabilities of discontinued operations held for sale and (loss) income from discontinued operations, respectively, due to purported net adverse development on prior accident years net claims and claim expenses associated with the Reserve Collar.  Effective May 23, 2012, the Company and QBE reached an agreement in respect of the Reserve Collar, and the Company paid QBE the sum of $9.0 million on June 1, 2012, representing full and final settlement of the Reserve Collar and recorded a gain of $1.0 million in income from discontinued operations during the second quarter of 2012.


9
    


NOTE 4. INVESTMENTS
Fixed Maturity Investments Trading
The following table summarizes the fair value of fixed maturity investments trading:
 
 
 
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
 
U.S. treasuries
$
1,126,759

 
$
885,152

 
 
Agencies
436,691

 
158,561

 
 
Non-U.S. government (Sovereign debt)
172,008

 
216,916

 
 
FDIC guaranteed corporate
29,386

 
423,630

 
 
Non-U.S. government-backed corporate
393,875

 
640,757

 
 
Corporate
1,652,007

 
1,187,437

 
 
Agency mortgage-backed
580,971

 
428,042

 
 
Non-agency mortgage-backed
135,268

 
82,096

 
 
Commercial mortgage-backed
414,524

 
255,885

 
 
Asset-backed
7,466

 
12,989

 
 
Total fixed maturity investments trading
$
4,948,955

 
$
4,291,465

 
 
 
 
 
 
 
Fixed Maturity Investments Available For Sale
The following table summarizes the amortized cost, fair value and related unrealized gains and losses and non-credit other-than-temporary impairments of fixed maturity investments available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
 
At June 30, 2012
Amortized 
Cost
 
Gross
Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments 
(1)  
 
 
Non-U.S. government (Sovereign debt)
$
5,000

 
$
223

 
$
—

 
$
5,223

 
$
—

 
 
Corporate
11,815

 
1,010

 
(110
)
 
12,715

 
75

 
 
Agency mortgage-backed
10,478

 
906

 
—

 
11,384

 
—

 
 
Non-agency mortgage-backed
15,929

 
2,496

 
(19
)
 
18,406

 
891

 
 
Commercial mortgage-backed
48,926

 
6,717

 
—

 
55,643

 
—

 
 
Asset-backed
4,499

 
232

 
—

 
4,731

 
—

 
 
Total fixed maturity investments available for sale
$
96,647

 
$
11,584

 
$
(129
)
 
$
108,102

 
$
966

 
 
 
 
 
 
 
 
 
 
 
 
 

10
    


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Accumulated
Other Comprehensive Income
 
 
 
 
 
 
At December 31, 2011
Amortized Cost
 
Gross
Unrealized    
Gains
 
Gross
Unrealized    
Losses
 
Fair Value
 
Non-Credit
Other-Than-
Temporary
Impairments
 (1)  
 
 
Non-U.S. government (Sovereign debt)
$
10,087

 
$
921

 
$
(12
)
 
$
10,996

 
$
—

 
 
Non-U.S. government-backed corporate
312

 
13

 
—

 
325

 
—

 
 
Corporate
18,449

 
1,535

 
(517
)
 
19,467

 
(176
)
 
 
Agency mortgage-backed
12,636

 
1,071

 
—

 
13,707

 
—

 
 
Non-agency mortgage-backed
21,097

 
1,862

 
(284
)
 
22,675

 
(1,837
)
 
 
Commercial mortgage-backed
63,269

 
6,576

 
(1
)
 
69,844

 
—

 
 
Asset-backed
4,819

 
219

 
—

 
5,038

 
—

 
 
Total fixed maturity investments available for sale
$
130,669

 
$
12,197

 
$
(814
)
 
$
142,052

 
$
(2,013
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents the non-credit component of other-than-temporary impairments recognized in accumulated other comprehensive income since the adoption of guidance related to the recognition and presentation of other-than-temporary impairments under FASB ASC Topic Financial Instruments – Debt and Equity Securities, during the second quarter of 2009, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
Contractual maturities of fixed maturity investments are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading
 
Available for Sale
 
Total Fixed Maturity Investments
 
 
At June 30, 2012
Amortized 
Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
Due in less than one year
$
405,210

 
$
405,547

 
$
112

 
$
89

 
$
405,322

 
$
405,636

 
 
Due after one through five years
2,606,528

 
2,615,915

 
8,358

 
8,761

 
2,614,886

 
2,624,676

 
 
Due after five through ten years
625,279

 
646,130

 
6,200

 
6,779

 
631,479

 
652,909

 
 
Due after ten years
130,574

 
143,134

 
2,145

 
2,309

 
132,719

 
145,443

 
 
Mortgage-backed
1,115,304

 
1,130,763

 
75,333

 
85,433

 
1,190,637

 
1,216,196

 
 
Asset-backed
7,356

 
7,466

 
4,499

 
4,731

 
11,855

 
12,197

 
 
Total
$
4,890,251

 
$
4,948,955

 
$
96,647

 
$
108,102

 
$
4,986,898

 
$
5,057,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Investments Trading
The following table summarizes the fair value of equity investments trading:
 
 
 
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
 
Financial institution securities
$
55,381

 
$
50,560

 
 
 
 
 
 
 

11
    


Pledged Investments
At June 30, 2012, $1,330.9 million of cash and investments at fair value were on deposit with, or in trust accounts for the benefit of various counterparties, including with respect to the Company's principal letter of credit facility. Of this amount, $522.6 million is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities.
Net Investment Income, Net Realized and Unrealized Gains on Investments and Net Other-Than-Temporary Impairments
The components of net investment income are as follows:
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
 
Fixed maturity investments
$
22,436

 
$
24,426

 
 
Short term investments
234

 
433

 
 
Equity investments
181

 
112

 
 
Other investments
 
 
 
 
 
Hedge funds and private equity investments
(10,413
)
 
8,230

 
 
Other
4,975

 
2,838

 
 
Cash and cash equivalents
54

 
45

 
 
 
17,467

 
36,084

 
 
Investment expenses
(2,724
)
 
(2,756
)
 
 
Net investment income
$
14,743

 
$
33,328

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Fixed maturity investments
$
48,769

 
$
52,339

 
 
Short term investments
734

 
1,028

 
 
Equity investments
351

 
126

 
 
Other investments
 
 
 
 
 
Hedge funds and private equity investments
18,060

 
31,737

 
 
Other
19,145

 
13,665

 
 
Cash and cash equivalents
80

 
86

 
 
 
87,139

 
98,981

 
 
Investment expenses
(5,425
)
 
(5,372
)
 
 
Net investment income
$
81,714

 
$
93,609

 
 
 
 
 
 
 
Net realized and unrealized gains on investments and net other-than-temporary impairments are as follows:
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
 
Gross realized gains
$
19,458

 
$
15,430

 
 
Gross realized losses
(3,294
)
 
(4,156
)
 
 
Net realized gains on fixed maturity investments
16,164

 
11,274

 
 
Net unrealized gains on fixed maturity investments trading
12,538

 
24,728

 
 
Net unrealized gains (losses) on equity investments trading
2,301

 
(1,023
)
 
 
Net realized and unrealized gains on investments
$
31,003

 
$
34,979

 
 
Total other-than-temporary impairments
$
(234
)
 
$
—

 
 
Portion recognized in other comprehensive income, before taxes
25

 
—

 
 
Net other-than-temporary impairments
$
(209
)
 
$
—

 
 
 
 
 
 
 

12
    


 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Gross realized gains
$
55,744

 
$
25,992

 
 
Gross realized losses
(10,244
)
 
(16,773
)
 
 
Net realized gains on fixed maturity investments
45,500

 
9,219

 
 
Net unrealized gains on fixed maturity investments trading
26,795

 
20,970

 
 
Net unrealized gains on equity investments trading
4,821

 
(424
)
 
 
Net realized and unrealized gains on investments
$
77,116

 
$
29,765

 
 
Total other-than-temporary impairments
$
(395
)
 
$
—

 
 
Portion recognized in other comprehensive income, before taxes
52

 
—

 
 
Net other-than-temporary impairments
$
(343
)
 
$
—

 
 
 
 
 
 
 
The following table provides an analysis of the length of time the Company’s fixed maturity investments available for sale in an unrealized loss have been in a continual unrealized loss position.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
At June 30, 2012
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Corporate
$
1,424

 
$
(49
)
 
$
513

 
$
(61
)
 
$
1,937

 
$
(110
)
 
 
Non-agency mortgage-backed
—

 
—

 
98

 
(19
)
 
98

 
(19
)
 
 
Total
$
1,424

 
$
(49
)
 
$
611

 
$
(80
)
 
$
2,035

 
$
(129
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
At December 31, 2011
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
Non-U.S. government (Sovereign debt)
$
915

 
$
(9
)
 
$
42

 
$
(3
)
 
$
957

 
$
(12
)
 
 
Corporate
3,935

 
(385
)
 
412

 
(132
)
 
4,347

 
(517
)
 
 
Non-agency mortgage-backed
8,024

 
(224
)
 
798

 
(60
)
 
8,822

 
(284
)
 
 
Commercial mortgage-backed
—

 
—

 
455

 
(1
)
 
455

 
(1
)
 
 
Total
$
12,874

 
$
(618
)
 
$
1,707

 
$
(196
)
 
$
14,581

 
$
(814
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012, the Company held 44 fixed maturity investments available for sale securities that were in an unrealized loss position, including 13 fixed maturity investments available for sale securities that were in an unrealized loss position for twelve months or greater. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. The Company performed reviews of its fixed maturity investments available for sale for the six months ended June 30, 2012 and 2011, respectively, in order to determine whether declines in the fair value below the amortized cost basis were considered other-than-temporary in accordance with the applicable guidance, as discussed below.
Other-Than-Temporary Impairment Process
The Company's process for assessing whether declines in the fair value of its fixed maturity investments available for sale represent impairments that are other-than-temporary includes reviewing each fixed maturity investment available for sale that is impaired and determining: (i) if the Company has the intent to sell the debt security or (ii) if it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery; and (iii) whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the security are less than the amortized cost basis of the security.

13
    


In assessing the Company’s intent to sell securities, the Company’s procedures may include actions such as discussing planned sales with its third party investment managers, reviewing sales that have occurred shortly after the balance sheet date, and consideration of other qualitative factors that may be indicative of the Company’s intent to sell or hold the relevant securities. For the six months ended June 30, 2012, the Company recognized $Nil other-than-temporary impairments due to the Company’s intent to sell these securities as of June 30, 2012 (2011 – $Nil).
In assessing whether it is more likely than not that the Company will be required to sell a security before its anticipated recovery, the Company considers various factors including its future cash flow forecasts and requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short term investments, fixed maturity investments trading and fixed maturity investments available for sale in an unrealized gain position, and other relevant factors. For the six months ended June 30, 2012, the Company recognized $Nil of other-than-temporary impairments due to required sales (2011 – $Nil).
In evaluating credit losses, the Company considers a variety of factors in the assessment of a security including: (i) the time period during which there has been a significant decline below cost; (ii) the extent of the decline below cost and par; (iii) the potential for the security to recover in value; (iv) an analysis of the financial condition of the issuer; (v) the rating of the issuer; (vi) the implied rating of the issuer based on an analysis of option adjusted spreads; (vii) the absolute level of the option adjusted spread for the issuer; and (viii) an analysis of the collateral structure and credit support of the security, if applicable.
Once the Company determines that it is possible that a credit loss may exist for a security, the Company performs a detailed review of the cash flows expected to be collected from the issuer. The Company estimates expected cash flows by applying estimated default probabilities and recovery rates to the contractual cash flows of the issuer, with such default and recovery rates reflecting long-term historical averages adjusted to reflect current credit, economic and market conditions, giving due consideration to collateral and credit support, if applicable, and discounting the expected cash flows at the purchase yield on the security. In instances in which a determination is made that an impairment exists but the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, the impairment is separated into: (i) the amount of the total other-than-temporary impairment related to the credit loss; and (ii) the amount of the total other-than-temporary impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income. For the six months ended June 30, 2012, the Company recognized $0.3 million of other-than-temporary impairments which were recognized in earnings and $52 thousand related to other factors which were recognized in other comprehensive income (2011 – $Nil and $Nil, respectively).

14
    


The following table provides a rollforward of the amount of other-than-temporary impairments related to credit losses recognized in earnings for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income:
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – April 1
$
520

 
$
2,875

 
 
Additions:
 
 
 
 
 
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized
11

 
—

 
 
Amount related to credit loss for which an other-than-temporary impairment was previously recognized
41

 
—

 
 
Reductions:
 
 
 
 
 
Securities sold during the period
(396
)
 
(246
)
 
 
Securities for which the amount previously recognized in other comprehensive income was recognized in earnings, because the Company intends to sell the security or is more likely than not the Company will be required to sell the security
—

 
—

 
 
Increases in cash flows expected to be collected that are recognized over the remaining life of the security
—

 
—

 
 
Balance – June 30
$
176

 
$
2,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – January 1
$
564

 
$
3,098

 
 
Additions:
 
 
 
 
 
Amount related to credit loss for which an other-than-temporary impairment was not previously recognized
11

 
—

 
 
Amount related to credit loss for which an other-than-temporary impairment was previously recognized
50

 
—

 
 
Reductions:
 
 
 
 
 
Securities sold during the period
(449
)
 
(469
)
 
 
Securities for which the amount previously recognized in other comprehensive income was recognized in earnings, because the Company intends to sell the security or is more likely than not the Company will be required to sell the security
—

 
—

 
 
Increases in cash flows expected to be collected that are recognized over the remaining life of the security
—

 
—

 
 
Balance – June 30
$
176

 
$
2,629

 
 
 
 
 
 
 


15
    


NOTE 5. FAIR VALUE MEASUREMENTS
The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within the Company's financial statements. Fair value is defined under accounting guidance currently applicable to the Company to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. The Company recognizes the change in unrealized gains and losses arising from changes in fair value in its consolidated statements of operations, with the exception of changes in unrealized gains and losses on its fixed maturity investments available for sale, which are recognized as a component of accumulated other comprehensive income in shareholders' equity.
FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
•
Fair values determined by Level 1 inputs utilize unadjusted quoted prices obtained from active markets for identical assets or liabilities for which the Company has access. The fair value is determined by multiplying the quoted price by the quantity held by the Company;
•
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals, broker quotes and certain pricing indices; and
•
Level 3 inputs are based on unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management's best estimate of the assumptions used by other market participants in determining the fair value of the 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, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability.
In order to determine if a market is active or inactive for a security, the Company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity. 
There have been no material changes in the Company's valuation techniques, nor have there been any transfers between Level 1 and Level 2, or Level 2 and Level 3, respectively, during the period represented by these consolidated financial statements.
 

16
    


Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis and also represents the carrying amount on the Company’s consolidated balance sheet:
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012
Total
 
Quoted
Prices in Active
Markets for
Identical 
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
1,126,759

 
$
1,126,759

 
$
—

 
$
—

 
 
Agencies
436,691

 
—

 
436,691

 
—

 
 
Non-U.S. government (Sovereign debt)
177,231

 
—

 
177,231

 
—

 
 
FDIC guaranteed corporate
29,386

 
—

 
29,386

 
—

 
 
Non-U.S. government-backed corporate
393,875

 
—

 
393,875

 
—

 
 
Corporate
1,664,722

 
—

 
1,636,947

 
27,775

 
 
Agency mortgage-backed
592,355

 
—

 
592,355

 
—

 
 
Non-agency mortgage-backed
153,674

 
—

 
153,674

 
—

 
 
Commercial mortgage-backed
470,167

 
—

 
470,167

 
—

 
 
Asset-backed
12,197

 
—

 
12,197

 
—

 
 
Total fixed maturity investments
5,057,057

 
1,126,759

 
3,902,523

 
27,775

 
 
Short term investments
654,912

 
—

 
654,912

 
—

 
 
Equity investments trading
55,381

 
55,381

 
—

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity partnerships
360,268

 
—

 
—

 
360,268

 
 
Senior secured bank loan funds
269,317

 
—

 
246,593

 
22,724

 
 
Catastrophe bonds
106,470

 
—

 
106,470

 
—

 
 
Hedge funds
6,243

 
—

 
—

 
6,243

 
 
Miscellaneous other investments
1,270

 
—

 
—

 
1,270

 
 
Total other investments
743,568

 
—

 
353,063

 
390,505

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
9,689

 
—

 
—

 
9,689

 
 
Derivatives (1)
14,752

 
2,011

 
3,660

 
9,081

 
 
Other
10,811

 
(4,604
)
 
—

 
15,415

 
 
Total other assets and (liabilities)
35,252

 
(2,593
)
 
3,660

 
34,185

 
 
 
$
6,546,170

 
$
1,179,547

 
$
4,914,158

 
$
452,465

 
 
 
 
 
 
 
 
 
 
 
(1) See "Note 12. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.


17
    


 
 
 
 
 
 
 
 
 
 
 
At December 31, 2011
Total
 
Quoted
Prices in Active
Markets for
Identical
 Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
885,152

 
$
885,152

 
$
—

 
$
—

 
 
Agencies
158,561

 
—

 
158,561

 
—

 
 
Non-U.S. government (Sovereign debt)
227,912

 
—

 
227,912

 
—

 
 
FDIC guaranteed corporate
423,630

 
—

 
423,630

 
—

 
 
Non-U.S. government-backed corporate
641,082

 
—

 
641,082

 
—

 
 
Corporate
1,206,904

 
—

 
1,179,143

 
27,761

 
 
Agency mortgage-backed
441,749

 
—

 
441,749

 
—

 
 
Non-agency mortgage-backed
104,771

 
—

 
104,771

 
—

 
 
Commercial mortgage-backed
325,729

 
—

 
325,729

 
—

 
 
Asset-backed
18,027

 
—

 
18,027

 
—

 
 
Total fixed maturity investments
4,433,517

 
885,152

 
3,520,604

 
27,761

 
 
Short term investments
905,477

 
—

 
905,477

 
—

 
 
Equity investments trading
50,560

 
50,560

 
—

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity partnerships
367,909

 
—

 
—

 
367,909

 
 
Senior secured bank loan funds
257,870

 
—

 
237,815

 
20,055

 
 
Catastrophe bonds
70,999

 
—

 
70,999

 
—

 
 
Non-U.S. fixed income funds
28,862

 
—

 
28,862

 
—

 
 
Hedge funds
21,344

 
—

 
14,782

 
6,562

 
 
Miscellaneous other investments
2,000

 
—

 
—

 
2,000

 
 
Total other investments
748,984

 
—

 
352,458

 
396,526

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
2,115

 
—

 
—

 
2,115

 
 
Derivatives (1)
3,312

 
707

 
(6,293
)
 
8,898

 
 
Other
10,644

 
(6,869
)
 
—

 
17,513

 
 
Total other assets and (liabilities)
16,071

 
(6,162
)
 
(6,293
)
 
28,526

 
 
 
$
6,154,609

 
$
929,550

 
$
4,772,246

 
$
452,813

 
 
 
 
 
 
 
 
 
 
 
(1) See "Note 12. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.
Level 1 and Level 2 Assets and Liabilities Measured at Fair Value
Fixed Maturity Investments
Fixed maturity investments included in Level 1 consist of the Company's investments in U.S. treasuries. Fixed maturity investments included in Level 2 are agencies, non-U.S. government, Federal Deposit Insurance Company ("FDIC") guaranteed corporate, non-U.S. government-backed corporate, corporate, agency mortgage-backed, non-agency mortgage-backed, commercial mortgage-backed and asset-backed fixed maturity investments.

18
    


The Company’s fixed maturity investments portfolios are primarily priced using pricing services, such as index providers and pricing vendors, as well as broker quotations. In general, the pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers, reference data and industry and economic events. Index pricing generally relies on market traders as the primary source for pricing, however models are also utilized to provide prices for all index eligible securities. The models use a variety of observable inputs such as benchmark yields, transactional data, dealer runs, broker-dealer quotes and corporate actions. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.
The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of our fixed maturity investments are detailed below by asset class.
U.S. treasuries
Level 1 - At June 30, 2012, the Company’s U.S. treasuries fixed maturity investments are primarily priced by pricing services and had a weighted average effective yield of 0.5% and a weighted average credit quality of AA (December 31, 2011 - 0.6% and AA, respectively). When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers. Certain data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue and maturity date.
Agencies
Level 2 - At June 30, 2012, the Company’s agency fixed maturity investments had a weighted average effective yield of 0.7% and a weighted average credit quality of AA (December 31, 2011 - 0.5% and AA, respectively). The issuers of the Company’s agency fixed maturity investments primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Fixed maturity investments included in agencies are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrates other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.
Non-U.S. government (Sovereign debt)
Level 2 - Non-U.S. government fixed maturity investments held by the Company at June 30, 2012, had a weighted average effective yield of 2.2% and a weighted average credit quality of AA (December 31, 2011 - 2.3% and AA, respectively). The issuers of securities in this sector are non-U.S. governments and their respective agencies as well as supranational organizations. Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

19
    


FDIC guaranteed corporate
Level 2 - The Company’s FDIC guaranteed corporate fixed maturity investments had a weighted average effective yield of 0.3% and a weighted average credit quality of AA at June 30, 2012 (December 31, 2011 - 0.3% and AA, respectively). The issuers consist of well known corporate issuers who participate in the FDIC program. The Company’s FDIC guaranteed corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve.
Non-U.S. government-backed corporate
Level 2 - Non-U.S. government-backed corporate fixed maturity investments had a weighted average effective yield of 1.2% and a weighted average credit quality of AAA at June 30, 2012 (December 31, 2011 - 1.4% and AAA, respectively). Non-U.S. government-backed fixed maturity investments are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread to the respective curve for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.
Corporate
Level 2 - At June 30, 2012, the Company’s corporate fixed maturity investments principally consist of U.S. and international corporations and had a weighted average effective yield of 3.1% and a weighted average credit quality of A (December 31, 2011 - 4.2% and A, respectively). The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.
Agency mortgage-backed
Level 2 - At June 30, 2012, the Company’s agency mortgage-backed fixed maturity investments included agency residential mortgage-backed securities with a weighted average effective yield of 1.5%, a weighted average credit quality of AA and a weighted average life of 2.8 years (December 31, 2011 - 1.5%, AA and 2.6 years, respectively). The Company’s agency mortgage-backed fixed maturity investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active and the to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.
Non-agency mortgage-backed
Level 2 - The Company’s non-agency mortgage-backed fixed maturity investments include non-agency prime residential mortgage-backed and non-agency Alt-A fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. At June 30, 2012, the Company’s non-agency prime residential mortgage-backed fixed maturity investments have a weighted average effective yield of 5.2%, a weighted average credit quality of BBB, and a weighted average life of 5.2 years (December 31, 2011 - 8.0%, BBB and 3.3 years, respectively). The Company’s non-agency Alt-A fixed maturity investments held at June 30, 2012 have a weighted average effective yield

20
    


of 7.0%, a weighted average credit quality of BBB and a weighted average life of 5.5 years (December 31, 2011 - 9.1%, A and 3.8 years, respectively) . Securities held in these sectors are primarily priced by pricing services using an option adjusted spread (”OAS”) model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.
Commercial mortgage-backed
Level 2 - The Company’s commercial mortgage-backed fixed maturity investments held at June 30, 2012 have a weighted average effective yield of 2.5%, a weighted average credit quality of AA, and a weighted average life of 3.8 years (December 31, 2011 - 3.2%, AA and 4.2 years, respectively). Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bid and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services discount the expected cash flows for each security held in this sector using a spread adjusted benchmark yield based on the characteristics of the security.
Asset-backed
Level 2 - At June 30, 2012, the Company’s asset-backed fixed maturity investments had a weighted average effective yield of 2.5%, a weighted average credit quality of AAA and a weighted average life of 3.8 years (December 31, 2011 - 0.9%, AAA and 1.8 years, respectively). The underlying collateral for the Company’s asset-backed fixed maturity investments primarily consists of student loans, credit card receivables, auto loans and other receivables. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.
Short Term Investments
Level 2 - The fair value of the Company's portfolio of short term investments are generally determined using amortized cost which approximates fair value and, in certain cases, in a manner similar to the Company’s fixed maturity investments noted above.
Equity Investments, Classified as Trading
Level 1 - The fair value of the Company's portfolio of equity investments, classified as trading are primarily priced by pricing services, reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers and applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue.
Other investments
Senior secured bank loan funds
Level 2 - At June 30, 2012, the Company’s investments in senior secured bank loan funds include funds that invest primarily in bank loans and other senior debt instruments. The fair value of the Company’s senior secured bank loan funds are determined using the net asset value per share of the funds. Investments of $246.6 million are redeemable, in part on a monthly basis, or in whole over a three month period.

21
    


Catastrophe bonds
Level 2 - The Company's other investments include investments in catastrophe bonds which are recorded at fair value. The fair value of the Company's investments in catastrophe bonds is based on broker or underwriter bid indications.
Non-U.S. fixed income funds
Level 2 - The Company’s non-U.S. fixed income funds invested primarily in non-U.S. convertible securities. The fair values of the investments in this category were estimated using the net asset value per share of the investments which were provided by third parties such as the relevant investment manager or administrator. During April 2012, the Company fully redeemed its remaining investment in non-U.S. fixed income funds at the then net asset value per share.
Hedge funds
Level 2 - The Company has investments in hedge funds that pursue multiple strategies. The fair values of the Company’s hedge funds are determined by adjusting the previous period's reported net asset value, which is generally one month in arrears, for an estimated periodic rate of return obtained from the respective investment manager.
For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the investment manager and the latest audited financial statements to attempt to ensure that the hedge fund investment is following fair value principles consistent with GAAP in determining the net asset value of each investor's interest.
During June 2012, the Company fully redeemed the portion of its investment in hedge funds which the Company had considered Level 2 in the fair value hierarchy, at the then net asset value per share.
Other assets and liabilities
Derivatives
Level 1 and Level 2 - Other assets and liabilities include certain other derivatives entered into by the Company. The fair value of these transactions include certain exchange traded foreign currency forward contracts which are considered Level 1, and certain credit derivatives, determined using standard industry valuation models and considered Level 2, as the inputs to the valuation model are based on observable market inputs, including credit spreads, credit ratings of the underlying referenced security, the risk free rate and the contract term.
Other
Level 1 - The liabilities measured at fair value and included in Level 1 at June 30, 2012 of $4.6 million are principally cash settled restricted stock units (“CSRSU”) that form part of the Company's compensation program. The fair value of the Company's CSRSUs is determined using observable exchange traded prices for the Company's common shares.


22
    


Level 3 Assets and Liabilities Measured at Fair Value
Below is a summary of quantitative information regarding the significant observable and unobservable inputs (Level 3) used in determining the fair value of assets and liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012
Fair Value
(Level 3)
 
Valuation Technique
 
Unobservable (U)
and Observable (O)
Inputs
 
Low
 
High
 
Weighted Average or Actual
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
17,521

 
Discounted cash flow ("DCF")
 
Credit spread (U)
 
n/a
 
n/a
 
4.6
 %
 
 
 
 
 
 
 
Illiquidity premium (U)
 
n/a
 
n/a
 
1.0
 %
 
 
 
 
 
 
 
Risk-free rate (O)
 
n/a
 
n/a
 
0.2
 %
 
 
 
 
 
 
 
Dividend rate (O)
 
n/a
 
n/a
 
5.9
 %
 
 
 
10,254

 
Internal valuation model
 
Private transaction (U)
 
n/a
 
n/a
 
See below

 
 
Total fixed maturity investments
27,775

 
 
 
 
 
 
 
 
 
 
 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity partnerships
360,268

 
Net asset valuation
 
Estimated performance (U)
 
(19.7
)%
 
12.6
%
 
(1.4
)%
 
 
Senior secured bank loan funds
22,724

 
Net asset valuation
 
Estimated performance (U)
 
n/a
 
n/a
 
0.4
 %
 
 
Hedge funds
6,243

 
Net asset valuation
 
Estimated performance (U)
 
(0.4
)%
 
3.0
%
 
1.9
 %
 
 
Miscellaneous other investments
1,270

 
DCF
 
Illiquidity premium (U)
 
n/a
 
n/a
 
1.0
 %
 
 
 
 
 
 
 
Risk-free rate (O)
 
n/a
 
n/a
 
0.5
 %
 
 
 
 
 
 
 
Credit spread (U)
 
n/a
 
n/a
 
7.4
 %
 
 
Total other investments
390,505

 
 
 
 
 
 
 
 
 
 
 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
9,689

 
Internal valuation model
 
Net premiums written (O)
 
—

 
$12.3 million

 
See below

 
 
 
 
 
 
 
Contract period (O)
 
183 days

 
365 days

 
See below

 
 
 
 
 
 
 
Net reserve for claims and claim expenses (U)
 
—

 
—

 
See below

 
 
Weather and energy related derivatives
9,081

 
Spread option; Quanto; Black Scholes; Simulation
 
Correlation (U)
 
0

 
1

 
See below

 
 
 
 
 
 
 
Volatility (U)
 
9.4
 %
 
525.0
%
 
See below

 
 
 
 
 
 
 
Commodity curve (U)
 
$
2.62

 
$
200.00

 
See below

 
 
 
 
 
 
 
Weather curve (U)
 
19

 
5,000

 
See below

 
 
 
 
 
 
 
Counterparty default risk (U)
 
0.0
 %
 
22.5
%
 
See below

 
 
Other
14,165

 
Net asset valuation
 
Estimated performance (U)
 
n/a
 
n/a
 
See below

 
 
 
1,250

 
Internal valuation model
 
Private transaction (U)
 
n/a
 
n/a
 
See below

 
 
Total other assets and (liabilities)
34,185

 
 
 
 
 
 
 
 
 
 
 
 
 
$
452,465

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

23
    


Fixed Maturity Investments
Corporate
Level 3 - Included in the Company's corporate fixed maturity investments is an investment with a fair value of $17.5 million in the preferred equity of a property and casualty insurance group organized to market residential property insurance in North America. The Company measures the fair value of this investment using a DCF model and seeks to incorporate all relevant information reasonably available to it. The Company considers the contractual agreement which stipulates the methodology for calculating a dividend rate to be paid upon liquidation, conversion or redemption. At June 30, 2012, the dividend rate was 5.9%. In addition, the Company has estimated an illiquidity premium of 1.0% and a risk-free rate of 0.2%. To ensure the estimate for fair value determined using the DCF model is reasonable, the Company reviews private market comparables of similar investments, if available, and in particular, credit ratings of other private market comparables for similar investments to determine the appropriateness of its estimate of fair value using a DCF model. The fair value of the Company's investment in corporate fixed maturity investments determined by a DCF model is positively correlated to the dividend rate, and inversely correlated to the credit spread, illiquidity premium and the risk-free rate.
In addition, the Company's corporate fixed maturity investments include an investment with a fair value of $10.3 million at June 30, 2012 in the preferred equity of a company that provides insurance for a variety of veterinarian costs, including surgeries, medication and diagnostic testing. When utilizing an internal valuation model to determine the fair value of this investment, the Company uses a combination of quantitative and qualitative factors, which may include, but are not limited to, discounted cash flow analysis, financial statement analysis, budgets and forecasts, capital transactions and third party valuations. In circumstances where a private market transaction has recently occurred, the Company will evaluate the comparableness of that transaction and incorporate into its internal valuation model accordingly. Recent private market transactions of investments similar to that held by the Company have been used to determine the fair value of $10.3 million at June 30, 2012, as the Company believes it represents the price that would be received upon the sale of its investment in an orderly transaction among market participants. Consequently, should future relevant private market transactions occur, the Company will re-evaluate the information available used to determine fair value of this investment and record any adjustments to fair value in its consolidated statements of operations.
Other investments
Private equity partnerships
Level 3 - Included in the Company’s $360.3 million of investments in private equity partnerships at June 30, 2012 are alternative asset limited partnerships (or similar corporate structures) that invest in certain private equity asset classes including U.S. and global leveraged buyouts; mezzanine investments; distressed securities; real estate; and oil, gas and power. The fair value of private equity partnership investments is based on current estimated net asset values established in accordance with the governing documents of such investments and is obtained from the investment manager or general partner of the respective entity. The type of underlying investments held by the investee which form the basis of the net asset valuation include assets such as private business ventures, for which the Company does not have access to financial information. As a result, the Company is unable to corroborate the fair value measurement of the underlying investments of the private equity partnership and therefore requires significant management judgment to determine the fair value of the private equity partnership. In circumstances where there is a reporting lag between the current period end reporting date and the reporting date of the latest fund valuation, the Company estimates the fair value of these funds by starting with the prior month or quarter-end fund valuations, adjusting these valuations for actual capital calls, redemptions or distributions, as well as the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which the Company estimates the return for the current period, all relevant information reasonably available to the Company is utilized. This principally includes preliminary estimates reported to the Company by its fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to the Company with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar

24
    


types of investments for which the Company has obtained reported results, or other valuation methods, where possible. The range of such current estimated periodic returns for the six months ended June 30, 2012 was negative 19.7% to positive 12.6% with a weighted average of negative 1.4%. The fair value of the Company's investment in private equity partnerships is positively correlated to the estimated periodic rate of return. The Company also considers factors such as recent financial information, the value of capital transactions with the partnership and management’s judgment regarding whether any adjustments should be made to the net asset value. For each respective private equity partnership, the Company obtains and reviews the valuation methodology used by the investment manager or general partner and the latest audited financial statements to ensure that the investment partnership is following fair value principles consistent with GAAP in determining the net asset value of each limited partner's interest.
Senior secured bank loan funds
Level 3 - The Company has a $22.7 million investment in a closed end fund which invests primarily in loans. The Company has no right to redeem its investment in this fund. The Company’s investment in this fund is valued using estimated monthly net asset valuations received from the investment manager. The lock up provisions in this fund result in a lack of current observable market transactions between the fund participants and the fund, and therefore, the Company considers the fair value of its investment in this fund to be determined using Level 3 inputs. The Company obtains and reviews the latest audited financial statements to attempt to ensure that the fund is following fair value principles consistent with GAAP in determining the net asset value.
Hedge funds
Level 3 - The Company has $6.2 million of hedge fund investments that are invested in so called "side pockets" or illiquid investments. In these instances, the Company generally does not have the right to redeem its interest, and as such, the Company classifies this portion of its investment as Level 3. The fair value of these illiquid investments are determined by adjusting the previous periods' reported net asset value (generally one month in arrears) for an estimated periodic rate of return obtained from the respective investment manager.
For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the investment manager and the latest audited financial statements to ensure that the hedge fund investment is following fair value principles consistent with GAAP in determining the net asset value.
Miscellaneous other investments
Level 3 - Included in miscellaneous other investments is a loan to a third party with a fair value of $1.3 million. The Company determines the fair value of this loan using a DCF model and endeavors to incorporate all relevant information reasonably available, including the outstanding principal amount, interest rate inherent in the loan as determined using the 3-month LIBOR, credit spread and an illiquidity premium. The fair value of this loan is inversely correlated to the 3-month LIBOR, credit spread and illiquidity premium.
Other assets and liabilities
Assumed and ceded (re)insurance contracts
Level 3 - The $9.7 million fair value of the Company's assumed and ceded (re)insurance contracts accounted for at fair value is obtained through the use of an internal valuation model with the inputs to the internal valuation model based on proprietary data as observable market inputs are not available. The most significant unobservable inputs are the reserve for claims and claim expenses and losses recoverable. Generally, an increase (decrease) in the reserve for claims and claim expenses, or a decrease (increase) in losses recoverable, would result in a decrease (increase) to the fair value of the Company's assumed and ceded (re)insurance contracts.

25
    


Derivatives
Level 3 - Derivatives measured at fair value include $9.1 million of proprietary, non-exchange traded derivative-based risk management products primarily to address weather and energy risks, and hedging and trading activities related to these risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena and in instances where market prices are not available, the Company uses industry or internally developed valuation techniques such as spread option, Black Scholes, quanto and simulation modeling to determine fair value and are considered Level 3. These models may reference prices for similar instruments.
Observable and unobservable inputs to these valuation techniques vary by contract requirements and commodity type, are validated using market-based or independently sourced parameters where applicable and would typically include the following, if applicable, dependent on contract requirements and commodity type:
•
observable inputs: contract price, notional, option strike, term to expiry, interest rate, contractual limits;
•
unobservable inputs: correlation; and
•
both observable and unobservable: spot and forward volatilities, forward commodity price, forward weather curve, counterparty credit risk.
The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the above table on quantitative information.
If a trade has one or more significant valuation inputs that are unobservable, such trades are initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the initial valuation, the Company updates market observable inputs to reflect observable market changes. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. The Company seeks to use broker quotes in less liquid markets.
Changes in any or all of the unobservable inputs listed above may contribute positively or negatively to the overall portfolio fair value depending upon the underlying position. In general, movements in weather curves are the largest contributing factor that impact fair value. However, trades valued using unobservable inputs represent a small percentage of the total number of transactions in the portfolio.
Pricing models are internally approved by the Company's Risk Committee prior to implementation and are reviewed periodically.
Other
Level 3 - The Company has an investment of $14.2 million at June 30, 2012 in the common equity of a mortgage insurance company which provides private capital to lenders and investors that supports financing for homeowner mortgages. The fair value of this investment is based on the unadjusted net asset value obtained from the management of the mortgage insurance company. The fair value of the Company's investment is positively correlated to the net asset valuation. The Company also considers factors such as recent financial information, the value of capital transactions with the mortgage insurance company and management's judgment regarding whether any adjustments should be made to the net asset value.
The Company also has an investment in the preferred equity of a company that develops online risk management products primarily focused on motor fuels risk, more specifically, structuring products, sourcing the risk and facilitating the settlement of capital. The fair value of this investment at June 30, 2012 of $1.3 million was determined using recent private market transactions. In instances where private market transactions are not available, the fair value is measured using a number of qualitative and quantitative factors, including but not limited to a net asset estimation of the company, projected earnings, private market transactions, and any other information that may be available to the Company. At June 30, 2012, the Company determined that the fair value of its investment was appropriate when compared to the net asset position of the company and recent private market transactions. Should the net asset position of the company increase, the fair value of the Company's investment would also increase.

