Investments

6 Months Ended

Jun. 30, 2011

Investments [Abstract]

Investments

3. Investments

     The Company’s investments in fixed maturities are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

(a) Classification within the fair value hierarchy

     Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

     Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.

     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices including overnight repos and commercial paper. Level 2 includes financial instruments that are valued through independent external sources using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. and U.K. Treasuries, sovereign debt, corporate debt, catastrophe bonds, U.S. agency and non-agency mortgage and asset-backed securities and bank loans. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. A hedge fund is the only financial instrument in this category as at June 30, 2011.

     The Company’s management and external investment advisors had noted illiquidity and dislocation in the non- Agency RMBS market for the period September 30, 2008 through to June 30, 2010. During this period, the Company identified certain non-Agency RMBS securities in its portfolio trading in inactive markets (“identified RMBS securities”). In order to gauge market activity for the identified RMBS securities, the Company, with assistance from external investment advisors, reviewed the pricing sources for each security in the portfolio. The Company utilized various pricing vendors to obtain market pricing information for investment securities.

     Consistent with U.S. GAAP, market approach fair value measurements for securities trading in inactive markets are not determinative. In weighing the fair value measurements resulting from market approach and income approach valuation techniques, the Company previously placed less reliance on the market approach fair value measurements. The income approach valuation technique determines the fair value of each security on the basis of contractual cash flows, discounted using a risk-adjusted discount rate. As the income approach valuation technique incorporates both observable and significant unobservable inputs, the securities were included as Level 3 assets with respect to the fair value hierarchy. The foundation for the income approach was the amount and timing of future cash flows.

     During the three month period ended September 30, 2010, the Company, with assistance from external investment advisors, determined that market activity had increased for the identified RMBS securities. Therefore, a market approach valuation technique was adopted for the identified RMBS securities. Because the market approach incorporates observable inputs, the identified RMBS securities are classified as Level 2 with respect to the fair value hierarchy at September 30, 2010. During the three months ended December 31, 2010, the Company liquidated substantially all of the identified RMBS securities which had previously been classified as Level 3 securities.

     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust held in mutual funds. The fund of hedge funds is a side pocket valued at $9,776 at June 30, 2011. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund’s administrator provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the funds administrator’s May 31, 2011 NAV was used as a partial basis for fair value measurement in the Company’s June 30, 2011 balance sheet. The fund manager provides an estimate of the performance of the fund for the following month based on the estimated performance provided from the underlying third-party funds. The Company utilizes the fund investment manager’s primary market approach estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the estimated NAV and the one-month delayed fund administrator’s NAV. Immaterial variances are recorded in the following reporting period.

     At June 30, 2011, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

	Level 1		Level 2		Level 3		Total
U.S. Government and Government Agency	$	—	$	838,912	$	—	$	838,912
Non-U.S. Government and Government Agency		—		476,590		—		476,590
States, municipalities, political subdivision		—		29,576		—		29,576
Agency residential mortgage-backed securities		—		470,933		—		470,933
Non-Agency residential mortgage-backed securities		—		51,223		—		51,223
U.S. corporate		—		1,406,591		—		1,406,591
Non-U.S. corporate		—		628,045		—		628,045
Bank Loans		—		387,201		—		387,201
Catastrophe bonds		—		29,934		—		29,934
Asset-backed securities		—		276,273		—		276,273
Commercial mortgage-backed securities		—		8,256		—		8,256
Total fixed maturities		—		4,603,534		—		4,603,534
Short-term investments		679,184		46,074		—		725,258
Hedge fund		—		—		9,776		9,776
Mutual funds		—		8,970		—		8,970
Total	$	679,184	$	4,658,578	$	9,776	$	5,347,538

