Investments

6 Months Ended

Jun. 30, 2011

Investments [Abstract]

INVESTMENTS

5.   INVESTMENTS

Available-for-sale

The amortized cost and estimated fair values of the Company’s fixed maturity securities and short-term investments classified as available-for-sale were as follows:

					Gross
			Gross		Unrealized
			Unrealized		Holding
	Amortized		Holding		Losses			Fair
	Cost		Gain		Non-OTTI			Value
As at June 30, 2011
U.S. government and agency	$	36,618	$	673	$	(11	)	$	37,280
Non-U.S. government		182,641		12,617		(53	)		195,205
Corporate		541,111		19,515		(445	)		560,181
Residential mortgage-backed		17,059		345		(104	)		17,300
Commercial mortgage-backed		14,681		2,913		(175	)		17,419
Asset backed		25,174		489		(238	)		25,425
	$	817,284	$	36,552	$	(1,026	)	$	852,810

					Gross
			Gross		Unrealized
			Unrealized		Holding
	Amortized		Holding		Losses			Fair
	Cost		Gain		Non-OTTI			Value
As at December 31, 2010
U.S. government and agency	$	65,115	$	766	$	(92	)	$	65,789
Non-U.S. government		248,487		8,832		(314	)		257,005
Corporate		695,372		16,513		(1,615	)		710,270
Residential mortgage-backed		20,036		305		(234	)		20,107
Commercial mortgage-backed		19,667		2,083		(11	)		21,739
Asset backed		27,072		574		(346	)		27,300
	$	1,075,749	$	29,073	$	(2,612	)	$	1,102,210

The following tables summarize the Company’s fixed maturity securities and short-term investments classified as available-for-sale in an unrealized loss position as well as 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
As at June 30, 2011
U.S. government and agency	$	7,013	$	(11	)	$	—	$	—		$	7,013	$	(11	)
Non-U.S. government		—		—			6,364		(53	)		6,364		(53	)
Corporate		36,228		(246	)		18,402		(199	)		54,630		(445	)
Residential mortgage-backed		11,307		(103	)		38		(1	)		11,345		(104	)
Commercial mortgage-backed		—		—			1,638		(175	)		1,638		(175	)
Asset backed		10,662		(179	)		4,936		(59	)		15,598		(238	)
	$	65,210	$	(539	)	$	31,378	$	(487	)	$	96,588	$	(1,026	)

	12 Months or Greater					Less Than 12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
As at December 31, 2010
U.S. government and agency	$	801	$	—		$	22,976	$	(92	)	$	23,777	$	(92	)
Non-U.S. government		7,710		(32	)		31,128		(282	)		38,838		(314	)
Corporate		22,039		(318	)		107,735		(1,297	)		129,774		(1,615	)
Residential mortgage-backed		2,368		(168	)		11,274		(66	)		13,642		(234	)
Commercial mortgage-backed		530		(10	)		1,516		(1	)		2,046		(11	)
Asset backed		10,554		(346	)		87		—			10,641		(346	)
	$	44,002	$	(874	)	$	174,716	$	(1,738	)	$	218,718	$	(2,612	)

As at June 30, 2011 and December 31, 2010, the number of securities classified as available-for-sale in an unrealized loss position was 74 and 136, respectively, with a fair value of $96.6 million and $218.7 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 46 and 32, respectively. As of June 30, 2011, none of these securities were considered to be other than temporarily impaired. The Company has no intent to sell and it is not more likely than not that the Company will be required to sell these securities before their fair values recover above the adjusted cost. The unrealized losses from these securities were not as a result of credit, collateral or structural issues.

The contractual maturities of the Company’s fixed maturity securities and short-term investments classified as available-for-sale are shown below. Actual 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
As at June 30, 2011
Due in one year or less	$	346,170	$	356,636		41.8	%
Due after one year through five years		407,730		428,877		50.3	%
Due after five years through ten years		3,589		3,934		0.5	%
Due after ten years		2,881		3,219		0.4	%
		760,370		792,666		93.0	%
Residential mortgage-backed		17,059		17,300		2.0	%
Commercial mortgage-backed		14,681		17,419		2.0	%
Asset backed		25,174		25,425		3.0	%
	$	817,284	$	852,810		100.0	%

	Amortized		Fair		% of Total
	Cost		Value		Fair Value
As at December 31, 2010
Due in one year or less	$	373,683	$	379,203		34.4	%
Due after one year through five years		625,463		643,252		58.3	%
Due after five years through ten years		5,307		5,539		0.5	%
Due after ten years		4,521		5,070		0.5	%
		1,008,974		1,033,064		93.7	%
Residential mortgage-backed		20,036		20,107		1.8	%
Commercial mortgage-backed		19,667		21,739		2.0	%
Asset backed		27,072		27,300		2.5	%
	$	1,075,749	$	1,102,210		100.0	%