26
    


Below is a reconciliation of the beginning and ending balances, for the periods shown, of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs. Interest and dividend income are included in net investment income and are excluded from the reconciliation.
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
  
Fixed maturity
investments,
trading
 
Other
investments
 
Other assets
and
(liabilities)
 
Total
 
 
Balance – April 1, 2012
$
27,838

 
$
418,537

 
$
48,145

 
$
494,520

 
 
Total unrealized losses
 
 
 
 
 
 
 
 
 
Included in net investment income
(63
)
 
(13,013
)
 
—

 
(13,076
)
 
 
Included in other income
—

 
—

 
(15,576
)
 
(15,576
)
 
 
Total realized gains
 
 
 
 
 
 
 
 
 
Included in net investment income
—

 
—

 
—

 
—

 
 
Included in other income
—

 
—

 
22,076

 
22,076

 
 
Total foreign exchange (losses) gains
—

 
(1,394
)
 
371

 
(1,023
)
 
 
Purchases
—

 
5,956

 
40,878

 
46,834

 
 
Sales
—

 
—

 
(91,655
)
 
(91,655
)
 
 
Settlements
—

 
(19,581
)
 
29,946

 
10,365

 
 
Net transfers into Level 3
—

 
—

 
—

 
—

 
 
Balance – June 30, 2012
$
27,775

 
$
390,505

 
$
34,185

 
$
452,465

 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income
$
(63
)
 
$
(13,013
)
 
$
—

 
$
(13,076
)
 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)
$
—

 
$
—

 
$
8,019

 
$
8,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
  
Fixed maturity
investments,
trading
 
Other
investments
 
Other assets
and
(liabilities)
 
Total
 
 
Balance – January 1, 2012
$
27,761

 
$
396,526

 
$
28,526

 
$
452,813

 
 
Total unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net investment income
14

 
16,094

 
—

 
16,108

 
 
Included in other loss
—

 
—

 
2,987

 
2,987

 
 
Total realized gains
 
 
 
 
 
 
 
 
 
Included in net investment income
—

 
—

 
—

 
—

 
 
Included in other loss
—

 
—

 
(33,232
)
 
(33,232
)
 
 
Total foreign exchange losses
—

 
(664
)
 
(6
)
 
(670
)
 
 
Purchases
—

 
18,645

 
50,159

 
68,804

 
 
Sales
—

 
—

 
(105,086
)
 
(105,086
)
 
 
Settlements
—

 
(40,096
)
 
90,837

 
50,741

 
 
Net transfers into Level 3
—

 
—

 
—

 
—

 
 
Balance – June 30, 2012
$
27,775

 
$
390,505

 
$
34,185

 
$
452,465

 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income
$
14

 
$
16,094

 
$
—

 
$
16,108

 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)
$
—

 
$
—

 
$
9,678

 
$
9,678

 
 
 
 
 
 
 
 
 
 
 

27
    


 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
  
Fixed maturity
investments
trading
 
Other
investments
 
Other assets  and (liabilities)
 
Total
 
 
Balance – April 1, 2011
$
21,826

 
$
381,815

 
$
68,380

 
$
472,021

 
 
Total unrealized (losses) gains
 
 
 
 
 
 
 
 
 
Included in net investment income
(562
)
 
6,135

 
—

 
5,573

 
 
Included in other loss
—

 
—

 
91

 
91

 
 
Total realized gains
 
 
 
 
 
 
 
 
 
Included in net investment income
—

 
—

 
—

 
—

 
 
Included in other loss
—

 
—

 
3,307

 
3,307

 
 
Total foreign exchange losses
—

 
553

 
(91
)
 
462

 
 
Purchases
—

 
11,219

 
8,984

 
20,203

 
 
Sales
—

 
—

 
(6,864
)
 
(6,864
)
 
 
Settlements
—

 
(18,599
)
 
(815
)
 
(19,414
)
 
 
Net transfers into Level 3
—

 
—

 
—

 
—

 
 
Balance – June 30, 2011
$
21,264

 
$
381,123

 
$
72,992

 
$
475,379

 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income
$
(562
)
 
$
6,135

 
$
—

 
$
5,573

 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)
$
—

 
$
—

 
$
4,195

 
$
4,195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
  
Fixed maturity
investments
trading
 
Other
investments
 
Other assets  and (liabilities)
 
Total
 
 
Balance – January 1, 2011
$
21,785

 
$
362,102

 
$
16,499

 
$
400,386

 
 
Total unrealized (losses) gains
 
 
 
 
 
 
 
 
 
Included in net investment income
(521
)
 
29,892

 
—

 
29,371

 
 
Included in other income
—

 
—

 
41,599

 
41,599

 
 
Total realized gains
 
 
 
 
 
 
 
 
 
Included in net investment income
—

 
—

 
—

 
—

 
 
Included in other income
—

 
—

 
12,822

 
12,822

 
 
Total foreign exchange losses
—

 
1,922

 
(142
)
 
1,780

 
 
Purchases
—

 
28,684

 
10,615

 
39,299

 
 
Sales
—

 
—

 
(11,024
)
 
(11,024
)
 
 
Settlements
—

 
(41,477
)
 
2,623

 
(38,854
)
 
 
Net transfers into Level 3
—

 
—

 
—

 
—

 
 
Balance – June 30, 2011
$
21,264

 
$
381,123

 
$
72,992

 
$
475,379

 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income
$
(521
)
 
$
29,892

 
$
—

 
$
29,371

 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)
$
—

 
$
—

 
$
48,598

 
$
48,598

 
 
 
 
 
 
 
 
 
 
 

28
    


Financial Instruments Disclosed, But Not Carried, at Fair Value
The Company uses various financial instruments in the normal course of its business. The Company's insurance contracts are excluded from fair value of financial instruments accounting guidance, unless the Company elects the fair value option, and therefore, are not included in the amounts discussed herein. The carrying values of cash, accrued interest, receivables for investments sold, certain other assets, payables for investments purchased, certain other liabilities, and other financial instruments not included herein approximated their fair values.
Senior Notes
In January 2003, RenaissanceRe issued $100.0 million, which represents the carrying amount on the Company’s consolidated balance sheet, of 5.875% Senior Notes due February 15, 2013, with interest on the notes payable on February 15 and August 15 of each year. At June 30, 2012, the fair value of the 5.875% Senior Notes was $102.2 million (December 31, 2011 – $103.4 million).
In March 2010, RenRe North America Holdings Inc. (“RRNAH”) issued $250.0 million of 5.75% Senior Notes due March 15, 2020, with interest on the notes payable on March 15 and September 15 of each year. At June 30, 2012, the fair value of the 5.75% Senior Notes was $264.1 million (December 31, 2011 - $263.0 million).
The fair value of RenaissanceRe’s 5.875% Senior Notes and RRNAH’s 5.75% Senior Notes is determined using indicative market pricing obtained from third-party service providers, which the Company considers Level 2 in the fair value hierarchy. There have been no changes during the period in the Company's valuation technique used to determine the fair value of its Senior Notes.
The Fair Value Option for Financial Assets and Financial Liabilities
The Company has elected to account for certain assets and liabilities at fair value using the guidance under FASB ASC Topic Financial Instruments as the Company believes it represents the most meaningful measurement basis for these assets and liabilities. Below is a summary of the balances the Company has elected to account for at fair value:
 
 
 
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
 
Other investments
$
743,568

 
$
748,984

 
 
Other assets
$
25,104

 
$
19,628

 
 
 
 
 
 
 
Included in net investment income for the three and six months ended June 30, 2012 was net unrealized (losses) gains of $(13.4) million and $21.9 million related to the changes in fair value of other investments (2011 – $5.7 million and $33.7 million, respectively). Net unrealized losses related to the changes in the fair value of other assets and liabilities recorded in other (loss) income was $0.4 million and $2.5 million for the three and six months ended June 30, 2012 (2011 – $(0.8) million and $43.3 million, respectively).
Measuring the Fair Value of Other Investments Using Net Asset Valuations
The table below shows the Company’s portfolio of other investments measured using net asset valuations:
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012
Fair Value
 
Unfunded
Commitments
 
Redemption Frequency
 
Redemption
Notice Period (Minimum Days)
 
Redemption
Notice Period (Maximum Days)
 
 
Private equity partnerships
$
360,268

 
$
99,125

 
See below
 
See below
 
See below
 
 
Senior secured bank loan funds
269,317

 
2,901

 
See below
 
See below
 
See below
 
 
Hedge funds
6,243

 
—

 
See below
 
See below
 
See below
 
 
Total other investments measured using net asset valuations
$
635,828

 
$
102,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

29
    


Private equity partnerships – Included in the Company’s investments in private equity partnerships are alternative asset limited partnerships (or similar corporate structures) that invest in certain private equity asset classes including U.S. and global leveraged buyouts; mezzanine investments; distressed securities; real estate; and oil, gas and power. The fair values of the investments in this category have been estimated using the net asset value of the investments, as discussed in detail above. The Company generally has no right to redeem its interest in any of these private equity partnerships in advance of dissolution of the applicable partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the liquidation of the underlying assets of the applicable limited partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 7 to 10 years from inception of the limited partnership.
Senior secured bank loan funds – The Company’s investment in senior secured bank loan funds includes funds that invest primarily in bank loans and other senior debt instruments. The fair values of the investments in this category have been determined using the net asset value per share of the funds or the estimated net asset per share where applicable, as discussed in detail above. Investments of $246.6 million are redeemable, in part on a monthly basis, or in whole over a three month period.
The Company also has a $22.7 million investment in a closed end fund which invests in loans. The Company has no right to redeem its investment in this fund.
Hedge funds – The Company invests in hedge funds that pursue multiple strategies. The fair values of the investments in this category are estimated using the net asset value per share of the funds, as discussed in detail above. The remaining portion of the Company's investments in hedge funds at June 30, 2012, are $6.2 million of so called “side pocket” investments which are not redeemable at the option of the shareholder. As noted above, the Company fully redeemed the remaining non-side pocket investments in hedge funds during June 2012. The Company has retained its interest in the side pocket investments until the underlying investments attributable to such side pockets are liquidated, realized or deemed realized at the discretion of the fund manager.


30
    


NOTE 6. CEDED REINSURANCE
The Company purchases reinsurance and other protection to manage its risk portfolio and to reduce its exposure to large losses. The Company currently has in place contracts that provide for recovery of a portion of certain claims and claim expenses, generally in excess of various retentions or on a proportional basis. In addition to loss recoveries, certain of the Company’s ceded reinsurance contracts provide for recoveries of additional premiums, reinstatement premiums and for lost no-claims bonuses, which are incurred when losses are ceded to other reinsurance contracts. The Company remains liable to the extent that any reinsurance company fails to meet its obligations.
The following tables set forth the effect of reinsurance and retrocessional activity on premiums written and earned and on net claims and claim expenses incurred:
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
 
Premiums written
 
 
 
 
 
Direct
$
11,736

 
$
9,309

 
 
Assumed
655,600

 
632,254

 
 
Ceded
(239,706
)
 
(213,568
)
 
 
Net premiums written
$
427,630

 
$
427,995

 
 
Premiums earned
 
 
 
 
 
Direct
$
7,950

 
$
4,033

 
 
Assumed
341,620

 
306,757

 
 
Ceded
(105,154
)
 
(93,615
)
 
 
Net premiums earned
$
244,416

 
$
217,175

 
 
Claims and claim expenses
 
 
 
 
 
Gross claims and claim expenses incurred
$
70,101

 
$
164,670

 
 
Claims and claim expenses recovered
(20,550
)
 
(13,409
)
 
 
Net claims and claim expenses incurred
$
49,551

 
$
151,261

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Premiums written
 
 
 
 
 
Direct
$
20,199

 
$
15,561

 
 
Assumed
1,311,288

 
1,236,507

 
 
Ceded
(411,282
)
 
(371,498
)
 
 
Net premiums written
$
920,205

 
$
880,570

 
 
Premiums earned
 
 
 
 
 
Direct
$
15,737

 
$
6,515

 
 
Assumed
698,906

 
701,292

 
 
Ceded
(191,562
)
 
(185,091
)
 
 
Net premiums earned
$
523,081

 
$
522,716

 
 
Claims and claim expenses
 
 
 
 
 
Gross claims and claim expenses incurred
$
85,383

 
$
1,027,993

 
 
Claims and claim expenses recovered
(20,280
)
 
(248,195
)
 
 
Net claims and claim expenses incurred
$
65,103

 
$
779,798

 
 
 
 
 
 
 


31
    


NOTE 7. NONCONTROLLING INTERESTS
Redeemable Noncontrolling Interest – DaVinciRe
In October 2001, the Company formed DaVinciRe and DaVinci with other equity investors. RenaissanceRe owns a noncontrolling economic interest in DaVinciRe; however, because RenaissanceRe controls a majority of DaVinciRe’s outstanding voting rights, the consolidated financial statements of DaVinciRe are included in the consolidated financial statements of the Company. The portion of DaVinciRe’s earnings owned by third parties is recorded in the consolidated statements of operations as net (income) loss attributable to noncontrolling interests. The Company's ownership in DaVinciRe was 31.5% at June 30, 2012 (December 31, 2011 - 42.8%).
DaVinciRe shareholders are party to a shareholders agreement (the “Shareholders Agreement”) which provides DaVinciRe shareholders, excluding RenaissanceRe, with certain redemption rights that enable each shareholder to notify DaVinciRe of such shareholder’s desire for DaVinciRe to repurchase up to half of such shareholder’s initial aggregate number of shares held, subject to certain limitations, such as limiting the aggregate of all share repurchase requests to 25% of DaVinciRe’s capital in any given year and satisfying all applicable regulatory requirements. If total shareholder requests exceed 25% of DaVinciRe’s capital, the number of shares repurchased will be reduced among the requesting shareholders pro-rata, based on the amounts desired to be repurchased. Shareholders desiring to have DaVinci repurchase their shares must notify DaVinciRe before March 1 of each year. The repurchase price will be based on GAAP book value as of the end of the year in which the shareholder notice is given, and the repurchase will be effective as of such date. Payment will be made by April 1 of the following year, following delivery of the audited financial statements for the year in which the repurchase was effective. The repurchase price is subject to a true-up for development on outstanding loss reserves after settlement of all claims relating to the applicable years.
Certain third party shareholders of DaVinciRe submitted repurchase notices on or before the required annual redemption notice date of March 1, 2011, in accordance with the Shareholders Agreement. The repurchase notices submitted on or before March 1, 2011, were for shares of DaVinciRe with a GAAP book value of $9.2 million at December 31, 2011. Effective January 1, 2012, DaVinciRe redeemed the shares for $9.2 million, less a $1.8 million reserve holdback.
On June 1, 2011, DaVinciRe completed an equity raise of $100.0 million from new and existing shareholders, including $30.0 million contributed by the Company. As a result of the equity raise, the Company's ownership in DaVinciRe decreased to 42.8% effective June 1, 2011.
Effective January 1, 2012, an existing third party shareholder sold a portion of its shares in DaVinciRe to a new third party shareholder.  In connection with the sale by the existing third party shareholder, DaVinciRe retained a $4.9 million holdback.  In addition, effective January 1, 2012, the Company sold a portion of its shares of DaVinciRe to a separate new third party shareholder.  The Company sold these shares for $98.9 million, net of a $10.0 million reserve holdback due from DaVinciRe.  The Company's ownership in DaVinciRe was 42.8% at December 31, 2011 and subsequent to the above transactions, its ownership interest in DaVinciRe decreased to 34.7% effective January 1, 2012.
Certain third party shareholders of DaVinciRe submitted repurchase notices on or before the required annual redemption notice date of March 1, 2012, in accordance with the Shareholders Agreement.  The repurchase notices submitted on or before March 1, 2012, were for shares of DaVinciRe with a GAAP book value of $50.0 million at June 30, 2012.
On June 1, 2012, DaVinciRe completed an equity raise of $49.3 million from a new third party investor.  In addition, the Company and an existing third party investor each sold $24.7 million in common shares of DaVinciRe to another existing third party investor, for a total of $49.4 million.  In connection with the sale by the Company and the existing third party investor, DaVinciRe retained a $5.0 million holdback, $2.5 million of which is payable to the Company.  As a result of the above transactions, the Company's ownership in DaVinciRe decreased to 31.5% effective January 1, 2012.
The Company expects its ownership in DaVinciRe to fluctuate over time.

32
    


The activity in redeemable noncontrolling interest – DaVinciRe is detailed in the table below:
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – April 1
$
796,743

 
$
536,717

 
 
Purchase of shares from redeemable noncontrolling interest
—

 
(446
)
 
 
Sale of shares to redeemable noncontrolling interests
70,501

 
70,000

 
 
Comprehensive income:
 
 
 
 
 
Net income attributable to redeemable noncontrolling interest
33,634

 
21,733

 
 
Other comprehensive loss attributable to redeemable noncontrolling interest
—

 
(3
)
 
 
Balance – June 30
$
900,878

 
$
628,001

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – January 1
$
657,727

 
$
757,655

 
 
Purchase of shares from redeemable noncontrolling interest
—

 
(135,618
)
 
 
Sale of shares to redeemable noncontrolling interests
156,169

 
70,000

 
 
Comprehensive income:
 
 
 
 
 
Net income (loss) attributable to redeemable noncontrolling interest
86,982

 
(64,030
)
 
 
Other comprehensive loss attributable to redeemable noncontrolling interest
—

 
(6
)
 
 
Balance – June 30
$
900,878

 
$
628,001

 
 
 
 
 
 
 
Noncontrolling Interest - Angus Fund L.P. (the “Angus Fund”)
In December 2010, REAL and RenRe Commodity Advisors Inc. (“RRCA”), both wholly owned subsidiaries of the Company, formed the Angus Fund with other equity investors. REAL, the general partner of the Angus Fund, has invested $55 thousand in the Angus Fund, representing a 1.0% ownership interest at June 30, 2012 (December 31, 2011 - $41 thousand and 1.0%, respectively), and RRCA, a limited partner, has invested $2.0 million in the Angus Fund, representing a 35.1% ownership interest at June 30, 2012 (December 31, 2011 - $1.0 million and 24.2%, respectively). The Angus Fund was formed to provide capital to and make investments in companies primarily in the heating oil and propane distribution industries to supplement the Company’s weather and energy risk management operations. The Angus Fund meets the definition of a variable interest entity ("VIE"), therefore the Company evaluated its ownership in the Angus Fund to determine if it is the primary beneficiary. The Company has concluded it is the primary beneficiary of the Angus Fund as it has the power to direct, and has a more than insignificant economic interest in, the activities of the Angus Fund and as such, the financial position and results of operations of the Angus Fund are consolidated. The portion of the Angus Fund's earnings owned by third parties is recorded in the consolidated statements of operations as net (income) loss attributable to noncontrolling interest. The Company expects its ownership in the Angus Fund to fluctuate over time.
The activity in noncontrolling interest is detailed in the table below:
 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – April 1
$
3,892

 
$
3,160

 
 
Sale of shares by noncontrolling interest
—

 
100

 
 
Comprehensive income:
 
 
 
 
 
Net (loss) income attributable to noncontrolling interest
(10
)
 
170

 
 
Dividends on common shares
29

 
—

 
 
Balance – June 30
$
3,911

 
$
3,430

 
 
 
 
 
 
 

33
    


 
 
 
 
 
 
 
 
2012
 
2011
 
 
Balance – January 1
$
3,340

 
$
2,889

 
 
Sale of shares by noncontrolling interest
300

 
100

 
 
Comprehensive income:
 
 
 
 
 
Net income attributable to noncontrolling interest
283

 
441

 
 
Dividends on common shares
(12
)
 
—

 
 
Balance – June 30
$
3,911

 
$
3,430

 
 
 
 
 
 
 
NOTE 8. VARIABLE INTEREST ENTITIES
Effective January 1, 2012, the Company formed and launched a new managed joint venture, Upsilon Reinsurance Ltd. (“Upsilon Re”), a Bermuda domiciled special purpose insurer ("SPI"), to provide additional capacity to the worldwide aggregate and per-occurrence retrocessional property catastrophe excess of loss market for the 2012 underwriting year. The original business was written by Renaissance Reinsurance of Europe ("ROE"), a wholly owned subsidiary of RenaissanceRe, and included $37.4 million of gross premiums written. A portion of this business was in turn ceded to Upsilon Re under a fully-collateralized retrocessional reinsurance contract, effective January 1, 2012. In conjunction with the formation and launch of Upsilon Re, $16.8 million of non-voting Class B shares were sold to external investors, and the Company invested $48.8 million in Upsilon Re's non-voting Class B shares, representing a 74.5% ownership interest in Upsilon Re. The Class B shareholders will participate in substantially all of the profits or losses of Upsilon Re while the Class B shares remain outstanding. The holders of Class B shares indemnify Upsilon Re against losses relating to insurance risk and therefore these shares have been accounted for as prospective reinsurance under Financial Accounting Standards Board Accounting Standards Codification Topic Financial Services - Insurance. In addition, another third party investor supplied $17.6 million of capital through a reinsurance participation with ROE alongside Upsilon Re. Inclusive of the third party quota share agreement, the Company has a 61.4% participation in the original risks assumed by ROE. Both Upsilon Re and the third party reinsurance participation related to Upsilon Re are managed by RUM in return for an expense override, as well as a potential underwriting profit commission. Upsilon Re is considered a VIE and the Company is considered the primary beneficiary. As a result, Upsilon Re is consolidated by the Company and all significant inter-company transactions have been eliminated.
The Company's ownership interest in Upsilon Re could change over time, perhaps materially so, and the Company may also elect to underwrite additional risks within Upsilon Re and to write business within Upsilon Re in future underwriting years.
Effective June 1, 2012, the Company formed and launched a new managed joint venture, Timicuan Reinsurance III Limited (“Tim Re III”), a Bermuda domiciled SPI, to provide collateralized reinsurance in respect of a portfolio of Florida reinstatement premium protection ("RPP") contracts. The original business was written by Renaissance Reinsurance and DaVinci, and included $41.1 million of gross premiums written incepting June 1, 2012 and Renaissance Reinsurance and DaVinci ceded $37.7 million to Tim Re III under a fully-collateralized reinsurance contract. In conjunction with the formation and launch of Tim Re III, $44.8 million of non-voting Class B shares were sold to external investors, and the Company invested an additional $10.3 million in Tim Re III's non-voting Class B shares, representing an 18.6% ownership interest in Tim Re III. The Class B shareholders will participate in substantially all of the profits or losses of Tim Re III while the Class B shares remain outstanding. The holders of Class B shares indemnify Tim Re III against losses relating to insurance risk and therefore these shares have been accounted for as prospective reinsurance under Financial Accounting Standards Board Accounting Standards Codification Topic Financial Services - Insurance. In addition, another third party investor supplied $5.2 million of capital through a reinsurance participation with Renaissance Reinsurance and DaVinci, alongside Tim Re III. Both Tim Re III and the third party reinsurance participation related to Tim Re III are managed by RUM in return for a potential underwriting profit commission. Tim Re III is considered a VIE and the Company is considered the primary beneficiary. As a result, Tim Re III is consolidated by the Company and all significant inter-company transactions have been eliminated.


34
    


NOTE 9. SHAREHOLDERS’ EQUITY
The Board of Directors of RenaissanceRe declared, and RenaissanceRe paid, a dividend of $0.27 per common share to shareholders of record on March 15 and June 15, 2012, respectively.
The Company’s share repurchase program may be effected from time to time, depending on market conditions and other factors, through open market purchases and privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the program will expire when the Company has repurchased the full value of the shares authorized. The Company’s decision to repurchase common shares will depend on, among other matters, the market price of the common shares and the capital requirements of the Company. During the six months ended June 30, 2012, the Company repurchased 1.2 million shares in open market transactions, at an aggregate cost of $91.6 million, and at an average share price of $74.57. Subsequent to June 30, 2012 and through the period ending July 30, 2012, the Company repurchased approximately 71 thousand common shares in open market transactions at an aggregate cost of $5.3 million and at an average share price of $74.21. On February 22, 2012, the Company approved an increase in its authorized share repurchase program to an aggregate amount of $500.0 million. At June 30, 2012, $412.0 million remained available for repurchase under the Board authorized share repurchase program. See "Part II, Item 2 - Unregistered Sales of Equity Securities and use of Proceeds" for additional information.
In December 2006, the Company raised $300.0 million through the issuance of 12 million Series D Preference Shares at $25 per share and in March 2004, the Company raised $250.0 million through the issuance of 10 million Series C Preference Shares at $25 per share. The Series D and Series C Preference Shares may be redeemed at $25 per share at the Company’s option on or after December 1, 2011 and March 23, 2009, respectively. Dividends on the Series D and Series C Preference Shares are cumulative from the date of original issuance and are payable quarterly in arrears at 6.60% and 6.08%, respectively, when, if, and as declared by the Board of Directors. The preference shares have no stated maturity and are not convertible into any other securities of the Company. Generally, the preference shares have no voting rights. Whenever dividends payable on the preference shares are in arrears (whether or not such dividends have been earned or declared) in an amount equivalent to dividends for six full dividend periods (whether or not consecutive), the holders of the preference shares, voting as a single class regardless of class or series, will have the right to elect two directors to the Board of Directors of the Company.
During the six months ended June 30, 2012, the Company declared and paid $17.5 million in preference share dividends (2011 – $17.5 million).


35
    


NOTE 10. EARNINGS PER SHARE
The Company accounts for its earnings per share in accordance with FASB ASC Topic Earnings per Share. Basic earnings per common share is based on weighted average common shares and excludes any dilutive effects of stock options and restricted stock. Diluted earnings per common share assumes the exercise of all dilutive stock options and restricted stock grants. In accordance with FASB ASC Topic Earnings per Share, earnings per share calculations use average common shares outstanding - basic, when the Company is in a net loss position for the period.
The following table sets forth the computation of basic and diluted earnings per common share:
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
 
(thousands of shares)
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income available to RenaissanceRe common shareholders
$
142,270

 
$
24,764

 
 
Amount allocated to participating common shareholders (1)
(2,236
)
 
(461
)
 
 
Net income allocated to RenaissanceRe common shareholders
$
140,034

 
$
24,303

 
 
Denominator:
 
 
 
 
 
Denominator for basic income per RenaissanceRe common share - weighted average common shares
50,278

 
50,493

 
 
Per common share equivalents of employee stock options and restricted shares
734

 
557

 
 
Denominator for diluted income per RenaissanceRe common share - adjusted weighted average common shares and assumed conversions
51,012

 
51,050

 
 
Basic income per RenaissanceRe common share
$
2.78

 
$
0.48

 
 
Diluted income per RenaissanceRe common share
$
2.75

 
$
0.48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
(thousands of shares)
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income (loss) available (attributable) to RenaissanceRe common shareholders
$
343,699

 
$
(223,269
)
 
 
Amount allocated to participating common shareholders (1)
(5,601
)
 
(514
)
 
 
Net income (loss) allocated to RenaissanceRe common shareholders
$
338,098

 
$
(223,783
)
 
 
Denominator:
 
 
 
 
 
Denominator for basic income (loss) per RenaissanceRe common share - weighted average common shares
50,328

 
50,994

 
 
Per common share equivalents of employee stock options and restricted shares
669

 
—

 
 
Denominator for diluted income (loss) per RenaissanceRe common share - adjusted weighted average common shares and assumed conversions
50,997

 
50,994

 
 
Basic income (loss) per RenaissanceRe common share
$
6.72

 
$
(4.39
)
 
 
Diluted income (loss) per RenaissanceRe common share
$
6.63

 
$
(4.39
)
 
 
 
 
 
 
 
(1)
Represents earnings attributable to holders of unvested restricted shares issued under the Company’s 2001 Stock Incentive Plan and Non-Employee Director Stock Incentive Plan.


36
    


NOTE 11. SEGMENT REPORTING
The Company has three reportable segments: Reinsurance, Lloyd's and Insurance.
The Company's Reinsurance operations are comprised of: 1) property catastrophe reinsurance, primarily written through Renaissance Reinsurance and DaVinci; 2) specialty reinsurance, primarily written through Renaissance Reinsurance and DaVinci; and 3) certain property catastrophe and specialty joint ventures, as described herein. The Reinsurance segment is managed by the Global Chief Underwriting Officer, who leads a team of underwriters, risk modelers and other industry professionals, who have access to the Company's proprietary risk management, underwriting and modeling resources and tools.
The Company's Lloyd's segment includes reinsurance and insurance business written through Syndicate 1458. Syndicate 1458 started writing certain lines of insurance and reinsurance business incepting on or after June 1, 2009. The syndicate was established to enhance the Company's underwriting platform by providing access to Lloyd's extensive distribution network and worldwide licenses and is managed by the Chief Underwriting Officer Lloyd's. RenaissanceRe Corporate Capital (UK) Limited (“RenaissanceRe CCL”), an indirect wholly owned subsidiary of the Company, is the sole corporate member of Syndicate 1458.
The Company's Insurance segment includes the operations of the Company's former Insurance segment that were not sold pursuant to the Stock Purchase Agreement with QBE, as discussed in “Note 1. Organization”. The Insurance segment is managed by the Global Chief Underwriting Officer. The Insurance business is written by Glencoe Insurance Ltd. (“Glencoe”). Glencoe is a Bermuda domiciled excess and surplus lines insurance company that is currently eligible to do business on an excess and surplus lines basis in 49 U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
The financial results of the Company's strategic investments, weather and energy risk management operations and noncontrolling interests are included in the Other category of the Company's segment results. Also included in the Other category of the Company's segment results are the Company's investments in other ventures, investments unit, corporate expenses and capital servicing costs.
The Company does not manage its assets by segment; accordingly, net investment income and total assets are not allocated to the segments.

37
    


A summary of the significant components of the Company's revenues and expenses is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2012
Reinsurance
 
Lloyd’s
 
Insurance
 
Other
 
Total
 
 
Gross premiums written
$
617,039

 
$
50,297

 
$
—

  
$
—

 
$
667,336

 
 
Net premiums written
$
379,369

 
$
48,510

 
$
(249
)
 
—

 
$
427,630

 
 
Net premiums earned
$
214,296

 
$
30,369

 
$
(249
)
 
—

 
$
244,416

 
 
Net claims and claim expenses incurred
35,488

 
14,960

 
(897
)
 
—

 
49,551

 
 
Acquisition expenses
20,098

 
5,510

 
—

 
—

 
25,608

 
 
Operational expenses
30,346

 
10,806

 
255

 
—

 
41,407

 
 
Underwriting income (loss)
$
128,364

 
$
(907
)
 
$
393

 
—

 
127,850

 
 
Net investment income
 
 
 
 
 
 
14,743

 
14,743

 
 
Net foreign exchange gains
 
 
 
 
 
 
2,410

 
2,410

 
 
Equity in earnings of other ventures
 
 
 
 
 
 
6,846

 
6,846

 
 
Other income
 
 
 
 
 
 
11,289

 
11,289

 
 
Net realized and unrealized gains on investments
 
 
 
 
 
 
31,003

 
31,003

 
 
Net other-than-temporary impairments
 
 
 
 
 
 
(209
)
 
(209
)
 
 
Corporate expenses
 
 
 
 
 
 
(4,067
)
 
(4,067
)
 
 
Interest expense
 
 
 
 
 
 
(5,716
)
 
(5,716
)
 
 
Income from continuing operations before taxes
 
 
 
 
 
 
 
 
184,149

 
 
Income tax expense
 
 
 
 
 
 
(898
)
 
(898
)
 
 
Income from discontinued operations
 
 
 
 
 
 
1,393

 
1,393

 
 
Net income attributable to noncontrolling interests
 
 
 
 
 
 
(33,624
)
 
(33,624
)
 
 
Dividends on preference shares
 
 
 
 
 
 
(8,750
)
 
(8,750
)
 
 
Net income available to RenaissanceRe common shareholders
 
 
 
 
 
 
 
 
$
142,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
76,631

 
$
18,366

 
$
—

  
 
 
$
94,997

 
 
Net claims and claim expenses incurred – prior accident years
(41,143
)
 
(3,406
)
 
(897
)
 
 
 
(45,446
)
 
 
Net claims and claim expenses incurred – total
$
35,488

 
$
14,960

 
$
(897
)
 
 
 
$
49,551

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
35.8
 %
 
60.5
 %
 
—
 %
 
 
 
38.9
 %
 
 
Net claims and claim expense ratio – prior accident years
(19.2
)%
 
(11.2
)%
 
360.2
 %
 
 
 
(18.6
)%
 
 
Net claims and claim expense ratio – calendar year
16.6
 %
 
49.3
 %
 
360.2
 %
 
 
 
20.3
 %
 
 
Underwriting expense ratio
23.5
 %
 
53.7
 %
 
(102.4
)%
 
 
 
27.4
 %
 
 
Combined ratio
40.1
 %
 
103.0
 %
 
257.8
 %
 
 
 
47.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 


38
    


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2012
Reinsurance
 
Lloyd’s
 
Insurance
 
Eliminations
(1)
 
Other
 
Total
 
 
Gross premiums written
$
1,226,801

 
$
105,114

 
$
—

 
$
(428
)
 
$
—

 
$
1,331,487

 
 
Net premiums written
$
838,007

 
$
82,447

 
$
(249
)
 
 
 
—

 
$
920,205

 
 
Net premiums earned
$
468,114

 
$
55,191

 
$
(224
)
 
 
 
—

 
$
523,081

 
 
Net claims and claim expenses incurred
43,812

 
23,961

 
(2,670
)
 
 
 
—

 
65,103

 
 
Acquisition expenses
39,484

 
10,178

 
57

 
 
 
—

 
49,719

 
 
Operational expenses
62,390

 
20,863

 
537

 
 
 
—

 
83,790

 
 
Underwriting income
$
322,428

 
$
189

 
$
1,852

 
 
 
—

 
324,469

 
 
Net investment income
 
 
 
 
 
 
 
 
81,714

 
81,714

 
 
Net foreign exchange gains
 
 
 
 
 
 
 
 
950

 
950

 
 
Equity in earnings of other ventures
 
 
 
 
 
 
 
 
12,316

 
12,316

 
 
Other loss
 
 
 
 
 
 
 
 
(27,805
)
 
(27,805
)
 
 
Net realized and unrealized gains on investments
 
 
 
 
 
 
 
 
77,116

 
77,116

 
 
Net other-than-temporary impairments
 
 
 
 
 
 
 
 
(343
)
 
(343
)
 
 
Corporate expenses
 
 
 
 
 
 
 
 
(8,878
)
 
(8,878
)
 
 
Interest expense
 
 
 
 
 
 
 
 
(11,434
)
 
(11,434
)
 
 
Income from continuing operations before taxes
 
 
 
 
 
 
 
 
 
 
448,105

 
 
Income tax expense
 
 
 
 
 
 
 
 
(861
)
 
(861
)
 
 
Income from discontinued operations
 
 
 
 
 
 
 
 
1,220

 
1,220

 
 
Net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
(87,265
)
 
(87,265
)
 
 
Dividends on preference shares
 
 
 
 
 
 
 
 
(17,500
)
 
(17,500
)
 
 
Net income available to RenaissanceRe common shareholders
 
 
 
 
 
 
 
 
 
 
$
343,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
131,775

 
$
34,646

 
$
—

  
 
 
 
 
$
166,421

 
 
Net claims and claim expenses incurred – prior accident years
(87,963
)
 
(10,685
)
 
(2,670
)
 
 
 
 
 
(101,318
)
 
 
Net claims and claim expenses incurred – total
$
43,812

 
$
23,961

 
$
(2,670
)
 
 
 
 
 
$
65,103

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
28.2
 %
 
62.8
 %
 
—
 %
 
 
 
 
 
31.8
 %
 
 
Net claims and claim expense ratio – prior accident years
(18.8
)%
 
(19.4
)%
 
1,192.0
 %
 
 
 
 
 
(19.4
)%
 
 
Net claims and claim expense ratio – calendar year
9.4
 %
 
43.4
 %
 
1,192.0
 %
 
 
 
 
 
12.4
 %
 
 
Underwriting expense ratio
21.7
 %
 
56.3
 %
 
(265.2
)%
 
 
 
 
 
25.6
 %
 
 
Combined ratio
31.1
 %
 
99.7
 %
 
926.8
 %
 
 
 
 
 
38.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents $0.4 million of gross premiums ceded from the Reinsurance segment to the Lloyd’s segment.

