INVESTMENTS

9 Months Ended

Sep. 30, 2011

3. INVESTMENTS

a) Fixed Maturities and Equities

The amortized cost or cost and fair values of our fixed maturities and equities were as follows:

				Amortized		Gross		Gross				Non-credit
				Cost or		Unrealized		Unrealized		Fair		OTTI
				Cost		Gains		Losses		Value		in AOCI⁽⁵⁾

	At September 30, 2011
	Fixed maturities
		U.S. government and agency	$	1,103,869	$	6,856	$	(1,282)	$	1,109,443	$	-
		Non-U.S. government		1,015,795		7,061		(22,278)		1,000,578		-
		Corporate debt		3,716,760		78,168		(74,828)		3,720,100		-
		Agency RMBS⁽¹⁾		2,538,293		73,876		(1,100)		2,611,069		-
		CMBS⁽²⁾		273,278		10,987		(1,105)		283,160		-
		Non-Agency RMBS		186,480		1,509		(11,203)		176,786		(874)
		ABS⁽³⁾		643,332		9,046		(13,836)		638,542		-
		Municipals⁽⁴⁾		1,163,380		35,894		(2,223)		1,197,051		-
		Total fixed maturities	$	10,641,187	$	223,397	$	(127,855)	$	10,736,729	$	(874)

	Equity securities		$	634,268	$	11,703	$	(78,090)	$	567,881

	At December 31, 2010
	Fixed maturities
		U.S. government and agency	$	856,711	$	7,101	$	(3,692)	$	860,120	$	-
		Non-U.S. government		777,236		9,321		(13,759)		772,798		-
		Corporate debt		4,054,048		144,956		(36,096)		4,162,908		-
		Agency RMBS		2,571,124		43,160		(20,702)		2,593,582		-
		CMBS		454,288		21,998		(1,501)		474,785		-
		Non-Agency RMBS		252,460		3,287		(11,545)		244,202		(7,443)
		ABS		668,037		8,856		(15,050)		661,843		(1,275)
		Municipals		712,339		11,870		(11,550)		712,659		(350)
		Total fixed maturities	$	10,346,243	$	250,549	$	(113,895)	$	10,482,897	$	(9,068)

	Equity securities		$	327,207	$	26,761	$	(4,714)	$	349,254

(1) Residential mortgage-backed securities (RMBS) originated by U.S. agencies.
(2) Commercial mortgage-backed securities (CMBS).
(3) Asset-backed securities (ABS) include debt tranched securities collateralized primarily by auto loans, student loans, credit cards, and other asset types. This asset class also includes an insignificant position in collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs).

(4) Municipals include bonds issued by states, municipalities and political subdivisions.
(5) Represents the non-credit component of the other-than-temporary impairment (OTTI) losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge and credit funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 3(b)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.

Contractual Maturities

The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


			Amortized		Fair	% of Total
			Cost		Value	Fair Value
	At September 30, 2011
	Maturity
	Due in one year or less	$	454,659	$	454,403	4.2	%
	Due after one year through five years		4,687,362		4,672,568	43.6	%
	Due after five years through ten years		1,694,606		1,734,473	16.2	%
	Due after ten years		163,177		165,728	1.5	%
			6,999,804		7,027,172	65.5	%
	Agency RMBS		2,538,293		2,611,069	24.3	%
	CMBS		273,278		283,160	2.6	%
	Non-Agency RMBS		186,480		176,786	1.7	%
	ABS		643,332		638,542	5.9	%
	Total	$	10,641,187	$	10,736,729	100.0	%

	At December 31, 2010
	Maturity
	Due in one year or less	$	476,807	$	489,190	4.7	%
	Due after one year through five years		4,096,477		4,144,144	39.5	%
	Due after five years through ten years		1,605,419		1,655,061	15.8	%
	Due after ten years		221,631		220,090	2.1	%
			6,400,334		6,508,485	62.1	%
	Agency RMBS		2,571,124		2,593,582	24.7	%
	CMBS		454,288		474,785	4.5	%
	Non-Agency RMBS		252,460		244,202	2.4	%
	ABS		668,037		661,843	6.3	%
	Total	$	10,346,243	$	10,482,897	100.0	%

Gross Unrealized Losses

The following tables summarize fixed maturities and equities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:


				12 months or greater				Less than 12 months				Total
				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
				Value		Losses		Value		Losses		Value		Losses