     At December 31, 2010, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

	Level 1		Level 2		Level 3		Total
U.S. Government and Government Agency	$	—	$	1,677,166	$	—	$	1,677,166
Non-U.S. Government and Government Agency		—		554,199		—		554,199
States, municipalities, political subdivision		—		26,285		—		26,285
Agency residential mortgage-backed securities		—		445,859		—		445,859
Non-Agency residential mortgage-backed securities		—		56,470		—		56,470
U.S. corporate		—		1,308,406		—		1,308,406
Non-U.S. corporate		—		502,067		—		502,067
Bank loans		—		52,566		—		52,566
Catastrophe bonds		—		58,737		—		58,737
Asset-backed securities		—		123,569		—		123,569
Commercial mortgage-backed securities		—		18,543		—		18,543
Total fixed maturities		—		4,823,867		—		4,823,867
Short-term investments		259,261		14,253		—		273,514
Hedge fund		—		—		12,892		12,892
Mutual funds		—		8,586		—		8,586
Total	$	259,261	$	4,846,706	$	12,892	$	5,118,859

     At June 30, 2011, Level 3 investments totaled $9,776, representing 0.2% of total investments measured at fair value on a recurring basis. At December 31, 2010, Level 3 investments totaled $12,892 representing 0.3% of total investments measured at fair value on a recurring basis.

     The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six month periods ending June 30, 2011 and 2010:

	Three Months Ended June 30, 2011
	Fixed Maturity					Total Fair Market
	Investments		Other Investments			Value
Level 3 investments - Beginning of period	$	—	$	10,713		$	10,713
Purchases		—		—			—
Sales		—		(1,247	)		(1,247	)
Issuances		—		—			—
Settlements		—		—			—
Realized gains		—		175			175
Unrealized gains		—		135			135
Amortization		—		—			—
Transfers		—		—			—
Level 3 investments — End of period	$	—	$	9,776		$	9,776

	Three Months Ended June 30, 2010
	Fixed Maturity						Total Fair Market
	Investments			Other Investments			Value
Level 3 investments - Beginning of period	$	76,943		$	21,919		$	98,862
Purchases		—			—			—
Sales		—			(2,710	)		(2,710	)
Issuances		—			—			—
Settlements		—			—			—
Realized gains		—			170			170
Unrealized gains (losses)		2,632			(249	)		2,383
Amortization		(3,997	)		—			(3,997	)
Transfers		—			—			—
Level 3 investments — End of period	$	75,578		$	19,130		$	94,708

	Six Months Ended June 30, 2011
	Fixed Maturity					Total Fair Market
	Investments		Other Investments			Value
Level 3 investments - Beginning of period	$	—	$	12,892		$	12,892
Purchases		—		—			—
Sales		—		(3,809	)		(3,809	)
Issuances		—		—			—
Settlements		—		—			—
Realized gains		—		435			435
Unrealized gains		—		258			258
Amortization		—		—			—
Transfers		—		—			—
Level 3 investments — End of period	$	—	$	9,776		$	9,776

	Six Months Ended June 30, 2010
	Fixed Maturity						Total Fair Market
	Investments			Other Investments			Value
Level 3 investments - Beginning of period	$	85,336		$	25,670		$	111,006
Purchases		—			—			—
Sales		—			(7,094	)		(7,094	)
Issuances		—			—			—
Settlements		—			—			—
Realized gains		—			344			344
Unrealized (losses) gains		(1,634	)		210			(1,424	)
Amortization		(8,124	)		—			(8,124	)
Transfers		—			—			—
Level 3 investments — End of period	$	75,578		$	19,130		$	94,708

(b) Net investment income

     Net investment income was derived from the following sources:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
Fixed maturities and short-term investments	$	27,535		$	36,346		$	56,470		$	72,101
Cash and cash equivalents		687			311			3,268			897
Securities lending income		8			49			24			119
Total gross investment income		28,230			36,706			59,762			73,117
Investment expenses		(1,736	)		(1,897	)		(3,293	)		(4,009	)
Net investment income	$	26,494		$	34,809		$	56,469		$	69,108