39
    


 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2011
Reinsurance
 
Lloyd’s
 
Insurance
 
Other
 
Total
 
 
Gross premiums written
$
607,404

 
$
34,126

 
$
33

  
$
—

 
$
641,563

 
 
Net premiums written
$
395,856

 
$
32,084

 
$
55

 
—

 
$
427,995

 
 
Net premiums earned
$
199,461

 
$
17,233

 
$
481

 
—

 
$
217,175

 
 
Net claims and claim expenses incurred
143,219

 
8,619

 
(577
)
 
—

 
151,261

 
 
Acquisition expenses
10,431

 
3,305

 
147

 
—

 
13,883

 
 
Operational expenses
32,901

 
8,635

 
763

 
—

 
42,299

 
 
Underwriting income (loss)
$
12,910

 
$
(3,326
)
 
$
148

 
—

 
9,732

 
 
Net investment income
 
 
 
 
 
 
33,328

 
33,328

 
 
Net foreign exchange losses
 
 
 
 
 
 
(4,521
)
 
(4,521
)
 
 
Equity in earnings of other ventures
 
 
 
 
 
 
5,128

 
5,128

 
 
Other loss
 
 
 
 
 
 
(5,167
)
 
(5,167
)
 
 
Net realized and unrealized gains on investments
 
 
 
 
 
 
34,979

 
34,979

 
 
Corporate expenses
 
 
 
 
 
 
(4,011
)
 
(4,011
)
 
 
Interest expense
 
 
 
 
 
 
(5,730
)
 
(5,730
)
 
 
Income from continuing operations before taxes
 
 
 
 
 
 
 
 
63,738

 
 
Income tax benefit
 
 
 
 
 
 
1,773

 
1,773

 
 
Loss from discontinued operations
 
 
 
 
 
 
(10,094
)
 
(10,094
)
 
 
Net income attributable to redeemable noncontrolling interest – DaVinciRe
 
 
 
 
 
 
(21,903
)
 
(21,903
)
 
 
Dividends on preference shares
 
 
 
 
 
 
(8,750
)
 
(8,750
)
 
 
Net income available to RenaissanceRe common shareholders
 
 
 
 
 
 
 
 
$
24,764

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
162,398

 
$
9,612

 
$
(78
)
 
 
 
$
171,932

 
 
Net claims and claim expenses incurred – prior accident years
(19,179
)
 
(993
)
 
(499
)
 
 
 
(20,671
)
 
 
Net claims and claim expenses incurred – total
$
143,219

 
$
8,619

 
$
(577
)
 
 
 
$
151,261

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
81.4
 %
 
55.8
 %
 
(16.2
)%
 
 
 
79.2
 %
 
 
Net claims and claim expense ratio – prior accident years
(9.6
)%
 
(5.8
)%
 
(103.8
)%
 
 
 
(9.6
)%
 
 
Net claims and claim expense ratio – calendar year
71.8
 %
 
50.0
 %
 
(120.0
)%
 
 
 
69.6
 %
 
 
Underwriting expense ratio
21.7
 %
 
69.3
 %
 
189.2
 %
 
 
 
25.9
 %
 
 
Combined ratio
93.5
 %
 
119.3
 %
 
69.2
 %
 
 
 
95.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 


40
    


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2011
Reinsurance
 
Lloyd’s
 
Insurance
 
Eliminations 
(1)
 
Other
 
Total
 
 
Gross premiums written
$
1,181,086

 
$
70,746

 
$
313

  
$
(77
)
 
$
—

 
$
1,252,068

 
 
Net premiums written
$
819,422

 
$
60,821

 
$
327

 
 
 
—

 
$
880,570

 
 
Net premiums earned
$
488,890

 
$
32,907

 
$
919

 
 
 
—

 
$
522,716

 
 
Net claims and claim expenses incurred
738,623

 
39,142

 
2,033

 
 
 
—

 
779,798

 
 
Acquisition expenses
40,223

 
5,766

 
229

 
 
 
—

 
46,218

 
 
Operational expenses
65,264

 
17,607

 
1,258

 
 
 
—

 
84,129

 
 
Underwriting loss
$
(355,220
)
 
$
(29,608
)
 
$
(2,601
)
 
 
 
—

 
(387,429
)
 
 
Net investment income
 
 
 
 
 
 
 
 
93,609

 
93,609

 
 
Net foreign exchange losses
 
 
 
 
 
 
 
 
(3,861
)
 
(3,861
)
 
 
Equity in losses of other ventures
 
 
 
 
 
 
 
 
(18,625
)
 
(18,625
)
 
 
Other income
 
 
 
 
 
 
 
 
44,978

 
44,978

 
 
Net realized and unrealized gains on investments
 
 
 
 
 
 
 
 
29,765

 
29,765

 
 
Corporate expenses
 
 
 
 
 
 
 
 
(6,075
)
 
(6,075
)
 
 
Interest expense
 
 
 
 
 
 
 
 
(11,925
)
 
(11,925
)
 
 
Loss from continuing operations before taxes
 
 
 
 
 
 
 
 
 
 
(259,563
)
 
 
Income tax benefit
 
 
 
 
 
 
 
 
1,825

 
1,825

 
 
Loss from discontinued operations
 
 
 
 
 
 
 
 
(11,620
)
 
(11,620
)
 
 
Net loss attributable to redeemable noncontrolling interest – DaVinciRe
 
 
 
 
 
 
 
 
63,589

 
63,589

 
 
Dividends on preference shares
 
 
 
 
 
 
 
 
(17,500
)
 
(17,500
)
 
 
Net loss attributable to RenaissanceRe common shareholders
 
 
 
 
 
 
 
 
 
 
$
(223,269
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
829,760

 
$
38,938

 
$
(69
)

 
 
 
 
$
868,629

 
 
Net claims and claim expenses incurred – prior accident years
(91,137
)
 
204

 
2,102

 
 
 
 
 
(88,831
)
 
 
Net claims and claim expenses incurred – total
$
738,623

 
$
39,142

 
$
2,033

 
 
 
 
 
$
779,798

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
169.7
 %
 
118.3
%
 
(7.5
)%
 
 
 
 
 
166.2
 %
 
 
Net claims and claim expense ratio – prior accident years
(18.6
)%
 
0.6
%
 
228.7
 %
 
 
 
 
 
(17.0
)%
 
 
Net claims and claim expense ratio – calendar year
151.1
 %
 
118.9
%
 
221.2
 %
 
 
 
 
 
149.2
 %
 
 
Underwriting expense ratio
21.6
 %
 
71.1
%
 
161.8
 %
 
 
 
 
 
24.9
 %
 
 
Combined ratio
172.7
 %
 
190.0
%
 
383.0
 %
 
 
 
 
 
174.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents $0.1 million of gross premiums ceded from the Reinsurance segment to the Lloyd’s segment.

41
    


NOTE 12. DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments such as futures, options, swaps, forward contracts and other derivative contracts primarily to manage its foreign currency exposure, obtain exposure to a particular financial market, for yield enhancement, or for trading and speculation. The Company accounts for its derivatives in accordance with FASB ASC Topic Derivatives and Hedging, which requires all derivatives to be recorded at fair value on the Company's balance sheet as either assets or liabilities, depending on the rights or obligations of the derivatives, with changes in fair value reflected in current earnings. The Company does not currently apply hedge accounting in respect of any positions reflected in its consolidated financial statements. Where the Company has entered into master netting agreements with counterparties, or the Company has the legal and contractual right to offset positions, the derivative positions are generally netted by counterparty and are reported accordingly in other assets and other liabilities.
The table below shows the location on the consolidated balance sheets and fair value of the Company’s principal derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
 
June 30,
2012
 
December 31,
2011
 
 
  
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
 
Interest rate futures
Other assets
 
$
2,301

 
Other assets
 
$
612

 
 
Foreign currency forward contracts (1)
Other assets
 
4,278

 
Other assets
 
—

 
 
Foreign currency forward contracts (2)
Other liabilities
 
3,359

 
Other liabilities
 
7,219

 
 
Foreign currency forward contracts (3)
Other assets
 
—

 
Other assets
 
387

 
 
Credit default swaps
Other assets
 
491

 
Other assets
 
—

 
 
Energy and weather contracts (4)
Other assets
 
27,516

 
Other assets
 
52,721

 
 
Total
 
 
$
37,945

 
 
 
$
60,939

 
 
 
 
 
 
 
 
 
 
 
 
  
Derivative Liabilities
 
 
 
June 30,
2012
 
December 31,
2011
 
 
  
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
 
Interest rate futures
Other liabilities
 
$
289

 
Other liabilities
 
$
339

 
 
Foreign currency forward contracts (1)
Other liabilities
 
4,987

 
Other liabilities
 
11,754

 
 
Foreign currency forward contracts (2)
Other liabilities
 
3,684

 
Other liabilities
 
1,606

 
 
Foreign currency forward contracts (3)
Other assets
 
175

 
Other assets
 
—

 
 
Credit default swaps
Other liabilities
 
536

 
Other liabilities
 
539

 
 
Energy and weather contracts (4)
Other liabilities
 
13,522

 
Other liabilities
 
43,389

 
 
Total
 
 
$
23,193

 
 
 
$
57,627

 
 
 
 
 
 
 
 
 
 
 
(1)
Contracts used to manage foreign currency risks in underwriting and non-investment operations.
(2)
Contracts used to manage foreign currency risks in investment operations. Included in other liabilities are derivative assets of $3.4 million (December 31, 2011 – $7.2 million) which are netted with derivative liabilities of $3.7 million (December 31, 2011 – $1.6 million) under a master netting arrangements.
(3)
Contracts used to manage foreign currency risks in energy and risk operations.
(4)
Included in other assets is $56.8 million of derivative assets (December 31, 2011 – $104.6 million) and $29.3 million of derivative liabilities (December 31, 2011 – $51.9 million). Included in other liabilities is $5.2 million of derivative assets (December 31, 2011 – $8.8 million) and $18.7 million of derivative liabilities (December 31, 2011 – $52.2 million).

42
    


The location and amount of the gain (loss) recognized in the Company’s consolidated statements of operations related to its derivative instruments is shown in the following table:
 
 
 
 
 
 
 
 
 
 
Location of gain (loss)
recognized on derivatives
 
Amount of gain (loss) recognized on
derivatives
 
 
Three months ended June 30,
 
 
2012
 
2011
 
 
Interest rate futures
Net investment income
 
$
(2,847
)
 
$
(7,693
)
 
 
Foreign currency forward contracts (1)
Net foreign exchange gains (losses)
 
(2,183
)
 
9,208

 
 
Foreign currency forward contracts (2)
Net foreign exchange gains (losses)
 
1,899

 
(7,752
)
 
 
Foreign currency forward contracts (3)
Net foreign exchange gains (losses)
 
376

 
(212
)
 
 
Credit default swaps
Net investment income
 
(24
)
 
420

 
 
Energy and weather contracts
Other income (loss)
 
11,987

 
1,429

 
 
Total
 
 
$
9,208

 
$
(4,600
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Location of gain (loss)
recognized on derivatives
 
Amount of gain (loss) recognized on
derivatives
 
 
Six months ended June 30,
 
 
2012
 
2011
 
 
Interest rate futures
Net investment income
 
$
(1,817
)
 
$
(8,347
)
 
 
Foreign currency forward contracts (1)
Net foreign exchange gains (losses)
 
1,369

 
17,007

 
 
Foreign currency forward contracts (2)
Net foreign exchange gains (losses)
 
(2,349
)
 
(21,152
)
 
 
Foreign currency forward contracts (3)
Net foreign exchange gains (losses)
 
513

 
(648
)
 
 
Credit default swaps
Net investment income
 
534

 
1,142

 
 
Energy and weather contracts
Other income (loss)
 
(16,726
)
 
9,929

 
 
Platinum warrant
Other income (loss)
 
—

 
2,975

 
 
Total
 
 
$
(18,476
)
 
$
906

 
 
 
 
 
 
 
 
 
(1)
Contracts used to manage foreign currency risks in underwriting and non-investment operations.
(2)
Contracts used to manage foreign currency risks in investment operations.
(3)
Contracts used to manage foreign currency risks in energy and risk operations.
The Company is not aware of the existence of any credit-risk related contingent features that it believes would be triggered in its derivative instruments that are in a net liability position at June 30, 2012.
Interest Rate Futures
The Company uses interest rate futures within its portfolio of fixed maturity investments to manage its exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk. At June 30, 2012, the Company had $360.2 million of notional long positions and $303.7 million of notional short positions of primarily Eurodollar, U.S. treasury and non-U.S. dollar futures contracts (December 31, 2011 – $3.2 billion and $285.7 million, respectively). The fair value of these derivatives is determined using exchange traded prices.

43
    


Foreign Currency Derivatives
The Company’s functional currency is the U.S. dollar. The Company writes a portion of its business in currencies other than U.S. dollars and may, from time to time, experience foreign exchange gains and losses in the Company’s consolidated financial statements. All changes in exchange rates, with the exception of non-U.S. dollar denominated investments classified as available for sale and non-monetary assets and liabilities, are recognized currently in the Company’s consolidated statements of operations.
Underwriting Operations Related Foreign Currency Contracts
The Company’s foreign currency policy with regard to its underwriting operations is generally to hold foreign currency assets, including cash, investments and receivables that approximate the foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable. When necessary, the Company may use foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar denominated assets and liabilities associated with its underwriting operations. The fair value of the Company's underwriting operations related foreign currency contracts is determined using indicative pricing obtained from counterparties or broker quotes. At June 30, 2012, the Company had outstanding underwriting related foreign currency contracts of $179.7 million in notional long positions and $503.4 million notional in short positions, denominated in U.S. dollars (December 31, 2011 – $160.5 million and $700.8 million, respectively).
Investment Portfolio Related Foreign Currency Forward Contracts
The Company’s investment operations are exposed to currency fluctuations through its investments in non-U.S. dollar fixed maturity investments, short term investments and other investments. To economically hedge its exposure to currency fluctuations from these investments, the Company has entered into foreign currency forward contracts. Foreign exchange gains (losses) associated with the Company’s hedging of these non-U.S. dollar investments are recorded in net foreign exchange (losses) gains in its consolidated statements of operations. The fair value of the Company's investment portfolio related foreign currency forward contracts is determined using an interpolated rate based on closing forward market rates. At June 30, 2012, the Company had outstanding investment portfolio related foreign currency contracts of $198.3 million in notional long positions and $284.6 million in notional short positions, denominated in U.S. dollars (December 31, 2011 – $48.1 million and $211.6 million, respectively).
Energy and Risk Operations Related Foreign Currency Contracts
The Company’s energy and risk operations are exposed to currency fluctuations through certain derivative transactions it enters into that are denominated in non-U.S. dollars. The Company may, from time to time, use foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar denominated assets and liabilities associated with these operations. The fair value of the Company's energy and risk operations related foreign currency contracts is based on exchange traded prices. At June 30, 2012, the Company’s energy and risk operations had foreign currency contracts of $Nil in notional long positions and $16.7 million in notional short positions (December 31, 2011 – $7.8 million and $12.7 million, respectively).
Credit Derivatives
The Company’s exposure to credit risk is primarily due to its fixed maturity investments, short term investments, premiums receivable and reinsurance recoverable.  From time to time, the Company purchases credit derivatives to hedge its exposures in the insurance industry, and to assist in managing the credit risk associated with ceded reinsurance.  The Company also employs credit derivatives in its investment portfolio to either assume credit risk or hedge its credit exposure. The fair value of the credit derivatives is determined using industry valuation models, broker bid indications or internal pricing valuation techniques.  The fair value of these credit derivatives can change based on a variety of factors including changes in credit spreads, default rates and recovery rates, the correlation of credit risk between the referenced credit and the counterparty, and market rate inputs such as interest rates. At June 30, 2012, the Company had outstanding credit derivatives of $15.0 million in notional long positions and $24.4 million in notional short positions, denominated in U.S. dollars (December 31, 2011 – $15.0 million and $38.1 million, respectively).

44
    


Energy and Weather-Related Derivatives
The Company regularly transacts in certain derivative-based risk management products primarily to address weather and energy risks and engages in hedging and trading activities related to these risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Currently, a percentage of the Company’s derivative-based risk management products are transacted on a dual-trigger basis combining weather or other natural phenomenon, with prices for commodities or securities related to energy or agriculture. The fair value of these contracts is obtained through the use of quoted market prices, or in the absence of such quoted prices, industry or internal valuation models. Generally, the Company’s current portfolio of such derivative contracts is of comparably short duration and such contracts are predominantly seasonal in nature. Over time, the Company currently expects that its participation in these markets, and the impact of these operations on its financial results, is likely to increase on both an absolute and relative basis.
As of the dates set forth below, the Company had the following gross derivative contract positions outstanding relating to its energy and weather derivatives trading activities.
 
 
 
 
 
 
 
 
 
 
Quantity (1)
 
 
 
 
 
June 30,
2012
 
December 31, 2011
 
Unit of measurement
 
 
Energy
170,095,670

 
240,363,364

 
One million British thermal units (“MMBTUs")
 
 
Temperature
24,141,394

 
14,917,438

 
$ per Degree Day Fahrenheit
 
 
Agriculture
29,798,000

 
6,098,000

 
Bushels
 
 
Precipitation
1,799,475

 
65,000

 
$ per Inch
 
 
Wind
146

 
712

 
$ per Meters per Second Hour
 
 
 
 
 
 
 
 
 
(1)
Represents the sum of gross long and gross short derivative contracts.
The Company uses, among other things, value-at-risk (“VaR”) analysis to monitor the risks associated with its energy and weather derivatives trading portfolio. VaR is a tool that measures the potential loss that could occur if the Company's trading positions were maintained over a defined period of time, calculated at a given statistical confidence level. Due to the seasonal nature of the Company's energy and weather derivatives trading activities, the VaR is based on a rolling two season (one-year) holding period assuming no dynamic trading during the holding period. A 99% confidence level is used for the VaR analysis. A 99% confidence level implies that within a one-year period, the potential loss in the Company's portfolio is not expected to exceed the VaR estimate in 99% of the possible modeled outcomes. In the remaining estimated 1% of the possible outcomes, the anticipated potential loss is expected to be higher than the VaR figure, and on average substantially higher.
The VaR model, based on a Monte Carlo simulation methodology, seeks to take into account correlations between different positions and potential for movements to offset one another within the portfolio. The expected value of the risk factors in the Company's portfolio is generally obtained from exchange-traded futures markets. For most of the risk factors, the volatility is derived from exchange-traded options markets. For those risk factors for which exchange-traded options might not exist, the volatility is based on historical analysis matched to broker quotes from the over-the-counter market, where available. The joint distribution of outcomes is based on our estimate of the historical seasonal dependence among the underlying risk factors, scaled to the current market levels. The Company then estimates the expected outcomes by applying a Monte Carlo simulation to these risk factors. The joint distribution of the simulated risk factors is then filtered through the portfolio positions, and then the distribution of the outcomes is realized. The 99th percentile of this distribution is then calculated as the portfolio VaR. Among the significant limitations of this methodology is that the market data used to forecast parameters of the model may not be an appropriate proxy of those parameters. The VaR methodology uses a number of assumptions, such as (i) risks are measured under average market conditions, assuming normal distribution of market risk factors, (ii) future movements in market risk factors follow estimated historical movements, and (iii) the assessed exposures do not change during the holding period. We believe the VaR methodology has utility but do not derive absolute assurance from it. Accordingly, there is no guarantee that these assumptions will prove correct and actual outcomes may vary, perhaps substantially and adversely. The Company expects that, for any given period, its actual results will differ from its assumptions, including with respect to previously estimated potential losses and that such losses could be substantially higher than the estimated VaR.

45
    


At June 30, 2012, the estimated VaR for the Company's portfolio of energy and weather-related derivatives, as described above, calculated at an estimated 99% confidence level, was $42.0 million. The average, low and high amounts calculated by the Company's VaR analysis during the six months ended June 30, 2012 were $26.4 million, $13.0 million and $49.3 million, respectively.
At June 30, 2012, RenaissanceRe had provided guarantees in the aggregate amount of $354.3 million to certain counterparties of the weather and energy risk operations of Renaissance Trading. In the future, RenaissanceRe may issue guarantees for other purposes or increase the amount of guarantees issued to counterparties of Renaissance Trading.
Platinum Warrant
The Company held a warrant to purchase up to 2.5 million common shares of Platinum for $27.00 per share. The Company recorded its investment in the Platinum warrant at fair value. The fair value of the warrant was estimated using either the Black-Scholes option pricing model or the in-the-money value, the greater of which the Company considered the best estimate of the exit value of the warrant. On January 20, 2011, the Company sold its warrant to Platinum for an aggregate of $47.9 million, and recognized a $3.0 million gain on the sale, which is included in other income during the six months ended June 30, 2011.
NOTE 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT OF SUBSIDIARIES
The following tables present condensed consolidating balance sheets at June 30, 2012 and December 31, 2011, condensed consolidating statements of operations and condensed consolidating statements of comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011, and condensed consolidating statements of cash flows for the six months ended June 30, 2012 and 2011, respectively, for RenaissanceRe, RRNAH and RenaissanceRe’s other subsidiaries. RRNAH is a wholly owned subsidiary of RenaissanceRe.
On March 17, 2010, RRNAH issued, and RenaissanceRe guaranteed, $250.0 million of 5.75% Senior Notes due March 15, 2020, with interest on the notes payable on March 15 and September 15. The notes can be redeemed by RRNAH prior to maturity, subject to payment of a “make-whole” premium. The notes, which are senior obligations, contain various covenants, including limitations on mergers and consolidations, restrictions as to the disposition of the stock of designated subsidiaries and limitations on liens of the stock of designated subsidiaries.

46
    


Condensed Consolidating Balance Sheet at June 30, 2012
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries and
Eliminations
(Non-guarantor
Subsidiaries) 
(1)
 
Consolidating
Adjustments 
(2)
 
RenaissanceRe
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Total investments
$
348,875

 
$
41,934

 
$
6,199,801

 
$
—

 
$
6,590,610

Cash and cash equivalents
4,749

 
871

 
258,612

 
—

 
264,232

Investments in subsidiaries
3,277,526

 
104,976

 
—

 
(3,382,502
)
 
—

Due from subsidiaries and affiliates
117,128

 
—

 
—

 
(117,128
)
 
—

Premiums receivable
—

 
—

 
971,546

 
—

 
971,546

Prepaid reinsurance premiums
—

 
—

 
278,242

 
—

 
278,242

Reinsurance recoverable
—

 
—

 
198,777

 
—

 
198,777

Accrued investment income
3,030

 
79

 
32,829

 
—

 
35,938

Deferred acquisition costs
—

 
—

 
106,027

 
—

 
106,027

Other assets
209,827

 
27,710

 
495,109

 
(218,500
)
 
514,146

Total assets
$
3,961,135

 
$
175,570

 
$
8,540,943

 
$
(3,718,130
)
 
$
8,959,518

Liabilities, Noncontrolling Interests and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Reserve for claims and claim expenses
$
—

 
$
—

 
$
1,801,247

 
$
—

 
$
1,801,247

Unearned premiums
—

 
—

 
964,499

 
—

 
964,499

Debt
100,000

 
249,293

 
5,000

 
—

 
354,293

Amounts due to subsidiaries and affiliates
—

 
5,215

 
—

 
(5,215
)
 
—

Reinsurance balances payable
—

 
—

 
396,669

 
—

 
396,669

Other liabilities
18,125

 
5,571

 
670,814

 
(1,458
)
 
693,052

Liabilities of discontinued operations held for sale
—

 
1,959

 
—

 
—

 
1,959

Total liabilities
118,125

 
262,038

 
3,838,229

 
(6,673
)
 
4,211,719

Redeemable noncontrolling interest – DaVinciRe
—

 
—

 
900,878

 
—

 
900,878

Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Total shareholders’ equity
3,843,010

 
(86,468
)
 
3,801,836

 
(3,711,457
)
 
3,846,921

Total liabilities, noncontrolling interests and shareholders’ equity
$
3,961,135

 
$
175,570

 
$
8,540,943

 
$
(3,718,130
)
 
$
8,959,518

 
(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.

47
    


Condensed Consolidating Balance Sheet at December 31, 2011
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries and
Eliminations
(Non-guarantor
Subsidiaries) 
(1)
 
Consolidating
Adjustments 
(2)
 
RenaissanceRe
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Total investments
$
593,973

 
$
104,869

 
$
5,510,410

 
$
—

 
$
6,209,252

Cash and cash equivalents
10,606

 
4,920

 
201,458

 
—

 
216,984

Investments in subsidiaries
2,776,997

 
83,031

 
—

 
(2,860,028
)
 
—

Due from subsidiaries and affiliates
172,069

 
846

 
—

 
(172,915
)
 
—

Premiums receivable
—

 
—

 
471,878

 
—

 
471,878

Prepaid reinsurance premiums
—

 
—

 
58,522

 
—

 
58,522

Reinsurance recoverable
—

 
—

 
404,029

 
—

 
404,029

Accrued investment income
4,106

 
311

 
29,106

 
—

 
33,523

Deferred acquisition costs
—

 
—

 
43,721

 
—

 
43,721

Other assets
206,171

 
27,198

 
275,092

 
(201,458
)
 
307,003

Total assets
$
3,763,922

 
$
221,175

 
$
6,994,216

 
$
(3,234,401
)
 
$
7,744,912

Liabilities, Redeemable Noncontrolling Interest and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Reserve for claims and claim expenses
$
—

 
$
—

 
$
1,992,354

 
$
—

 
$
1,992,354

Unearned premiums
—

 
—

 
347,655

 
—

 
347,655

Debt
100,000

 
249,247

 
4,373

 
—

 
353,620

Amounts due to subsidiaries and affiliates
30,519

 
6,081

 
—

 
(36,600
)
 
—

Reinsurance balances payable
—

 
—

 
256,883

 
—

 
256,883

Other liabilities
28,210

 
3,755

 
482,668

 
—

 
514,633

Liabilities of discontinued operations held for sale
—

 
13,507

 
—

 
—

 
13,507

Total liabilities
158,729

 
272,590

 
3,083,933

 
(36,600
)
 
3,478,652

Redeemable noncontrolling interest – DaVinciRe
—

 
—

 
657,727

 
—

 
657,727

Shareholders’ Equity
 
 
 
 
 
 
 
 
 
Total shareholders’ equity
3,605,193

 
(51,415
)
 
3,252,556

 
(3,197,801
)
 
3,608,533

Total liabilities, redeemable noncontrolling interest and shareholders’ equity
$
3,763,922

 
$
221,175

 
$
6,994,216

 
$
(3,234,401
)
 
$
7,744,912

 
(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.


48
    


Condensed Consolidating Statement of Operations for
the three months ended June 30, 2012
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries and
Eliminations
(Non-guarantor
Subsidiaries) 
(1)
 
Consolidating
Adjustments 
(2)
 
RenaissanceRe
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
244,416

 
$
—

 
$
244,416

Net investment income
3,243

 
206

 
13,338

 
(2,044
)
 
14,743

Net foreign exchange (losses) gains
(13
)
 
—

 
2,423

 
—

 
2,410

Equity in earnings of other ventures
—

 
—

 
6,846

 
—

 
6,846

Other income
60

 
—

 
11,229

 
—

 
11,289

Net realized and unrealized gains on investments
4,907

 
8

 
26,088

 
—

 
31,003

Net other-than-temporary impairments
—

 
—

 
(209
)
 
—

 
(209
)
Total revenues
8,197

 
214

 
304,131

 
(2,044
)
 
310,498

Expenses
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
—

 
—

 
49,551

 
—

 
49,551

Acquisition expenses
—

 
—

 
25,608

 
—

 
25,608

Operational expenses
(1,303
)
 
1,749

 
40,961

 
—

 
41,407

Corporate expenses
3,501

 
59

 
507

 
—

 
4,067

Interest expense
1,469

 
3,616

 
631

 
—

 
5,716

Total expenses
3,667

 
5,424

 
117,258

 
—

 
126,349

Income (loss) before equity in net income of subsidiaries and taxes
4,530

 
(5,210
)
 
186,873

 
(2,044
)
 
184,149

Equity in net income of subsidiaries
146,490

 
6,511

 
—

 
(153,001
)
 
—

Income from continuing operations before taxes
151,020

 
1,301

 
186,873

 
(155,045
)
 
184,149

Income tax expense
—

 
(400
)
 
(498
)
 
—

 
(898
)
Income from continuing operations
151,020

 
901

 
186,375

 
(155,045
)
 
183,251

Income from discontinued operations
—

 
1,393

 
—

 
—

 
1,393

Net income
151,020

 
2,294

 
186,375

 
(155,045
)
 
184,644

Net income attributable to noncontrolling interests
—

 
—

 
(33,624
)
 
—

 
(33,624
)
Net income attributable to RenaissanceRe
151,020

 
2,294

 
152,751

 
(155,045
)
 
151,020

Dividends on preference shares
(8,750
)
 
—

 
—

 
—

 
(8,750
)
Net income attributable to RenaissanceRe common shareholders
$
142,270

 
$
2,294

 
$
152,751

 
$
(155,045
)
 
$
142,270

(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.


49
    


Condensed Consolidating Statement of Comprehensive Income for the three months ended June 30, 2012
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
Consolidating
Adjustments
(2)
 
RenaissanceRe
Consolidated
Comprehensive income
 
 
 
 
 
 
 
 
 
Net income
$
151,020

 
$
2,294

 
$
186,375

 
$
(155,045
)
 
$
184,644

Change in net unrealized gains on investments
—

 
—

 
(432
)
 
—

 
(432
)
Portion of other-than-temporary impairments recognized in other comprehensive income
—

 
—

 
(25
)
 
—

 
(25
)
Comprehensive income
151,020

 
2,294

 
185,918

 
(155,045
)
 
184,187

Net income attributable to noncontrolling interests
—

 
—

 
(33,624
)
 
—

 
(33,624
)
Change in net unrealized gains on fixed maturity investments available for sale attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

Comprehensive income attributable to noncontrolling interests
—


—

 
(33,624
)
 
—

 
(33,624
)
Comprehensive income attributable to RenaissanceRe
$
151,020

 
$
2,294

 
$
152,294

 
$
(155,045
)
 
$
150,563

(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.


50
    


Condensed Consolidating Statement of Operations for
the six months ended June 30, 2012
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries and
Eliminations
(Non-guarantor
Subsidiaries) 
(1)
 
Consolidating
Adjustments 
(2)
 
RenaissanceRe
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
523,081

 
$
—

 
$
523,081

Net investment income
7,691

 
475

 
77,697

 
(4,149
)
 
81,714

Net foreign exchange gains
7

 
—

 
943

 
—

 
950

Equity in earnings of other ventures
—

 
—

 
12,316

 
—

 
12,316

Other income (loss)
152

 
—

 
(27,957
)
 
—

 
(27,805
)
Net realized and unrealized gains on investments
8,419

 
1,052

 
67,645

 
—

 
77,116

Net other-than-temporary impairments
—

 
—

 
(343
)
 
—

 
(343
)
Total revenues
16,269

 
1,527

 
653,382

 
(4,149
)
 
667,029

Expenses
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
—

 
—

 
65,103

 
—

 
65,103

Acquisition expenses
—

 
—

 
49,719

 
—

 
49,719

Operational expenses
(2,614
)
 
3,757

 
82,647

 
—

 
83,790

Corporate expenses
7,679

 
152

 
1,047

 
—

 
8,878

Interest expense
2,938

 
7,233

 
1,263

 
—

 
11,434

Total expenses
8,003

 
11,142

 
199,779

 
—

 
218,924

Income (loss) before equity in net income (loss) of subsidiaries and taxes
8,266

 
(9,615
)
 
453,603

 
(4,149
)
 
448,105

Equity in net income (loss) of subsidiaries
352,933

 
(23,757
)
 
—

 
(329,176
)
 
—

Income (loss) from continuing operations before taxes
361,199

 
(33,372
)
 
453,603

 
(333,325
)
 
448,105

Income tax (expense) benefit
—

 
(2,968
)
 
2,107

 
—

 
(861
)
Income (loss) from continuing operations
361,199

 
(36,340
)
 
455,710

 
(333,325
)
 
447,244

Income from discontinued operations
—

 
1,220

 
—

 
—

 
1,220

Net income (loss)
361,199

 
(35,120
)
 
455,710

 
(333,325
)
 
448,464

Net income attributable to noncontrolling interests
—

 
—

 
(87,265
)
 
—

 
(87,265
)
Net income (loss) attributable to RenaissanceRe
361,199

 
(35,120
)
 
368,445

 
(333,325
)
 
361,199

Dividends on preference shares
(17,500
)
 
—

 
—

 
—

 
(17,500
)
Net income (loss) attributable to RenaissanceRe common shareholders
$
343,699

 
$
(35,120
)
 
$
368,445

 
$
(333,325
)
 
$
343,699

 
(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.

51
    


Condensed Consolidating Statement of Comprehensive Income (Loss) for the six months ended June 30, 2012
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
Consolidating
Adjustments
(2)
 
RenaissanceRe
Consolidated
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net income (loss)
$
361,199

 
$
(35,120
)
 
$
455,710

 
$
(333,325
)
 
$
448,464

Change in net unrealized gains on investments
—

 
—

 
823

 
—

 
823

Portion of other-than-temporary impairments recognized in other comprehensive income
—

 
—

 
(52
)
 
—

 
(52
)
Comprehensive income (loss)
361,199

 
(35,120
)
 
456,481

 
(333,325
)
 
449,235

Net income attributable to noncontrolling interests
—

 
—

 
(87,265
)
 
—

 
(87,265
)
Change in net unrealized gains on fixed maturity investments available for sale attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

Comprehensive income attributable to noncontrolling interests
—

 
—

 
(87,265
)
 
—

 
(87,265
)
Comprehensive income (loss) attributable to RenaissanceRe
$
361,199

 
$
(35,120
)
 
$
369,216

 
$
(333,325
)
 
$
361,970

(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.


52
    


Condensed Consolidating Statement of Operations
for the three months ended June 30, 2011
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
Consolidating
Adjustments
(2)
 
RenaissanceRe
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
217,175

 
$
—

 
$
217,175

Net investment income
5,586

 
203

 
29,441

 
(1,902
)
 
33,328

Net foreign exchange gains (losses)
5

 
—

 
(4,526
)
 
—

 
(4,521
)
Equity in earnings of other ventures
—

 
—

 
5,128

 
—

 
5,128

Other income (loss)
29

 
—

 
(5,196
)
 
—

 
(5,167
)
Net realized and unrealized gains (losses) on investments
3,324

 
(39
)
 
31,694

 
—

 
34,979

Total revenues
8,944

 
164

 
273,716

 
(1,902
)
 
280,922

Expenses
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
—

 
—

 
151,261

 
—

 
151,261

Acquisition expenses
—

 
—

 
13,883

 
—

 
13,883

Operational expenses
(1,196
)
 
1,542

 
41,953

 
—

 
42,299

Corporate expenses
3,474

 
48

 
489

 
—

 
4,011

Interest expense
2,559

 
3,617

 
645

 
(1,091
)
 
5,730

Total expenses
4,837

 
5,207

 
208,231

 
(1,091
)
 
217,184

Income (loss) before equity in net loss of subsidiaries and taxes
4,107

 
(5,043
)
 
65,485

 
(811
)
 
63,738

Equity in net income (loss) of subsidiaries
29,407

 
(2,568
)
 
—

 
(26,839
)
 
—

Income (loss) from continuing operations before taxes
33,514

 
(7,611
)
 
65,485

 
(27,650
)
 
63,738

Income tax benefit
—

 
1,512

 
261

 
—

 
1,773

Income (loss) from continuing operations
33,514

 
(6,099
)
 
65,746

 
(27,650
)
 
65,511

Loss from discontinued operations
—

 
(10,094
)
 
—

 
—

 
(10,094
)
Net income (loss)
33,514

 
(16,193
)
 
65,746

 
(27,650
)
 
55,417

Net income attributable to noncontrolling interest
—

 
—

 
(21,903
)
 
—

 
(21,903
)
Net income (loss) attributable to RenaissanceRe
33,514

 
(16,193
)
 
43,843

 
(27,650
)
 
33,514

Dividends on preference shares
(8,750
)
 
—

 
—

 
—

 
(8,750
)
Net income (loss) attributable to RenaissanceRe common shareholders
$
24,764

 
$
(16,193
)
 
$
43,843

 
$
(27,650
)
 
$
24,764

(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.


