4. INVESTMENTS

a) Available for Sale Securities

The amortized cost, gross unrealized gains, gross unrealized losses and fair value of the Company's available for sale investments by category are as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
September 30, 2011
U.S. Government and Government agencies	$	32,971	$	2,327	$	—		$	35,298
States, municipalities and political subdivisions		29,099		4,008		—			33,107
Corporate debt:
Financial institutions		38,368		1,501		(302	)		39,567
Industrials		87,661		6,250		—			93,911
Utilities		75,951		7,132		—			83,083

Total fixed maturity investments, available for sale	$	264,050	$	21,218	$	(302	)	$	284,966

December 31, 2010
U.S. Government and Government agencies	$	85,030	$	6,923	$	—		$	91,953
Non-U.S. Government and Government agencies		138,386		9,539		(2,541	)		145,384
States, municipalities and political subdivisions		107,289		10,901		(13	)		118,177
Corporate debt:
Financial institutions		66,660		6,776		(38	)		73,398
Industrials		310,664		20,548		(2	)		331,210
Utilities		120,515		11,212		—			131,727

Total fixed maturity investments, available for sale	$	828,544	$	65,899	$	(2,594	)	$	891,849

b) Trading Securities

Securities accounted for at fair value with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive (loss) income ("consolidated income statements") by category are as follows:


	September 30, 2011		December 31, 2010
U.S. Government and Government agencies	$	1,067,673	$	1,229,720
Non-U.S. Government and Government agencies		225,782		120,793
States, municipalities and political subdivisions		103,180		127,436
Corporate debt:
Financial institutions		1,292,078		1,261,219
Industrials		827,425		627,524
Utilities		115,214		101,472
Residential mortgage-backed:
Non-agency residential		328,395		371,935
Agency residential		1,374,564		1,195,905
Commercial mortgage-backed:		350,704		184,043
Asset-backed		594,600		549,050

Total fixed maturity investments, trading		6,279,615		5,769,097
Equity securities		424,104		174,976
Other invested assets ⁽¹⁾		552,074		347,632

Total	$	7,255,793	$	6,291,705


(1)		Within the Company's financial statements and footnotes "other invested assets" include the Company's investments in both hedge funds and private equity funds.

c) Contractual Maturity Dates

The contractual maturity dates of available for sale fixed maturity investments are as follows:


	September 30, 2011
	Amortized Cost		Fair Value
Due within one year	$	26,354	$	26,819
Due after one year through five years		198,860		213,579
Due after five years through ten years		35,815		40,787
Due after ten years		3,021		3,781

	$	264,050	$	284,966

Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

d) Other Invested Assets

Included in other invested assets are the Company's hedge fund and private equity investments. As of the balance sheet date, the Company held 21 funds with a total fair value of $552,074, which comprised 6.5% of the total fair value of its investments and cash and cash equivalents and are summarized as follows by type of investment strategy:


					Long			Short
	Fair Value as of		Unfunded		Exposure⁽¹⁾			Exposure⁽²⁾			Gross			Net
Fund Type	September 30, 2011		Commitments		(% of funded)			(% of funded)			Exposure⁽³⁾			Exposure⁽⁴⁾
Private equity (primary and secondary)	$	78,078	$	162,162		100	%		0	%		100	%		100	%
Mezzanine debt		3,308		111,621		100	%		0	%		100	%		100	%
Distressed		8,744		36,392		100	%		0	%		100	%		100	%

Total private equity		90,130		310,175

Distressed hedge funds		46,767		—		64	%		42	%		106	%		22	%
Equity long/short		175,170		—		78	%		58	%		136	%		20	%
Multi-strategy		157,479		—		88	%		66	%		154	%		22	%
Event driven		82,528		—		93	%		69	%		162	%		24	%

Total	$	552,074	$	310,175


(1)		Long exposure represents the ratio of the fund's long investments in securities to the fund's equity capital (over 100% may denote explicit borrowing). Two of the Company's hedge funds, one event driven fund and one multi-strategy fund had long exposure greater than 100% of the funds' net asset value (indicating explicit leverage) of 140% and 110%, respectively, as of September 30, 2011.

(2)		Short exposure represents the ratio of the securities sold short to the fund's equity capital.

(3)		Gross exposure is the addition of the long and short exposures (over 100% may denote explicit borrowing).

(4)		Net exposure is the subtraction of the short exposure from the long exposure.

•

Private equity funds: These funds buy limited partnership interests from existing limited partners of primary private equity funds. As owners of private equity funds seek liquidity, they can sell their existing investments, plus any remaining commitment, to secondary market participants. The Company has invested in four private equity funds to purchase those primary limited partnership interests. The fair values of the investments in this class have been estimated using the net asset value per share of the investments. These funds cannot be redeemed because the investments include restrictions that do not allow for redemption until termination of the fund. The restriction period for these funds from initial investment ranges from eight to ten years.

