Fair value measurements

Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources ("observable inputs") and a reporting entity's internal assumptions based upon the best information available when external market data is limited or unavailable ("unobservable inputs"). Quoted prices in active markets for identical assets or liabilities have the highest priority ("Level 1"), followed by observable inputs other than quoted prices, including prices for similar but not identical assets or liabilities ("Level 2"), and unobservable inputs, including the reporting entity's estimates of the assumptions that market participants would use, having the lowest priority ("Level 3").

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of the valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy. Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries Bills and Notes, equity securities, and short-term investments. Investments valued using Level 2 inputs are primarily comprised of fixed maturity investments, which have been disaggregated into classes, including U.S. government and government agency, corporate debt securities, mortgage-backed and asset-backed securities, non-U.S. government and government agency, U.S. state and municipalities and political subdivision and preferred stocks. Investments valued using Level 2 inputs also include certain exchange-traded funds that track U.S. stock indices such as the S&P 500 but are traded on foreign exchanges. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Sirius Group determines when transfers between levels have occurred as of the beginning of the period.

Valuation techniques

Sirius Group uses outside pricing services to assist in determining fair values for its investments. For investments in active markets, Sirius Group uses the quoted market prices provided by outside pricing services to determine fair value. The outside pricing services Sirius Group uses have indicated that they will only provide prices where observable inputs are available. In circumstances where quoted market prices are unavailable or are not considered reasonable, Sirius Group estimates the fair value using industry standard pricing models and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, prepayment speeds, reference data including research publications, and other relevant inputs. Given that many fixed maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity investments vary by asset type and take into account market convention.

The valuation process above is generally applicable to all of Sirius Group's fixed maturity investments. The techniques and inputs specific to asset classes within Sirius Group's fixed maturity investments for Level 2 securities that use observable inputs are as follows:

U.S. government and government agency

U.S. government and government agency securities consist primarily of debt 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 the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate 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 that incorporate option-adjusted spreads and other daily interest rate data.

Non-U.S. government and government agency

Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services that 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.

Corporate debt securities

Corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. and non-U.S. corporate issuers and industries. The 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 that may influence risk.

Mortgage-backed and asset-backed securities

The fair value of mortgage and asset-backed securities is primarily priced by pricing services using a pricing model that utilizes information from market sources and leveraging similar securities. Key inputs include benchmark yields, reported trades, underlying tranche cash flow data and collateral performance, plus new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including issuer, vintage, loan type, collateral attributes, prepayment speeds, default rates, recovery rates, cash flow stress testing, credit quality ratings, and market research publications.

U.S. states, municipalities and political subdivisions

The U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above.

Preferred stocks

The fair value of preferred stocks is generally priced by independent pricing services using an evaluated pricing model that calculates the appropriate spread over a comparable security for each issue. Key inputs include exchange prices (underlying and common stock of the same issuer), benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings, duration, credit enhancements, early redemption features, and market research publications.

Level 3 Investments

Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable assumptions reflect Sirius Group's assumptions about what market participants would use in valuing the investment. Generally, certain securities may start out as Level 3 when they are originally issued but, as observable inputs become available in the market, they may be reclassified to Level 2.

Sirius Group employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing the audited annual financial statements of hedge funds and private equity funds and periodically discussing each fund's pricing with the fund manager. However, since the fund managers do not provide sufficient information to evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable.

The fair values of Sirius Group's investments in private equity securities and private debt instruments have been classified as Level 3 measurements. They are carried at fair value and are initially valued based on transaction price. Their valuation is subsequently estimated based on available evidence such as a market transaction in similar instruments and other financial information for the issuer.