53
    


Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended June 30, 2011
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
Consolidating
Adjustments
(2)
 
RenaissanceRe
Consolidated
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net income (loss)
$
33,514

 
$
(16,193
)
 
$
65,746

 
$
(27,650
)
 
$
55,417

Change in net unrealized gains on investments
—

 
—

 
(1,817
)
 
—

 
(1,817
)
Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

Comprehensive income (loss)
33,514

 
(16,193
)
 
63,929

 
(27,650
)
 
53,600

Net income attributable to noncontrolling interests
—

 
—

 
(21,903
)
 
—

 
(21,903
)
Change in net unrealized gains on fixed maturity investments available for sale attributable to noncontrolling interests
—

 
—

 
3

 
—

 
3

Comprehensive income attributable to noncontrolling interests
—

 
—

 
(21,900
)
 
—

 
(21,900
)
Comprehensive income (loss) attributable to RenaissanceRe
$
33,514

 
$
(16,193
)
 
$
42,029

 
$
(27,650
)
 
$
31,700

(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.


54
    


Condensed Consolidating Statement of Operations
for the six months ended June 30, 2011
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
Consolidating
Adjustments
(2)
 
RenaissanceRe
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
522,716

 
$
—

 
$
522,716

Net investment income
10,750

 
219

 
84,643

 
(2,003
)
 
93,609

Net foreign exchange gains (losses)
96

 
—

 
(3,957
)
 
—

 
(3,861
)
Equity in losses of other ventures
—

 
—

 
(18,625
)
 
—

 
(18,625
)
Other income
195

 
—

 
44,783

 
—

 
44,978

Net realized and unrealized gains (losses) on investments
2,332

 
(39
)
 
27,472

 
—

 
29,765

Total revenues
13,373

 
180

 
657,032

 
(2,003
)
 
668,582

Expenses
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
—

 
—

 
779,798

 
—

 
779,798

Acquisition expenses
—

 
—

 
46,218

 
—

 
46,218

Operational expenses
(2,416
)
 
3,044

 
83,501

 
—

 
84,129

Corporate expenses
5,515

 
109

 
451

 
—

 
6,075

Interest expense
7,534

 
7,335

 
1,754

 
(4,698
)
 
11,925

Total expenses
10,633

 
10,488

 
911,722

 
(4,698
)
 
928,145

Income (loss) before equity in net loss of subsidiaries and taxes
2,740

 
(10,308
)
 
(254,690
)
 
2,695

 
(259,563
)
Equity in net loss subsidiaries
(208,799
)
 
(732
)
 
—

 
209,531

 
—

Loss from continuing operations before taxes
(206,059
)
 
(11,040
)
 
(254,690
)
 
212,226

 
(259,563
)
Income tax benefit (expense)
290

 
3,077

 
(1,542
)
 
—

 
1,825

Loss from continuing operations
(205,769
)
 
(7,963
)
 
(256,232
)
 
212,226

 
(257,738
)
Loss from discontinued operations
—

 
(11,620
)
 
—

 
—

 
(11,620
)
Net loss
(205,769
)
 
(19,583
)
 
(256,232
)
 
212,226

 
(269,358
)
Net loss attributable to redeemable noncontrolling interest – DaVinciRe
—

 
—

 
63,589

 
—

 
63,589

Net loss attributable to RenaissanceRe
(205,769
)
 
(19,583
)
 
(192,643
)
 
212,226

 
(205,769
)
Dividends on preference shares
(17,500
)
 
—

 
—

 
—

 
(17,500
)
Net loss attributable to RenaissanceRe common shareholders
$
(223,269
)
 
$
(19,583
)
 
$
(192,643
)
 
$
212,226

 
$
(223,269
)
 
(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.

55
    


Condensed Consolidating Statement of Comprehensive Loss for the six months ended June 30, 2011
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
Consolidating
Adjustments
(2)
 
RenaissanceRe
Consolidated
Comprehensive loss
 
 
 
 
 
 
 
 
 
Net loss
$
(205,769
)
 
$
(19,583
)
 
$
(256,232
)
 
$
212,226

 
$
(269,358
)
Change in net unrealized gains on investments
—

 
—

 
(1,798
)
 
—

 
(1,798
)
Portion of other-than-temporary impairments recognized in other comprehensive loss
—

 
—

 
—

 
—

 
—

Comprehensive loss
(205,769
)
 
(19,583
)
 
(258,030
)
 
212,226

 
(271,156
)
Net loss attributable to noncontrolling interests
—

 
—

 
63,589

 
—

 
63,589

Change in net unrealized gains on fixed maturity investments available for sale attributable to noncontrolling interests
—

 
—

 
6

 
—

 
6

Comprehensive loss attributable to noncontrolling interests
—

 
—

 
63,595

 
—

 
63,595

Comprehensive loss attributable to RenaissanceRe
$
(205,769
)
 
$
(19,583
)
 
$
(194,435
)
 
$
212,226

 
$
(207,561
)
(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.
(2)
Includes Parent Guarantor and Subsidiary Issuer consolidating adjustments.


56
    


Condensed Consolidating Statement of Cash Flows
for the six months ended June 30, 2012
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
RenaissanceRe
Consolidated
Cash flows provided by (used in) operating activities
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
9,361

 
$
(21,004
)
 
$
315,420

 
$
303,777

Cash flows provided by (used in) investing activities
 
 
 
 
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
507,082

 
124,658

 
4,160,962

 
4,792,702

Purchases of fixed maturity investments trading
(405,809
)
 
(57,652
)
 
(4,849,441
)
 
(5,312,902
)
Proceeds from sales and maturities of fixed maturity investments available for sale
—

 
—

 
37,530

 
37,530

Net sales (purchases) of short term investments
141,196

 
(3,483
)
 
45,892

 
183,605

Net sales of other investments
—

 
—

 
18,681

 
18,681

Net sales of other assets
—

 
—

 
(166
)
 
(166
)
Dividends and return of capital from subsidiaries
256,153

 
4,298

 
(260,451
)
 
—

Contributions to subsidiaries
(372,700
)
 
(50,000
)
 
422,700

 
—

Due to (from) subsidiary
(5,856
)
 
(866
)
 
6,722

 
—

Net cash provided by (used in) investing activities
120,066

 
16,955

 
(417,571
)
 
(280,550
)
Cash flows (used in) provided by financing activities
 
 
 
 
 
 
 
Dividends paid – RenaissanceRe common shares
(27,673
)
 
—

 
—

 
(27,673
)
Dividends paid – preference shares
(17,500
)
 
—

 
—

 
(17,500
)
RenaissanceRe common share repurchases
(90,111
)
 
—

 
—

 
(90,111
)
Third party DaVinciRe share transactions
—

 
—

 
160,864

 
160,864

Net cash (used in) provided by financing activities
(135,284
)
 
—

 
160,864

 
25,580

Effect of exchange rate changes on foreign currency cash
—

 
—

 
(1,559
)
 
(1,559
)
Net (decrease) increase in cash and cash equivalents
(5,857
)
 
(4,049
)
 
57,154

 
47,248

Cash and cash equivalents, beginning of period
10,606

 
4,920

 
201,458

 
216,984

Cash and cash equivalents, end of period
$
4,749

 
$
871

 
$
258,612

 
$
264,232

 
(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.

57
    


Condensed Consolidating Statement of Cash Flows
for the six months ended June 30, 2011
RenaissanceRe
Holdings Ltd.
(Parent
Guarantor)
 
RenRe North
America
Holdings Inc.
(Subsidiary
Issuer)
 
Other
RenaissanceRe
Holdings Ltd.
Subsidiaries
and
Eliminations
(Non-guarantor
Subsidiaries)
(1)
 
RenaissanceRe
Consolidated
Cash flows provided by (used in) operating activities
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
123,220

 
$
(25,043
)
 
$
(67,181
)
 
$
30,996

Cash flows provided by investing activities
 
 
 
 
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
28,749

 
72,982

 
2,777,484

 
2,879,215

Purchases of fixed maturity investments trading
(33,626
)
 
(208,847
)
 
(2,569,205
)
 
(2,811,678
)
Proceeds from sales and maturities of fixed maturity investments available for sale
—

 
—

 
48,135

 
48,135

Purchases of fixed maturity investments available for sale
—

 
—

 
(4,078
)
 
(4,078
)
Net purchases of equity investments trading
—

 
—

 
(32,676
)
 
(32,676
)
Net sales of short term investments
24,965

 
7,468

 
18,419

 
50,852

Net sales (purchases) of other investments
102,717

 
—

 
(126,598
)
 
(23,881
)
Net purchases of investments in other ventures
—

 
—

 
(21,000
)
 
(21,000
)
Net sales of other assets
—

 
—

 
46,984

 
46,984

Dividends and return of capital from subsidiaries
718,294

 
9,306

 
(727,600
)
 
—

Contributions to subsidiaries
(262,115
)
 
(5,700
)
 
267,815

 
—

Due (from) to subsidiaries
(230,079
)
 
1,645

 
228,434

 
—

Net proceeds from sale of discontinued operations held for sale
—

 
269,520

 
—

 
269,520

Net cash provided by investing activities
348,905

 
146,374

 
(93,886
)
 
401,393

Cash flows used in financing activities
 
 
 
 
 
 
 
Dividends paid – RenaissanceRe common shares
(26,721
)
 
—

 
—

 
(26,721
)
Dividends paid – preference shares
(17,500
)
 
—

 
—

 
(17,500
)
RenaissanceRe common share repurchases
(174,792
)
 
—

 
—

 
(174,792
)
Net repayment of debt
(253,512
)
 
(124,995
)
 
178,507

 
(200,000
)
Third party DaVinciRe share transactions
—

 
—

 
(56,708
)
 
(56,708
)
Net cash used in financing activities
(472,525
)
 
(124,995
)
 
121,799

 
(475,721
)
Effect of exchange rate changes on foreign currency cash
—

 
—

 
3,331

 
3,331

Net decrease in cash and cash equivalents
(400
)
 
(3,664
)
 
(35,937
)
 
(40,001
)
Cash and cash equivalents, beginning of period
3,414

 
3,940

 
270,384

 
277,738

Cash and cash equivalents, end of period
$
3,014

 
$
276

 
$
234,447

 
$
237,737

 
(1)
Includes all other subsidiaries of RenaissanceRe Holdings Ltd. and eliminations.

58
    


NOTE 14. COMMITMENTS AND CONTINGENCIES
There are no material changes from the commitments and contingencies previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
The Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or direct surplus lines insurance policies.  This category of business litigation may involve allegations of underwriting or claims-handling errors or misconduct, employment claims, regulatory actions or disputes arising from the Company's business ventures.  The Company's operating subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages.  Generally, the Company's direct surplus lines insurance operations are subject to greater frequency and diversity of claims and claims-related litigation than its reinsurance operations and, in some jurisdictions, may be subject to direct actions by allegedly injured persons or entities seeking damages from policyholders.  These lawsuits, involving claims on policies issued by the Company's subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in its loss and loss expense reserves which are discussed in its loss reserves discussion.  In addition, the Company may from time to time engage in litigation or arbitration related to its claims for payment in respect of ceded reinsurance.  Any such litigation or arbitration contains an element of uncertainty, and the Company believes the inherent uncertainty in such matters may have increased recently and will likely continue to increase. Currently, the Company believes that no individual litigation or arbitration to which it is presently a party is likely to have a material adverse effect on its financial condition, business or operations.

59
    


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our results of operations for the three and six months ended June 30, 2012 and 2011, respectively. The following also includes a discussion of our liquidity and capital resources at June 30, 2012. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this filing and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. This filing contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the results described or implied by these forward-looking statements. See “Note on Forward-Looking Statements.”
OVERVIEW
RenaissanceRe was established in Bermuda in 1993 to write principally property catastrophe reinsurance and today is a leading global provider of reinsurance and insurance coverages and related services. Our aspiration is to be the world’s best underwriter of high-severity, low frequency risks. Through our operating subsidiaries, we seek to produce superior returns for our shareholders by being a trusted, long-term partner to our customers, for assessing and managing risk, delivering responsive solutions, and keeping our promises. We accomplish this by leveraging our core capabilities of risk assessment and information management, and by investing in our capabilities to serve our customers across the cycles that have historically characterized our markets. Overall, our strategy focuses on superior risk selection, customer relationships and capital management. We provide value to our customers and joint venture partners in the form of financial security, innovative products, and responsive service. We are known as a leader in paying valid reinsurance claims promptly. We principally measure our financial success through long-term growth in tangible book value per common share plus the change in accumulated dividends, which we believe is the most appropriate measure of our Company’s financial performance, and believe we have delivered superior performance in respect of this measure over time.
Since a substantial portion of the reinsurance and insurance we write provides protection from damages relating to natural and man-made catastrophes, our results depend to a large extent on the frequency and severity of such catastrophic events, and the coverages we offer to customers affected by these events. We are exposed to significant losses from these catastrophic events and other exposures that we cover. Accordingly, we expect a significant degree of volatility in our financial results and our financial results may vary significantly from quarter-to-quarter or from year-to-year, based on the level of insured catastrophic losses occurring around the world.
Our revenues are principally derived from three sources: 1) net premiums earned from the reinsurance and insurance policies we sell; 2) net investment income and realized and unrealized gains from the investment of our capital funds and the investment of the cash we receive on the policies which we sell; and 3) other income received from our joint ventures, advisory services, weather and energy risk management operations and various other items.
Our expenses primarily consist of: 1) net claims and claim expenses incurred on the policies of reinsurance and insurance we sell; 2) acquisition costs which typically represent a percentage of the premiums we write; 3) operating expenses which primarily consist of personnel expenses, rent and other operating expenses; 4) corporate expenses which include certain executive, legal and consulting expenses, costs for research and development, and other miscellaneous costs, including those associated with operating as a publicly traded company; 5) redeemable noncontrolling interest - DaVinciRe, which represents the interest of third parties with respect to the net income (loss) of DaVinciRe; and 6) interest and dividend costs related to our debt and preference shares. We are also subject to taxes in certain jurisdictions in which we operate; however, since the majority of our income is currently earned in Bermuda, a non-taxable jurisdiction, the tax impact to our operations has historically been minimal.
The operating results, also known as the underwriting results, of an insurance or reinsurance company are discussed frequently by reference to its net claims and claim expense ratio, underwriting expense ratio, and combined ratio. The net claims and claim expense ratio is calculated by dividing net claims and claim expenses incurred by net premiums earned. The underwriting expense ratio is calculated by dividing underwriting expenses (acquisition expenses and operational expenses) by net premiums earned. The combined ratio is the sum of the net claims and claim expense ratio and the underwriting expense ratio.

60
    


A combined ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income. We also discuss our net claims and claim expense ratio on an accident year basis. This ratio is calculated by taking net claims and claim expenses, excluding development on net claims and claim expenses from events that took place in prior fiscal years, divided by net premiums earned.
Segments
Our reportable segments include: (1) Reinsurance, (2) Lloyd’s and (3) Insurance.
Reinsurance
Our Reinsurance segment has two main units:
(1)
Property catastrophe reinsurance, written for our own account, and for DaVinci, is our traditional core business. We believe we are one of the world’s leading providers of this coverage, based on catastrophe gross premiums written. This coverage protects against large natural catastrophes, such as earthquakes, hurricanes and tsunamis, as well as claims arising from other natural and man-made catastrophes such as winter storms, freezes, floods, fires, wind storms, tornadoes, explosions and acts of terrorism. We offer this coverage to insurance companies and other reinsurers primarily on an excess of loss basis. This means that we begin paying when our customers’ claims from a catastrophe exceed a certain retained amount.
(2)
Specialty reinsurance, written for our own account, and for DaVinci, covering certain targeted classes of business where we believe we have a sound basis for underwriting and pricing the risk that we assume. Our portfolio includes various classes of business, such as catastrophe exposed workers’ compensation, surety, terrorism, energy, aviation, crop, political risk, trade credit, financial, mortgage guarantee, catastrophe-exposed personal lines property, casualty clash, certain other casualty lines and other specialty lines of reinsurance that we collectively refer to as specialty reinsurance. We believe that we are seen as a market leader in certain of these classes of business. We are seeking to expand our specialty reinsurance operations over time, although we cannot assure you that we will do so, particularly in light of current and forecasted market conditions.
Lloyd’s
Our Lloyd’s segment includes insurance and reinsurance business written for our own account through Syndicate 1458. The syndicate enhances our underwriting platform by providing access to Lloyd’s extensive distribution network and worldwide licenses. RenaissanceRe CCL, an indirect wholly owned subsidiary of the Company, is the sole corporate member of Syndicate 1458. We expect Syndicate 1458's absolute and relative contributions to our consolidated results of operations to continue to grow over time.
Insurance
Our Insurance segment includes the insurance policies previously written in connection with our Bermuda-based insurance operations which were not sold to QBE. Our Insurance segment is managed by our Global Chief Underwriting Officer. The Bermuda-based insurance business is written by Glencoe, a Bermuda domiciled excess and surplus lines insurance company that is currently eligible to do business on an excess and surplus lines basis in 49 U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. We may from time to time evaluate potential new business opportunities for our Insurance segment.
Other
Our Other category primarily includes the results of: (1) our share of strategic investments in certain markets we believe offer attractive risk-adjusted returns or where we believe our investment adds value, where, rather than assuming exclusive management responsibilities ourselves, we partner with other market participants; (2) our weather and energy risk management operations primarily through Renaissance Trading and REAL, (3) our investment unit which manages and invests the funds generated by our consolidated operations, (4) corporate expenses, capital services costs and noncontrolling interests; and (5) the results of our discontinued operations.

61
    


New Business
From time to time we consider diversification into new ventures, either through organic growth, the formation of new joint ventures, or the acquisition of or the investment in other companies or books of business of other companies. This potential diversification includes opportunities to write targeted, additional classes of risk-exposed business, both directly for our own account and through possible new joint venture opportunities. We also regularly evaluate potential strategic opportunities that we believe might utilize our skills, capabilities, proprietary technology and relationships to support possible expansion into further risk-related coverages, services and products. Generally, we focus on underwriting or trading risks where reasonably sufficient data may be available, and where our analytical abilities may provide us a competitive advantage, in order for us to seek to model estimated probabilities of losses and returns in accordance with our approach in respect of our then current portfolio of risks.
We regularly review potential strategic transactions that might improve our portfolio of business, enhance or focus our strategies, expand our distribution or capabilities, or to seek other benefits. In evaluating potential new ventures or investments, we generally seek an attractive estimated return on equity, the ability to develop or capitalize on a competitive advantage, and opportunities which we believe will not detract from our core operations. While we regularly review potential strategic transactions and periodically engage in discussions regarding possible transactions, there can be no assurance that we will complete any such transactions or that any such transaction would be successful or materially enhance our results of operations or financial condition. We believe that our ability to potentially attract investment and operational opportunities is supported by our strong reputation and financial resources, and by the capabilities and track record of our ventures unit.
During the first six months of 2012, the Company formed and launched two new managed joint ventures, namely Tim Re III and Upsilon Re. Tim Re III and Upsilon Re are partially owned subsidiaries of RenaissanceRe and Bermuda domiciled SPIs, providing collateralized reinsurance of a portfolio of Florida RPP contracts and additional capacity to the worldwide aggregate and per-occurrence retrocessional property catastrophe excess of loss market for the 2012 underwriting year, respectively. Our ownership interest in Tim Re III and Upsilon Re could change over time, perhaps materially so, and we may also elect to underwrite additional risks within Tim Re III and Upsilon Re and these entities to write business in future underwriting years. We cannot assure you that additional opportunities to grow the business we have accessed through Tim Re III and Upsilon Re will be realized, however. See "Note 8. Variable Interest Entities" in our notes to the consolidated financial statements for additional information related to Tim Re III and Upsilon Re.
Risk Management
We seek to develop and effectively utilize sophisticated computer models and other analytical tools to assess and manage the risks that we underwrite and attempt to optimize our portfolio of reinsurance and insurance contracts and other financial risks. Our policies, procedures, tools and resources to monitor and assess our operational risks companywide, as well as our global enterprise-wide risk management practices, are overseen by our Chief Risk Officer, who reports directly to our Chief Financial Officer.
With respect to our Reinsurance operations, since 1993 we have developed and continuously seek to improve our proprietary, computer-based pricing and exposure management system, REMS©. We believe that REMS©, as updated from time to time, is a more robust underwriting and risk management system than is currently commercially available elsewhere in the reinsurance industry and offers us a significant competitive advantage. REMS© was originally developed to analyze catastrophe risks, though we continuously seek ways to enhance the program in order to analyze other classes of risk.
Discontinued Operations
During the fourth quarter of 2010, we made the strategic decision to divest substantially all of our U.S.-based insurance operations in order to focus on the business encompassed within our Reinsurance and Lloyd’s segments and our other businesses. Except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations. Prior years presented have been reclassified to conform to this new presentation.

62
    


On November 18, 2010, we entered into a Stock Purchase Agreement with QBE to sell substantially all of our U.S.-based insurance operations, including our U.S. property and casualty business underwritten through managing general agents, our crop insurance business underwritten through Agro National Inc. (“Agro National”), our commercial property insurance operations and our claims operations.  We have classified the assets and liabilities associated with this transaction as held for sale. The financial results for these operations have been presented as discontinued operations in our Consolidated Statements of Operations. 
Consideration for the transaction was book value at December 31, 2010, for the aforementioned businesses, payable in cash at closing and subject to adjustment for certain tax and other items. The transaction closed on March 4, 2011 and we received net consideration of $269.5 million.
Pursuant to the Stock Purchase Agreement, the Company was subject to a post-closing review following December 31, 2011 of the net reserve for claims and claim expenses for loss events occurring on or prior to December 31, 2010 (the “Reserve Collar”). Subsequent to the post-closing review, the Company was liable to pay, or otherwise reimburse QBE amounts up to $10.0 million for net adverse development on prior accident years net claims and claim expenses. Conversely, if prior accident years net claims and claim expenses experienced net favorable development, QBE was liable to pay, or otherwise reimburse the Company amounts up to $10.0 million.
During 2011, the Company recognized a $10.0 million liability and corresponding expense in liabilities of discontinued operations held for sale and (loss) income from discontinued operations, respectively, due to purported net adverse development on prior accident years net claims and claim expenses associated with the Reserve Collar.  Effective May 23, 2012, the Company and QBE reached an agreement in respect of the Reserve Collar, and the Company paid QBE the sum of $9.0 million on June 1, 2012, representing full and final settlement of the Reserve Collar and recorded a gain of $1.0 million in income from discontinued operations during the second quarter of 2012.
See “Note 3. Discontinued Operations in our Notes to Consolidated Financial Statements” for additional information.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
The Company's critical accounting estimates are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations found in our Annual Report on Form 10-K for the year ended December 31, 2011.

63
    


SUMMARY OF RESULTS OF OPERATIONS
Below is a discussion of the results of operations for the three months ended June 30, 2012 compared to the three months ended June 30, 2011.
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except per share amounts and percentages)
 
 
 
 
 
 
 
Statement of operations highlights
 
 
 
 
 
 
 
Gross premiums written
$
667,336

 
$
641,563

 
$
25,773

 
 
Net premiums written
427,630

 
427,995

 
(365
)
 
 
Net premiums earned
244,416

 
217,175

 
27,241

 
 
Net claims and claim expenses incurred
49,551

 
151,261

 
(101,710
)
 
 
Underwriting income
127,850

 
9,732

 
118,118

 
 
Net investment income
14,743

 
33,328

 
(18,585
)
 
 
Net realized and unrealized gains on investments
31,003

 
34,979

 
(3,976
)
 
 
Income from continuing operations
183,251

 
65,511

 
117,740

 
 
Income (loss) from discontinued operations
1,393

 
(10,094
)
 
11,487

 
 
Net income
184,644

 
55,417

 
129,227

 
 
Net income available to RenaissanceRe common shareholders
142,270

 
24,764

 
117,506

 
 
 
 
 
 
 
 
 
 
Income from continuing operations available to RenaissanceRe common shareholders per common share – diluted
$
2.72

 
$
0.68

 
$
2.04

 
 
Income (loss) from discontinued operations per common share – diluted
0.03

 
(0.20
)
 
0.23

 
 
Net income available to RenaissanceRe common shareholders per common share – diluted
$
2.75

 
$
0.48

 
$
2.27

 
 
Dividends per common share
$
0.27

 
$
0.26

 
$
0.01

 
 
 
 
 
 
 
 
 
 
Key ratios
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
38.9
 %
 
79.2
 %
 
(40.3
)%
 
 
Net claims and claim expense ratio – prior accident years
(18.6
)%
 
(9.6
)%
 
(9.0
)%
 
 
Net claims and claim expense ratio – calendar year
20.3
 %
 
69.6
 %
 
(49.3
)%
 
 
Underwriting expense ratio
27.4
 %
 
25.9
 %
 
1.5
 %
 
 
Combined ratio
47.7
 %
 
95.5
 %
 
(47.8
)%
 
 
 
 
 
 
 
 
 
 
Return on average common equity
17.5
 %
 
3.3
 %
 
14.2
 %
 
 
 
 
 
 
 
 
 
 
Book value
June 30,
2012
 
March 31,
2012
 
Change
 
 
Book value per common share
$
65.07

 
$
62.68

 
$
2.39

 
 
Accumulated dividends per common share
11.46

 
11.19

 
0.27

 
 
Book value per common share plus accumulated dividends
$
76.53

 
$
73.87

 
$
2.66

 
 
Change in book value per common share plus change in accumulated dividends
4.2
 %
 
 
 


 
 
 
 
 
 
 
 
 
 
Balance sheet highlights
June 30,
2012
 
March 31,
2012
 
Change
 
 
Total assets
$
8,959,518

 
$
8,353,598

 
$
605,920

 
 
Total shareholders’ equity attributable to RenaissanceRe
$
3,843,010

 
$
3,794,565

 
$
48,445

 
 
 
 
 
 
 
 
 

64
    


Net income available to RenaissanceRe common shareholders was $142.3 million in the second quarter of 2012, compared to $24.8 million in the second quarter of 2011, an improvement of $117.5 million. As a result of our net income available to RenaissanceRe common shareholders in the second quarter of 2012, we generated an annualized return on average common equity of 17.5% and our book value per common share increased from $62.68 at March 31, 2012 to $65.07 at June 30, 2012, a 4.2% increase, after considering the change in accumulated dividends paid to our common shareholders.
The most significant events affecting our financial performance during the second quarter of 2012, on a comparative basis to the second quarter of 2011 include:
•
Significantly Improved Underwriting Results - our underwriting income of $127.9 million in the second quarter of 2012 improved $118.1 million from $9.7 million in the second quarter of 2011, primarily due to a relatively low level of insured catastrophes during the second quarter of 2012, compared to $99.9 million of underwriting losses as a result of the U.S. tornadoes in the second quarter of 2011, as detailed below;
•
Improved Other Income - other income improved $16.5 million in the second quarter of 2012, compared to the second quarter of 2011, primarily due to our weather and energy risk management operations generating income of $5.9 million, compared to incurring a loss of $3.8 million, primarily as a result of positive results from its positions in the United Kingdom and its summer positions as at June 30, 2012 in certain regions of the United States and Canada;
•
Income from Discontinued Operations - income (loss) from discontinued operations improved to income of $1.4 million in the second quarter of 2012, compared to a loss of $10.1 million in the second quarter of 2011 principally due to the absence of a $10.0 million expense recorded in the second quarter of 2011 related to the Reserve Collar with QBE; partially offset by
•
Lower Investment Results - net investment income and net realized and unrealized gains on investments in the second quarter of 2012 decreased $18.6 million and $4.0 million, respectively, compared to the second quarter of 2011. The decrease in our investment results was primarily due to lower returns on our portfolio of other investments, principally our private equity investments; and
•
Net Income (Loss) Attributable to Redeemable Noncontrolling Interest - DaVinciRe - our net income attributable to redeemable noncontrolling interest - DaVinciRe was $33.6 million in the second quarter of 2012, compared to $21.7 million in the second quarter of 2011, a change of $11.9 million, principally due to an increase in net income in DaVinciRe, combined with a decrease in our ownership in DaVinciRe from 42.8% at June 30, 2011 to 31.5% at June 30, 2012, consequently increasing redeemable noncontrolling interest - DaVinciRe.
Net Negative Impact of U.S. Tornadoes in the Second Quarter of 2011
Net negative impact includes the sum of estimates of net claims and claim expenses incurred, earned reinstatement premiums assumed and ceded, lost profit commissions and redeemable noncontrolling interest - DaVinciRe. Our estimates are based on a review of our potential exposures, preliminary discussions with certain counterparties and catastrophe modeling techniques. Given the magnitude and recent occurrence of the U.S. tornadoes, delays in receiving claims data, potential uncertainties relating to reinsurance recoveries and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from the U.S. tornadoes. Accordingly, our actual net negative impact from the U.S. tornadoes will vary from these preliminary estimates, perhaps materially so. Changes in these estimates will be recorded in the period in which they occur.

65
    


See the financial data below for additional information detailing the net negative impact of the U.S. tornadoes on our consolidated financial statements for the second quarter of 2011.
 
 
 
 
 
Three months ended June 30, 2011
U.S. Tornadoes
 
 
(in thousands, except percentages)
 
 
 
Net claims and claim expenses incurred
$
(121,655
)
 
 
Reinstatement premiums earned
22,499

 
 
Lost profit commissions
(708
)
 
 
Net negative impact on underwriting result
(99,864
)
 
 
Redeemable noncontrolling interest - DaVinciRe
29,054

 
 
Net negative impact
$
(70,810
)
 
 
Percentage point impact on consolidated combined ratio
51.8

 
 
 
 
 
 
Net negative impact on Reinsurance segment underwriting result
(96,944
)
 
 
Net negative impact on Lloyd's segment underwriting result
(2,920
)
 
 
Net negative impact on underwriting result
$
(99,864
)
 
 
 
 
 
Underwriting Results by Segment
Reinsurance Segment
Below is a summary of the underwriting results and ratios for our Reinsurance segment followed by an analysis of our catastrophe unit and specialty reinsurance unit underwriting results and ratios:
 
 
 
 
 
 
 
 
 
Reinsurance segment overview
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Gross premiums written
$
617,039

 
$
607,404

 
$
9,635

 
 
Net premiums written
$
379,369

 
$
395,856

 
$
(16,487
)
 
 
Net premiums earned
$
214,296

 
$
199,461

 
$
14,835

 
 
Net claims and claim expenses incurred
35,488

 
143,219

 
(107,731
)
 
 
Acquisition expenses
20,098

 
10,431

 
9,667

 
 
Operational expenses
30,346

 
32,901

 
(2,555
)
 
 
Underwriting income
$
128,364

 
$
12,910

 
$
115,454

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
76,631

 
$
162,398

 
$
(85,767
)
 
 
Net claims and claim expenses incurred – prior accident years
(41,143
)
 
(19,179
)
 
(21,964
)
 
 
Net claims and claim expenses incurred – total
$
35,488

 
$
143,219

 
$
(107,731
)
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
35.8
 %
 
81.4
 %
 
(45.6
)%
 
 
Net claims and claim expense ratio – prior accident years
(19.2
)%
 
(9.6
)%
 
(9.6
)%
 
 
Net claims and claim expense ratio – calendar year
16.6
 %
 
71.8
 %
 
(55.2
)%
 
 
Underwriting expense ratio
23.5
 %
 
21.7
 %
 
1.8
 %
 
 
Combined ratio
40.1
 %
 
93.5
 %
 
(53.4
)%
 
 
 
 
 
 
 
 
 

66
    


Reinsurance Segment Gross Premiums Written – Gross premiums written in our Reinsurance segment increased by $9.6 million, or 1.6%, to $617.0 million in the second quarter of 2012, compared to $607.4 million in the second quarter of 2011. Excluding the impact of negative reinstatement premiums adjustments on the 2011 New Zealand and Tohoku earthquakes of $30.7 million recorded in the second quarter of 2012, as discussed below, and reinstatement premiums written in the second quarter of 2011 of $23.2 million, as discussed above, related primarily to the U.S. tornadoes, our Reinsurance segment gross premiums written increased $63.4 million or 10.9%, primarily due to our catastrophe unit writing more business during the June 2012 renewals, as well as the inception of certain new contracts in our specialty unit which met our risk-adjusted return thresholds and some loss related premiums in our specialty unit in the second quarter of 2012. During the second quarter of 2012, our remaining incurred but not reported (“IBNR”) reserves for the 2011 New Zealand and Tohoku earthquakes were allocated to the contract level and in doing so we re-estimated our allocation of losses from higher rate on line excess of loss retrocessional reinsurance contracts to lower rate on line excess of loss primary reinsurance contracts resulting in a downward adjustment to our estimate of ultimate reinstatement premiums from these two large events.  In addition, the reinstatement premiums were also impacted by changes to the ultimate losses for these events.  The net negative impact from the movement in the ultimate reinstatement premium and related losses for these two large events was $19.8 million for the second quarter of 2012.  With the passage of time more information in respect of these two large events will become known, including updated reported losses from our clients, and the losses will subsequently be paid and the reinstatement premium ultimately received, which will likely result in further changes to our estimated ultimate losses and reinstatement premiums from these two large events, perhaps materially so.
Our Reinsurance segment premiums are prone to significant volatility due to the timing of contract inception and also due to the business being characterized by a relatively small number of relatively large transactions. In addition, our property catastrophe reinsurance gross premiums written continue to be characterized by a large percentage of U.S. and Caribbean premium as we have found business derived from exposures in Europe and the rest of the world to be, in general, less attractive on a risk-adjusted basis during recent periods. A significant amount of our U.S. and Caribbean premium provides coverage against windstorms, mainly U.S. Atlantic hurricanes, as well as earthquakes and other natural and man-made catastrophes.
Reinsurance Segment Underwriting Results – Our Reinsurance segment generated underwriting income of $128.4 million in the second quarter of 2012, compared to $12.9 million in the second quarter of 2011, an increase of $115.5 million. In the second quarter of 2012, our Reinsurance segment generated a net claims and claim expense ratio of 16.6%, an underwriting expense ratio of 23.5% and a combined ratio of 40.1%, compared to 71.8%, 21.7% and 93.5%, respectively, in the second quarter of 2011.
The $115.5 million increase in the Reinsurance segment's underwriting result and 53.4 percentage point decrease in the combined ratio was principally due to the relatively low level of insured catastrophes in the second quarter of 2012, compared to the second quarter of 2011. The U.S. tornadoes during the second quarter of 2011 had a net negative impact on the Reinsurance segment underwriting result of $96.9 million and added 55.5 percentage points to the Reinsurance segment combined ratio, after considering the impact of net reinstatement premiums earned and net lost profit commission related to these events, as detailed in the table below.
 