The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity securities and short-term investments classified as available-for-sale:

	Amortized		Fair		% of Total
	Cost		Value		Fair Value
As at June 30, 2011
AAA	$	295,445	$	313,744		36.8	%
AA		211,064		219,468		25.7	%
A		257,740		264,831		31.0	%
BBB or lower		52,655		54,254		6.4	%
Not Rated		380		513		0.1	%
	$	817,284	$	852,810		100.0	%

	Amortized		Fair		% of Total
	Cost		Value		Fair Value
As at December 31, 2010
AAA	$	405,682	$	416,526		37.8	%
AA		267,917		273,500		24.8	%
A		332,401		341,447		31.0	%
BBB or lower		69,359		70,274		6.4	%
Not Rated		390		463		0.0	%
	$	1,075,749	$	1,102,210		100.0	%

Trading

The estimated fair values of the Company’s investments in fixed maturity securities, short-term investments and equities classified as trading securities were as follows:

	June 30,		December 31,
	2011		2010
U.S. government and agency	$	174,422	$	162,014
Non-U.S. government		188,942		129,861
Corporate		927,237		637,114
Municipal		1,599		2,297
Residential mortgage-backed		77,713		82,399
Commercial mortgage-backed		37,638		17,102
Asset backed		10,619		1,313
Equities		65,890		60,082
	$	1,484,060	$	1,092,182

The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity securities and short-term investments classified as trading:

	Fair		% of Total
	Value		Fair Value
As at June 30, 2011
AAA	$	542,416		38.2	%
AA		265,877		18.7	%
A		509,512		36.0	%
BBB or lower		76,713		5.4	%
Not Rated		23,652		1.7	%
	$	1,418,170		100.0	%

	Fair		% of Total
	Value		Fair Value
As at December 31, 2010
AAA	$	395,881		38.4	%
AA		177,302		17.2	%
A		400,314		38.8	%
BBB or lower		51,983		5.0	%
Not Rated		6,620		0.6	%
	$	1,032,100		100.0	%

Other Investments

The estimated fair values of the Company’s other investments were as follows:

	June 30,		December 31,
	2011		2010
Private equities	$	118,682	$	104,109
Bond funds		106,779		102,279
Hedge fund		23,884		22,037
Other		6,274		6,289
	$	255,619	$	234,714

At June 30, 2011 and December 31, 2010, the Company had $118.7 million and $104.1 million, respectively, of other investments recorded in private equities, which represented 3.1% and 2.4% of total investments and cash and cash equivalents at June 30, 2011 and December 31, 2010, respectively. All of the Company’s investments in private equities are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short term. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. These investments are accounted for at estimated fair value determined by the Company’s proportionate share of the net asset value of the investee reduced by any impairment charges. As at June 30, 2011 and December 31, 2010, the Company had unfunded capital commitments relating to its other investments of $74.5 million and $84.7 million, respectively. See Note 12 for details of other investments with related parties.

Our bond fund holdings comprise a number of positions in diversified bond mutual funds managed by third-party managers.

Other-Than-Temporary Impairment Process

The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale represent impairments that are other-than-temporary by reviewing each fixed maturity investment that is impaired and: (1) determining if the Company has the intent to sell the fixed maturity investment or (2) determining if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated recovery; and (3) assessing 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 fixed maturity investment is less than the amortized cost basis of the investment.

The Company had no planned sales of its fixed maturity investments classified as available-for-sale as at June 30, 2011. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short-term investments and fixed maturity investments classified as available-for-sale in an unrealized gain position, and other relevant factors. For the six months ended June 30, 2011, the Company did not recognize any other-than-temporary impairments due to required sales.

In evaluating credit losses, the Company considers a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the fixed maturity investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the fixed maturity investment to make scheduled interest or principal payments.

Based on the factors described above, the Company determined that, as at June 30, 2011, no credit losses existed.

Fair Value of Financial Instruments

Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The Company uses a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:

•  Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

•  Level 2 — Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

•  Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own assumptions about assumptions that market participants might use.

The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.

Fixed Maturity Investments

The Company’s fixed maturity portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors. The Company uses inputs from nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of its fixed maturity investments. These pricing services include FT Interactive Data, Barclays Capital Aggregate Index (formerly Lehman Index), Reuters Pricing Service and others.