Investments measured using Net Asset Value

The fair value of Sirius Group's investments in hedge funds and private equity funds has been determined using net asset value ("NAV"). The hedge fund's administrator provides quarterly updates of fair value in the form of Sirius Group's proportional interest in the underlying fund's NAV, which is deemed to approximate fair value, generally with a three month delay in valuation. The fair value of investment in hedge funds is measured using the NAV practical expedient and therefore has been not categorized within the fair value hierarchy. The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation. These private equity investments vary in investment strategies and are not actively traded in any open markets. Due to a lag in reporting, some of the fund managers, fund administrators, or both, are unable to provide final fund valuations as of the Company's reporting date. In these circumstances, Sirius Group estimates the return of the current period and uses all credible information available. This includes utilizing preliminary estimates reported by its fund managers and using other information that is available to Sirius Group with respect to the underlying investments, as necessary.

Fair Value Measurements by Level

The following tables summarize Sirius Group's financial assets and liabilities measured at fair value as of March 31, 2020 and December 31, 2019 by level:



	March 31, 2020
(Millions)	Fair Value			Level 1 Inputs			Level 2 Inputs		Level 3 Inputs
Assets measured at fair value
Fixed maturity investments:
U.S. Government and government agency	$	128.2		$	127.1		$	1.1	$	—
Corporate debt securities	444.3			—			444.3		—
Residential mortgage-backed securities	471.9			—			471.9		—
Asset-backed securities	524.4			—			524.4		—
Commercial mortgage-backed securities	94.3			—			94.3		—
Non-U.S. government and government agency	60.8			29.7			31.1		—
Preferred stocks	6.5			—			3.9		2.6
U.S. States, municipalities, and political subdivision	1.7			—			1.7		—
Total fixed maturity investments	1,732.1			156.8			1,572.7		2.6
Equity securities:
Fixed income mutual funds	192.1			192.1			—		—
Common stocks	184.4			184.4			—		—
Other equity securities⁽¹⁾	(9.9		)	(11.6		)	1.7		—
Total equity securities	366.6			364.9			1.7		—
Short-term investments	1,041.8			1,019.5			22.3		—
Other long-term investments⁽²⁾	75.9			—			—		75.9
Total investments	$	3,216.4		$	1,541.2		$	1,596.7	$	78.5
Loan participation	19.9			—			—		19.9
Derivative instruments	11.7			1.0			—		10.7
Total assets measured at fair value	$	3,248.0		$	1,542.2		$	1,596.7	$	109.1
Liabilities measured at fair value
Contingent consideration liabilities	$	28.3		$	—		$	—	$	28.3
Derivative instruments	20.4			0.8			—		19.6
Total liabilities measured at fair value	$	48.7		$	0.8		$	—	$	47.9

⁽¹⁾Sirius Group engaged in short selling of certain equity securities for which settlement was pending as of March 31, 2020.

⁽²⁾Excludes fair value of $279.6 associated with hedge funds and private equity funds which fair value is measured using NAV practical expedient.



	December 31, 2019
(Millions)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Assets measured at fair value
Fixed maturity investments:
U.S. Government and government agency	$	110.5	$	109.1	$	1.4	$	—
Corporate debt securities	474.1		—		474.1		—
Asset-backed securities	486.8		—		486.8		—
Residential mortgage-backed securities	438.9		—		438.9		—
Commercial mortgage-backed securities	89.0		—		89.0		—
Non-U.S. government and government agency	63.0		31.7		31.3		—
Preferred stocks	17.0		—		—		17.0
U.S. States, municipalities, and political subdivision	1.7		—		1.7		—
Total fixed maturity investments	1,681.0		140.8		1,523.2		17.0
Equity securities:
Fixed income mutual funds	175.3		175.3		—		—
Common stocks	228.1		228.1		—		—
Other equity securities	1.8		—		1.8		—
Total equity securities	405.2		403.4		1.8		—
Short-term investments	1,085.2		1,073.7		11.5		—
Other long-term investments⁽¹⁾	77.8		—		—		77.8
Total investments	$	3,249.2	$	1,617.9	$	1,536.5	$	94.8
Loan participation	20.0		—		—		20.0
Derivative instruments	11.4		1.3		—		10.1
Total assets measured at fair value	$	3,280.6	$	1,619.2	$	1,536.5	$	124.9
Liabilities measured at fair value
Contingent consideration liabilities	$	28.2	$	—	$	—	$	28.2
Derivative instruments	9.5		0.2		—		9.3
Total liabilities measured at fair value	$	37.7	$	0.2	$	—	$	37.5

⁽¹⁾Excludes fair value of $269.0 associated with hedge funds and private equity funds which fair value is measured using NAV practical expedient.