 
 
 
 
Three months ended June 30, 2011
U.S. Tornadoes
 
 
(in thousands, except percentages)
 
 
 
Net claims and claim expenses incurred
$
(118,655
)
 
 
Reinstatement premiums earned
22,419

 
 
Lost profit commissions
(708
)
 
 
Net negative impact on Reinsurance segment underwriting result
$
(96,944
)
 
 
Percentage point impact on Reinsurance segment combined ratio
55.5

 
 
 
 
 
 
Net negative impact on catastrophe unit underwriting result
$
(96,944
)
 
 
Net negative impact on specialty unit underwriting result
—

 
 
Net negative impact on Reinsurance segment underwriting result
$
(96,944
)
 
 
 
 
 

67
    


Our Reinsurance segment prior year reserves experienced $41.1 million and $19.2 million of net favorable development in the second quarter of 2012 and 2011, respectively. The favorable development on prior year reserves in the second quarter of 2012 included $33.2 million related to our catastrophe reinsurance unit and $7.9 million related to our specialty reinsurance unit, as discussed below in the underwriting results of the catastrophe and specialty units, respectively.
We have entered into joint ventures and specialized quota share cessions of our book of business. In accordance with the joint venture and quota share agreements, we are entitled to certain profit commissions and fee income. We record these profit commissions and fees as a reduction in acquisition and operating expenses and, accordingly, these fees have reduced our underwriting expense ratios. These fees totaled $18.5 million and $24.6 million in the second quarter of 2012 and 2011, respectively, and resulted in a corresponding decrease to the Reinsurance segment underwriting expense ratio of 8.7% and 12.3%, respectively. In addition, we are entitled to certain fee income and profit commissions from DaVinci. Because the results of DaVinci, and its parent DaVinciRe, are consolidated in our results of operations, these fees and profit commissions are eliminated in our consolidated financial statements and are principally reflected in redeemable noncontrolling interest – DaVinciRe. The net impact of all fees and profit commissions related to these joint ventures and specialized quota share cessions within our Reinsurance segment was $31.8 million and $15.5 million in the second quarter of 2012 and 2011, respectively.
Catastrophe
Below is a summary of the underwriting results and ratios for our catastrophe unit:
 
 
 
 
 
 
 
 
 
Catastrophe unit overview
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Property catastrophe gross premiums written
 
 
 
 
 
 
 
Renaissance
$
345,094

 
$
366,929

 
$
(21,835
)
 
 
DaVinci
234,644

 
216,317

 
18,327

 
 
Total property catastrophe gross premiums written
$
579,738

 
$
583,246

 
$
(3,508
)
 
 
Net premiums written
$
344,497

 
$
373,039

 
$
(28,542
)
 
 
Net premiums earned
$
170,637

 
$
167,509

 
$
3,128

 
 
Net claims and claim expenses incurred
19,578

 
127,374

 
(107,796
)
 
 
Acquisition expenses
14,847

 
5,896

 
8,951

 
 
Operational expenses
23,245

 
25,460

 
(2,215
)
 
 
Underwriting income
$
112,967

 
$
8,779

 
$
104,188

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
52,781

 
$
139,161

 
$
(86,380
)
 
 
Net claims and claim expenses incurred – prior accident years
(33,203
)
 
(11,787
)
 
(21,416
)
 
 
Net claims and claim expenses incurred – total
$
19,578

 
$
127,374

 
$
(107,796
)
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
30.9
 %
 
83.1
 %
 
(52.2
)%
 
 
Net claims and claim expense ratio – prior accident years
(19.4
)%
 
(7.1
)%
 
(12.3
)%
 
 
Net claims and claim expense ratio – calendar year
11.5
 %
 
76.0
 %
 
(64.5
)%
 
 
Underwriting expense ratio
22.3
 %
 
18.8
 %
 
3.5
 %
 
 
Combined ratio
33.8
 %
 
94.8
 %
 
(61.0
)%
 
 
 
 
 
 
 
 
 
Catastrophe Reinsurance Gross Premiums Written – In the second quarter of 2012 our catastrophe reinsurance gross premiums written decreased by $3.5 million, or 0.6%, to $579.7 million, compared to $583.2 million in the second quarter of 2011. Excluding the impact of $30.7 million of negative reinstatement premiums adjustments recorded in the second quarter of 2012, and reinstatement premiums written in the second quarter of 2011 of $23.0 million, each as discussed above, the catastrophe unit gross

68
    


premiums written increased $50.3 million, or 9.0%, in the second quarter of 2012, primarily due to our catastrophe unit writing more business during the June 2012 renewals, and inclusive of $37.7 million of gross premiums written on behalf of our most recent fully-collateralized joint venture, Tim Re III.
Our property catastrophe reinsurance gross premiums written continue to be characterized by a large percentage of U.S. and Caribbean premium, as we have found business derived from exposures in Europe or the rest of the world to be, in general, less attractive on a risk-adjusted basis during recent periods. A significant amount of our U.S. and Caribbean premium provides coverage against windstorms, mainly U.S. Atlantic hurricanes, as well as earthquakes and other natural and man-made catastrophes.
Catastrophe Reinsurance Underwriting Results – Our catastrophe unit generated underwriting income of $113.0 million in the second quarter of 2012, compared to $8.8 million in the second quarter of 2011, an increase of $104.2 million. The increase in underwriting income was principally due to a $86.4 million decrease in current accident year claims and claim expenses as a result of the relatively low level of insured catastrophes in the second quarter of 2012, compared to the second quarter of 2011 which was negatively impacted by net claims and claim expenses related to the U.S. tornadoes of $118.7 million.
In the second quarter of 2012, our catastrophe unit generated a net claims and claim expense ratio of 11.5%, an underwriting expense ratio of 22.3% and a combined ratio of 33.8%, compared to 76.0%, 18.8% and 94.8%, respectively, in the second quarter of 2011. As noted above, the catastrophe unit experienced a relatively low level of insured catastrophes in the second quarter of 2012, with $52.8 million of current accident year net claims and claim expenses, including net claims and claim expenses of $20.5 million related to the June 29, 2012 derecho (PCS 83) which impacted the Midwest to Mid-Atlantic coast of the U.S. In comparison, the second quarter of 2011 was negatively impacted by the U.S. tornadoes and resulted in $118.7 million of net claims and claim expenses which had a net negative impact on the catastrophe unit underwriting result of $96.9 million and added 67.7 percentage points to the catastrophe unit combined ratio, after considering the impact of net reinstatement premiums earned and net lost profit commission related to the U.S. tornadoes, as detailed in the table below.
 
 
 
 
 
Three months ended June 30, 2011
U.S. Tornadoes
 
 
(in thousands, except percentages)
 
 
 
Net claims and claim expenses incurred
$
(118,655
)
 
 
Reinstatement premiums earned
22,419

 
 
Lost profit commissions
(708
)
 
 
Net negative impact on catastrophe unit underwriting result
$
(96,944
)
 
 
Percentage point impact on catastrophe unit combined ratio
67.7

 
 
 
 
 
During the second quarter of 2012, we experienced $33.2 million of favorable development on prior year reserves within the catastrophe unit, compared to $11.8 million of favorable development on prior years reserves in the second quarter of 2011, primarily due to reductions in estimated ultimate losses on certain specific events occurring in prior accident years including the Tohoku earthquake ($10.6 million), the 2011 Thailand floods ($3.9 million), a number of other relatively small catastrophes and $5.9 million of actuarial assumption changes, partially offset by adverse development on the 2011 New Zealand earthquake of $5.9 million. The $5.9 million of actuarial assumption changes noted above were related to our small catastrophe paid loss development curve due to better than expected paid loss activity. The favorable development of $11.8 million in the second quarter of 2011 was primarily related to decreases in estimated ultimate losses on certain specific events, including $3.5 million related to the 2005 hurricanes and $3.0 million related to the 2007 California wildfires, with the remainder due to better than expected claims emergence associated with a number of other catastrophes.
        


69
    


Specialty
Below is a summary of the underwriting results and ratios for our specialty reinsurance unit:
 
 
 
 
 
 
 
 
 
Specialty unit overview
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Specialty gross premiums written
 
 
 
 
 
 
 
Renaissance
$
35,778

 
23,066

 
$
12,712

 
 
DaVinci
1,523

 
1,092

 
431

 
 
Total specialty gross premiums written
$
37,301

 
$
24,158

 
$
13,143

 
 
Net premiums written
$
34,872

 
$
22,817

 
$
12,055

 
 
Net premiums earned
$
43,659

 
$
31,952

 
$
11,707

 
 
Net claims and claim expenses incurred
15,910

 
15,845

 
65

 
 
Acquisition expenses
5,251

 
4,535

 
716

 
 
Operational expenses
7,101

 
7,441

 
(340
)
 
 
Underwriting income
$
15,397

 
$
4,131

 
$
11,266

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
23,850

 
$
23,237

 
$
613

 
 
Net claims and claim expenses incurred – prior accident years
(7,940
)
 
(7,392
)
 
(548
)
 
 
Net claims and claim expenses incurred – total
$
15,910

 
$
15,845

 
$
65

 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
54.6
 %
 
72.7
 %
 
(18.1
)%
 
 
Net claims and claim expense ratio – prior accident years
(18.2
)%
 
(23.1
)%
 
4.9
 %
 
 
Net claims and claim expense ratio – calendar year
36.4
 %
 
49.6
 %
 
(13.2
)%
 
 
Underwriting expense ratio
28.3
 %
 
37.5
 %
 
(9.2
)%
 
 
Combined ratio
64.7
 %
 
87.1
 %
 
(22.4
)%
 
 
 
 
 
 
 
 
 
Specialty Reinsurance Gross Premiums Written – In the second quarter of 2012, our specialty reinsurance gross premiums written increased $13.1 million, or 54.4%, to $37.3 million, compared to $24.2 million in the second quarter of 2011, primarily due to the inception of several new quota share contracts and loss related premiums during the second quarter of 2012.
Specialty Reinsurance Underwriting Results – Our specialty unit generated $15.4 million of underwriting income in the second quarter of 2012, compared to $4.1 million in the second quarter of 2011, an increase of $11.3 million, principally due to an $11.7 million increase in net premiums earned as a result of the increase in gross premiums written, as noted above.
In the second quarter of 2012, our specialty unit generated a net claims and claim expense ratio of 36.4%, an underwriting expense ratio of 28.3% and a combined ratio of 64.7%, compared to 49.6%, 37.5% and 87.1%, respectively, in the second quarter of 2011. The 13.2% percentage point decrease in the underwriting expense ratio was principally driven by the increase in net premiums earned during the second quarter of 2012 as a result of the increase in gross premiums written, as noted above, compared to the second quarter of 2011, while underwriting expenses were relatively flat.
Current accident year net claims and claim expenses of $23.9 million was principally comprised of the application of our formulaic reserving methodologies for establishing incurred but not reported reserves for net claims and claim expenses.
The favorable development of $7.9 million and $7.4 million within our specialty reinsurance unit in the second quarter of 2012 and 2011, respectively, was principally the result of lower than expected claims emergence.

70
    


Lloyd’s Segment
Below is a summary of the underwriting results and ratios for our Lloyd’s segment:
 
 
 
 
 
 
 
 
 
Lloyd’s segment overview
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Lloyd’s gross premiums written
 
 
 
 
 
 
 
Specialty
$
32,925

 
$
17,546

 
$
15,379

 
 
Catastrophe
17,372

 
16,580

 
792

 
 
Total Lloyd’s gross premiums written
$
50,297

 
$
34,126

 
$
16,171

 
 
Net premiums written
$
48,510

 
$
32,084

 
$
16,426

 
 
Net premiums earned
$
30,369

 
$
17,233

 
$
13,136

 
 
Net claims and claim expenses incurred
14,960

 
8,619

 
6,341

 
 
Acquisition expenses
5,510

 
3,305

 
2,205

 
 
Operational expenses
10,806

 
8,635

 
2,171

 
 
Underwriting loss
$
(907
)
 
$
(3,326
)
 
$
2,419

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
18,366

 
$
9,612

 
$
8,754

 
 
Net claims and claim expenses incurred – prior accident years
(3,406
)
 
(993
)
 
(2,413
)
 
 
Net claims and claim expenses incurred – total
$
14,960

 
$
8,619

 
$
6,341

 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
60.5
 %
 
55.8
 %
 
4.7
 %
 
 
Net claims and claim expense ratio – prior accident years
(11.2
)%
 
(5.8
)%
 
(5.4
)%
 
 
Net claims and claim expense ratio – calendar year
49.3
 %
 
50.0
 %
 
(0.7
)%
 
 
Underwriting expense ratio
53.7
 %
 
69.3
 %
 
(15.6
)%
 
 
Combined ratio
103.0
 %
 
119.3
 %
 
(16.3
)%
 
 
 
 
 
 
 
 
 
Lloyd’s Gross Premiums Written – Gross premiums written in our Lloyd's segment increased by $16.2 million, or 47.4%, to $50.3 million in the second quarter of 2012, compared to $34.1 million in the second quarter of 2011, primarily due to Syndicate 1458 growing its book of business across the majority of its lines of business.
Lloyd’s Underwriting Results – Our Lloyd's segment incurred an underwriting loss of $0.9 million and generated a combined ratio of 103.0% in the second quarter of 2012, compared to $3.3 million and 119.3%, respectively, in the second quarter of 2011. Our Lloyd's segment experienced current accident year net claims and claim expenses of $18.4 million during the second quarter of 2012 which was principally due to the application of our formulaic reserving methodologies for establishing incurred but not reported reserves for net claims and claim expenses, compared to the second quarter of 2011 which was negatively impacted $3.0 million by the U.S. tornadoes. Operational expenses increased $2.2 million to $10.8 million in the second quarter of 2012, compared to the second quarter of 2011, and principally include compensation and related operating expenses. The decrease in the underwriting expense ratio to 53.7% in the second quarter of 2012, from 69.3% in the second quarter of 2011, was primarily driven by the increase in net premiums earned.

71
    


Insurance segment
Below is a summary of the underwriting results and ratios for our Insurance segment:
 
 
 
 
 
 
 
 
 
Insurance segment overview
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Gross premiums written
$
—

 
$
33

 
$
(33
)
 
 
Net premiums written
$
(249
)
 
$
55

 
$
(304
)
 
 
Net premiums earned
$
(249
)
 
$
481

 
$
(730
)
 
 
Net claims and claim expenses incurred
(897
)
 
(577
)
 
(320
)
 
 
Acquisition expenses
—

 
147

 
(147
)
 
 
Operational expenses
255

 
763

 
(508
)
 
 
Underwriting income
$
393

 
$
148

 
$
245

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
—

 
$
(78
)
 
$
78

 
 
Net claims and claim expenses incurred – prior accident years
(897
)
 
(499
)
 
(398
)
 
 
Net claims and claim expenses incurred – total
$
(897
)
 
$
(577
)
 
$
(320
)
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
—
 %
 
(16.2
)%
 
16.2
 %
 
 
Net claims and claim expense ratio – prior accident years
360.2
 %
 
(103.8
)%
 
464.0
 %
 
 
Net claims and claim expense ratio – calendar year
360.2
 %
 
(120.0
)%
 
480.2
 %
 
 
Underwriting expense ratio
(102.4
)%
 
189.2
 %
 
(291.6
)%
 
 
Combined ratio
257.8
 %
 
69.2
 %
 
188.6
 %
 
 
 
 
 
 
 
 
 
Insurance Segment Gross Premiums Written – Insurance policies and quota-share reinsurance contracts written in connection with our Bermuda-based insurance operations not sold to QBE are included in continuing operations and are reported in our Insurance segment. Although we are not actively underwriting new business in the Insurance segment at this time, we may from time to time evaluate potential new business opportunities for our Insurance segment. Gross premiums written in our Insurance segment during the second quarter of 2011 were primarily attributable to premium adjustments on prior underwriting year contracts. Gross premiums written in the Insurance segment can fluctuate significantly between quarters and between years based on several factors, including, without limitation, the timing of the inception or cessation of quota share reinsurance contracts, including whether or not the Company has portfolio transfers in, or portfolio transfers out, of quota share reinsurance contracts of in-force books of business.
Insurance Segment Underwriting Results – Our Insurance segment generated underwriting income of $0.4 million in the second quarter of 2012, primarily due to favorable development on prior accident years of $0.9 million as a result of reductions in reported losses on certain attritional loss contracts.

72
    


Net Investment Income
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Fixed maturity investments
$
22,436

 
$
24,426

 
$
(1,990
)
 
 
Short term investments
234

 
433

 
(199
)
 
 
Equity investments trading
181

 
112

 
69

 
 
Other investments
 
 
 
 

 
 
Hedge funds and private equity investments
(10,413
)
 
8,230

 
(18,643
)
 
 
Other
4,975

 
2,838

 
2,137

 
 
Cash and cash equivalents
54

 
45

 
9

 
 
 
17,467

 
36,084

 
(18,617
)
 
 
Investment expenses
(2,724
)
 
(2,756
)
 
32

 
 
Net investment income
$
14,743

 
$
33,328

 
$
(18,585
)
 
 
 
 
 
 
 
 
 
Net investment income was $14.7 million in the second quarter of 2012, compared to $33.3 million in the second quarter of 2011. The $18.6 million decrease in net investment income was primarily due to lower returns in our portfolio of other investments, principally our private equity investments.
Historically low interest rates as compared to recent years have lowered the yields at which we invest our assets relative to historical levels. We expect these developments, combined with the current composition of our investment portfolio and other factors, to continue to put downward pressure on our net investment income for the near term. The hedge fund, private equity and other investment portfolios are accounted for at fair value with the change in fair value recorded in net investment income which included net unrealized losses of $13.4 million in the second quarter of 2012, compared to unrealized gains of $5.7 million in the second quarter of 2011.
Commencing in the first quarter of 2011, we established a portfolio of certain publicly traded equities which are reflected in our consolidated balance sheet as equity investments trading. This portfolio of equity investments is carried at fair value with dividend income included in net investment income, and realized and unrealized gains included in net realized and unrealized gains on investments, in our consolidated statements of operations. We may add to this portfolio during subsequent periods, although we do not expect it to represent a material portion of our invested assets or our financial results for the reasonably foreseeable period.
Net Realized and Unrealized Gains on Investments and Net Other-Than-Temporary Impairments
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Gross realized gains
$
19,458

 
$
15,430

 
$
4,028

 
 
Gross realized losses
(3,294
)
 
(4,156
)
 
862

 
 
Net realized gains on fixed maturity investments
16,164

 
11,274

 
4,890

 
 
Net unrealized gains on fixed maturity investments trading
12,538

 
24,728

 
(12,190
)
 
 
Net unrealized gains (losses) on equity investments trading
2,301

 
(1,023
)
 
3,324

 
 
Net realized and unrealized gains on investments
$
31,003

 
$
34,979

 
$
(3,976
)
 
 
Total other-than-temporary impairments
(234
)
 
—

 
(234
)
 
 
Portion recognized in other comprehensive income, before taxes
25

 
—

 
25

 
 
Net other-than-temporary impairments
$
(209
)
 
$
—

 
$
(209
)
 
 
 
 
 
 
 
 
 
Our investment portfolio is structured to preserve capital and provide us with a high level of liquidity. A large majority of our investments are invested in the fixed income markets and, therefore, our realized holding gains and losses on investments are highly correlated to fluctuations in interest rates. Therefore, as interest

73
    


rates decline, we will tend to have realized and unrealized gains from our investment portfolio, and as interest rates rise, we will tend to have realized and unrealized losses from our investment portfolio. We experienced net realized and unrealized gains on fixed maturity investments included in our consolidated statements of operations of $28.7 million during the second quarter of 2012. However, we cannot assure you that this trend will continue as historically low interest rates (as compared to recent years) may increase in the near term resulting in a rising interest rate environment which would tend to diminish our ability to generate net realized gains on our portfolio of fixed maturity investments.
Net realized and unrealized gains on investments were $31.0 million in the second quarter of 2012, compared to $35.0 million in the second quarter of 2011, a decrease of $4.0 million. The net unrealized gains on our fixed maturity investments trading of $12.5 million during the the second quarter of 2012 decreased $12.2 million, compared to $24.7 million in the second quarter of 2011, primarily due to the net depreciation of our fixed maturity investment portfolio as a result of widening credit spreads during the second quarter of 2012. Included in net realized and unrealized gains on investment in the second quarter of 2012 is $2.3 million of net unrealized gains on equity investments trading due to increases in the share prices of our equity positions.
Equity in Earnings of Other Ventures
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Top Layer Re
$
5,113

 
$
3,967

 
$
1,146

 
 
Tower Hill Companies
1,744

 
1,216

 
528

 
 
Other
(11
)
 
(55
)
 
44

 
 
Total equity in earnings of other ventures
$
6,846

 
$
5,128

 
$
1,718

 
 
 
 
 
 
 
 
 
Equity in earnings of other ventures primarily represents our pro-rata share of the net income from our investments in Top Layer Re and the Tower Hill Companies and was $6.8 million in the second quarter of 2012, compared to $5.1 million in the second quarter of 2011. The $1.7 million improvement in equity in earnings of other ventures was primarily due to improved profitability in both Top Layer Re and the Tower Hill Companies. The equity in earnings from the Tower Hill Companies is recorded one quarter in arrears.
Other Income (Loss)
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Weather and energy risk management operations
$
5,875

 
$
(3,779
)
 
$
9,654

 
 
Assumed and ceded reinsurance contracts accounted for as derivatives and deposits
4,082

 
(1,022
)
 
5,104

 
 
Other
1,332

 
(366
)
 
1,698

 
 
Total other income (loss)
$
11,289

 
$
(5,167
)
 
$
16,456

 
 
 
 
 
 
 
 
 
In the second quarter of 2012 we generated other income of $11.3 million, compared to an other loss of $5.2 million in the second quarter of 2011. The $16.5 million improvement in other income is primarily due our weather and energy risk management operations generating income of $5.9 million, compared to incurring a loss of $3.8 million primarily as a result of positive results from its positions in the United Kingdom and its summer positions as at June 30, 2012 in certain regions of the United States and Canada.
Certain contracts we enter into in our weather and energy risk operations are informed in part on proprietary weather forecasts provided by our Weather Predict subsidiary. The weather and energy risk operations in which we engage are both seasonal and volatile, and there is no assurance that our performance to date will be indicative of future periods.  We continue to allocate capital to our weather and energy risk management operations. This operation continually seeks new markets and relationships for its weather and energy risk products, including leveraging strategic affiliations and ceding risk where appropriate.  Although there can be no assurances, it is possible that our results from these activities will increase on an absolute or relative basis over time.  We have expanded our weather and energy risk management

74
    


operations in the last several years to include weather contingent energy products and by increasing the size and volume of transactions with respect to our previously existing weather and energy risk management operations.  The weather and energy risk management operations results include net realized and unrealized gains and losses on agreements with end users and net realized and unrealized gains and losses on hedging and trading activities.  We are currently in the process of enhancing our weather and energy risk management infrastructure and operations. These activities present certain operational as well as financial risks, which we seek to mitigate, although there can be no assurance that we will be able to successfully mitigate such risks.
Corporate Expenses
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Total corporate expenses
$
4,067

 
$
4,011

 
$
56

 
 
 
 
 
 
 
 
 
Corporate expenses include certain executive, director, legal and consulting expenses, costs for research and development, impairment charges related to goodwill and other intangible assets, and other miscellaneous costs, including those associated with operating as a publicly traded company. Corporate expenses were relatively flat at $4.1 million in the second quarter of 2012, compared to $4.0 million in the second quarter of 2011.
Net Income Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
(33,624
)
 
$
(21,903
)
 
$
(11,721
)
 
 
 
 
 
 
 
 
 
Our net income attributable to the noncontrolling interests was $33.6 million in the second quarter of 2012, compared to $21.9 million in the second quarter of 2011. The $11.7 million change is primarily due to an increase in the profitability of DaVinciRe and a decrease in our ownership in DaVinciRe from 42.8% at June 30, 2011 to 31.5% at June 30, 2012, consequently increasing redeemable noncontrolling interest - DaVinciRe. We expect our ownership in DaVinciRe to fluctuate over time.
Income (Loss) from Discontinued Operations
 
 
 
 
 
 
 
 
 
Three months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Income (loss) from discontinued operations
$
1,393

 
$
(10,094
)
 
$
11,487

 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations includes the financial results of substantially all of our U.S.-based insurance operations sold to QBE. Income from discontinued operations of $1.4 million in the second quarter of 2012 is primarily due to recognizing a gain of $1.0 million on the settlement of the Reserve Collar, as noted below, compared to a loss from discontinued operations of $10.1 million in the second quarter of 2011 which was primarily due to the recognition of a $10.0 million expense related to the contractually agreed obligation to pay, or otherwise reimburse, QBE for amounts potentially up to $10.0 million in respect of net adverse development on prior accident years net claims and claim expenses. Effective May 23, 2012, the Company and QBE reached an agreement in respect of the Reserve Collar, and the Company paid QBE the sum of $9.0 million on June 1, 2012, representing full and final settlement of the Reserve Collar.


75
    


SUMMARY OF RESULTS OF OPERATIONS
Below is a discussion of the results of operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except per share amounts and percentages)
 
 
 
 
 
 
 
Statement of operations highlights
 
 
 
 
 
 
 
Gross premiums written
$
1,331,487

 
$
1,252,068

 
$
79,419

 
 
Net premiums written
920,205

 
880,570

 
39,635

 
 
Net premiums earned
523,081

 
522,716

 
365

 
 
Net claims and claim expenses incurred
65,103

 
779,798

 
(714,695
)
 
 
Underwriting income (loss)
324,469

 
(387,429
)
 
711,898

 
 
Net investment income
81,714

 
93,609

 
(11,895
)
 
 
Net realized and unrealized gains on investments
77,116

 
29,765

 
47,351

 
 
Income (loss) from continuing operations
447,244

 
(257,738
)
 
704,982

 
 
Income (loss) from discontinued operations
1,220

 
(11,620
)
 
12,840

 
 
Net income (loss)
448,464

 
(269,358
)
 
717,822

 
 
Net income (loss) available (attributable) to RenaissanceRe common shareholders
343,699

 
(223,269
)
 
566,968

 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
6.61

 
$
(4.16
)
 
$
10.77

 
 
Income (loss) from discontinued operations per common share – diluted
0.02

 
(0.23
)
 
0.25

 
 
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
6.63

 
$
(4.39
)
 
$
11.02

 
 
Dividends per common share
$
0.54

 
$
0.52

 
$
0.02

 
 
 
 
 
 
 
 
 
 
Key ratios
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
31.8
 %
 
166.2
 %
 
(134.4
)%
 
 
Net claims and claim expense ratio – prior accident years
(19.4
)%
 
(17.0
)%
 
(2.4
)%
 
 
Net claims and claim expense ratio – calendar year
12.4
 %
 
149.2
 %
 
(136.8
)%
 
 
Underwriting expense ratio
25.6
 %
 
24.9
 %
 
0.7
 %
 
 
Combined ratio
38.0
 %
 
174.1
 %
 
(136.1
)%
 
 
 
 
 
 
 
 
 
 
Return on average common equity
21.5
 %
 
(14.4
)%
 
35.9
 %
 
 
 
 
 
 
 
 
 
 
Book value
June 30,
2012
 
December 31,
2011
 
Change
 
 
Book value per common share
$
65.07

 
$
59.27

 
$
5.80

 
 
Accumulated dividends per common share
11.46

 
10.92

 
0.54

 
 
Book value per common share plus accumulated dividends
$
76.53

 
$
70.19

 
$
6.34

 
 
Change in book value per common share plus change in accumulated dividends
10.7
 %
 
 
 


 
 
 
 
 
 
 
 
 
 
Balance sheet highlights
June 30,
2012
 
December 31,
2011
 
Change
 
 
Total assets
$
8,959,518

 
$
7,744,912

 
$
1,214,606

 
 
Total shareholders’ equity attributable to RenaissanceRe
$
3,843,010

 
$
3,605,193

 
$
237,817

 
 
 
 
 
 
 
 
 

76
    


Net income available to RenaissanceRe common shareholders was $343.7 million in the first six months of 2012, compared to a net loss attributable to RenaissanceRe common shareholders of $223.3 million in the first six months of 2011, an improvement of $567.0 million. As a result of our net income available to RenaissanceRe common shareholders in the first six months of 2012, we generated an annualized return on average common equity of 21.5% and our book value per common share increased from $59.27 at December 31, 2011 to $65.07 at June 30, 2012, a 10.7% increase, after considering the change in accumulated dividends paid to our common shareholders.
The most significant events affecting our financial performance during the first six months of 2012, on a comparative basis to the first six months of 2011 include:
•
Significantly Improved Underwriting Results - our underwriting income of $324.5 million in the first six months of 2012 improved $711.9 million from an underwriting loss of $387.4 million in the first six months of 2011, primarily due to a relatively low level of insured catastrophes in the first six months of 2012 and improved pricing which resulted in higher premiums, compared to $662.5 million of underwriting losses as a result of a number of large losses which occurred in the first six months of 2011, namely the 2011 New Zealand and Tohoku earthquakes, the Australian floods and the U.S. tornadoes (collectively referred to as the "2011 Large Losses"), as detailed below;
•
Higher Investment Results - our net realized and unrealized gains on investments increased $47.4 million in the first six months of 2012, compared to the first six months of 2011, primarily due to increased turnover and improved valuations in our fixed maturity investments portfolio combined with improved valuations within our equity investments portfolio. The increase in our net realized and unrealized gains on investments was partially offset by a $11.9 million decrease in net investment income in the first six months of 2012, compared to the first six months of 2011, primarily as a result of lower returns from our private equity investments portfolio;
•
Equity in Earnings of Other Ventures - our equity in earnings of other ventures improved to earnings of $12.3 million in the first six months of 2012, compared to a loss of $18.6 million in the first six months of 2011. The $30.9 million improvement is primarily due to our equity investment in Top Layer Re which generated income of $9.9 million in the first six months of 2012, compared to a loss of $18.5 million in the first six months of 2011, an improvement of $28.4 million, principally due to the absence of large losses during the first six months of 2012, compared to claims and claim expenses incurred in the first six months of 2011 in Top Layer Re related to the 2011 New Zealand earthquake; and partially offset by
•
Net (Income) Loss Attributable to Redeemable Noncontrolling Interest - DaVinciRe - our net income attributable to redeemable noncontrolling interest - DaVinciRe was $87.0 million in the first six months of 2012, compared to net loss attributable to redeemable noncontrolling interest - DaVinciRe of $64.0 million in the first six months of 2011, a change of $151.0 million, principally due to a significant improvement in underwriting income as a result of the decrease in current accident year net claims and claim expenses and higher investment results, as noted above, which also impacted DaVinciRe, and together resulted in net income for the first six months of 2012, compared to net loss in the first six months of 2011. In addition, our ownership in DaVinciRe decreased from 42.8% at June 30, 2011 to 31.5% at June 30, 2012, consequently increasing redeemable noncontrolling interest - DaVinciRe; and
•
Other (Loss) Income - our other (loss) income deteriorated $72.8 million to a loss of $27.8 million in the first six months of 2012, compared to income of $45.0 million in the first six months of 2011, primarily the result of $29.6 million of trading losses within the Company's weather and energy risk management operations due to the unusually warm weather experienced in parts of the United Kingdom and parts of the United States experienced during the first quarter of 2012, compared to a trading loss of $0.5 million in the first six months of 2011; and ceded reinsurance contracts accounted for at fair value which generated income of $2.3 million the first six months of 2012, compared to $42.5 million in the first six months of 2011, due to net recoverables on the Tohoku earthquake in the first quarter of 2011 which did not reoccur in the first six months of 2012.

77
    


Net Negative Impact of the 2011 Large Losses
Net negative impact includes the sum of estimates of net claims and claim expenses incurred, earned reinstatement premiums assumed and ceded, lost profit commissions, redeemable noncontrolling interest - DaVinci Re, equity in the net claims and claim expenses of Top Layer Re, and other income in respect of ceded reinsurance contracts accounted for at fair value. Our estimates are based on a review of our potential exposures, preliminary discussions with certain counterparties and catastrophe modeling techniques. Given the magnitude and recent occurrence of the 2011 Large Losses, delays in receiving claims data, the contingent nature of business interruption and other exposures, potential uncertainties relating to reinsurance recoveries and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from the 2011 Large Losses. In addition, a significant portion of the net claims and claim expenses associated with the 2011 New Zealand and Tohoku earthquakes are concentrated with a few large clients and therefore the loss estimates for these events may vary significantly based on the claims experience of those clients. Accordingly, our actual net negative impact from the 2011 Large Losses will vary from these preliminary estimates, perhaps materially so. Changes in these estimates will be recorded in the period in which they occur.
See the financial data below for additional information detailing the net negative impact of the 2011 Large Losses, on our consolidated financial statements for the first six months of 2011.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011 Large Losses
 
 
Six months ended June 30, 2011
2011 New Zealand Earthquake
 
Tohoku Earthquake
 
Australian Floods
 
U.S. Tornadoes
 
Total
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
$
(209,954
)
 
$
(399,989
)
 
$
(46,118
)
 
$
(121,655
)
 
$
(777,716
)
 
 
Assumed reinstatement premiums earned
23,375

 
82,087

 
8,672

 
22,499

 
136,633

 
 
Ceded reinstatement premiums earned
(2,140
)
 
(9,889
)
 
—

 
—

 
(12,029
)
 
 
Lost profit commissions
(8,452
)
 
1,337

 
(1,550
)
 
(708
)
 
(9,373
)
 
 
Net negative impact on underwriting result
(197,171
)
 
(326,454
)
 
(38,996
)
 
(99,864
)
 
(662,485
)
 
 
Equity in net claims and claim expenses of Top Layer Re
(23,758
)
 
—

 
—

 
—

 
(23,758
)
 
 
Recoveries from ceded reinsurance contracts accounted for at fair value
—

 
44,903

 
—

 
—

 
44,903

 
 
Redeemable noncontrolling interest - DaVinciRe
42,183

 
66,120

 
8,148

 
29,054

 
145,505

 
 
Net negative impact
$
(178,746
)
 
$
(215,431
)
 
$
(30,848
)
 
$
(70,810
)
 
$
(495,835
)
 
 
Percentage point impact on consolidated combined ratio
32.6

 
60.6

 
6.3

 
16.6

 
143.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net negative impact on Reinsurance segment underwriting result
$
(191,217
)
 
$
(313,912
)
 
$
(38,996
)
 
$
(96,944
)
 
(641,069
)
 
 
Net negative impact on Lloyd's segment underwriting result
(5,954
)
 
(12,542
)
 
—

 
(2,920
)
 
(21,416
)
 
 
Net negative impact on underwriting result
$
(197,171
)
 
$
(326,454
)
 
$
(38,996
)
 
$
(99,864
)
 
$
(662,485
)
 
 
 
 
 
 
 
 
 
 
 
 
 

78
    


Underwriting Results by Segment
Reinsurance Segment
Below is a summary of the underwriting results and ratios for our Reinsurance segment followed by an analysis of our catastrophe unit and specialty reinsurance unit underwriting results and ratios:
 
 
 
 
 
 
 
 
 
Reinsurance segment overview
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Gross premiums written
$
1,226,801

 
$
1,181,086

 
$
45,715

 
 
Net premiums written
$
838,007

 
$
819,422

 
$
18,585

 
 
Net premiums earned
$
468,114

 
$
488,890

 
$
(20,776
)
 
 
Net claims and claim expenses incurred
43,812

 
738,623

 
(694,811
)
 
 
Acquisition expenses
39,484

 
40,223

 
(739
)
 
 
Operational expenses
62,390

 
65,264

 
(2,874
)
 
 
Underwriting income (loss)
$
322,428

 
$
(355,220
)
 
$
677,648

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
131,775

 
$
829,760

 
$
(697,985
)
 
 
Net claims and claim expenses incurred – prior accident years
(87,963
)
 
(91,137
)
 
3,174

 
 
Net claims and claim expenses incurred – total
$
43,812

 
$
738,623

 
$
(694,811
)
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
28.2
 %
 
169.7
 %
 
(141.5
)%
 
 
Net claims and claim expense ratio – prior accident years
(18.8
)%
 
(18.6
)%
 
(0.2
)%
 
 
Net claims and claim expense ratio – calendar year
9.4
 %
 
151.1
 %
 
(141.7
)%
 
 
Underwriting expense ratio
21.7
 %
 
21.6
 %
 
0.1
 %
 
 
Combined ratio
31.1
 %
 
172.7
 %
 
(141.6
)%
 
 
 
 
 
 
 
 
 
Reinsurance Segment Gross Premiums Written – Gross premiums written in our Reinsurance segment increased by $45.7 million, or 3.9%, to $1,226.8 million in the first six months of 2012, compared to $1,181.1 million in the first six months of 2011. Excluding the impact of $30.7 million of negative reinstatement premiums adjustments in the first six months of 2012 and $135.8 million of reinstatement premiums written in the first six months of 2011, each as discussed above, gross premiums written increased $212.3 million or 20.3%, primarily due to the catastrophe unit experiencing improved market conditions on a risk-adjusted basis within its core lines of business during the January 2012 renewals and writing more business during the June 2012 renewals and due to the inception of several new contracts during the first six months of 2012 which met our risk-adjusted return thresholds within our specialty unit.
Our Reinsurance segment premiums are prone to significant volatility due to the timing of contract inception and also due to the business being characterized by a relatively small number of relatively large transactions. In addition, our property catastrophe reinsurance gross premiums written continue to be characterized by a large percentage of U.S. and Caribbean premium as we have found business derived from exposures in Europe and the rest of the world to be, in general, less attractive on a risk-adjusted basis during recent periods. A significant amount of our U.S. and Caribbean premium provides coverage against windstorms, mainly U.S. Atlantic hurricanes, as well as earthquakes and other natural and man-made catastrophes.
Reinsurance Segment Underwriting Results – Our Reinsurance segment generated underwriting income of $322.4 million in the first six months of 2012, compared to incurring an underwriting loss of $355.2 million in the first six months of 2011, an improvement of $677.6 million. In the first six months of 2012, our Reinsurance segment generated a net claims and claim expense ratio of 9.4%, an underwriting expense ratio of 21.7% and a combined ratio of 31.1%, compared to 151.1%, 21.6% and 172.7%, respectively, in the first six months of 2011.