•

Mezzanine debt funds: Mezzanine debt funds invest primarily in privately negotiated mezzanine investments. The funds' strategies will focus primarily on providing capital to upper middle market and middle market companies, and private equity sponsors, in connection with leveraged buyouts, mergers and acquisitions, recapitalizations, growth financings and other corporate transactions. The most common position in the capital structure will be between the senior secured debt holder and the equity, however the funds will utilize a flexible approach when structuring investments, which may include secured debt, subordinated debt, preferred stock and/or private equity. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in one mezzanine debt fund which cannot be redeemed at this time because the investments include restrictions that do not allow for redemption until termination of the fund. The restriction period for this fund from initial investment is ten years.

•

Distressed funds: In distressed debt investing, managers take positions in the debt of companies experiencing significant financial difficulties, including bankruptcy, or in certain positions of the capital structure of structured securities. The manager relies on the fundamental analysis of these securities, including the claims on the assets and the likely return to bondholders. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in five distressed funds, three of which (representing approximately 32% of the value of the funds in this class) are not currently eligible for redemption due to imposed lock-up periods from initial investments ranging from one to eight years. The remaining funds representing approximately 45% and 23% of the value of the funds in this class are currently eligible for quarterly redemption with a 65-day and 45-day notification period, respectively, and are subject to redemption limitations and a redemption fee if redeemed prior to January 2012.

•

Equity long/short funds: In equity long/short funds, managers take long positions in companies they deem to be undervalued and short positions in companies they deem to be overvalued. Long/short managers may invest in countries, regions or sectors and vary by their use of leverage and target net long position. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in five equity long/short funds, one of which (representing approximately 25% of the value of the funds in this class) is not currently eligible for redemption due to an imposed lock-up period of eighteen months from initial investment, at which time the fund will be eligible for quarterly redemption with a 45-day notification period. The remaining four funds, representing approximately 75% of the value of the funds in this class, are currently eligible for quarterly redemption, one with a 30-day notification period or monthly redemption with a 30-day notification period and redemption fee, one with a 45-day notification period and redemption fee if redeemed prior to July 2012 and two with a 60-day notification period.

•

Multi-strategy funds: These funds may utilize many strategies employed by specialized funds including distressed investing, equity long/short, merger arbitrage, convertible arbitrage, fixed income arbitrage and macro trading. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in four multi-strategy funds, all of which are currently eligible for quarterly redemption. Three of the funds require notification periods before redemption which range from 45 days to 90 days. The remaining fund is currently eligible for redemption of one third of the net asset value with a 65-day notification period.

•

Event driven funds: Event driven strategies seek to deploy capital into specific securities whose returns are affected by a specific event that affects the value of one or more securities of a company. Returns for such securities are linked primarily to the specific outcome of the events and not by the overall direction of the bond or stock markets. Examples could include mergers and acquisitions (arbitrage), corporate restructurings and spin-offs and capital structure arbitrage. The fair values of the funds in this class have been estimated using the net asset value per share of the funds. The Company has invested in two event driven funds. Approximately 53% of the value of the funds is not currently eligible for redemption due to an imposed two year lock-up period from initial investment. The remaining 47% of the value of the funds in this class is currently eligible for quarterly redemption, but is subject to redemption fees and limitations.

e) Net Investment Income


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Fixed maturity investments	$	47,877		$	55,165		$	149,471		$	193,815
Equity securities and other invested assets		3,397			6,438			10,608			7,684
Cash and cash equivalents		166			183			611			346
Expenses		(3,557	)		(2,307	)		(10,231	)		(7,870	)

Net investment income	$	47,883		$	59,479		$	150,459		$	193,975

f) Components of Realized Gains and Losses

Components of realized gains and (losses) are summarized in the following table:


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Gross realized gains on sale of securities	$	44,674		$	33,222		$	122,842		$	163,461
Gross realized losses on sale of securities		(10,634	)		(2,533	)		(35,896	)		(15,663	)
Treasury yield hedge		—			—			—			(3,958	)
Futures not designated as hedges		(27,060	)		—			(47,470	)		—

Foreign exchange forwards not designated as hedges		1,442			—			882			—
Mark-to-market changes: debt securities trading		(46,078	)		73,563			(742	)		134,040
Mark-to-market changes: foreign exchange forwards and futures not designated as hedges		(17,667	)		—			(12,233	)		—
Mark-to-market changes: hedge funds and equity securities		(75,486	)		10,818			(48,938	)	$	9,610
Gain on sale of Program Administrator		—			1,860			—			1,860

Net realized investment (losses) gains	$	(130,809	)	$	116,930		$	(21,555	)	$	289,350

Proceeds from sale of available for sale securities	$	60,043		$	208,473		$	606,234		$	2,054,547
Proceeds from sale of trading securities	$	1,321,722		$	2,517,784		$	4,740,270		$	7,815,137

g) Pledged Assets

As of September 30, 2011 and December 31, 2010, $285,501 and $280,175, respectively, of cash and cash equivalents and investments were on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with relevant insurance regulations. In addition, the Company has set up trust accounts to meet security requirements for inter-company reinsurance transactions. These trusts contained assets of $1,356,304 and $1,377,266 as of September 30, 2011 and December 31, 2010, respectively, and are included in fixed maturity investments.