(c) Fixed maturity and short-term investments

     The following represents an analysis of net realized gains  and the change in net unrealized gains on investments:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
Fixed maturities, short-term and other investments and cash equivalents
Gross realized gains	$	13,032		$	15,120		$	28,797		$	27,885
Gross realized (losses)		(1,480	)		(2,679	)		(10,866	)		(4,046	)
Net realized gains on investments		11,552			12,441			17,931			23,839
Net unrealized gains (losses) on securities lending		11			(6	)		41			(1,020	)
Change in net unrealized gains on investments		18,515			41,646			5,657			58,073
Total net realized gains and change in net unrealized gains on investments	$	30,078		$	54,081		$	23,629		$	80,892

     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at June 30, 2011 were as follows:

			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Estimated Fair Value
U.S. Government and Government Agency	$	828,627	$	10,656	$	(371	)	$	838,912
Non-U.S. Government and Government Agency		470,438		9,551		(3,399	)		476,590
States, municipalities, political subdivision		29,199		394		(17	)		29,576
Agency residential mortgage-backed securities		454,517		16,899		(483	)		470,933
Non-Agency residential mortgage-backed securities		57,678		148		(6,603	)		51,223
U.S. corporate		1,378,760		29,227		(1,396	)		1,406,591
Non-U.S. corporate		618,411		10,615		(981	)		628,045
Bank loans		389,193		702		(2,694	)		387,201
Catastrophe bonds		29,550		445		(61	)		29,934
Asset-backed securities		275,417		1,142		(286	)		276,273
Commercial mortgage-backed securities		8,208		48		—			8,256
Total fixed maturities		4,539,998		79,827		(16,291	)		4,603,534
Total short-term investments		725,230		57		(29	)		725,258
Total other investments		15,018		3,728		—			18,746
Total	$	5,280,246	$	83,612	$	(16,320	)	$	5,347,538

     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2010 were as follows:

			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Estimated Fair Value
U.S. Government and Government Agency	$	1,665,050	$	20,134	$	(8,018	)	$	1,677,166
Non-U.S. Government and Government Agency		550,759		11,635		(8,195	)		554,199
States, municipalities, political subdivision		26,365		90		(170	)		26,285
Agency residential mortgage-backed securities		430,873		15,491		(505	)		445,859
Non-Agency residential mortgage-backed securities		62,020		64		(5,614	)		56,470
U.S. corporate		1,288,078		28,526		(8,198	)		1,308,406
Non-U.S. corporate		497,689		7,939		(3,561	)		502,067
Bank loans		52,612		58		(104	)		52,566
Catastrophe bonds		56,991		2,042		(296	)		58,737
Asset-backed securities		123,354		605		(390	)		123,569
Commercial mortgage-backed securities		18,246		299		(2	)		18,543
Total fixed maturities		4,772,037		86,883		(35,053	)		4,823,867
Total short-term investments		273,444		70		—			273,514
Total other investments		18,392		3,086		—			21,478
Total	$	5,063,873	$	90,039	$	(35,053	)	$	5,118,859

     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at June 30, 2011 and December 31, 2010. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

	June 30, 2011					December 31, 2010
	Estimated Fair					Estimated Fair
	Value		% of Total			Value		% of Total
AAA	$	2,237,017		48.6	%	$	2,946,514		61.2	%
AA		400,177		8.7	%		428,972		8.9	%
A		1,193,431		25.9	%		1,077,389		22.3	%
BBB		331,145		7.2	%		219,523		4.6	%
Investment grade		4,161,770		90.4	%		4,672,398		97.0	%
BB		218,227		4.7	%		74,475		1.5	%
B		199,649		4.3	%		45,660		0.9	%
CCC		21,548		0.5	%		29,219		0.6	%
CC		—		0.0	%		—		0.0	%
D/NR		2,340		0.1	%		2,115		0.0	%
Non-Investment grade		441,764		9.6	%		151,469		3.0	%
Total Fixed Maturities	$	4,603,534		100.0	%	$	4,823,867		100.0	%

     The amortized cost and estimated fair value amounts for fixed maturity securities held at June 30, 2011 and December 31, 2010 are shown by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