	At September 30, 2011
	Fixed maturities
	U.S. government and agency		$	-	$	-	$	621,060	$	(1,282)	$	621,060	$	(1,282)
	Non-U.S. government			-		-		669,817		(22,278)		669,817		(22,278)
	Corporate debt			49,282		(2,530)		1,759,460		(72,298)		1,808,742		(74,828)
	Agency RMBS			-		-		284,510		(1,100)		284,510		(1,100)
	CMBS			20,237		(585)		41,834		(520)		62,071		(1,105)
	Non-Agency RMBS			43,727		(7,382)		93,518		(3,821)		137,245		(11,203)
	ABS			47,099		(9,752)		206,310		(4,084)		253,409		(13,836)
	Municipals			7,269		(1,469)		109,084		(754)		116,353		(2,223)
		Total fixed maturities	$	167,614	$	(21,718)	$	3,785,593	$	(106,137)	$	3,953,207	$	(127,855)

	Equity securities		$	3,022	$	(990)	$	460,598	$	(77,100)	$	463,620	$	(78,090)

	At December 31, 2010
	Fixed maturities
	U.S. government and agency		$	-	$	-	$	453,207	$	(3,692)	$	453,207	$	(3,692)
	Non-U.S. government			83,572		(6,062)		302,431		(7,697)		386,003		(13,759)
	Corporate debt			160,161		(13,123)		1,087,683		(22,973)		1,247,844		(36,096)
	Agency RMBS			735		(42)		1,308,690		(20,660)		1,309,425		(20,702)
	CMBS			1,164		(59)		48,701		(1,442)		49,865		(1,501)
	Non-Agency RMBS			100,074		(10,030)		57,095		(1,515)		157,169		(11,545)
	ABS			40,617		(12,871)		155,491		(2,179)		196,108		(15,050)
	Municipals			23,681		(3,118)		288,130		(8,432)		311,811		(11,550)
		Total fixed maturities	$	410,004	$	(45,305)	$	3,701,428	$	(68,590)	$	4,111,432	$	(113,895)

	Equity securities		$	4,347	$	(601)	$	122,317	$	(4,113)	$	126,664	$	(4,714)

Fixed Maturities

At September 30, 2011, 1,017 fixed maturities (2010: 1,150) were in an unrealized loss position of $128 million (2010: $114 million) of which $26 million (2010: $15 million) of this balance was related to securities below investment grade or not rated.

At September 30, 2011, 123 (2010: 206) securities have been in continuous unrealized loss position for 12 months or greater and have a fair value of $168 million (2010: $410 million). These securities were primarily ABS and non-agency RMBS with a weighted average credit rating of BBB and BB+, respectively. We concluded that these securities, as well as the remaining securities in an unrealized loss position, are temporarily depressed and are expected to recover in value as the securities approach maturity. Further, at September 30, 2011, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.

Equity Securities

At September 30, 2011, 153 securities (2010: 71) were in an unrealized loss position of $78 million (2010: $5 million).

At September 30, 2011, 9 (2010: 12) securities have been in a continuous unrealized loss position for 12 months or greater and have a fair value of $3 million (2010: $4 million). Based on our OTTI quarterly review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, we concluded that the above equities in an unrealized loss position were temporarily impaired at September 30, 2011 and December 31, 2010.

b) Other Investments

The table below shows our portfolio of other investments reported at fair value:


			September 30, 2011			December 31, 2010

	Hedge funds	$	267,055	42%	$	123,036	24%
	Funds of hedge funds		230,187	36%		235,240	45%
	Long/short credit funds		66,823	10%		82,846	16%
	Distressed securities		20,563	3%		21,911	4%
	CLO - equity tranched securities		58,642	9%		56,263	11%
	Total other investments	$	643,270	100%	$	519,296	100%

The major categories and related investment strategies for our investments in hedge and credit funds are as follows:


	Types of funds	Investment Strategy

	Funds of hedge funds	Seek to achieve attractive risk-adjusted returns by investing in a large pool of hedge funds across a diversified range of hedge fund strategies.

	Hedge funds	Seek to achieve attractive risk-adjusted returns primarily through multi-strategy and long/short equity approaches. Multi-strategy funds invest in a variety of asset classes on a long and short basis and may employ leverage. Long/short equity funds invest primarily in equity securities (or derivatives) on a long and short basis and may employ leverage.

	Long/short credit funds	Seek to achieve attractive risk-adjusted returns by executing a credit trading strategy involving selecting long and short positions in primarily below investment-grade credit.

	Distressed securities	Seek to achieve attractive risk-adjusted returns by executing a strategy which assesses the issuer’s ability to improve its operations and often attempts to influence the process by which the issuer restructures its debt.