79
    


The $677.6 million improvement in the Reinsurance segment's underwriting result and 141.6 percentage point decrease in the combined ratio was principally due to the relatively low level of insured catastrophes in the first six months of 2012, compared to the first six months of 2011. The 2011 Large Losses had a net negative impact on the Reinsurance segment underwriting result of $641.1 million and added 151.0 percentage points to the Reinsurance segment combined ratio, after considering the impact of net reinstatement premiums earned and net lost profit commission related to these events, as detailed in the table below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011 Large Losses
 
 
Six months ended June 30, 2011
2011 New Zealand Earthquake
 
Tohoku Earthquake
 
Australian Floods
 
U.S. Tornadoes
 
Total
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
$
(204,000
)
 
$
(386,985
)
 
$
(46,118
)
 
$
(118,655
)
 
$
(755,758
)
 
 
Assumed reinstatement premiums earned
23,375

 
81,327

 
8,672

 
22,419

 
135,793

 
 
Ceded reinstatement premiums earned
(2,140
)
 
(9,591
)
 
—

 
—

 
(11,731
)
 
 
Lost profit commissions
(8,452
)
 
1,337

 
(1,550
)
 
(708
)
 
(9,373
)
 
 
Net negative impact on Reinsurance segment underwriting result
$
(191,217
)
 
$
(313,912
)
 
$
(38,996
)
 
$
(96,944
)
 
$
(641,069
)
 
 
Percentage point impact on Reinsurance segment combined ratio
37.6

 
62.8

 
6.8

 
17.3

 
151.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net negative impact on catastrophe unit underwriting result
$
(178,717
)
 
$
(293,912
)
 
$
(32,996
)
 
$
(96,944
)
 
$
(602,569
)
 
 
Net negative impact on specialty unit underwriting result
(12,500
)
 
(20,000
)
 
(6,000
)
 
—

 
(38,500
)
 
 
Net negative impact on Reinsurance segment underwriting result
$
(191,217
)
 
$
(313,912
)
 
$
(38,996
)
 
$
(96,944
)
 
$
(641,069
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Our Reinsurance segment prior year reserves experienced $88.0 million and $91.1 million of net favorable development in the first six months of 2012 and 2011, respectively. The favorable development on prior year reserves in the first six months of 2012 included $68.1 million related to our catastrophe reinsurance unit and $19.8 million related to our specialty reinsurance unit, as discussed below in the underwriting results of the catastrophe and specialty units, respectively.
We have entered into joint ventures and specialized quota share cessions of our book of business. In accordance with the joint venture and quota share agreements, we are entitled to certain profit commissions and fee income. We record these profit commissions and fees as a reduction in acquisition and operating expenses and, accordingly, these fees have reduced our underwriting expense ratios. These fees totaled $36.9 million and $29.1 million in the first six months of 2012 and 2011, respectively, and resulted in a corresponding decrease to the Reinsurance segment underwriting expense ratio of 7.9% and 6.0%, respectively. In addition, we are entitled to certain fee income and profit commissions from DaVinci. Because the results of DaVinci, and its parent DaVinciRe, are consolidated in our results of operations, these fees and profit commissions are eliminated in our consolidated financial statements and are principally reflected in redeemable noncontrolling interest – DaVinciRe. The net impact of all fees and profit commissions related to these joint ventures and specialized quota share cessions within our Reinsurance segment was $66.5 million and $16.7 million in the first six months of 2012 and 2011, respectively.

80
    


Catastrophe
Below is a summary of the underwriting results and ratios for our catastrophe unit:
 
 
 
 
 
 
 
 
 
Catastrophe unit overview
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Property catastrophe gross premiums written
 
 
 
 
 
 
 
Renaissance
$
675,521

 
$
678,571

 
$
(3,050
)
 
 
DaVinci
413,457

 
403,353

 
10,104

 
 
Total property catastrophe gross premiums written
$
1,088,978

 
$
1,081,924

 
$
7,054

 
 
Net premiums written
$
706,749

 
$
725,676

 
$
(18,927
)
 
 
Net premiums earned
$
385,692

 
$
422,798

 
$
(37,106
)
 
 
Net claims and claim expenses incurred
16,262

 
713,892

 
(697,630
)
 
 
Acquisition expenses
29,164

 
29,509

 
(345
)
 
 
Operational expenses
48,573

 
50,461

 
(1,888
)
 
 
Underwriting income (loss)
$
291,693

 
$
(371,064
)
 
$
662,757

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
84,404

 
$
745,388

 
$
(660,984
)
 
 
Net claims and claim expenses incurred – prior accident years
(68,142
)
 
(31,496
)
 
(36,646
)
 
 
Net claims and claim expenses incurred – total
$
16,262

 
$
713,892

 
$
(697,630
)
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
21.9
 %
 
176.3
 %
 
(154.4
)%
 
 
Net claims and claim expense ratio – prior accident years
(17.7
)%
 
(7.5
)%
 
(10.2
)%
 
 
Net claims and claim expense ratio – calendar year
4.2
 %
 
168.8
 %
 
(164.6
)%
 
 
Underwriting expense ratio
20.2
 %
 
19.0
 %
 
1.2
 %
 
 
Combined ratio
24.4
 %
 
187.8
 %
 
(163.4
)%
 
 
 
 
 
 
 
 
 
Catastrophe Reinsurance Gross Premiums Written – In the first six months of 2012, our catastrophe reinsurance gross premiums written increased by $7.1 million, or 0.7%, to $1,089.0 million, compared to $1,081.9 million in the first six months of 2011. Excluding the impact of $30.7 million of negative reinstatement premiums adjustments in the first six months of 2012 and $135.8 million of reinstatement premiums written in the first six months of 2011, each as discussed above, our catastrophe unit gross premiums written increased $173.6 million, or 18.3%, in the first six months of 2012, primarily due to improved market conditions on a risk-adjusted basis within our core lines of business during the January 2012 renewals and writing more business during the June 2012 renewals, inclusive of $37.4 million and $37.7 million of gross premiums written on behalf of our most recent fully-collateralized joint ventures, Upsilon Re and Tim Re III.
Our property catastrophe reinsurance gross premiums written continue to be characterized by a large percentage of U.S. and Caribbean premium, as we have found business derived from exposures in Europe or the rest of the world to be, in general, less attractive on a risk-adjusted basis during recent periods. A significant amount of our U.S. and Caribbean premium provides coverage against windstorms, mainly U.S. Atlantic hurricanes, as well as earthquakes and other natural and man-made catastrophes.

81
    


Catastrophe Reinsurance Underwriting Results – Our catastrophe unit generated underwriting income of $291.7 million in the first six months of 2012, compared to incurring an underwriting loss of $371.1 million in the first six months of 2011, an improvement of $662.8 million. The improvement in underwriting income was principally due to a $661.0 million decrease in current accident year claims and claim expenses as a result of the relatively low level of insured catastrophe losses during the first six months of 2012, compared to the first six months of 2011 which was negatively impacted by net claims and claim expenses related to the 2011 Large Losses of $717.3 million. Partially offsetting the decrease in current accident year net claims and claim expenses was a $37.1 million decrease in net premiums earned, which was driven by the absence of net earned reinstatement premiums in the first six months of 2012, compared to $124.1 million of net earned reinstatement premiums in the first six months of 2011.
In the first six months of 2012, our catastrophe unit generated a net claims and claim expense ratio of 4.2%, an underwriting expense ratio of 20.2% and a combined ratio of 24.4%, compared to 168.8%, 19.0% and 187.8%, respectively, in the first six months of 2011. Current accident year net claims and claim expenses of $84.4 million includes $20.5 million related to the June 29, 2012 derecho (PCS 83) which impacted the Midwest to Mid-Atlantic coast of the U.S., with the remainder due primarily to a number of other relatively small events throughout the U.S., compared to the first six months of 2011 which was negatively impacted by the 2011 Large Losses which had a net negative impact on the catastrophe unit underwriting result of $602.6 million and added 165.3 percentage points to the catastrophe unit combined ratio, after considering the impact of net reinstatement premiums earned and net lost profit commission related to these events, as detailed in the table below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011 Large Losses
 
 
Six months ended June 30, 2011
2011 New Zealand Earthquake
 
Tohoku Earthquake
 
Australian Floods
 
U.S. Tornadoes
 
Total
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
$
(191,500
)
 
$
(366,985
)
 
$
(40,118
)
 
$
(118,655
)
 
$
(717,258
)
 
 
Assumed reinstatement premiums earned
23,375

 
81,327

 
8,672

 
22,419

 
135,793

 
 
Ceded reinstatement premiums earned
(2,140
)
 
(9,591
)
 
—

 
—

 
(11,731
)
 
 
Lost profit commissions
(8,452
)
 
1,337

 
(1,550
)
 
(708
)
 
(9,373
)
 
 
Net negative impact on catastrophe unit underwriting result
$
(178,717
)
 
$
(293,912
)
 
$
(32,996
)
 
$
(96,944
)
 
$
(602,569
)
 
 
Percentage point impact on catastrophe unit combined ratio
39.9

 
65.8

 
6.2

 
19.3

 
165.3

 
 
 
 
 
 
 
 
 
 
 
 
 
During the first six months of 2012, we experienced $68.1 million of favorable development on prior year reserves, compared to $31.5 million of favorable development on prior years reserves in the first six months of 2011. The favorable development on prior year reserves in the first six months of 2012 within the catastrophe reinsurance unit of $68.1 million was primarily due to $17.3 million related to the 2007 U.K floods, $12.0 million related to the Tohoku earthquake, $5.0 million related to the 2011 Danish floods, $4.6 million related to hurricane Irene, and $5.9 million related to actuarial assumption changes, with the remainder due to better than expected claims emergence associated with a number of other catastrophes, partially offset by adverse development on the 2011 New Zealand earthquake of $5.9 million. The favorable development of $31.5 million in the first six months of 2012 was primarily related to decreases in estimated ultimate losses on certain specific events, including $4.0 million related to tropical cyclone Tasha and $7.7 million related to the 2005 hurricanes, with the remainder due to better than expected claims emergence associated with a number of other catastrophes.
        


82
    


Specialty
Below is a summary of the underwriting results and ratios for our specialty reinsurance unit:
 
 
 
 
 
 
 
 
 
Specialty unit overview
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Specialty gross premiums written
 
 
 
 
 
 
 
Renaissance
$
135,323

 
$
97,461

 
$
37,862

 
 
DaVinci
2,500

 
1,701

 
799

 
 
Total specialty gross premiums written
$
137,823

 
$
99,162

 
$
38,661

 
 
Net premiums written
$
131,258

 
$
93,746

 
$
37,512

 
 
Net premiums earned
$
82,422

 
$
66,092

 
$
16,330

 
 
Net claims and claim expenses incurred
27,550

 
24,731

 
2,819

 
 
Acquisition expenses
10,320

 
10,714

 
(394
)
 
 
Operational expenses
13,817

 
14,803

 
(986
)
 
 
Underwriting income
$
30,735

 
$
15,844

 
$
14,891

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
47,371

 
$
84,372

 
$
(37,001
)
 
 
Net claims and claim expenses incurred – prior accident years
(19,821
)
 
(59,641
)
 
39,820

 
 
Net claims and claim expenses incurred – total
$
27,550

 
$
24,731

 
$
2,819

 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
57.5
 %
 
127.7
 %
 
(70.2
)%
 
 
Net claims and claim expense ratio – prior accident years
(24.1
)%
 
(90.3
)%
 
66.2
 %
 
 
Net claims and claim expense ratio – calendar year
33.4
 %
 
37.4
 %
 
(4.0
)%
 
 
Underwriting expense ratio
29.3
 %
 
38.6
 %
 
(9.3
)%
 
 
Combined ratio
62.7
 %
 
76.0
 %
 
(13.3
)%
 
 
 
 
 
 
 
 
 
Specialty Reinsurance Gross Premiums Written – In the first six months of 2012, our specialty reinsurance gross premiums written increased $38.7 million, or 39.0%, to $137.8 million, compared to $99.2 million in the first six months of 2011, primarily due to the inception of several new contracts during the first six months of 2012 which met our risk-adjusted return thresholds.
Specialty Reinsurance Underwriting Results – Our specialty unit generated $30.7 million of underwriting income in the first six months of 2012, compared to $15.8 million in the first six months of 2011, an increase of $14.9 million, principally due to a $16.3 million increase in net premiums earned, partially offset by a $2.8 million increase in net claims and claim expenses. The $2.8 million increase in net claims and claim expenses is primarily driven by a $39.8 million decrease in favorable development on prior accident year net claims and claim expenses, as discussed below, and partially offset by a $37.0 million decrease in current accident year net claims and claim expenses, as discussed below.
In the first six months of 2012, our specialty unit generated a net claims and claim expense ratio of 33.4%, an underwriting expense ratio of 29.3% and a combined ratio of 62.7%, compared to 37.4%, 38.6% and 76.0%, respectively, in the first six months of 2011. The 9.3 percentage point decrease in the underwriting expense ratio was principally driven by a combination of an increase in net premiums earned as a result of the increase in gross premiums written, as noted above, and a $0.4 million and $1.0 million decrease in acquisition and operational expenses, respectively, during the first six months of 2012, compared to the first six months of 2011.

83
    


Current accident year net claims and claim expenses of $47.4 million included $5.0 million related to the grounding of the Costa Concordia cruise ship, with the remainder primarily due to attritional losses, compared with the the first six months of 2011 which experienced estimated losses associated with the Tohoku earthquake, 2011 New Zealand earthquake and the Australian flooding of $20.0 million, $12.5 million and $6.0 million, respectively.
The favorable development of $19.8 million within our specialty reinsurance unit in the first six months of 2012 included $14.4 million associated with actuarial assumption changes, principally in our casualty and medical malpractice lines of business, and primarily as a result of revised initial expected claims ratios and claim development factors due to actual experience coming in better than expected, $2.0 million favorable development on the 2005 hurricanes and $3.4 million of reported losses developing more favorably than expected during the first six months of 2012 on prior accident years events. The favorable development on prior accident years in the first six months of 2011 of $59.6 million was principally the result of $32.8 million due to actual reported loss activity coming in better than expected and $26.8 million due to changes in our actuarial assumptions.
Lloyd’s Segment
Below is a summary of the underwriting results and ratios for our Lloyd’s segment:
 
 
 
 
 
 
 
 
 
Lloyd’s segment overview
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Lloyd’s gross premiums written
 
 
 
 
 
 
 
Specialty
$
72,254

 
$
46,781

 
$
25,473

 
 
Catastrophe
32,860

 
23,965

 
8,895

 
 
Total Lloyd’s gross premiums written
$
105,114

 
$
70,746

 
$
34,368

 
 
Net premiums written
$
82,447

 
$
60,821

 
$
21,626

 
 
Net premiums earned
$
55,191

 
$
32,907

 
$
22,284

 
 
Net claims and claim expenses incurred
23,961

 
39,142

 
(15,181
)
 
 
Acquisition expenses
10,178

 
5,766

 
4,412

 
 
Operational expenses
20,863

 
17,607

 
3,256

 
 
Underwriting income (loss)
$
189

 
$
(29,608
)
 
$
29,797

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
34,646

 
$
38,938

 
$
(4,292
)
 
 
Net claims and claim expenses incurred – prior accident years
(10,685
)
 
204

 
(10,889
)
 
 
Net claims and claim expenses incurred – total
$
23,961

 
$
39,142

 
$
(15,181
)
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
62.8
 %
 
118.3
%
 
(55.5
)%
 
 
Net claims and claim expense ratio – prior accident years
(19.4
)%
 
0.6
%
 
(20.0
)%
 
 
Net claims and claim expense ratio – calendar year
43.4
 %
 
118.9
%
 
(75.5
)%
 
 
Underwriting expense ratio
56.3
 %
 
71.1
%
 
(14.8
)%
 
 
Combined ratio
99.7
 %
 
190.0
%
 
(90.3
)%
 
 
 
 
 
 
 
 
 
Lloyd’s Gross Premiums Written – Gross premiums written in our Lloyd's segment increased by $34.4 million, or 48.6% to $105.1 million in the first six months of 2012, compared to $70.7 million in the first six months of 2011, primarily due to Syndicate 1458 growing its book of business across the majority of its lines of business and the impact of rate increases, most notably in its casualty lines of business.

84
    


Lloyd’s Underwriting Results – Our Lloyd's segment generated underwriting income of $0.2 million and a combined ratio of 99.7% in the first six months of 2012, compared to an underwriting loss of $29.6 million and a combined ratio of 190.0% in the first six months of 2011. Our Lloyd's segment experienced current accident year net claims and claim expenses of $34.6 million during the first six months of 2012, compared to $38.9 million in the first six months of 2011 which was negatively impacted by the 2011 Large Losses, resulting in $21.4 million of underwriting losses from the 2011 Large Losses and increasing the combined ratio by 64.5 percentage points, after considering the impact of net reinstatement premiums earned and lost profit commissions related to these events, as detailed in the table below. Operational expenses increased $3.3 million, to $20.9 million in the first six months of 2012, compared to the first six months of 2011, and principally include compensation and related operating expenses. The decrease in the underwriting expense ratio to 56.3% in the first six months of 2012, from 71.1% in the first six months of 2011, was primarily driven by the increase in net premiums earned.
 
 
 
 
 
 
 
 
 
 
 
 
2011 Large Losses
 
 
Six months ended June 30, 2011
2011 New Zealand Earthquake
 
Tohoku Earthquake
 
U.S. Tornadoes
 
Total
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred
$
(5,954
)
 
$
(13,004
)
 
$
(3,000
)
 
$
(21,958
)
 
 
Assumed reinstatement premiums earned
—

 
760

 
80

 
840

 
 
Ceded reinstatement premiums earned
—

 
(298
)
 
—

 
(298
)
 
 
Net negative impact on Lloyd's segment underwriting result
$
(5,954
)
 
$
(12,542
)
 
$
(2,920
)
 
$
(21,416
)
 
 
Percentage point impact on Lloyd's segment combined ratio
18.1

 
36.0

 
8.7

 
64.5

 
 
 
 
 
 
 
 
 
 
 
Insurance segment
Below is a summary of the underwriting results and ratios for our Insurance segment:
 
 
 
 
 
 
 
 
 
Insurance segment overview
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
Gross premiums written
$
—

 
$
313

 
$
(313
)
 
 
Net premiums written
$
(249
)
 
$
327

 
$
(576
)
 
 
Net premiums earned
$
(224
)
 
$
919

 
$
(1,143
)
 
 
Net claims and claim expenses incurred
(2,670
)
 
2,033

 
(4,703
)
 
 
Acquisition expenses
57

 
229

 
(172
)
 
 
Operational expenses
537

 
1,258

 
(721
)
 
 
Underwriting income (loss)
$
1,852

 
$
(2,601
)
 
$
4,453

 
 
 
 
 
 
 
 
 
 
Net claims and claim expenses incurred – current accident year
$
—

 
$
(69
)
 
$
69

 
 
Net claims and claim expenses incurred – prior accident years
(2,670
)
 
2,102

 
(4,772
)
 
 
Net claims and claim expenses incurred – total
$
(2,670
)
 
$
2,033

 
$
(4,703
)
 
 
 
 
 
 
 
 
 
 
Net claims and claim expense ratio – current accident year
—
 %
 
(7.5
)%
 
7.5
 %
 
 
Net claims and claim expense ratio – prior accident years
1,192.0
 %
 
228.7
 %
 
963.3
 %
 
 
Net claims and claim expense ratio – calendar year
1,192.0
 %
 
221.2
 %
 
970.8
 %
 
 
Underwriting expense ratio
(265.2
)%
 
161.8
 %
 
(427.0
)%
 
 
Combined ratio
926.8
 %
 
383.0
 %
 
543.8
 %
 
 
 
 
 
 
 
 
 

85
    


Insurance Segment Gross Premiums Written – Insurance policies and quota-share reinsurance contracts written in connection with our Bermuda-based insurance operations not sold to QBE are included in continuing operations and are reported in our Insurance segment. Although we are not actively underwriting new business in the Insurance segment at this time, we may from time to time evaluate potential new business opportunities for our Insurance segment. Gross premiums written in our Insurance segment during the first six months of 2011 were primarily attributable to premium adjustments on prior underwriting year contracts. Gross premiums written in the Insurance segment can fluctuate significantly between quarters and between years based on several factors, including, without limitation, the timing of the inception or cessation of quota share reinsurance contracts, including whether or not the Company has portfolio transfers in, or portfolio transfers out, of quota share reinsurance contracts of in-force books of business.
Insurance Segment Underwriting Results – Our Insurance segment generated underwriting income of $1.9 million in the first six months of 2012, primarily due to favorable development on prior accident years of $2.7 million as a result of reductions in reported losses on certain attritional loss contracts, compared to incurring an underwriting loss of $2.6 million in the first six months of 2011.
Net Investment Income
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Fixed maturity investments
$
48,769

 
$
52,339

 
$
(3,570
)
 
 
Short term investments
734

 
1,028

 
(294
)
 
 
Equity investments trading
351

 
126

 
225

 
 
Other investments
 
 
 
 

 
 
Hedge funds and private equity investments
18,060

 
31,737

 
(13,677
)
 
 
Other
19,145

 
13,665

 
5,480

 
 
Cash and cash equivalents
80

 
86

 
(6
)
 
 
 
87,139

 
98,981

 
(11,842
)
 
 
Investment expenses
(5,425
)
 
(5,372
)
 
(53
)
 
 
Net investment income
$
81,714

 
$
93,609

 
$
(11,895
)
 
 
 
 
 
 
 
 
 
Net investment income was $81.7 million in the first six months of 2012, compared to $93.6 million in the first six months of 2011. The $11.9 million decrease in net investment income was principally driven by a $13.7 million decrease in the returns primarily from our private equity investments due to lower returns in the first six months of 2012, and a $3.6 million decrease from our fixed maturity portfolio due to the continued low interest rate environment, partially offset by a $5.5 million increase in the returns on the remaining investments included in other investments. Historically low interest rates as compared to recent years have lowered the yields at which we invest our assets relative to historical levels. We expect these developments, combined with the current composition of our investment portfolio and other factors, to continue to put downward pressure on our net investment income for the near term. The hedge fund, private equity and other investment portfolios are accounted for at fair value with the change in fair value recorded in net investment income which included net unrealized gains of $21.9 million in the first six months of 2012, compared to $33.7 million in the first six months of 2011.
Commencing in the first quarter of 2011, we established a portfolio of certain publicly traded equities which are reflected in our consolidated balance sheet as equity investments trading. This portfolio of equity investments is carried at fair value with dividend income included in net investment income, and realized and unrealized gains included in net realized and unrealized gains on investments, in our consolidated statements of operations. We may add to this portfolio during subsequent periods, although we do not expect it to represent a material portion of our invested assets or our financial results for the reasonably foreseeable period.

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Net Realized and Unrealized Gains on Investments and Net Other-Than-Temporary Impairments
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Gross realized gains
$
55,744

 
$
25,992

 
$
29,752

 
 
Gross realized losses
(10,244
)
 
(16,773
)
 
6,529

 
 
Net realized gains on fixed maturity investments
45,500

 
9,219

 
36,281

 
 
Net unrealized gains on fixed maturity investments trading
26,795

 
20,970

 
5,825

 
 
Net unrealized gains (losses) on equity investments trading
4,821

 
(424
)
 
5,245

 
 
Net realized and unrealized gains on investments
$
77,116

 
$
29,765

 
$
47,351

 
 
Total other-than-temporary impairments
(395
)
 
—

 
(395
)
 
 
Portion recognized in other comprehensive income, before taxes
52

 
—

 
52

 
 
Net other-than-temporary impairments
$
(343
)
 
$
—

 
$
(343
)
 
 
 
 
 
 
 
 
 
Our investment portfolio is structured to preserve capital and provide us with a high level of liquidity. A large majority of our investments are invested in the fixed income markets and, therefore, our realized and unrealized holding gains and losses on investments are highly correlated to fluctuations in interest rates. Therefore, as interest rates decline, we will tend to have realized and unrealized gains from our investment portfolio, and as interest rates rise, we will tend to have realized and unrealized losses from our investment portfolio. We experienced net realized and unrealized gains on fixed maturity investments included in our consolidated statements of operations of $72.3 million during the first six months of 2012. However, we cannot assure you that this trend will continue as historically low interest rates (as compared to recent years) may increase in the near term resulting in a rising interest rate environment which would tend to diminish our ability to generate net realized gains on our portfolio of fixed maturity investments.
Net realized and unrealized gains on investments were $77.1 million in the first six months of 2012, compared to $29.8 million in the first six months of 2011, an improvement of $47.4 million. In addition to increased turnover in our fixed maturity investments portfolio generating $45.5 million of net realized gains in the the first six months of 2012, unrealized gains on our fixed maturity investments trading of $26.8 million during the the first six months of 2012 increased $5.8 million, compared to $21.0 million of unrealized gains in the first six months of 2011, primarily due to the net appreciation of our fixed maturity investment portfolio as a result of tightening credit spreads during the first six months of 2012. Included in net realized and unrealized gains on investments in the first six months of 2012 is $4.8 million of net unrealized gains on equity investments trading due to increases in the share prices of our equity positions.
Equity in Earnings (Losses) of Other Ventures
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Top Layer Re
$
9,850

 
$
(18,542
)
 
$
28,392

 
 
Tower Hill Companies
2,861

 
767

 
2,094

 
 
Other
(395
)
 
(850
)
 
455

 
 
Total equity in earnings (losses) of other ventures
$
12,316

 
$
(18,625
)
 
$
30,941

 
 
 
 
 
 
 
 
 
Equity in earnings (losses) of other ventures primarily represents our pro-rata share of the net income (loss) from our investments in Top Layer Re and the Tower Hill Companies and was $12.3 million in the first six months of 2012, compared to losses of $18.6 million in the first six months of 2011. The $30.9 million improvement in equity in earnings of other ventures was primarily due to our equity in earnings of Top Layer Re of $9.9 million during the first six months of 2012, as a result of Top Layer Re experiencing no net claims and claims expenses during the first six months of 2012, compared to the first six months of 2011, which was negatively impacted by net claims and claim expenses related to the 2011 New Zealand earthquake. The equity in earnings from the Tower Hill Companies is recorded one quarter in arrears.

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Other (Loss) Income
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Assumed and ceded reinsurance contracts accounted for as derivatives and deposits
$
2,303

 
$
42,499

 
$
(40,196
)
 
 
Weather and energy risk management operations
(29,588
)
 
(484
)
 
(29,104
)
 
 
Mark-to-market on Platinum warrant
—

 
2,975

 
(2,975
)
 
 
Other
(520
)
 
(12
)
 
(508
)
 
 
Total other (loss) income
$
(27,805
)
 
$
44,978

 
$
(72,783
)
 
 
 
 
 
 
 
 
 
In the first six months of 2012 we incurred an other loss of $27.8 million, compared to other income of $45.0 million in the first six months of 2011. The $72.8 million deterioration in other income is primarily due to:
•
a $40.2 million decrease in other income generated by our assumed and ceded reinsurance contracts accounted for at fair value, principally as a result of $44.9 million of net recoverables from the Tohoku earthquake during the first six months of 2011 not reoccurring in the first six months of 2012;
•
losses from our weather and energy risk management operations of $29.6 million due to the unusually warm weather experienced in parts of the United Kingdom and parts of the United States during the first quarter of 2012, compared to losses from these operations of $0.5 million in the first six months of 2011; and
•
the absence in the first six months of 2012 of a mark-to-market adjustment on the Platinum warrant due to its sale during the first quarter of 2011.
Certain contracts we enter into in our weather and energy risk operations are informed in part on proprietary weather forecasts provided by our Weather Predict subsidiary. The weather and energy risk operations in which we engage are both seasonal and volatile, and there is no assurance that our performance to date will be indicative of future periods.  We continue to allocate capital to our weather and energy risk management operations. This operation continually seeks new markets and relationships for its weather and energy risk products, including leveraging strategic affiliations and ceding risk where appropriate.  Although there can be no assurances, it is possible that our results from these activities will increase on an absolute or relative basis over time.  We have expanded our weather and energy risk management operations in the last several years to include weather contingent energy products and by increasing the size and volume of transactions with respect to our previously existing weather and energy risk management operations.  The weather and energy risk management operations results include net realized and unrealized gains and losses on agreements with end users and net realized and unrealized gains and losses on hedging and trading activities.  We are currently in the process of enhancing our weather and energy risk management infrastructure and operations. These activities present certain operational as well as financial risks, which we seek to mitigate, although there can be no assurance that we will be able to successfully mitigate such risks.
Corporate Expenses
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Total corporate expenses
$
8,878

 
$
6,075

 
$
2,803

 
 
 
 
 
 
 
 
 
Corporate expenses include certain executive, director, legal and consulting expenses, costs for research and development, impairment charges related to goodwill and other intangible assets, and other miscellaneous costs, including those associated with operating as a publicly traded company. Corporate expenses were $8.9 million in the first six months of 2012, compared to $6.1 million in the first six months of 2011, with the increase primarily due to the absence of a corporate insurance recovery which was recorded in the first quarter of 2011 and did not reoccur in the first six months of 2012.

88
    


Net (Income) Loss Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests
$
(87,265
)
 
$
63,589

 
$
(150,854
)
 
 
 
 
 
 
 
 
 
Our net income attributable to the noncontrolling interests was $87.3 million in the first six months of 2012, compared to a net loss attributable to noncontrolling interests of $63.6 million in the first six months of 2011. The $150.9 million change is primarily due to an increase in the profitability of DaVinciRe as a result of the relatively low level of insured catastrophes during the first six months of 2012, compared to the first six months of 2011 which was negatively impacted by the 2011 Large Losses, combined with a decrease in our ownership percentage in DaVinciRe from 42.8% at June 30, 2011 to 31.5% at June 30, 2012. We expect our ownership in DaVinciRe to fluctuate over time.
Income (Loss) from Discontinued Operations
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Income (loss) from discontinued operations
$
1,220

 
$
(11,620
)
 
$
12,840

 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations includes the financial results of substantially all of our U.S.-based insurance operations sold to QBE. Income from discontinued operations of $1.2 million in the first six months of 2012 is primarily due to recognizing a gain of $1.0 million on the settlement of the Reserve Collar, as noted below, compared to a loss from discontinued operations of $11.6 million in the first six months of 2011 which was primarily due to the recognition of a $10.0 million expense related to the contractually agreed obligation to pay, or otherwise reimburse, QBE for amounts potentially up to $10.0 million in respect of net adverse development on prior accident years net claims and claim expenses. Effective May 23, 2012, the Company and QBE reached an agreement in respect of the Reserve Collar, and the Company paid QBE the sum of $9.0 million on June 1, 2012, representing full and final settlement of the Reserve Collar.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
RenaissanceRe is a holding company, and we therefore rely on dividends from our subsidiaries and investment income to make principal and interest payments on our debt and to make dividend payments to our preference and common shareholders.
The payment of dividends by our subsidiaries is, under certain circumstances, limited under statutory regulations and insurance law, which require our insurance subsidiaries to maintain certain measures of solvency and liquidity. In addition, Bermuda regulations require approval from the Bermuda Monetary Authority ("BMA") for any reduction of capital in excess of 15% of statutory capital, as defined in the Insurance Act. The Insurance Act also requires these Bermuda insurance subsidiaries of the Company to maintain certain measures of solvency and liquidity. At June 30, 2012, the statutory capital and surplus of our Bermuda insurance subsidiaries was $3.0 billion (December 31, 2011 - $2.7 billion) and the minimum amount required to be maintained under Bermuda law, the Minimum Solvency Margin, was $562.8 million (December 31, 2011 - $552.9 million). During the first six months of 2012, Renaissance Reinsurance, DaVinciRe and the operating subsidiaries of RenRe Insurance Holdings Ltd. returned capital to our holding company, which included dividends declared and return of capital, net of capital contributions received of $114.4 million, $123.5 million and $Nil, respectively (2011 – $Nil, $6.5 million and $547.3 million, respectively).
As discussed in the “Capital Resources” section below, Renaissance Reinsurance is obligated to make a mandatory capital contribution of up to $50.0 million in the event that a loss reduces Top Layer Re's capital below a specified level.

89
    


Under the Insurance Act, Renaissance Reinsurance and DaVinci are classified as Class 4 insurers, and therefore must maintain capital at a level equal to its Enhanced Capital Requirement ("ECR") which is established by reference to the Bermuda Solvency and Capital Requirement ("BSCR") model. The BSCR is a standard mathematical model designed to give the BMA more advanced methods for determining an insurer’s capital adequacy. Underlying the BSCR is the belief that all insurers should operate on an ongoing basis with a view to maintaining their capital at a prudent level in excess of the minimum solvency margin otherwise prescribed under the Insurance Act. Alternatively, under the Insurance Act, insurers may, subject to the terms of the Insurance Act and to the BMA’s oversight, elect to utilize an approved internal capital model to determine regulatory capital. In either case, the ECR shall at all times equal or exceed the Class 4 insurer’s Minimum Solvency Margin and may be adjusted in circumstances where the BMA concludes that the insurer’s risk profile deviates significantly from the assumptions underlying its ECR or the insurer’s assessment of its risk management policies and practices used to calculate the ECR applicable to it. While not specifically referred to in the Insurance Act, the BMA has also established a Target Capital Level ("TCL") for each Class 4 insurer equal to 120% of its ECR. While a Class 4 insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA and failure to maintain statutory capital at least equal to the TCL will likely result in increased BMA regulatory oversight. The 2011 BSCR for Renaissance Reinsurance and DaVinci was filed with the BMA in advance of the April 30, 2012 deadline, and both companies exceeded the target level of required capital.
RenaissanceRe Corporate Capital (UK) Limited and Syndicate 1458 are subject to oversight by the Council of Lloyd’s. RenaissanceRe Syndicate Management Limited is subject to regulation by the Financial Services Authority ("FSA") under the Financial Services and Markets Act 2000. Underwriting capacity of a member of Lloyd’s must be supported by providing a deposit in the form of cash, securities or letters of credit, which are referred to as Funds at Lloyd’s, in an amount determined by Lloyd’s in relation to the member’s underwriting capacity. This amount is determined by Lloyd’s through application of a risk-based capital formula. At June 30, 2012, the Company maintained $127.5 million and £26.5 million as a Funds at Lloyd’s facility (December 31, 2011 - $118.5 million and £24.5 million). In addition, the FSA requires Lloyd’s syndicates to satisfy an annual solvency test and to maintain solvency on a continuous basis, which Syndicate 1458 was in compliance with at December 31, 2011.
In the aggregate, our operating subsidiaries have historically produced sufficient cash flows to meet their expected claims payments and operational expenses and to provide dividend payments to us. Our subsidiaries also maintain a concentration of investments in high quality liquid securities, which management believes will provide additional liquidity for extraordinary claims payments should the need arise. See “Capital Resources” section below.
Cash Flows and Liquidity
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
(in thousands)
 
 
 
 
 
Net cash provided by operating activities
$
303,777

 
$
30,996

 
 
Net cash (used in) provided by investing activities
(280,550
)
 
401,393

 
 
Net cash provided by (used in) financing activities
25,580

 
(475,721
)
 
 
Effect of exchange rate changes on foreign currency cash
(1,559
)
 
3,331

 
 
Net increase (decrease) in cash and cash equivalents
47,248

 
(40,001
)
 
 
Cash and cash equivalents, beginning of period
216,984

 
277,738

 
 
Cash and cash equivalents, end of period
$
264,232

 
$
237,737

 
 
 
 
 
 
 
During the first six months of 2012, our cash and cash equivalents increased $47.2 million, to $264.2 million at June 30, 2012, compared to $217.0 million at December 31, 2011.
Cash flows provided by operating activities. Cash flows provided by operating activities during the first six months of 2012 were $303.8 million, compared to $31.0 million in the first six months of 2011. Cash flows provided by operating activities during the first six months of 2012 were primarily the result of certain adjustments to reconcile our net income of $448.5 million to net cash provided by operating activities, including: an increase in unearned premiums of $616.8 million due to the timing of, and growth in, our

90
    


gross premiums written; a reduction in reinsurance recoverable of $205.3 million primarily due to the collection of those balances; and a $139.8 million increase in reinsurance balances payable due to the timing of, and increase in, our premiums ceded, and partially offset by an increase in premiums receivable of $499.7 million due to gross premiums written during the June renewal season, an increase in our prepaid reinsurance premiums of $219.7 million due to the timing of, and increase in, our premiums ceded and a decrease in our reserve for claims and claim expenses of $191.1 million driven by the payment of claims and favorable development on prior accident years net claims and claims expenses during the first six months of 2012. As discussed under “Summary of Results of Operations”, we generated higher underwriting income and higher investment results in the first six months of 2012 compared to the first six months of 2011, which contributed to the increase in cash flows provided by operating activities.
Cash flows used in investing activities. During the first six months of 2012, our cash flows used in investing activities were $280.6 million, principally reflecting our net investment in fixed maturity investments trading of $520.2 million, which was funded primarily by cash provided by our operating activities and net sales of short term investments of $183.6 million.
Cash flows provided by financing activities. Our cash flows provided by financing activities in the first six months of 2012 were $25.6 million, and were principally comprised of net inflows of $160.9 million related to additional third party equity capital raised during the first six months of 2012 in our redeemable noncontrolling interest - DaVinciRe, partially offset by the repurchase of $90.1 million of our common shares, and the payment of $27.7 million and $17.5 million in dividends to our common and preferred shareholders, respectively.
During the first six months of 2011, our cash and cash equivalents decreased $40.0 million, to $237.7 million at June 30, 2011, compared to $277.7 million at December 31, 2010.
Cash flows provided by operating activities. Cash flows provided by operating activities during the first six months of 2011 were $31.0 million, compared to $288.5 million in the first six months of 2010 and were primarily the result of certain adjustments to reconcile our net loss of $269.4 million to net cash provided by operating activities, including: an increase in our reserve for claims and claim expenses of $912.9 million; an increase in unearned premiums of $544.8 million; an increase in reinsurance balances payable of $85.1 million; and partially offset by an increase in premiums receivable and prepaid reinsurance premiums of $611.4 million and $185.0 million, respectively; an increase in deferred acquisition costs of $55.2 million; and net unrealized gains included in other income of $63.1 million principally due to reinsurance contracts accounted for at fair value which experienced net recoverables from the Tohoku earthquake during the first quarter of 2011. As discussed under “Summary of Results of Operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011”, we incurred underwriting losses and lower investment results, which contributed to the decrease in cash flows provided by operating activities.
Cash flows provided by investing activities. During the first six months of 2011, our cash flows provided by investing activities were $401.4 million, which principally reflected $269.5 million in net proceeds from the sale of substantially all of our U.S.-based insurance operations to QBE and $47.0 million related to the sale of our Platinum warrant during the first quarter of 2011. In addition, during the first six months of 2011, in response to the large catastrophes of the first six months and the desire to have appropriate capital resources available to pay valid claims quickly, we had net cash inflows of $162.4 million resulting from our fixed maturity and short term investments.
Cash flows used in financing activities. Our cash flows used in financing activities in the first six months of 2011 were $475.7 million, principally comprised of the repurchase of $174.8 million of our common shares, the payment of $26.7 million and $17.5 million in dividends to our common and preferred shareholders, respectively, the repurchase of $126.7 million of DaVinciRe shares and the repayment of the outstanding principal of the DaVinciRe revolving credit facility of $200.0 million. Partially offsetting the above cash flows used in financing activities, was a $70.0 million cash inflow related to the redeemable noncontrolling interest portion of the DaVinciRe equity capital raise executed during the second quarter of 2011.