The Company also has facilities available for the issuance of letters of credit collateralized against the Company's investment portfolio. The collateralized portion of these facilities is up to $1,300,000 as of September 30, 2011 and December 31, 2010. See Note 8 "Debt and Financing Arrangements" for details on the facilities.

The following table shows the Company's trust accounts on deposit, as well as outstanding and remaining letter of credit facilities, and the collateral committed to support the letter of credit facilities:


	As of		As of
	September 30,		December 31,
	2011		2010
Total trust accounts on deposit	$	1,641,805	$	1,657,441
Total letter of credit facilities:
Citibank Europe plc		900,000		900,000
Credit Facility		800,000		800,000

Total letter of credit facilities		1,700,000		1,700,000

Total letter of credit facilities outstanding:
Citibank Europe plc		752,412		689,851
Credit Facility		161,677		158,983

Total letter of credit facilities outstanding		914,089		848,834

Total letter of credit facilities remaining:
Citibank Europe plc		147,588		210,149
Credit Facility (1)		638,323		641,017

Total letter of credit facilities remaining		785,911		851,166

Collateral committed to support the letter of credit facilities	$	1,062,380	$	1,121,345


(1)		Net of any borrowing or repayments under the Unsecured Facility (as defined in Note 8). See Note 8 for further details on the Unsecured Facility.

Total trust accounts on deposit includes available for sale securities, trading securities and cash and cash equivalents. The fair values of the combined total cash and cash equivalents and investments held under trust were $2,704,185 and $2,778,786 as of September 30, 2011 and December 31, 2010, respectively. Of the total letters of credit facilities outstanding as of September 30, 2011 and December 31, 2010, $7,295 was used to meet security requirements for inter-company transactions and the remaining letters of credit facilities outstanding of $906,794 and $841,539 was used for third-party beneficiaries, respectively.

h) Analysis of Unrealized Losses

As of September 30, 2011 and December 31, 2010, there were three and nine securities, respectively, in an unrealized loss position. The following table summarizes the market value of those investments in an unrealized loss position for periods less than and greater than 12 months:


	September 30, 2011					December 31, 2010
	Gross Fair		Unrealized			Gross Fair		Unrealized
	Value		Loss			Value		Loss
Less than 12 months
Non-U.S. Government and Government agencies	$	—	$	—		$	34,204	$	(1,116	)
States, municipalities and political subdivisions		—		—			472		(13	)
Corporate debt:		—		—
Financial institutions		9,477		(302	)		2,796		(38	)
Industrials		—		—			2,150		(2	)

	$	9,477	$	(302	)	$	39,622	$	(1,169	)

More than 12 months
Non-U.S. Government and Government agencies	$	—	$	—		$	10,998	$	(1,425	)

	$	—	$	—		$	10,998	$	(1,425	)

	$	9,477	$	(302	)	$	50,620	$	(2,594	)

i) Other-than-temporary impairment charges

Following the Company's review of the securities in the investment portfolio during the three and nine months ended September 30, 2011, no securities were considered to be other-than-temporarily impaired.

Following the Company's review of the securities in the investment portfolio during the three and nine months ended September 30, 2010 nil and one mortgage-backed security was considered to be other-than-temporarily impaired due to the present value of the expected cash flows being lower than the amortized cost. The $168 of other than temporary impairment ("OTTI") during the nine months ended September 30, 2010 was recognized through earnings due to credit related losses.

The following table summarizes the amounts related to credit losses on debt securities for which a portion of the OTTI was recognized in other comprehensive income in the consolidated income statements for the three and nine months ended September 30, 2010:


	For the Three Months			For the Nine Months
	Ended September 30,			Ended September 30,
	2010			2010
Beginning balance of credit losses	$	1,264		$	1,096
Additions for credit loss for which OTTI was not previously recognized		—			168
Reductions for securities sold during the period (realized)		—			—
Reductions for OTTI previously recognized due to intent to sell		—			—
Additions resulting from the increase in credit losses		—			—
Reductions resulting from the improvement in expected cash flows		—			—
Adoption of ASU 2010-11		(1,264	)		(1,264	)

Ending balance of credit losses	$	—		$	—