In aggregate, 95% of our hedge funds (including funds of hedge funds) are redeemable within one year and 100% within three years, subject to prior written redemption notice varying from 45 to 95 days. This includes recognition of certain funds we hold which restrict new investor redemptions during a lock-up period. A lock-up period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. Another common restriction is the suspension of redemptions (known as “gates”) which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund's net assets or to prevent certain adverse regulatory, or any other reasons that may render the manager unable to promptly and accurately calculate the fund's net asset value. During the nine months ended September 30, 2011, no gates were imposed on our redemption requests. Additionally, certain hedge funds may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism used is a side-pocket, whereby the illiquid security is assigned to a designated account. Generally, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or otherwise deemed liquid by the fund, may investors redeem their interest. At September 30, 2011, the fair value of our hedge funds held in side-pockets was $3 million (2010: $4 million). At September 30, 2011 and December 31, 2010, redemptions receivable were insignificant.

At September 30, 2011, we had $31 million (2010: $46 million) of a long/short credit fund that we do not have the ability to liquidate at our own discretion as the fund is beyond its investment period and is currently distributing capital to its investors. Of the remaining credit fund holdings (long/short credit and distressed securities), 30% (2010: 32%) of the carrying value has annual or semi-annual liquidity and 70% (2010: 68%) has quarterly liquidity, subject to prior written redemption notice varying from 65 to 95 days. At September 30, 2011 and December 31, 2010, none of our credit funds had established side-pockets.

At September 30, 2011, we have no unfunded commitments relating to our investments in hedge and credit funds.

c) Net Investment Income

Net investment income was derived from the following sources:

		Three months ended September 30,				Nine months ended September 30,
			2011		2010		2011		2010

	Fixed maturities	$	81,900	$	89,580	$	259,683	$	267,471
	Equities		2,079		917		6,977		2,837
	Other investments		(30,376)		25,094		6,732		39,374
	Cash and cash equivalents		1,148		1,517		4,803		4,241
	Short-term investments		302		308		1,161		735
	Gross investment income		55,053		117,416		279,356		314,658
	Investment expenses		(5,657)		(5,616)		(19,288)		(15,654)
	Net investment income	$	49,396	$	111,800	$	260,068	$	299,004

d) Net Realized Investment Gains

The following table provides an analysis of net realized investment gains:

		Three months ended September 30,				Nine months ended September 30,
			2011		2010		2011		2010

	Gross realized gains	$	86,341	$	105,701	$	223,264	$	224,661
	Gross realized losses		(33,595)		(17,559)		(86,235)		(93,138)
	Net OTTI recognized in earnings		(9,273)		(2,363)		(12,686)		(15,297)
	Net realized gains on fixed maturities
	and equities		43,473		85,779		124,343		116,226

	Change in fair value of investment derivatives⁽¹⁾		18,825		(6,333)		5,364		(3,503)

	Fair value hedges⁽¹⁾		(4,741)		(2,915)		(4,530)		4,602

	Net realized investment gains	$	57,557	$	76,531	$	125,177	$	117,325

(1) Refer to Note 6 – Derivative Instruments

The following table summarizes the OTTI recognized in earnings by asset class:

		Three months ended September 30,				Nine months ended September 30,
			2011		2010		2011		2010

	Fixed maturities:
	Corporate debt	$	928	$	-	$	1,954	$	1,650
	CMBS		-		88		-		413
	Non-Agency RMBS		347		772		717		4,715
	ABS		-		-		61		1,126
	Municipals		-		-		483		19
			1,275		860		3,215		7,923

	Equities		7,998		1,503		9,471		7,374
	Total OTTI recognized in earnings	$	9,273	$	2,363	$	12,686	$	15,297

The following table provides a roll forward of the credit losses, before income taxes, for which a portion of the OTTI was recognized in AOCI:


		Three months ended				Nine months ended
		September 30,				September 30,
			2011		2010		2011		2010

	Balance at beginning of period	$	1,894	$	146,963	$	57,498	$	162,390
	Credit impairments recognized on securities not previously impaired		448		167		448		1,355
	Additional credit impairments recognized on securities previously impaired		-		1,396		(96)		2,173
	Change in timing of future cash flows on securities previously impaired		-		(141)		(5)		(116)
	Intent to sell of securities previously impaired		-		(764)		-		(829)
	Securities sold/redeemed/matured		(30)		(44,682)		(55,533)		(62,034)
	Balance at end of period	$	2,312	$	102,939	$	2,312	$	102,939

- Definition

Tabular disclosure of investments in certain debt and equity securities (and certain other trading assets) which include all debt and equity securities (other than those equity securities accounted for under the equity or cost methods of accounting) with readily determinable fair values. Other trading assets include assets that are carried on the balance sheet at fair value and held for trading purposes. A debt security represents a creditor relationship with an enterprise that is in the form of a security. Debt securities include, among other items, US Treasury securities, US government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. An equity security represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices. Equity securities include, among other things, common stock, certain preferred stock, warrant rights, call options, and put options, but do not include convertible debt. An entity may opt to provide the reader with additional narrative text to better understand the nature of investments in debt and equity securities (and other trading assets).

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