91
    


A large portion of the coverages we provide can produce losses of high severity and low frequency, it is not possible to accurately predict our future cash flows from operating activities. As a consequence, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Due to the magnitude and relatively recent occurrence of the 2010 and 2011 large loss events, meaningful uncertainty remains regarding losses from these events and our actual ultimate net losses from these events may vary from preliminary estimates, perhaps materially. As a result, our cash flows from operations would be impacted accordingly.
Reserves for Claims and Claim Expenses
We believe the most significant accounting judgment made by management is our estimate of claims and claim expense reserves. Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts we sell. We establish our claims and claim expense reserves by taking claims reported to us by insureds and ceding companies, but which have not yet been paid (“case reserves”), adding the costs for additional case reserves (“additional case reserves”) which represent our estimates for claims previously reported to us which we believe may not be adequately reserved as of that date, and adding estimates for the anticipated cost of claims incurred but not yet reported to us ("IBNR").
The following table summarizes our claims and claim expense reserves by line of business and split between case reserves, additional case reserves and IBNR: 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012
Case
Reserves
 
Additional
Case Reserves
 
IBNR
 
Total
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Catastrophe
$
698,335

 
$
306,158

 
$
160,478

 
$
1,164,971

 
 
Specialty
123,978

 
87,277

 
247,290

 
458,545

 
 
Total Reinsurance
822,313

 
393,435

 
407,768

 
1,623,516

 
 
Lloyd’s
19,219

 
7,920

 
74,411

 
101,550

 
 
Insurance
21,605

 
8,336

 
46,240

 
76,181

 
 
Total
$
863,137

 
$
409,691

 
$
528,419

 
$
1,801,247

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2011
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Catastrophe
$
681,771

 
$
271,990

 
$
388,147

 
$
1,341,908

 
 
Specialty
120,189

 
49,840

 
301,589

 
471,618

 
 
Total Reinsurance
801,960

 
321,830

 
689,736

 
1,813,526

 
 
Lloyd's
17,909

 
14,459

 
55,127

 
87,495

 
 
Insurance
32,944

 
3,515

 
54,874

 
91,333

 
 
Total
$
852,813

 
$
339,804

 
$
799,737

 
$
1,992,354

 
 
 
 
 
 
 
 
 
 
 
Our estimates of claims and claim expense reserves are not precise in that, among other matters, they are based on predictions of future developments and estimates of future trends and other variable factors. Some, but not all, of our reserves are further subject to the uncertainty inherent in actuarial methodologies and estimates. Because a reserve estimate is simply an insurer’s estimate at a point in time of its ultimate liability, and because there are numerous factors which affect reserves and claims payments that cannot be determined with certainty in advance, our ultimate payments will vary, perhaps materially, from our estimates of reserves. If we determine in a subsequent period that adjustments to our previously established reserves are appropriate, such adjustments are recorded in the period in which they are identified. During the six months ended June 30, 2012, changes to prior year estimated claims reserves increased (decreased) our net income (loss) by $101.3 million (2011 - $88.8 million), excluding the consideration of changes in reinstatement premium, profit commissions, redeemable noncontrolling interest - DaVinciRe, equity in net claims and claim expenses of Top Layer Re and income tax.

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Our reserving methodology for each line of business uses a loss reserving process that calculates a point estimate for the Company’s ultimate settlement and administration costs for claims and claim expenses. We do not calculate a range of estimates. We use this point estimate, along with paid claims and case reserves, to record our best estimate of additional case reserves and IBNR in our consolidated financial statements. Under GAAP, we are not permitted to establish estimates for catastrophe claims and claim expense reserves until an event occurs that gives rise to a loss.
Reserving for our reinsurance claims involves other uncertainties, such as the dependence on information from ceding companies, which among other matters, includes the time lag inherent in reporting information from the primary insurer to us or to our ceding companies and differing reserving practices among ceding companies. The information received from ceding companies is typically in the form of bordereaux, broker notifications of loss and/or discussions with ceding companies or their brokers. This information can be received on a monthly, quarterly or transactional basis and normally includes estimates of paid claims and case reserves. We sometimes also receive an estimate or provision for IBNR. This information is often updated and adjusted from time to time during the loss settlement period as new data or facts in respect of initial claims, client accounts, industry or event trends may be reported or emerge in addition to changes in applicable statutory and case laws.
Our estimates of losses from the large events of 2011, 2010 and 2008 are based on factors including currently available information derived from the Company's claims information from certain customers and brokers, industry assessments of losses from the events, proprietary models, and the terms and conditions of our contracts. The uncertainty of our estimates for the 2011 and 2010 events is additionally impacted by the preliminary nature of the information available, the magnitude and relative infrequency of the events, the expected duration of the respective claims development period, inadequacies in the data provided thus far by industry participants and the potential for further reporting lags or insufficiencies (particularly in respect of the Chilean, September 2010 New Zealand, 2011 New Zealand and Tohoku earthquakes); and in the case of the Australian flooding and the Thailand flooding, significant uncertainty as to the form of the claims and legal issues including, but not limited to, the number, nature and fiscal periods of the loss events under the relevant terms of insurance contracts and reinsurance treaties. In addition, a significant portion of the net claims and claim expenses associated with the New Zealand and Tohoku earthquakes are concentrated with a few large clients and therefore the loss estimates for these events may vary significantly based on the claims experience of those clients. Loss reserve estimation in respect of our retrocessional contracts poses further challenges compared to directly assumed reinsurance. A significant portion of our reinsurance recoverable relates to the New Zealand and Tohoku earthquakes. There is inherent uncertainty and complexity in evaluating loss reserve levels and reinsurance recoverable amounts, due to the nature of the losses relating to earthquake events, including that loss development time frames tend to take longer with respect to earthquake events. The contingent nature of business interruption and other exposures will also impact losses in a meaningful way, especially with regard to the Tohoku earthquake and Thailand flooding, which we believe may give rise to significant complexity in respect of claims handling, claims adjustment and other coverage issues, over time. Given the magnitude and relatively recent occurrence of these events, meaningful uncertainty remains regarding total covered losses for the insurance industry and, accordingly, several of the key assumptions underlying our loss estimates. In addition, our actual net losses from these events may increase if our reinsurers or other obligors fail to meet their obligations.
Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.
Prior Year Development of Reserve for Net Claims and Claim Expenses
We use statistical and actuarial methods to estimate ultimate expected claims and claim expenses. The period of time from the reporting of a claim to us and the settlement of our liability may be many years. During this period, additional facts and trends will be revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserve for claims and claim expenses, and at other times requiring a reallocation of IBNR reserves to specific case reserves or additional case reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected in the results of operations in the period in which they become known and are accounted for as changes in estimates. Adjustments to our reserve for claims and claim expenses can impact current year

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net income (loss) by increasing net income or decreasing net loss if the estimates of prior year claims and claim expense reserves prove to be overstated or by decreasing net income or increasing net loss if the estimates of prior year claims and claim expense reserves prove to be insufficient.
Our estimates of claims and claim expenses are also based in part upon the estimation of claims resulting from natural and man-made disasters such as hurricanes, earthquakes, tsunamis, winter storms, terrorist attacks and other catastrophic events. Estimation of claims resulting from catastrophic events is inherently difficult because of the potential severity of property catastrophe claims. Additionally, we have recently increased our specialty reinsurance business but do not have the benefit of a significant amount of our own historical experience in certain of these lines. Therefore, we use both proprietary and commercially available models, as well as historical (re)insurance industry claims experience, for purposes of evaluating future trends and providing an estimate of ultimate claims costs.
Activity in the liability for unpaid claims and claim expenses is summarized as follows:
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Net reserves as of January 1
$
1,588,325

 
$
1,156,132

 
 
Net incurred related to:
 
 
 
 
 
Current year
166,421

 
868,629

 
 
Prior years
(101,318
)
 
(88,831
)
 
 
Total net incurred
65,103

 
779,798

 
 
Net paid related to:
 
 
 
 
 
Current year
18,937

 
51,578

 
 
Prior years
32,021

 
46,869

 
 
Total net paid
50,958

 
98,447

 
 
Total net reserves as of June 30
1,602,470

 
1,837,483

 
 
Reinsurance recoverable as of June 30
198,777

 
333,245

 
 
Total gross reserves as of June 30
$
1,801,247

 
$
2,170,728

 
 
 
 
 
 
 
The following table details our prior year development by segment of its liability for unpaid claims and claim expenses:
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Reinsurance
$
(87,963
)
 
$
(91,137
)
 
 
Lloyd's
(10,685
)
 
204

 
 
Insurance
(2,670
)
 
2,102

 
 
Total
$
(101,318
)
 
$
(88,831
)
 
 
 
 
 
 
 
For the six months ended June 30, 2012, the prior year net favorable development of $101.3 million included favorable development of $88.0 million, $10.7 million and $2.7 million attributable to our Reinsurance, Lloyd's and Insurance segments, respectively. Within our Reinsurance segment, the catastrophe unit experienced $68.1 million of favorable development on prior years claims and claim expense reserves and the specialty reinsurance unit experienced $19.8 million of favorable development on prior years claims and claim expense reserves.
For the six months ended June 30, 2011, the prior year favorable development of $88.8 million included favorable development of $91.1 million, adverse development of $0.2 million and adverse development of $2.1 million attributable to our Reinsurance, Lloyd's and Insurance segments, respectively. Within our Reinsurance segment, the catastrophe unit experienced $31.5 million of favorable development on prior years claims and claim expense reserves and the specialty reinsurance unit experienced $59.6 million of favorable development on prior years claims and claim expense reserves.

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Reinsurance Segment
We review substantially all of our catastrophe reinsurance claims and claim expense reserves quarterly. Our quarterly review procedures include identifying events that have occurred up to the latest balance sheet date, determining our best estimate of the ultimate expected cost to settle all claims and administrative costs associated with those new events which have arisen during the reporting period, reviewing the ultimate expected cost to settle claims and administrative costs associated with those events which occurred during previous periods, and considering new estimation techniques, such as additional actuarial methods or other statistical techniques, that can assist us in developing our best estimate. This process is judgmental in that it involves reviewing changes in paid and reported claims each period and adjusting our estimates of the ultimate expected claims for each event where there are developments that are different from our previous expectations. If we determine that adjustments to an earlier estimate are appropriate, such adjustments are recorded in the period in which they are identified. The level of our claims associated with certain catastrophes can be very large. For example, within our Reinsurance segment, initial estimated ultimate claims associated with the 2005 hurricanes, Katrina, Rita and Wilma, were over $1.5 billion, the 2008 hurricanes, Gustav and Ike, were over $530 million and the large losses of 2011 (including the 2011 New Zealand earthquake, the Tohoku earthquake, the U.S. tornadoes, flooding in Australia, certain aggregate losses, hurricane Irene and the Thailand floods) were over $1.2 billion. As a result, small percentage changes in the estimated ultimate claims of large catastrophic events can significantly impact our reserves for claims and claim expenses in subsequent periods.
When initially developing reserving techniques for our specialty reinsurance coverages, we considered estimating reserves utilizing several actuarial techniques such as paid and reported claims development methods. We elected to use the Bornhuetter-Ferguson actuarial method because this method is appropriate for lines of business, such as our specialty reinsurance business, where there is a lack of historical claims experience. This method allows for greater weight to be applied to expected results in periods where little or no actual experience is available, and, hence, is less susceptible to the potential pitfall of being excessively impacted by one particular year or quarter of actual paid and/or reported claims data. This method uses initial expected claims ratio expectations to the extent that claims are not paid or reported, and it assumes that past experience is not fully representative of the future. As our reserves for claims and claim expenses age, and actual claims experience becomes available, this method places less weight on expected experience and places more weight on actual experience. This experience, which represents the difference between expected reported claims and actual reported claims is reflected in the respective reporting period as a change in estimate. We reevaluate our actuarial reserving techniques on a periodic basis.
We review substantially all of our specialty reinsurance claims and claim expense reserves quarterly. Typically, the quarterly review procedures include reviewing paid and reported claims in the most recent reporting period, reviewing the development of paid and reported claims from prior periods, and reviewing our overall experience by underwriting year and in the aggregate. We monitor our expected ultimate claims and claim expense ratios and expected claims reporting assumptions on a quarterly basis and compare them to our actual experience. These actuarial assumptions are generally reviewed annually, based on input from our actuaries, underwriters, claims personnel and finance professionals, although adjustments may be made more frequently if needed. Assumption changes are made to adjust for changes in the pricing and terms of coverage we provide, changes in industry standards, as well as our actual experience, to the extent we have enough data to rely on our own experience. If we determine that adjustments to an earlier estimate are appropriate, such adjustments are recorded in the period in which they are identified.

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The following table details the development of our liability for unpaid claims and claim expenses for our Reinsurance segment for the six months ended June 30, 2012 split between our catastrophe reinsurance unit and our specialty reinsurance unit and then further split between catastrophe claims and claim expenses and attritional claims and claim expenses:
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2012
Catastrophe Reinsurance Unit
 
Specialty Reinsurance Unit
 
Reinsurance Segment
 
 
Catastrophe claims and claim expenses
 
 
 
 
 
 
 
Large catastrophe events
 
 
 
 
 
 
 
U.K. Floods (2007)
$
17,271

 
$
—

 
$
17,271

 
 
Tohoku Earthquake and Tsunami (2011)
12,025

 
—

 
12,025

 
 
Hurricanes Katrina, Rita and Wilma (2005)
3,859

 
2,000

 
5,859

 
 
Hurricane Irene (2011)
4,630

 
—

 
4,630

 
 
Thailand Floods (2011)
3,932

 
—

 
3,932

 
 
New Zealand Earthquake (2011)
(5,894
)
 
—

 
(5,894
)
 
 
Other
2,221

 
—

 
2,221

 
 
Total large catastrophe events
38,044

 
2,000

 
40,044

 
 
Small catastrophe events
 
 
 
 
 
 
 
Danish Floods (2011)
5,000

 
—

 
5,000

 
 
U.S. PCS 63 Winter Storm (2011)
2,600

 
—

 
2,600

 
 
U.S. PCS 42 Winter Storm (2011)
2,560

 
—

 
2,560

 
 
U.S. PCS 53 Winter Storm (2011)
2,179

 
—

 
2,179

 
 
Other
11,827

 
—

 
11,827

 
 
Total small catastrophe events
24,166

 
—

 
24,166

 
 
Total catastrophe claims and claim expenses
$
62,210

 
$
2,000

 
$
64,210

 
 
Attritional claims and claim expenses
 
 
 
 
 
 
 
Bornhuetter-Ferguson actuarial method - actual reported claims greater than expected claims
$
—

 
$
3,422

 
$
3,422

 
 
Actuarial assumption changes
5,932

 
14,399

 
20,331

 
 
Total attritional claims and claim expenses
$
5,932

 
$
17,821

 
$
23,753

 
 
Total favorable development of prior accident years claims and claim expenses
$
68,142

 
$
19,821

 
$
87,963

 
 
 
 
 
 
 
 
 
Catastrophe Reinsurance Unit
The favorable development of prior accident years claims and claim expenses within our catastrophe reinsurance unit in the six months ended June 30, 2012 of $68.1 million was primarily due to net reductions of $38.0 million arising from the estimated ultimate claims of large catastrophe events, including the 2007 U.K. flooding, the Tohoku earthquake, the 2005 hurricanes, hurricane Irene of 2011 and the 2011 Thailand floods, as reported claims came in better than expected. The remainder of the favorable development of prior accident years claims and claim expenses was due to a reduction in ultimate claims on a number of relatively small catastrophes, all principally the result of reported claims coming in less than expected, resulting in formulaic decreases to the ultimate claims for these events. Partially offsetting the reductions noted above was a $5.9 million increase in net claims and claim expenses from the 2011 New Zealand earthquake primarily as a result of increased cedant gross ultimate loss estimates.
Specialty Reinsurance Unit
The favorable development of prior accident years claims and claim expenses within our specialty reinsurance unit in the six months ended June 30, 2012 of $19.8 million includes $14.4 million associated with actuarial assumption changes, principally in our casualty and medical malpractice lines of business, and primarily as a result of revised initial expected claims ratios and claim development factors due to

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actual experience coming in better than expected and $3.4 million due to reported claims coming in lower than expected on prior accident years events, as a result of the application of our formulaic actuarial reserving methodology.
The following table details the development of our liability for unpaid claims and claim expenses for its Reinsurance segment for the six months ended June 30, 2011 split between its catastrophe reinsurance unit and its specialty reinsurance unit and then further split between catastrophe claims and claim expenses and attritional claims and claim expenses:
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2011
Catastrophe Reinsurance Unit
 
Specialty Reinsurance Unit
 
Reinsurance Segment
 
 
Catastrophe claims and claim expenses
 
 
 
 
 
 
 
Large catastrophe events
 
 
 
 
 
 
 
Hurricanes Katrina, Rita and Wilma (2005)
$
7,743

 
$
4,108

 
$
11,851

 
 
Tropical Cyclone Tasha (2010)
4,016

 
1,500

 
5,516

 
 
Chile Earthquake (2010)
—

 
3,750

 
3,750

 
 
U.K. Floods (2007)
3,635

 
—

 
3,635

 
 
Hurricanes Charley, Francis, Ivan and Jeanne (2004)
2,631

 
—

 
2,631

 
 
European Windstorm Kyrill (2007)
2,494

 
—

 
2,494

 
 
New Zealand Earthquake (2010)
(1,972
)
 
—

 
(1,972
)
 
 
Total large catastrophe events
18,547

 
9,358

 
27,905

 
 
Small catastrophe events
 
 
 
 
 
 
 
U.S. PCS 21 Wildland Fire (2007)
3,000

 
—

 
3,000

 
 
U.S. PCS 96 Wind and Thunderstorm (2010)
2,107

 
—

 
2,107

 
 
Other
7,842

 
—

 
7,842

 
 
Total small catastrophe events
12,949

 
—

 
12,949

 
 
Total catastrophe claims and claim expenses
$
31,496

 
$
9,358

 
$
40,854

 
 
Attritional claims and claim expenses
 
 
 
 
 
 
 
Bornhuetter-Ferguson actuarial method - actual reported claims less than expected claims
—

 
$
23,483

 
$
23,483

 
 
Actuarial assumption changes
—

 
26,800

 
26,800

 
 
Total attritional claims and claim expenses
$
—

 
$
50,283

 
$
50,283

 
 
Total favorable development of prior accident years claims and claim expenses
$
31,496

 
$
59,641

 
$
91,137

 
 
 
 
 
 
 
 
 
Catastrophe Reinsurance Unit
The favorable development of prior accident years claims and claim expenses within our catastrophe reinsurance unit of $31.5 million in the six months ended June 30, 2011 was due to $18.5 million and $12.9 million related to large and small catastrophe events, respectively. Favorable development of prior accident years claims and claim expenses related to large catastrophe events was primarily related to decreases in estimated ultimate losses on the 2005 hurricanes of $7.7 million, tropical cyclone Tasha of $4.0 million and the 2007 U.K. flooding of $3.6 million, with the remainder due to better than expected claims emergence associated with a number of other large and small catastrophe events.
Specialty Reinsurance Unit
The favorable development of prior accident years claims and claim expenses within our specialty reinsurance unit in the six months ended June 30, 2011 of $59.6 million was principally the result of $23.5 million due to actual reported loss activity coming in better than expected and $26.8 million due to changes in our actuarial assumptions determined in accordance with our annually scheduled review of our specialty unit actuarial assumptions. In addition, favorable development on large catastrophe events of $9.4 million

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was principally due to decreases in estimated ultimate losses on the 2005 hurricanes of $4.1 million, the Chilean earthquake of $3.8 million and tropical cyclone Tasha of $1.5 million.
Lloyd's Segment
We use the Bornhuetter-Ferguson actuarial method to estimate claims and claim expenses within our Lloyd's segment for our property and casualty (re)insurance contracts and quota share reinsurance business. The comments discussed above relating to our reserving techniques and processes for the specialty reinsurance unit within our Reinsurance segment also apply to our Lloyd's segment. In addition, certain of our coverages may be impacted by natural and man-made catastrophes. We estimate claim reserves for these claims after the event giving rise to these claims occurs, following a process that is similar to our catastrophe reinsurance unit discussed above.
The following table details the development of our liability for unpaid claims and claim expenses for our Lloyd's segment for the six months ended June 30, 2012 and 2011:
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Catastrophe events
$
4,000

 
$
—

 
 
Attritional claims and claim expenses
7,970

 
(204
)
 
 
Actuarial assumption changes
(1,285
)
 
—

 
 
Total
$
10,685

 
$
(204
)
 
 
 
 
 
 
 
The favorable development of prior accident years claims and claim expenses within our Lloyd's segment of $10.7 million during the six months ended June 30, 2012 was principally due to decreases in estimated ultimate losses on certain specific events, including $2.0 million related to hurricane Irene and $2.0 million related to the Thailand floods, with the remainder due to reported claims coming in lower than expected on prior accident years events, as a result of the application of our formulaic actuarial reserving methodology, partially offset by adverse development of $1.3 million due to assumption changes used in our formulaic actuarial reserving methodology.
Insurance Segment
The Company uses the Bornhuetter-Ferguson actuarial method to estimate claims and claim expenses within its Insurance segment for its property and casualty insurance contracts and quota share reinsurance business. The comments discussed above relating to the Company's reserving techniques and processes for its specialty reinsurance unit within the Company's Reinsurance segment also apply to the Company's Insurance segment. In addition, certain of the Company's coverages may be impacted by natural and man-made catastrophes. The Company estimates claim reserves for these claims after the event giving rise to these claims occurs, following a process that is similar to the Company's catastrophe reinsurance unit discussed above. The following table details the development of the Company's liability for unpaid claims and claim expenses for its Insurance segment for the the six months ended June 30, 2012 and 2011:
 
 
 
 
 
 
 
Six months ended June 30,
2012
 
2011
 
 
Catastrophe events
$
(1,103
)
 
$
(150
)
 
 
Attritional claims and claim expenses
3,773

 
(1,952
)
 
 
Total
$
2,670

 
$
(2,102
)
 
 
 
 
 
 
 
The favorable development on prior accident years of $2.7 million in the six months ended June 30, 2012 within our Insurance segment was principally due to reductions in reported losses on certain attritional loss contracts. The adverse development of $2.1 million in the six months ended June 30, 2011 on prior accident year claims and claim expenses within the Company's Insurance segment was principally driven by the application of the Company's formulaic actuarial reserving methodology for this business with the increases being due to actual paid and reported claim activity coming in higher than what was originally anticipated when setting the initial reserves.
There were no significant changes made to the actuarial assumptions in the six months ended June 30, 2012 or 2011.


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Capital Resources
Our total capital resources are as follows:
 
 
 
 
 
 
 
 
 
 
At June 30, 2012
 
At December 31, 2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Common shareholders’ equity
$
3,293,010

 
$
3,055,193

 
$
237,817

 
 
Preference shares
550,000

 
550,000

 
—

 
 
Total shareholders’ equity attributable to RenaissanceRe
3,843,010

 
3,605,193

 
237,817

 
 
5.875% Senior Notes
100,000

 
100,000

 
—

 
 
5.750% Senior Notes
249,293

 
249,247

 
46

 
 
RenaissanceRe revolving credit facility – borrowed
—

 
—

 
—

 
 
RenaissanceRe revolving credit facility – unborrowed
150,000

 
150,000

 
—

 
 
Renaissance Trading credit facility – borrowed
5,000

 
4,373

 
627

 
 
Renaissance Trading credit facility – unborrowed
5,000

 
5,627

 
(627
)
 
 
Total capital resources
$
4,352,303

 
$
4,114,440

 
$
237,863

 
 
 
 
 
 
 
 
 
In the first six months of 2012, our capital resources increased by $237.9 million, principally due to an increase in shareholders' equity as a result of our comprehensive income attributable to RenaissanceRe of $362.0 million, partially offset by $27.7 million of dividends on our common shares and $91.6 million of common share repurchases as discussed in more detail in “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds”. There have been no material changes in our capital resources as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, other than noted below.
RenaissanceRe Revolving Credit Facility
Effective May 17, 2012, RenaissanceRe entered into a credit agreement with various banks and financial institutions parties thereto (collectively, the "Lenders"), Wells Fargo Bank, National Association ("Wells Fargo"), as fronting bank, letter of credit administrator and administrative agent for the Lenders, Citibank, N.A. (“Citibank”), as syndication agent, and Wells Fargo Securities, LLC and Citigroup Global Markets Inc., as joint lead arrangers and joint lead bookrunners (the “Credit Agreement”). The Credit Agreement replaces the Credit Agreement, dated as of April 22, 2010, which was terminated concurrently with the effectiveness of the Credit Agreement.
The Credit Agreement provides for a revolving commitment to RenaissanceRe of $150.0 million, including the issuance of letters of credit for the account of RenaissanceRe and RenaissanceRe’s insurance subsidiaries of up to $150.0 million and the issuance of letters of credit for the account of RenaissanceRe’s non-insurance subsidiaries of up to $50.0 million. RenaissanceRe has the right, subject to satisfying certain conditions, to increase the size of the facility to $250.0 million. Amounts borrowed under the Credit Agreement bear interest at a rate selected by RenaissanceRe equal to the Base Rate or LIBOR (each as defined in the Credit Agreement) plus a margin, all as more fully set forth in the Credit Agreement.
The Credit Agreement contains representations, warranties and covenants customary for bank loan facilities of this type. In addition to customary covenants which limit RenaissanceRe and its subsidiaries' ability to merge, consolidate, enter into negative pledge agreements, sell a substantial amount of assets, incur liens and declare or pay dividends under certain circumstances, the Credit Agreement also contains certain financial covenants. These financial covenants generally provide that consolidated debt to capital shall not exceed the ratio of 0.35:1 and that the consolidated net worth of RenaissanceRe and Renaissance Reinsurance shall equal or exceed approximately $2.2 billion and $1.1 billion, respectively (the “Net Worth Requirements”). The Net Worth Requirements are recalculated effective as of the end of each fiscal year, all as more fully set forth in the Credit Agreement. The scheduled commitment maturity date of the Credit Agreement is May 17, 2015.
In the event of the occurrence and continuation of certain events of default, the administrative agent shall, at the request of the Required Lenders (as defined in the Credit Agreement), or may, with the consent of the Required Lenders, among other things, take any or all of the following actions: terminate the Lenders'

99
    


obligations to make loans or issue letters of credit, accelerate the outstanding obligations of RenaissanceRe under the Credit Agreement and require RenaissanceRe to cash collateralize the outstanding letter of credit obligations in an amount equal to 103% thereof.
Principal Letter of Credit Facility
Effective May 17, 2012, RenaissanceRe and certain of its affiliates, Renaissance Reinsurance, ROE, Glencoe and DaVinci (such affiliates, collectively, the “Account Parties”), entered into a Fourth Amended and Restated Reimbursement Agreement with various banks and financial institutions parties thereto (collectively, the “Banks”), Wells Fargo, as issuing bank, administrative agent and collateral agent for the Banks, and certain other agents (the “Reimbursement Agreement”). The Reimbursement Agreement amends and restates in its entirety the Third Amended and Restated Reimbursement Agreement, dated as of April 22, 2010 (the “Prior Reimbursement Agreement”), which was terminated concurrently with the effectiveness of the Reimbursement Agreement.
The Reimbursement Agreement continues to serve as RenaissanceRe's principal secured letter of credit facility and the commitments thereunder expire on May 17, 2015. The Reimbursement Agreement provides a commitment from the Banks in an aggregate amount of $450.0 million, which may be increased up to an amount not to exceed $800.0 million, subject to RenaissanceRe satisfying certain conditions. The Reimbursement Agreement contains representations, warranties and covenants in respect of RenaissanceRe, the Account Parties and their respective subsidiaries that are customary for facilities of this type, including customary covenants limiting the ability to merge, consolidate and sell a substantial amount of assets. The Reimbursement Agreement contains certain financial covenants requiring RenaissanceRe and DaVinci to maintain a minimum net worth of approximately $1.8 billion and $675.0 million, respectively, which requirements are recalculated effective as of the end of each fiscal year, all as more fully set forth in the Reimbursement Agreement.
Under the Reimbursement Agreement, each Account Party is required to pledge eligible collateral having a value sufficient to cover all of its obligations under the Reimbursement Agreement, including reimbursement obligations for outstanding letters of credit issued for its account. In the case of an event of default under the Reimbursement Agreement, and in certain other circumstances set forth in the Reimbursement Agreement, including, among others, a decrease in the net worth of an Account Party below the level specified therein for such Account Party, a decline in collateral value, and certain failures to maintain specified ratings, the Banks may exercise certain remedies, including conversion of collateral into cash.
Under the Reimbursement Agreement, redeemable preference shares of Renaissance Investment Holdings Ltd. are no longer eligible collateral. Therefore, the Second Amended and Restated RIHL Undertaking and Agreement, dated as of April 22, 2010, entered into in connection with the Prior Reimbursement Agreement, was terminated concurrently with the execution of the Reimbursement Agreement.
At June 30, 2012, we had $272.3 million of letters of credit with effective dates on or before June 30, 2012 outstanding under the Reimbursement Agreement.
Letters of Credit
At June 30, 2012, we had total letters of credit outstanding under all facilities of $446.4 million.
Renaissance Reinsurance is also party to a collateralized letter of credit and reimbursement agreement in the amount of $37.5 million that supports our Top Layer Re joint venture. Renaissance Reinsurance is obligated to make a mandatory capital contribution of up to $50.0 million in the event that a loss reduces Top Layer Re’s capital below a specified level.
Multi-Beneficiary Reinsurance Trusts
Effective March 15, 2011, each of Renaissance Reinsurance and DaVinci was approved as a Trusteed Reinsurer in the State of New York and established a multi-beneficiary reinsurance trust ("MBRT") to collateralize its respective (re)insurance liabilities associated with U.S. domiciled cedants. The MBRTs are subject to the rules and regulations of the State of New York and the respective deed of trust, including but not limited to certain minimum capital funding requirements, investment guidelines, capital distribution restrictions and regulatory reporting requirements. Following the initial approval in the State of New York, Renaissance Reinsurance and DaVinci have submitted applications to essentially all U.S. states to become

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Trusteed Reinsurers. As of June 30, 2012, Renaissance Reinsurance and DaVinci are approved in 46 and 45 U.S. states, respectively. We expect, over time, to transition cedants with existing outstanding letters of credit, to the appropriate MBRT as determined by cedant state of domicile, thereby reducing our absolute and relative reliance on letters of credit. New business incepting with cedants domiciled in approved states will be collateralized using a MBRT. Cedants collateralized with a MBRT will be eligible for automatic reinsurance credit in their respective U.S. regulatory filings. Assets held under trust at June 30, 2012 with respect to the MBRTs totaled $402.1 million and $153.5 million for Renaissance Reinsurance and DaVinci, respectively.
Renaissance Trading Margin Facility and Guarantees
Renaissance Trading maintains a brokerage facility with a leading prime broker, which has an associated margin facility.  This margin facility, which we believe allows Renaissance Trading to prudently manage its cash position related to its exchange traded products, is supported by a $20.0 million guarantee issued by RenaissanceRe.  Interest on amounts outstanding under this facility is at overnight LIBOR plus 75 basis points.  At June 30, 2012, $5.0 million was outstanding under the facility.
At June 30, 2012, RenaissanceRe had provided guarantees in the aggregate amount of $354.3 million to certain counterparties of the weather and energy risk operations of Renaissance Trading. In the future, RenaissanceRe may issue guarantees for other purposes or increase the amount of guarantees issued to counterparties of Renaissance Trading.
Redeemable Noncontrolling Interest – DaVinciRe
DaVinciRe shareholders are party to a shareholders agreement (the “Shareholders Agreement”) which provides DaVinciRe shareholders, excluding us, with certain redemption rights, that enable each shareholder to notify DaVinciRe of such shareholder's desire for DaVinciRe to repurchase up to half of such shareholder's aggregate number of shares held, subject to certain limitations, such as limiting the aggregate of all share repurchase requests to 25% of DaVinciRe's capital in any given year and satisfying all applicable regulatory requirements. If total shareholder requests exceed 25% of DaVinciRe's capital, the number of shares repurchased will be reduced among the requesting shareholders pro-rata, based on the amounts desired to be repurchased. Shareholders desiring to have DaVinciRe repurchase their shares must notify DaVinciRe before March 1 of each year. The repurchase price will be based on GAAP book value as of the end of the year in which the shareholder notice is given, and the repurchase will be effective as of such date. Payment will be made by April 1 of the following year, following delivery of the audited financial statements for the year in which the repurchase was effective. The repurchase price is subject to a true-up for development on outstanding loss reserves after settlement of all claims relating to the applicable years.
Effective January 1, 2012, an existing third party shareholder sold a portion of its shares in DaVinciRe to a new third party shareholder.  In connection with the sale by the existing third party shareholder, DaVinciRe retained a $4.9 million holdback.  In addition, effective January 1, 2012, we sold a portion of our shares of DaVinci Re to a separate new third party shareholder.  We sold these shares for $98.9 million, net of a $10.0 million reserve holdback due from DaVinciRe.  Our ownership in DaVinciRe was 42.8% at December 31, 2011 and subsequent to the above transactions, our ownership interest in DaVinciRe decreased to 34.7% effective January 1, 2012.
Certain third party shareholders of DaVinciRe submitted repurchase notices on or before the required annual redemption notice date of March 1, 2012, in accordance with the Shareholders Agreement.  The repurchase notices submitted on or before March 1, 2012, were for shares of DaVinciRe with a GAAP book value of $50.0 million at June 30, 2012.
On June 1, 2012, DaVinciRe completed an equity raise of $49.3 million from a new third party investor.  In addition, the Company and an existing third party investor each sold $24.7 million in common shares of DaVinciRe to another existing third party investor, for a total of $49.4 million.  In connection with the sale by the Company and the existing third party investor, DaVinciRe retained a $5.0 million holdback, $2.5 million of which is payable to the Company.  As a result of the above transactions, the Company's ownership in DaVinciRe decreased to 31.5% effective retroactively to January 1, 2012. We expect our ownership in DaVinciRe to fluctuate over time.


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Investments
The table below shows the aggregate amounts of our invested assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
December 31, 2011
 
Change
 
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
1,126,759

 
17.1
%
 
$
885,152

 
14.3
%
 
$
241,607

 
 
Agencies
436,691

 
6.7
%
 
158,561

 
2.6
%
 
278,130

 
 
Non-U.S. government (Sovereign debt)
177,231

 
2.7
%
 
227,912

 
3.7
%
 
(50,681
)
 
 
FDIC guaranteed corporate
29,386

 
0.4
%
 
423,630

 
6.8
%
 
(394,244
)
 
 
Non-U.S. government-backed corporate
393,875

 
6.0
%
 
641,082

 
10.3
%
 
(247,207
)
 
 
Corporate
1,664,722

 
25.3
%
 
1,206,904

 
19.4
%
 
457,818

 
 
Agency mortgage-backed
592,355

 
9.0
%
 
441,749

 
7.1
%
 
150,606

 
 
Non-agency mortgage-backed
153,674

 
2.3
%
 
104,771

 
1.7
%
 
48,903

 
 
Commercial mortgage-backed
470,167

 
7.1
%
 
325,729

 
5.2
%
 
144,438

 
 
Asset-backed
12,197

 
0.2
%
 
18,027

 
0.3
%
 
(5,830
)
 
 
Total fixed maturity investments, at fair value
5,057,057

 
76.8
%
 
4,433,517

 
71.4
%
 
623,540

 
 
Short term investments, at fair value
654,912

 
9.9
%
 
905,477

 
14.6
%
 
(250,565
)
 
 
Equity investments trading, at fair value
55,381

 
0.8
%
 
50,560

 
0.8
%
 
4,821

 
 
Other investments, at fair value
743,568

 
11.3
%
 
748,984

 
12.1
%
 
(5,416
)
 
 
Total managed investment portfolio
6,510,918

 
98.8
%
 
6,138,538

 
98.9
%
 
372,380

 
 
Investments in other ventures, under equity method
79,692

 
1.2
%
 
70,714

 
1.1
%
 
8,978

 
 
Total investments
$
6,590,610

 
100.0
%
 
$
6,209,252

 
100.0
%
 
$
381,358

 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2012, we held investments totaling $6.6 billion, compared to $6.2 billion at December 31, 2011, with net unrealized appreciation included in accumulated other comprehensive income of $12.5 million at June 30, 2012, compared to $11.8 million at December 31, 2011. Our investment guidelines stress preservation of capital, market liquidity, and diversification of risk. Notwithstanding the foregoing, our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities.
As the reinsurance coverages we sell include substantial protection for damages resulting from natural and man-made catastrophes, we expect from time to time to become liable for substantial claim payments on short notice. Accordingly, our investment portfolio as a whole is structured to seek to preserve capital and provide a high level of liquidity which means that the large majority of our investment portfolio consists of highly rated fixed income securities, including U.S. treasuries, agencies, highly rated sovereign and supranational securities, high-grade corporate securities, FDIC guaranteed corporate securities and mortgage-backed and asset-backed securities. We also have an allocation to other investments, including hedge funds, private equity partnerships, senior secured bank loan funds and other investments.