In general, the pricing services use observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmark curves, benchmarking of like securities, non-binding broker-dealer quotes, reported trades and sector groupings to determine the fair value. In addition, pricing services use valuation models, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset backed securities.

The following describes the techniques generally used to determine the fair value of the Company’s fixed maturities by asset class.

•  U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass- through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. The significant inputs include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

•  Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

•  Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at June 30, 2011, the Company had one corporate security classified as Level 3.

•  Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

•  Asset backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds, and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

•  Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds, and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at June 30, 2011, the Company had one commercial mortgage-backed security classified as Level 3.

To validate the techniques or models used by the pricing services, the Company compares the fair value estimates to its knowledge of the current market and challenges any prices deemed not to be representative of fair value.

As of June 30, 2011, there were no material differences between the prices obtained from the pricing services and the fair value estimates developed by the Company.

Equity Securities

The Company’s equity securities are managed by two external advisors. The Company uses nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of its equity securities. These pricing services include FT Interactive Data and others.

The Company has categorized all of its investments in common stock as Level 1 investments because the fair values of these securities are based on quoted prices in active markets for identical assets or liabilities. The Company has categorized all of its investments in preferred stock as Level 2 (except one which was categorized as Level 3) because their fair value estimates are based on observable market data. As at June 30, 2011 the Company did not have any investments in preferred stock categorized as Level 2.

Other Investments

For its investments in private equities, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. The Company’s private equity investments are mainly in the financial services industry. The fund advisors continue to evaluate the overall market environment, as well as specific areas in the financial services sector, in order to identify segments they believe will offer the most attractive investment opportunities. The financial statements of each fund generally are audited annually under U.S. GAAP, using fair value measurement for the underlying investments. For all publicly-traded companies within the funds, the Company has valued those investments based on the latest share price. The value of Affirmative Investment LLC (in which the Company owns a non-voting 7% membership interest) is based on the market value of the shares of Affirmative Insurance Holdings, Inc., a publicly-traded company.

All of the Company’s investments in private equities are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments in the short term. These restrictions have been in place since the initial investments. The capital commitments are discussed in detail in Note 12 to the unaudited condensed consolidated financial statements. The Company has classified private equities as Level 3 investments because they reflect the Company’s own judgment about the assumptions that market participants might use.

For its investment in the hedge fund, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. The adviser of the fund intends to seek attractive risk-adjusted total returns for the fund’s investors by acquiring, originating, and actively managing a diversified portfolio of debt securities, with a focus on various forms of asset backed securities and loans. The fund will focus on investments that the adviser believes to be fundamentally undervalued with current market prices that are believed to be compelling relative to intrinsic value. The units of account that are valued by the Company are its interests in the fund and not the underlying holdings of such fund. Thus, the inputs used by the Company to value its investment in the fund may differ from the inputs used to value the underlying holdings of such fund. The hedge fund is not currently eligible for redemption due to imposed lock-up periods of three years from the time of the initial investment. Once eligible, redemptions will be permitted quarterly with 90 days notice. There are no unfunded capital commitments in relation to the hedge fund. The investment in the fund is classified as Level 3 in the fair value hierarchy.

The bond funds in which the Company invests have been classified as Level 2 investments because their fair value is estimated using the net asset value reported by Bloomberg and they have daily liquidity.

Fair Value Measurements

In accordance with the provisions of the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification, the Company has categorized its investments that are recorded at fair value among levels as follows:

	June 30, 2011
	Quoted Prices in				Significant
	Active Markets		Significant Other		Unobservable
	for Identical Assets		Observable Inputs		Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value
U.S. government and agency	$	—	$	211,702	$	—	$	211,702
Non-U.S. government		—		384,147		—		384,147
Corporate		—		1,486,875		543		1,487,418
Municipal		—		1,599		—		1,599
Residential mortgage-backed		—		95,013		—		95,013
Commercial mortgage-backed		—		55,048		9		55,057
Asset backed		—		36,044		—		36,044
Equities		61,459		—		4,431		65,890
Other investments		—		106,779		148,840		255,619
Total investments	$	61,459	$	2,377,207	$	153,823	$	2,592,489

	December 31, 2010
	Quoted Prices in				Significant
	Active Markets		Significant Other		Unobservable
	for Identical Assets		Observable Inputs		Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value
U.S. government and agency	$	—	$	227,803	$	—	$	227,803
Non-U.S. government		—		386,866		—		386,866
Corporate		—		1,346,854		530		1,347,384
Municipal		—		2,297		—		2,297
Residential mortgage-backed		—		102,506		—		102,506
Commercial mortgage-backed		—		37,927		914		38,841
Asset backed		—		28,613		—		28,613
Equities		56,369		138		3,575		60,082
Other investments		—		102,279		132,435		234,714
Total investments	$	56,369	$	2,235,283	$	137,454	$	2,429,106