Rollforward of Level 3 fair value measurements

The following tables present changes in Level 3 for financial instruments measured at fair value for the three months ended March 31, 2020 and March 31, 2019:



	For the three months ended March 31, 2020
(Millions)	Fixed Maturities			Other long-term investments⁽¹⁾			Loan Participation			Derivative instruments assets & (liabilities)			Contingent consideration (liabilities)
Balance as of January 1, 2020	$	17.0		$	77.8		$	20.0		$	0.8		$	(28.2	)
Total realized and unrealized gains (losses)	2.6			(0.9		)	—			(13.3		)	(0.1		)
Foreign currency gains (losses) through Other Comprehensive Income	—			(1.0		)	—			—			—
Purchases	—			—			—			—			—
Sales/Settlements	(17.0		)	—			(0.1		)	3.6			—
Balance as of March 31, 2020	$	2.6		$	75.9		$	19.9		$	(8.9	)	$	(28.3	)

⁽¹⁾Excludes fair value of $279.6 associated with hedge funds and private equity funds which fair value is measured using NAV practical expedient.



	For the three months ended March 31, 2019
(Millions)	Fixed Maturities			Other long-term investments⁽¹⁾			Loan Participation		Derivative instruments assets & (liabilities)			Contingent consideration (liabilities)
Balance as of January 1, 2019	$	5.4		$	63.6		$	—	$	(0.5	)	$	(28.8	)
Total realized and unrealized gains (losses)	—			9.3			—		(5.1		)	—
Foreign currency gains (losses) through Other Comprehensive Income	—			(0.7		)	—		—			—
Purchases	—			15.8			—		—			—
Sales/Settlements	(5.4		)	—			—		0.8			—
Balance as of March 31, 2019	$	—		$	88.0		$	—	$	(4.8	)	$	(28.8	)

⁽¹⁾Excludes fair value of $301.7 associated with hedge funds and private equity funds which fair value is measured using NAV practical expedient.

Fair value measurements – transfers between levels

There were no transfers between Level 3 and Level 2 measurements during the three months ended March 31, 2020 and 2019.

Significant Unobservable Inputs

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments as of March 31, 2020 and December 31, 2019, and includes only those instruments for which information about the inputs is reasonably available to Sirius Group, such as data from independent third-party valuation service providers and from internal valuation models.



(Millions, except share prices)	March 31, 2020
Description	Valuation Technique(s)	Fair value			Unobservable input
Private equity securities⁽¹⁾	Share price of recent transaction	$	32.5		Purchase share price	40.6
Loan participation⁽¹⁾	Purchase price of recent transaction	$	19.9		Comparable yields	Range - 4.46% - 7.25% Median - 5.75%
Preferred stock⁽¹⁾	Share price of recent transaction	$	17.5		Purchase price	7.74
Private equity securities⁽¹⁾	Multiple of GAAP book value	$	13.3		Book value multiple	Range - 0.73x-0.91x Median - 0.82x
Private debt instrument⁽¹⁾	Discounted cash flow	$	6.2		Discount yield	Range - 11.87% - 12.32% Median - 12.08%
Private equity securities⁽¹⁾	Purchase price of recent transaction	$	5.1		Purchase price	7.74
Currency swaps⁽²⁾	Third party appraisal	$	2.4		Broker quote	$	2.4
Preferred stock⁽¹⁾	Purchase price of recent transaction	$	1.9		Purchase price	$	1.9
Currency forwards⁽²⁾	Third party appraisal	$	1.7		Broker quote	$	1.7
Private equity securities⁽¹⁾	Purchase price of recent transaction	$	1.0		Purchase price	$	10.0
Equity warrants⁽²⁾	Option pricing model	$	0.9		Strike price	$	0.2
Preferred stock⁽¹⁾	Purchase price of recent transaction	$	0.7		Purchase price	$	0.70
Private equity securities⁽¹⁾	Purchase price of recent transaction	$	0.3		Purchase price	$	0.3
Weather derivatives⁽²⁾	Third party appraisal	$	(13.9	)	Broker quote	$	(13.9	)
Contingent consideration	External valuation model	$	(28.3	)	Discounted future payments	$	(28.3	)