	June 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	427,713	$	431,200	$	424,327	$	426,167
Due after one year through five years		2,965,528		3,015,190		3,498,334		3,540,408
Due after five years through ten years		344,337		343,859		207,918		206,317
Due after ten years		6,600		6,600		6,965		6,534
		3,744,178		3,796,849		4,137,544		4,179,426
Asset-backed and mortgage-backed securities		795,820		806,685		634,493		644,441
Total	$	4,539,998	$	4,603,534	$	4,772,037	$	4,823,867

     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At June 30, 2011, approximately $277,679 (December 31, 2010: $268,944) of letters of credit were issued and outstanding under this facility for which $352,636 of investments were pledged as collateral (December 31, 2010: $325,532). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s (the “Talbot FAL Facility”).

     On November 19, 2009, the Company entered into a Second Amendment to the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000. At June 30, 2011, $25,000 (December 31, 2010: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $45,204 of investments were pledged as collateral (December 31, 2010: $45,504). In addition, $1,993,707 of investments were held in trust at June 30, 2011 (December 31, 2010: $1,729,631). Of those, $1,545,533 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators (December 31, 2010: $1,489,243).

     The Company assumed two letters of credit facilities as part of the acquisition of IPC Holdings, Ltd. (the “IPC Acquisition”). A Credit Facility between IPC, IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a Letters of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the “IPC Bi-Lateral Facility”). At March 31, 2010, the IPC Syndicated Facility was closed. At June 30, 2011, the IPC Bi-Lateral Facility had $63,284 (December 31, 2010: $68,063) letters of credit issued and outstanding for which $106,216 (December 31, 2010: $105,310) of investments were held in an associated collateral account.

(d) Securities lending

     The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at June 30, 2011, the Company had $21,604 (December 31, 2010: $22,566) in securities on loan. During the three months ended June 30, 2011, the Company recorded a $11 unrealized gain on this collateral on its Statements of Operations (June 30, 2010: unrealized loss $6). During the six months ended June 30, 2011, the Company recorded a $41 unrealized gain on this collateral in its Statements of Operations (June 30, 2010: unrealized loss $1,020).

     Securities lending collateral reinvested includes corporate floating rate securities and overnight repo with an average reset period of 1.1 days (December 31, 2010: 17.6 days). As at June 30, 2011, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:

	Level 1		Level 2		Level 3		Total
Corporate	$	—	$	257	$	—	$	257
Asset-backed securities		—		—		—		—
Short-term investments		20,979		173		—		21,152
Total	$	20,979	$	430	$	—	$	21,409

     As at December 31, 2010, the securities lending collateral reinvested by the Company in connection with its securities program was allocated between Levels 1, 2 and 3 as follows:

	Level 1		Level 2		Level 3		Total
Corporate	$	—	$	229	$	—	$	229
Asset-backed securities		—		5,005		—		5,005
Short-term investments		2,644		14,450		—		17,094
Total	$	2,644	$	19,684	$	—	$	22,328

For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

	June 30, 2011					December 31, 2010
	Estimated Fair Value		% of Total			Estimated Fair Value		% of Total
AAA	$	173		0.8	%	$	5,454		24.4	%
AA+		—		0.0	%		11,003		49.3	%
AA		—		0.0	%		—		0.0	%
AA-		—		0.0	%		2,998		13.5	%
A+		—		0.0	%		—		0.0	%
A		—		0.0	%		—		0.0	%
NR		257		1.2	%		229		1.0	%
		430		2.0	%		19,684		88.2	%
NR- Short-term investments (a)		20,979		98.0	%		2,644		11.8	%
Total	$	21,409		100.0	%	$	22,328		100.0	%

(a) This amount relates to short-term investments and is therefore not a rated security.

     The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at June 30, 2011 and December 31, 2010 are shown by contractual maturity below. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

	June 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	21,133	$	21,152	$	17,093	$	17,095
Due after one year through five years		1,000		257		6,000		5,233
Total	$	22,133	$	21,409	$	23,093	$	22,328