The following table presents 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 months ended June 30, 2011:

	Fixed
	Maturity			Other			Equity
	Investments			Investments			Securities		Total
Level 3 investments as of April 1, 2011	$	1,513		$	139,962		$	3,975	$	145,450
Purchases		—			6,407			—		6,407
Sales		(1,043	)		(1,617	)		—		(2,660	)
Total realized and unrealized gains (losses) through earnings		82			4,088			456		4,626
Net transfers in and/or (out) of Level 3		—			—			—		—
Level 3 investments as of June 30, 2011	$	552		$	148,840		$	4,431	$	153,823

The amount of net gains/(losses) for the three months ended June 30, 2011 included in earnings attributable to the fair value of changes in assets still held at June 30, 2011 was $3.9 million. Of this amount, $0.5 million was included in net realized and unrealized gains and $3.4 million was included in net investment income.

The following table presents 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 months ended June 30, 2010:

	Fixed
	Maturity		Other			Equity
	Investments		Investments			Securities			Total
Level 3 investments as of April 1, 2010	$	1,336	$	91,294		$	3,450		$	96,080
Net purchases (sales and distributions)		—		13,197			—			13,197
Total realized and unrealized gains (losses) through earnings		58		(412	)		(212	)		(566	)
Net transfers in and/or (out) of Level 3		—		—			—			—
Level 3 investments as of June 30, 2010	$	1,394	$	104,079		$	3,238		$	108,711

The amount of net gains/(losses) for the three months ended June 30, 2010 included in earnings attributable to the fair value of changes in assets still held at June 30, 2010 was $1.5 million. Of this amount, $(0.2) million was included in net realized and unrealized gains and $1.7 million was included in net investment income.

The following table presents 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 six months ended June 30, 2011:

	Fixed
	Maturity			Other			Equity
	Investments			Investments			Securities		Total
Level 3 investments as of January 1, 2011	$	1,444		$	132,435		$	3,575	$	137,454
Purchases		—			10,564			—		10,564
Sales		(1,043	)		(1,666	)		—		(2,709	)
Total realized and unrealized gains (losses) through earnings		151			7,507			856		8,514
Net transfers in and/or (out) of Level 3		—			—			—		—
Level 3 investments as of June 30, 2011	$	552		$	148,840		$	4,431	$	153,823

The amount of net gains/(losses) for the six months ended June 30, 2011 included in earnings attributable to the fair value of changes in assets still held at June 30, 2011 was $6.4 million. Of this amount, $1.0 million was included in net realized and unrealized gains and $5.4 million was included in net investment income.

The following table presents 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 six months ended June 30, 2010:

	Fixed
	Maturity		Other		Equity
	Investments		Investments		Securities			Total
Level 3 investments as of January 1, 2010	$	641	$	81,801	$	3,300		$	85,742
Net purchases (sales and distributions)		579		16,246		—			16,825
Total realized and unrealized gains (losses) through earnings		174		6,032		(62	)		6,144
Net transfers in and/or (out) of Level 3		—		—		—			—
Level 3 investments as of June 30, 2010	$	1,394	$	104,079	$	3,238		$	108,711

The amount of net gains/(losses) for the six months ended June 30, 2010 included in earnings attributable to the fair value of changes in assets still held at June 30, 2010 was $9.4 million. Of this amount, $0.1 million was included in net realized and unrealized gains and $9.3 million was included in net investment income.

During the six months ended June 30, 2011 and 2010, proceeds from the sales and maturities of available-for-sale securities were $262.0 million and $54.9 million, respectively. Gross realized gains on the sale of available-for-sale securities were, for the six months ended June 30, 2011 and 2010, $0.6 million and $0.1 million, respectively, and gross realized losses on the sale of available-for-sale securities, were $0.3 million and $nil, respectively. Net unrealized gains and (losses) on trading securities were $3.1 million and $(2.5) million as at June 30, 2011 and 2010, respectively.

Restricted Investments

The Company is required to maintain investments on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The investments held in trust as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted investments as of June 30, 2011 and December 31, 2010 was as follows:

	June 30,		December 31,
	2011		2010
Assets used for collateral in trust for third-party agreements	$	486,955	$	371,834
Deposits with regulatory authorities		35,317		33,970
Others		62,939		62,437
	$	585,211	$	468,241