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Other Investments
The table below shows our portfolio of other investments: 
 
 
 
 
 
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
Change
 
 
(in thousands)
 
 
 
 
 
 
 
Private equity partnerships
$
360,268

 
$
367,909

 
$
(7,641
)
 
 
Senior secured bank loan funds
269,317

 
257,870

 
11,447

 
 
Catastrophe bonds
106,470

 
70,999

 
35,471

 
 
Hedge funds
6,243

 
21,344

 
(15,101
)
 
 
Non-U.S. fixed income funds
—

 
28,862

 
(28,862
)
 
 
Miscellaneous other investments
1,270

 
2,000

 
(730
)
 
 
Total other investments
$
743,568

 
$
748,984

 
$
(5,416
)
 
 
 
 
 
 
 
 
 
We account for our other investments at fair value in accordance with ASC Topic Financial Instruments. The fair value of certain of our fund investments, which principally include hedge funds, private equity funds, senior secured bank loan funds and non-U.S. fixed income funds, are recorded on our balance sheet in other investments, and is generally established on the basis of the net valuation criteria established by the managers of such investments, if applicable. The net valuation criteria established by the managers of such investments is established in accordance with the governing documents of such investments. Many of our fund investments are subject to restrictions on redemptions and sales which are determined by the governing documents and limit our ability to liquidate these investments in the short term. Certain of our fund managers, fund administrators, or both, are unable to provide final fund valuations as of our current reporting date. The typical reporting lag experienced by us to receive a final net asset value report is one month for hedge funds, senior secured bank loan funds and non-U.S. fixed income funds and three months for private equity funds, although, in the past, in respect of certain of our private equity funds, we have on occasion experienced delays of up to six months at year end, as the private equity funds typically complete their respective year-end audits before releasing their final net asset value statements.
In circumstances where there is a reporting lag between the current period end reporting date and the reporting date of the latest fund valuation, we estimate the fair value of these funds by starting with the prior month or quarter-end fund valuations, adjusting these valuations for actual capital calls, redemptions or distributions, as well as the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which we estimate the return for the current period, all information available to us is utilized. This principally includes preliminary estimates reported to us by our fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to us with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which we have obtained reported results, or other valuation methods, where possible. Actual final fund valuations may differ, perhaps materially so, from our estimates and these differences are recorded in our statement of operations in the period in which they are reported to us as a change in estimate. Included in net investment income for the six months ended June 30, 2012 is a loss of $4.7 million (2011 - $1.4 million) representing the change in estimate during the period related to the difference between our estimated net investment income due to the lag in reporting discussed above and the actual amount as reported in the final net asset values provided by our fund managers.
Our estimate of the fair value of catastrophe bonds are based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications.
Interest income, income distributions and realized and unrealized gains (losses) on other investments are included in net investment income and resulted in $37.2 million of net investment income for the six months ended June 30, 2012 (2011 - $45.4 million). Of this amount, $21.9 million relates to net unrealized gains (2011 - $33.7 million).

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We have committed capital to private equity partnerships and other investments of $681.8 million, of which $554.0 million has been contributed at June 30, 2012. Our remaining commitments to these investments at June 30, 2012 totaled $130.1 million. In the future, we may enter into additional commitments in respect of private equity partnerships or individual portfolio company investment opportunities.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. The anticipated effects on us are considered in our catastrophe loss models. Our estimates of the potential effects of inflation are also considered in pricing and in estimating reserves for unpaid claims and claim expenses. In addition, it is possible that the risk of general economic inflation has increased which could, among other things, cause claims and claim expenses to increase and also impact the performance of our investment portfolio. The actual effects of this potential increase in inflation on our results cannot be accurately known until, among other items, claims are ultimately settled. The onset, duration and severity of an inflationary period cannot be estimated with precision.
OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At June 30, 2012, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
CONTRACTUAL OBLIGATIONS
In the normal course of its business, the Company is a party to a variety of contractual obligations as summarized in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. These contractual obligations are considered by the Company when assessing its liquidity requirements. As of June 30, 2012, there are no material changes in the Company’s contractual obligations as disclosed in the Company’s table of contractual obligations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
In certain circumstances, our contractual obligations may be accelerated to dates other than those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, due to defaults under the agreement governing those obligations (including pursuant to cross-default provisions in such agreement) or in connection with certain changes in control of the Company, if applicable. In addition, in connection with any such default under the agreement governing these obligations, in certain circumstances these obligations may bear an increased interest rate or be subject to penalties as a result of such a default.
CURRENT OUTLOOK
Catastrophe Exposed Market Developments
During 2011, the global insurance and reinsurance markets experienced significant losses from natural catastrophes, including severe flooding in Australia, the series of earthquakes affecting New Zealand, tornadoes in the U.S., hurricane Irene, the flooding which occurred in Thailand over four months and, most materially, the Tohoku earthquake. Overall, we believe these events somewhat depleted the excess capital we estimated was then held by private market insurers and reinsurers in 2010, and were among the factors contributing to a degree of increased demand for certain coverages and solutions, particularly in the impacted regions and in respect of the catastrophe-exposed products in which we specialize. In addition, over this period we believe that demand was favorably impacted by the ongoing adoption of Version 11.0 of the RMS Atlantic Hurricane Model for the U.S., and by the continued low investment return environment. During the June and July 2012 renewal markets we believe that supply, principally from traditional market participants and complemented by alternative capital providers generally offset increased demand, resulting in overall market pricing we estimate to have been approximately flat on a risk-adjusted basis. Moreover, we believe that many of the positive factors impacting market conditions since 2011 have now been absorbed by the market and, we believe, are unlikely to drive further improvement in our core catastrophe-exposed markets absent new developments. Accordingly, we cannot assure you that the increased demand of recent market renewals will be sustained, or that we can continue to improve the size and portfolio quality of our book of business.

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According to the National Oceanic and Atmospheric Administration, whose records date back to 1895, 2012 has thus far been the hottest year ever recorded in the U.S. Among other things, the extreme weather experienced, particularly including the severe and ongoing drought conditions throughout most of the Midwestern region of the U.S., has adversely impacted the production of a range of crops, including those subject to the U.S. federal government's multi-peril crop insurance ("MPCI") program. According to industry and government reports, a record number of U.S. farmers reportedly are prepared to abandon their 2012 crop, which may contribute towards significant insured claims for insurers and reinsurers that write MPCI. Preliminary estimates indicate that the total indemnified losses as a result of the Midwest droughts could significantly exceed last year's record of $10 billion, and would be borne primarily by the private carriers who write MPCI, or those who reinsure such carriers, with additional amounts subsidized by the U.S. federal government. We underwrite certain crop-related coverages principally on an excess of loss reinsurance basis with gross premiums written of approximately $8 million in 2012 of which approximately $3 million relates to the U.S. MPCI business. This excess of loss reinsurance is typically written at relatively low rates on line. While meaningful uncertainty remains regarding the impact of the severe U.S. drought conditions on crop prices and yields for the 2012 crop year, we currently believe that the crop insurance industry as a whole will sustain losses, perhaps significant in magnitude, as a result. Accordingly, any such losses could have a net negative impact on our business and operations and would likely be reflected in our third or fourth quarter 2012 results as the losses arise and become known.
General Economic Conditions
Meaningful uncertainty remains regarding the strength, duration and comprehensiveness of any economic recovery in the U.S. and our other key markets. In particular, global economic markets, including many of the key markets which we serve, may continue to be adversely impacted by the financial and fiscal instability of several European jurisdictions and, increasingly, the Eurozone market as a whole. Accordingly, we continue to believe that meaningful risk remains for continued uncertainty or disruptions in general economic and financial market conditions, which could give rise to increased economic uncertainty, or to further deterioration of economic conditions. Moreover, if economic growth were to return, such growth may be only at a comparably suppressed rate for a relatively extended period of time. Declining or weak economic conditions could reduce demand for the products sold by us or our customers, or our overall ability to write business at risk-adequate rates could weaken. In addition, persistent low levels of economic activity could adversely impact other areas of our financial performance, such as by contributing to unforeseen premium adjustments, mid-term policy cancellations or commutations, or asset devaluation. Any of the foregoing or other outcomes of a prolonged period of relative economic weakness could adversely impact our financial position or results of operations. In addition, during a period of extended economic weakness, we believe our consolidated credit risk, reflecting our counterparty dealings with customers, agents, brokers, retrocessionaires, capital providers and parties associated with our investment portfolio, among others, is likely to be increased. Several of these risks could materialize, and our financial results could be negatively impacted, even after the end of any economic downturn.
Moreover, we continue to monitor the risk that our principal markets will experience increased inflationary conditions, which would, among other things, cause costs related to our claims and claim expenses to increase, and impact the performance of our investment portfolio.  The onset, duration and severity of an inflationary period cannot be estimated with precision. The sovereign debt crisis in Europe and the related financial restructuring efforts has, among other factors, made it more difficult to predict the inflationary environment.
Our catastrophe-exposed operations are subject to the ever-present potential for significant volatility in capital due primarily to our exposure to severe catastrophic events. Our specialty reinsurance portfolio is also exposed to emerging risks arising from the ongoing relative economic weakness, including with respect to a potential increase of claims in directors and officers, errors and omissions, surety, casualty clash and other lines of business.
Historically low interest rates and lower spreads have lowered the yields at which we invest our assets relative to historical levels. We expect these developments, combined with the current composition of our investment portfolio and other factors, to continue to put downward pressure on our net investment income for the near term. In addition to impacting our reported net income, potential future losses on our investment portfolio, including potential future mark-to-market results, would adversely impact our equity capital. Moreover, as we invest cash from new premiums written or reinvest the proceeds of invested

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assets that mature or that we choose to sell, the yield on our portfolio is impacted by the prevailing environment of comparably low yields. While it is possible yields will improve in future periods, we currently expect the challenging economic conditions to persist and we are unable to predict with certainty when conditions will substantially improve, or the pace of any such improvement.
Market Conditions and Competition
Leading global intermediaries and other sources have generally reported that the U.S. casualty reinsurance market continues to reflect a relatively soft pricing environment, with pockets of niche or specialty casualty renewals providing more attractive opportunities for stronger or well-positioned reinsurers. We anticipate that persistent low investment returns and, to a degree, balance sheet issues in the broader market may increase demand for coverages on terms that we find attractive. However, we cannot assure you that any increased demand will indeed materialize or that we will be successful in consummating new or expanded transactions.
As described above, we currently anticipate a continued level of healthy demand for our catastrophe coverages over coming periods, offset by ample supplies of private market capital and decreased drivers of new demand. In addition, the relatively attractive prevailing market conditions for many of the products in which we specialize could also be offset by adverse or unforeseen factors. Renewal terms vary widely by insured account and our ability to shape our portfolio to improve its risk and return characteristics as estimated by us is subject to a range of competitive and commercial factors. While we believe that our strong relationships, and track record of superior claims paying ability and other client service will enable us to compete for the business we find attractive, we may not succeed in doing so; moreover, our relationships in emerging markets are not as developed as they are in our current core markets.
The market for our catastrophe reinsurance products is generally dynamic and volatile. The market dynamics noted above, increased or decreased catastrophe loss activity, and changes in the amount of capital in the industry can result in significant changes to the pricing, policy terms and demand for our catastrophe reinsurance products over a relatively short period of time. In addition, changes in state-sponsored catastrophe funds, or residual markets, which have generally grown dramatically in recent years, or the implementation of new government-subsidized or sponsored programs, can dramatically alter market conditions. We believe that the overall trend of increased frequency and severity of tropical cyclones experienced in recent years may continue for the foreseeable future. Increased understanding of the potential increase in frequency and severity of storms may contribute to increased demand for protection in respect of coastal risks which could impact pricing and terms and conditions in coastal areas over time. Overall, we expect higher property loss cost trends, driven by increased severity and by the potential for increased frequency, to continue in the future. At the same time, certain markets we target continue to be impacted by fundamental weakness experienced by primary insurers, due to ongoing economic weakness and, in many cases, inadequate primary insurance rate levels, including without limitation insurers operating on an admitted basis in Florida. These conditions, which occurred in a period characterized by relatively low insured catastrophic losses for these respective regions, have contributed to certain publicly announced instances of insolvency, regulatory supervision and other regulatory actions, and have weakened the ability of certain carriers to invest in reinsurance and other protections for coming periods, and in some cases to meet their existing premium obligations. It is possible that these dynamics will continue in future periods.
In addition, we continue to explore potential strategic transactions or investments, and other opportunities, from time to time that are presented to us or that we originate. In evaluating these potential investments and opportunities, we seek to improve the portfolio optimization of our business as a whole, to enhance our strategy, to achieve an attractive estimated return on equity in respect of investments, to develop or capitalize on a competitive advantage, and to source business opportunities that will not detract from our core operations.
Legislative and Regulatory Update
In April 2010, the U.S. House Financial Services Committee approved H.R. 2555, titled “The Homeowners Defense Act,” by a vote of 39-26. Concurrently, the Financial Services Committee passed legislation which would expand the National Flood Insurance Program (the “NFIP”) to cover damage to or loss of real or related personal property located in the U.S. arising from any windstorm (any hurricane, tornado, cyclone, typhoon, or other wind event) (this legislation, together with H.R. 2555, is referred to below as the “House

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Bills”).  H.R. 2555 would, if enacted, provide for the creation of (i) a federal reinsurance catastrophe fund; (ii) a federal consortium to facilitate qualifying state residual markets and catastrophe funds in securing reinsurance; and (iii) a federal bond guarantee program for state catastrophe funds in qualifying state residual markets.  While neither of the House Bills has been passed in Congress, members of both the House and Senate continue to express support for this legislation and it remains possible this legislation or similar legislation will be considered by Congress.
In early 2011, California's two Senators, Dianne Feinstein and Barbara Boxer, introduced the Earthquake Insurance Affordability Act of 2011 (S. 367), pursuant to which the federal government would provide limited federal backing to certain qualifying state-affiliated organizations that provide catastrophic residential earthquake insurance as a way to help them reduce the amount they spend each year in reinsurance premiums. In the third quarter of 2011, companion legislation was introduced in respect of S. 367 in the U.S. House of Representatives. According to published reports, the sole state organization currently eligible to participate is the California Earthquake Authority (the “CEA”). Should the legislation be enacted, the CEA has stated it would decrease significantly the relative and, perhaps, the absolute amount of private reinsurance purchased by the CEA in the future.
If enacted, any of these bills, or legislation similar to these proposals, would, we believe, likely contribute to the growth of state entities offering below market priced insurance and reinsurance in a manner adverse to us and market participants more generally. While none of this legislation has been enacted to date, and although we believe such legislation will continue to be vigorously opposed, if adopted these bills would likely diminish the role of private market catastrophe reinsurers and could adversely impact our financial results, perhaps materially.
In June 2012, Congress passed the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012, which provided for a five-year renewal of the National Flood Insurance Program (“NFIP”) and effected substantial reforms in the program. The NFIP had not been subject to a long-term renewal since 2004. Among other things, pursuant to this statute, the Federal Emergency Management Agency (“FEMA”) is explicitly authorized to carry out initiatives to determine the capacity of private insurers, reinsurers, and financial markets to assume a greater portion of the flood risk exposure in the U.S., and to assess the capacity of the private reinsurance market to assume some of the program's risk. FEMA is required to submit a report on this assessment within six months of enactment. The bill also increased the annual limitation on program premium increases from 10% to 20% of the average of the risk premium rates for certain properties concerned; established a four-year phase-in, after the first year, in annual 20% increments, of full actuarial rates for a newly mapped risk premium rate area; instructed FEMA to establish new flood insurance rate maps; allows multi-family properties to purchase NFIP polices; and introduces minimum deductibles for flood claims. We believe that these reforms could increase the role of private risk-bearing capital in respect of U.S. flood perils, perhaps significantly. However, we cannot assure you that the bill will materially benefit private carriers, or that we will succeed in participating in any positive market developments that may transpire.
In 2007, the State of Florida enacted legislation to expand the Florida Hurricane Catastrophe Fund's (“FHCF”) provision of below-market rate reinsurance to up to $28.0 billion per season (the “2007 Florida Bill”). In May of 2009, the Florida legislature enacted Bill No. CS/HB 1495 (the “2009 Bill”), which will gradually phase out $12.0 billion in optional reinsurance coverage under the FHCF over the succeeding five years. The 2009 Bill similarly allows the state-sponsored property insurer, Citizens Property Insurance Corporation ("Citizens"), to raise its rates up to 10% starting in 2010 and every year thereafter, until such time that it has sufficient funds to pay its claims and expenses.  For 2012, Citizens' rates will increase a statewide average of 6.2%.  The rate increases and cut back on coverage by FHCF and Citizens are expected to support, over time, a relatively increased role of the private insurers in Florida, a market in which we have established substantial market share.
In May 2011, the Florida legislature passed Florida Senate bill 408 (“SB 408”), relating principally to property insurance. Among other things, SB 408 requires an increase in minimum capital and surplus for newly licensed Florida domestic insurers from $5.0 million to $15.0 million; institutes a 3-year claims filing deadline for new and reopened claims from the date of a hurricane or windstorm; allows an insurer to offer coverage where replacement cost value is paid, but initial payment is limited to actual cash value; allows admitted insurers to seek rate increases up to 15% to adjust for third party reinsurance costs; and institutes a range of reforms relating to various matters that have increased the costs of insuring sinkholes in Florida.

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While we believe SB 408 should contribute over time to stabilization of the Florida market, legislation intended to further reform and stabilize Citizens was not passed in the 2011 or 2012 legislative sessions.
On February 16, 2012, the Florida Senate Banking and Insurance Committee approved, with one dissenting vote, legislation to reform the FHCF and solidify its financial fund. The bill provided for incremental reductions in the FHCF limit which admitted carriers are mandated to buy from the FHCF from an industry aggregate of $17.0 billion to $12.0 billion by 2015; would have reduced the 90% purchase option (the percentage of the FHCF mandatory coverage layer a company purchases) which is selected by most insurers to 75% by 2015; and would have increased the industry wide "retention", or deductible, from $7.3 to $8.0 billion. While the bill did not pass the full legislature in 2012, its sponsor has announced an intention to reintroduce the legislation in 2013. We cannot estimate the likelihood of enactment, or the possible final form of this or similar legislation.
We believe the 2007 Florida Bill caused a substantial decline in the private reinsurance and insurance markets in and relating to Florida, and contributed to the ongoing instability in the Florida primary insurance market, where many insurers have reported substantial and continuing losses from 2009 through 2011, an unusually low period for catastrophe losses in the state. Because of our position as one of the largest providers of catastrophe-exposed coverage, both on a global basis and in respect of the Florida market, the 2007 Florida Bill and the weakened financial position of Florida insurers may have a disproportionate adverse impact on us compared to other reinsurance market participants. The advent of a large windstorm, or of multiple smaller storms, could challenge the assessment-based claims paying capacity of Citizens and the FHCF. In May 2012, the FHCF Advisory Council approved official bonding capacity estimates in respect of the current contract year, reflecting the amount of post-catastrophe bonding currently estimated to be achievable by the FHCF's management and lead financial advisor.  The FHCF projected a 2012 year-end fund balance of approximately $8.5 billion, and a total bonding capacity estimate of $7.0 billion; given the FHCF's total potential claims-paying obligation of $17.3 billion, this estimated claims-paying capacity of approximately $15.6 billion was therefore estimated by the FHCF's lead adviser to reflect a potential shortfall of $1.8 billion in respect of an initial season or event.  Any inability, or delay, in the claims paying ability of these entities or of private market participants could further weaken or destabilize the Florida market, potentially giving rise to an unpredictable range of adverse impacts. The FHCF and the Florida Office of Insurance Regulation ("OIR") have each estimated that even partial failure, or deferral, of the FHCF's ability to pay claims in full could substantially weaken numerous private insurers, with the OIR having estimated that a 25% shortfall in the FHCF's claims-paying capacity could cause as many as 24 of the top 50 insurers in the state to have less than the statutory minimum surplus of $5.0 million, with such insurers representing approximately 35% of the market based on premium volume, or approximately 2.2 million policies. Adverse market, regulatory or legislative changes impacting Florida could affect our ability to sell certain of our products, to collect premiums we may be owed on policies we have already written, to renew business with our customers for future periods, or have other adverse impacts, some of which may be difficult to foresee, and could therefore have a material adverse effect on our operations.
Internationally, in the wake of the large natural catastrophes in 2011 a number of proposals have been introduced to alter the financing of natural catastrophes in several of the markets in which we operate. For example, the Thailand government has announced it is studying proposals for a natural catastrophe fund, under which the government would provide coverage for natural disasters in excess of an industry retention and below a certain limit, after which private reinsurers would continue to participate. The government of the Philippines has announced that it is considering similar proposals. A range of proposals from varying stakeholders have been reported to have been made to alter the current regimes for insuring flood risk in the U.K., flood risk in Australia and earthquake risk in New Zealand. If these proposals are enacted and reduce market opportunities for our clients or for the reinsurance industry, we could be adversely impacted.
Over the past few years the U.S. Congress has considered legislation which, if passed, would deny U.S. insurers and reinsurers the deduction for reinsurance placed with non-U.S. affiliates. In February 2012, the Obama administration included a formal proposal for such a provision in its budget proposal. As described in the administration's 2012 budget request, the proposal would deny an insurance company a deduction for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks to the extent that the foreign reinsurer (or its parent company) is not subject to U.S. income tax with respect to the premiums received; and would exclude from the insurance company's income (in the same proportion in which the premium deduction was denied) any return premiums, ceding commissions, reinsurance recovered, or other amounts received with respect to reinsurance policies for

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which a premium deduction is wholly or partially denied. We believe that the passage of such legislation could adversely affect the reinsurance market broadly and potentially impact our own current or future operations in particular.
On February 7, 2012, U.S. Senators Carl Levin and Kent Conrad introduced legislation in the U.S. Senate entitled the “Cut Unjustified Loopholes Act” (S. 2075). Senator Levin introduced similar legislation in 2011 and 2010. If enacted, this legislation would, among other things, cause to be treated as a U.S. corporation for U.S. tax purposes generally, certain corporate entities if the “management and control” of such a corporation is, directly or indirectly, treated as occurring primarily within the U.S. The proposed legislation provides that a corporation will be so treated if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the U.S. To date, this legislation has not been approved by either the House of Representatives or the Senate. However, we can provide no assurance that this legislation or similar legislation will not ultimately be adopted. While we do not believe that the legislation would impact us, it is possible that an adopted bill would include additional or expanded provisions which could negatively impact us, or that the interpretation or enforcement of the current proposal, if enacted, would be more expansive or adverse than we currently estimate.
NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us.
In particular, statements using words such as “may”, “should”, “estimate”, “expect”, “anticipate”, “intends”, “believe”, “predict”, “potential”, or words of similar import generally involve forward-looking statements. For example, we may include certain forward-looking statements in “Management's Discussion and Analysis of Financial Condition and Results of Operations” with regard to trends in results, prices, volumes, operations, investment results, margins, combined ratios, reserves, market conditions, risk management and exchange rates. This Form 10-Q also contains forward-looking statements with respect to our business and industry, such as those relating to our strategy and management objectives, market standing and product volumes, insured losses from loss events, government initiatives and regulatory matters affecting the reinsurance and insurance industries.
In light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be considered as a representation by us or any other person that our objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from those addressed by the forward-looking statements, including the following:
•
we are exposed to significant losses from catastrophic events and other exposures that we cover, which we expect to cause significant volatility in our financial results from time to time;
•
the frequency and severity of catastrophic events or other events which we cover could exceed our estimates and cause losses greater than we expect;
•
the risk of the lowering or loss of any of the ratings of RenaissanceRe or of one or more of our subsidiaries or changes in the policies or practices of the rating agencies;  
•
risks associated with appropriately modeling, pricing for, and contractually addressing new or potential factors in loss emergence, such as the trend toward potentially significant global warming and other aspects of climate change which have the potential to adversely affect our business, which could cause us to underestimate our exposures and potentially adversely impact our financial results;
•
risks due to our dependence on a few insurance and reinsurance brokers for the preponderance of our revenue, a risk we believe is increasing as a larger portion of our business is provided by a small number of these brokers;

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•
the risk that our customers may fail to make premium payments due to us (a risk that we believe has increased in certain of our key markets), as well as the risk of failures of our reinsurers, brokers or other counterparties to honor their obligations to us, including as regards to the large catastrophic events of 2010 and 2011, and also including their obligations to make third party payments for which we might be liable;
•
we operate in a highly competitive environment, which we expect to increase over time from new competition from traditional and non-traditional participants, particularly as capital markets products provide alternatives and replacements for our more traditional reinsurance and insurance products, as new entrants or existing competitors attempt to replicate our business model, and as a result of consolidation in the (re)insurance industry;
•
the inherent uncertainties in our reserving process, particularly as regards the large catastrophic events of 2010 and 2011, and also including those related to the 2005 and 2008 catastrophes, which uncertainties could increase as the product classes we offer evolve over time;
•
risks relating to adverse legislative developments that could reduce the size of the private markets we serve, or impede their future growth, including proposals to shift U.S. catastrophe risks to federal mechanisms; similar proposals at the state level in the U.S., including the risk of new legislation in Florida to expand the reinsurance coverages offered by the FHCF and the insurance policies written by state-sponsored Citizens, or failing to implement reforms to reduce such coverages; and the risk that new legislation will be enacted in the international markets we serve which might reduce market opportunities in the private sector, weaken our customers or otherwise adversely impact us;
•
risks relating to the inability, or delay, in the claims paying ability of Citizens, FHCF or of private market participants in Florida, particularly following a large windstorm or of multiple smaller storms, which we believe would further weaken or destabilize the Florida market and give rise to an unpredictable range of impacts which might be adverse, perhaps materially so;
•
changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including risks arising out of the Dodd-Frank Act or its related rule making or implementation;
•
the risk of potential challenges to the Company's claim of exemption from insurance regulation under certain current laws and the risk of increased global regulation of the insurance and reinsurance industry;
•
the passage of federal or state legislation subjecting Renaissance Reinsurance or our other Bermuda subsidiaries to supervision, regulation or taxation in the U.S. or other jurisdictions in which we operate, or increasing the taxation of business ceded to us;
•
a contention by the Internal Revenue Service that Renaissance Reinsurance, or any of our other Bermuda subsidiaries, is subject to U.S. taxation;
•
risks associated with implementing our business strategies and initiatives, including risks related to developing or enhancing the operations, controls and other infrastructure necessary in respect of our more recent, new or proposed initiatives;
•
the risk that there could be regulatory or legislative changes adversely impacting us, as a Bermuda-based company, relative to our competitors, or actions taken by multinational organizations having such an impact;
•
risks associated with highly subjective judgments, such as valuing our more illiquid assets, and determining the impairments taken on our investments, which could impact our financial position or operating results;
•
risks associated with our investment portfolio, including the risk that investment managers may breach our investment guidelines, or the inability of such guidelines to mitigate risks arising out of the ongoing period of relative economic weakness;
•
risks associated with inflation, which could cause loss costs to increase, and impact the performance of our investment portfolio, thereby adversely impacting our financial position or operating results;
•
the risk we might be bound to policyholder obligations beyond our underwriting intent, including due to emerging claims and coverage issues;

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•
risks associated with counterparty credit risk, including with respect to reinsurance brokers, customers, agents, retrocessionaires, capital providers, parties associated with our investment portfolio and/or our energy trading business, and premiums and other receivables owed to us, which risks we believe continue to be heightened as a result of the ongoing period of relative economic weakness;
•
loss of services of any one of our key senior officers, or difficulties associated with the transition of new members of our senior management team;
•
risks associated with our increased allocation of capital to our weather and energy risk management operations, including the risks that these operations may give rise to unforeseen or unanticipated losses;
•
the risk that ongoing or future industry regulatory developments will disrupt our business, or that of our business partners, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;
•
acts of terrorism, war or political unrest;
•
risks that the advent of the new U.S. Federal Insurance Office or other related developments may adversely impact our business, or significantly increase our operating costs;
•
operational risks, including system or human failures;
•
risks in connection with our management of third party capital;
•
changes in economic conditions, including interest rate, currency, equity and credit conditions which could affect our investment portfolio or declines in our investment returns for other reasons which could reduce our profitability and hinder our ability to pay claims promptly in accordance with our strategy, which risks we believe are currently enhanced in light of the ongoing period of relative economic weakness, both globally, particularly in respect of Eurozone countries and companies, and in the U.S.;
•
the impact of the perceived inability of the U.S. to continue to pay its debt obligations when due, including the downgrade of U.S. government securities by Standard & Poor's, and the resulting effect on the value of securities in our investment portfolio as well as the uncertainty in the market generally;
•
risks relating to failure to comply with covenants in our debt agreements;
•
risks relating to the inability of our operating subsidiaries to declare and pay dividends to RenaissanceRe;
•
risks that we may require additional capital in the future, particularly after a catastrophic event or to support potential growth opportunities in our business, which may not be available or may be available only on unfavorable terms;
•
risks that certain of our new or potentially expanding business lines could have a significant negative impact on our financial results or cause significant volatility in our results for any particular period, including risks relating to our weather and energy risk operations, whose results may be more volatile than we estimate;
•
risks arising out of possible changes in the distribution or placement of risks due to increased consolidation of customers or insurance and reinsurance brokers, or from potential changes in their business practices which may be required by future regulatory changes; and
•
risks relating to changes in regulatory regimes and/or accounting rules, which could result in significant changes to our financial results, including but not limited to, the European Union directive concerning capital adequacy, risk management and regulatory reporting for insurers.
The factors listed above should not be construed as exhaustive. Certain of these risk factors and others are described in more detail from time to time in our filings with the SEC. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are principally exposed to five types of market risk: interest rate risk; foreign currency risk; credit risk; energy and weather-related risk; and equity price risk. The Company’s investment guidelines permit, subject to approval, investments in derivative instruments such as futures, options, foreign currency forward contracts and swap agreements, which may be used to assume risks or for hedging purposes. See the Company’s Form 10-K for the fiscal year ended December 31, 2011 for additional information related to the Company’s exposure to these risks.
ITEM 4.    CONTROLS AND PROCEDURES
Disclosure Controls and Internal Controls: We have designed various disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule 15d-15(e) under the Exchange Act), to help ensure that information required to be disclosed in our periodic Exchange Act reports, such as this quarterly report, is recorded, processed, summarized and reported on a timely and accurate basis. Our disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our senior management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Limitations on the Effectiveness of Controls: Our Board of Directors and management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. Controls, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are met. Further, we believe that the design of prudent controls must reflect appropriate resource constraints, such that the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all controls, there can be no absolute assurance that all control issues and instances of fraud, if any, applicable to us have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some individuals, by collusion of more than one person, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Evaluation: An evaluation was performed under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based upon that evaluation, the Company's management, including our Chief Executive Officer and Chief Financial Officer, concluded that, at June 30, 2012, the Company's disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information required to be disclosed in Company reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There has been no change in the Company's internal control over financial reporting during the three months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II - OTHER IFORMATION
ITEM 1.    LEGAL PROCEEDINGS
There are no material changes from the legal proceedings previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
We and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or direct surplus lines insurance policies.  This category of business litigation may involve allegations of underwriting or claims-handling errors or misconduct, employment claims, regulatory actions or disputes arising from our business ventures.  Our operating subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages.  Generally, our direct surplus lines insurance operations are subject to greater frequency and diversity of claims and claims-related litigation than our reinsurance operations and, in some jurisdictions, may be subject to direct actions by allegedly injured persons or entities seeking damages from policyholders.  These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in its loss and loss expense reserves which are discussed in its loss reserves discussion.  In addition, we may from time to time engage in litigation or arbitration related to claims for payment in respect of ceded reinsurance.  Any such litigation or arbitration contains an element of uncertainty, and we believe the inherent uncertainty in such matters may have increased recently and will likely continue to increase. Currently, we believe that no individual litigation or arbitration to which we are presently a party is likely to have a material adverse effect on our financial condition, business or operations.
ITEM 1A.    RISK FACTORS
There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s share repurchase program may be effected from time to time, depending on market conditions and other factors, through open market purchases and privately negotiated transactions. On February 22, 2012, the Company approved an increase in its authorized share repurchase program to an aggregate amount of $500.0 million. Unless terminated earlier by resolution of the Company’s Board of Directors, the program will expire when the Company has repurchased the full value of the shares authorized. The table below details the repurchases that were made under the program during the three months ended June 30, 2012, and also includes other shares purchased which represents withholdings from employees surrendered in respect of withholding tax obligations on the vesting of restricted stock, or in lieu of cash payments for the exercise price of employee stock options.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shares purchased
 
Other shares purchased
 
Shares purchased under
repurchase program
 
Dollar
amount 
still
available
under
repurchase
program
 
 
  
Shares
purchased
 
Average
price per
share
 
Shares
purchased
 
Average
price per
share
 
Shares
purchased
 
Average
price per
share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
Beginning dollar amount available to be repurchased
 
 
 
 
 
 
 
 
 
 
 
 
$
500.0

 
 
April 1 - 30, 2012
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
 
May 1 - 31, 2012
160,042

 
$
76.84

 
1,514

 
$
79.74

 
158,528

 
$
76.81

 
(12.2
)
 
 
June 1 - 30, 2012
1,019,539

 
$
74.36

 
—

 
$
—

 
1,019,539

 
$
74.36

 
(75.8
)
 
 
Total
1,179,581

 
$
74.70

 
1,514

 
$
79.74

 
1,178,067

 
$
74.69

 
$
412.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In the future, the Company may adopt additional trading plans or authorize purchase activities under the remaining authorization, which the Board may increase in the future. Subsequent to June 30, 2012 and through the period ending July 30, 2012, the Company has repurchased approximately 71 thousand common shares in open market transactions at an aggregate cost of $5.3 million and at an average share price of $74.21.

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ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.    OTHER INFORMATION
None.
ITEM 6.    EXHIBITS
10.1   
Credit Agreement, dated as of May 17, 2012, by and among RenaissanceRe Holdings Ltd., various banks and financial institutions parties thereto, Wells Fargo Bank, National Association, as Fronting Bank, LC Administrator and Administrative Agent for the Lenders, Citibank, N.A., as Syndication Agent, and Wells Fargo Securities, LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Lead Bookrunners. (1)
10.2   
Fourth Amended and Restated Reimbursement Agreement, dated as of May 17, 2012, by and among RenaissanceRe Holdings Ltd., Renaissance Reinsurance Ltd., Renaissance Reinsurance of Europe, Glencoe Insurance Ltd., DaVinci Reinsurance Ltd., the banks and financial institutions parties thereto, Wells Fargo Bank, National Association, as issuing bank, administrative agent and collateral agent for the lenders, and certain other agents. (1)
31.1
Certification of Neill A. Currie, Chief Executive Officer of RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
Certification of Jeffrey D. Kelly, Chief Financial Officer of RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
Certification of Neill A. Currie, Chief Executive Officer of RenaissanceRe Holdings Ltd., 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 Jeffrey D. Kelly, Chief Financial Officer of RenaissanceRe Holdings Ltd., 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 Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
(1)
Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current Report on Form 8-K, filed with the Commission on May 22, 2012. 


114

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

RENAISSANCERE HOLDINGS LTD. 
 
 
 
 
 
 
 
Signature
 
Title
 
 
Date
 
 
 
 
 
/s/ Jeffrey D. Kelly
 
Executive Vice President, Chief Financial Officer
 
August 1, 2012
 
Jeffrey D. Kelly
 
 
 
 
 
 
 
 
 
 
 
/s/ Mark A. Wilcox
 
Senior Vice President, Corporate Controller and Chief Accounting Officer
 
August 1, 2012
 
Mark A. Wilcox
 
 
 
 
 

115