⁽¹⁾As of March 31, 2020, each asset type consists of one security.

⁽²⁾See Note 12 for discussion of derivative instruments.



(Millions, except share prices)	December 31, 2019
Description	Valuation Technique(s)	Fair value			Unobservable input
Private equity securities⁽¹⁾	Share price of recent transaction	$	32.5		Purchase share price	$	40.6
Loan participation⁽¹⁾	Purchase price of recent transaction	$	20.0		Purchase price	20.0
Preferred stock⁽¹⁾	Share price of recent transaction	$	17.5		Purchase price	$	7.74
Private equity securities⁽¹⁾	Multiple of GAAP book value	$	14.2		Book value multiple	0.9
Preferred stock⁽¹⁾	Purchase price of recent transaction	$	12.2		Purchase price	$	12.2
Private debt instrument⁽¹⁾	Purchase price of recent transaction	$	7.2		Purchase price	$	9.0
Weather derivatives⁽²⁾	Third party appraisal	$	7.0		Broker quote	$	7.0
Private equity security⁽¹⁾	Purchase price of recent transaction	$	5.1		Purchase price	$	7.74
Preferred stock⁽¹⁾	Purchase price of recent transaction	$	4.8		Purchase price	$	4.80
Currency forwards⁽²⁾	Third party appraisal	$	2.7		Broker quote	$	2.7
Private equity securities⁽¹⁾	Purchase price of recent transaction	$	1.0		Purchase price	$	10.0
Equity warrants⁽²⁾	Option pricing model	$	0.4		Strike price	$	0.2
Private equity securities⁽¹⁾	Purchase price of recent transaction	$	0.3		Purchase price	$	0.3
Currency swaps⁽²⁾	Third party appraisal	$	(3.6	)	Broker quote	$	(3.6	)
Currency forwards⁽²⁾	Third party appraisal	$	(5.7	)	Broker quote	$	(5.7	)
Contingent consideration	External valuation model	$	(28.2	)	Discounted future payments	$	(28.2	)

⁽¹⁾As of December 31, 2019, each asset type consists of one security.

⁽²⁾See Note 12 for discussion of derivative instruments.

Financial instruments disclosed, but not carried at fair value

Sirius Group uses various financial instruments in the normal course of its business. The carrying values of Cash, Accrued investment income, certain other assets, Accounts payable on unsettled investment purchases, certain other liabilities, and other financial instruments not included in the table below approximated their fair values at March 31, 2020 and December 31, 2019, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 3. The following table includes financial instruments for which the carrying value differs from the estimated fair values at March 31, 2020 and December 31, 2019:



	March 31, 2020				December 31, 2019
(Millions)	Fair Value⁽¹⁾		Carrying Value		Fair Value⁽¹⁾		Carrying Value
Liabilities, Mezzanine equity, and Non-controlling interest:
2017 SEK Subordinated Notes	$	268.3	$	270.6	$	294.5	$	291.2
2016 SIG Senior Notes	$	394.9	$	394.2	$	394.5	$	394.0
Series B preference shares	$	171.4	$	205.0	$	186.4	$	223.0

⁽¹⁾Fair value estimated by internal pricing and considered a Level 3 measurement.