Q1 2015 10-Q
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
¨        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31721
AXIS CAPITAL HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of incorporation or organization)
98-0395986
(I.R.S. Employer Identification No.)
92 Pitts Bay Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x  Accelerated filer  ¨   Non-accelerated filer  ¨  Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x
As of April 24, 2015, there were 100,928,728 Common Shares, $0.0125 par value per share, of the registrant outstanding.


Table of Contents




AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q


 
 
 
Page
 
PART I
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
PART II
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 



2
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PART I
FINANCIAL INFORMATION
This quarterly report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report may include information regarding our estimates of losses related to catastrophes and other large losses, measurements of potential losses in the fair value of our investment portfolio and derivative contracts, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity prices, credit spreads and foreign currency rates. Forward-looking statements only reflect our expectations and are not guarantees of performance.
These statements involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following: 
•
the occurrence and magnitude of natural and man-made disasters,
•
actual claims exceeding our loss reserves,
•
general economic, capital and credit market conditions,
•
the failure of any of the loss limitation methods we employ,
•
the effects of emerging claims, coverage and regulatory issues, including uncertainty related to coverage definitions, limits, terms and conditions,
•
the failure of our cedants to adequately evaluate risks,
•
inability to obtain additional capital on favorable terms, or at all,
•
the loss of one or more key executives,
•
a decline in our ratings with rating agencies,
•
loss of business provided to us by our major brokers,
•
changes in accounting policies or practices,
•
the use of industry catastrophe models and changes to these models,
•
changes in governmental regulations,
•
increased competition,
•
changes in the political environment of certain countries in which we operate or underwrite business,
•
fluctuations in interest rates, credit spreads, equity prices and/or currency values,
•
the failure to complete our amalgamation with PartnerRe Ltd., and
•
the other matters set forth under Item 1A, ‘Risk Factors’ and Item 7, ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ included in our Annual Report on Form 10-K for the year ended December 31, 2014.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.




3
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ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page  
 
 
Consolidated Balance Sheets at March 31, 2015 (Unaudited) and December 31, 2014
Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (Unaudited)
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (Unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2015 and 2014 (Unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Accounting Policies
Note 2 - Segment Information
Note 3 - Investments
Note 4 - Fair Value Measurements
Note 5 - Derivative Instruments
Note 6 - Reserve for Losses and Loss Expenses
Note 7 - Share-Based Compensation
Note 8 - Earnings Per Common Share
Note 9 - Shareholders' Equity
Note 10 - Noncontrolling Interests
Note 11 - Debt and Financing Arrangements
Note 12 - Commitments and Contingencies
Note 13 - Other Comprehensive Income
Note 14 - Subsequent Events






4
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2015 (UNAUDITED) AND DECEMBER 31, 2014
 
 
2015
 
2014
 
(in thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available for sale, at fair value
(Amortized cost 2015: $12,012,633; 2014: $12,185,973)
$
12,012,894

 
$
12,129,273

Equity securities, available for sale, at fair value
(Cost 2015: $572,317; 2014: $531,648)
601,329

 
567,707

Other investments, at fair value
939,006

 
965,465

Short-term investments, at fair value and amortized cost
38,373

 
107,534

Total investments
13,591,602

 
13,769,979

Cash and cash equivalents
996,596

 
921,830

Restricted cash and cash equivalents
273,496

 
287,865

Accrued interest receivable
79,706

 
83,070

Insurance and reinsurance premium balances receivable
2,241,875

 
1,808,620

Reinsurance recoverable on unpaid and paid losses
1,921,311

 
1,926,145

Deferred acquisition costs
616,966

 
466,987

Prepaid reinsurance premiums
357,042

 
351,441

Receivable for investments sold
13,432

 
169

Goodwill and intangible assets
88,508

 
88,960

Other assets
278,285

 
250,670

Total assets
$
20,458,819

 
$
19,955,736

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
9,443,222

 
$
9,596,797

Unearned premiums
3,293,952

 
2,735,376

Insurance and reinsurance balances payable
266,789

 
249,186

Senior notes
991,045

 
990,790

Payable for investments purchased
196,526

 
188,176

Other liabilities
221,050

 
315,471

Total liabilities
14,412,584

 
14,075,796

 
 
 
 
Shareholders’ equity
 
 
 
Preferred shares
627,843

 
627,843

Common shares (2015: 176,190; 2014: 175,478 shares issued and
2015: 100,219; 2014: 99,426 shares outstanding)
2,200

 
2,191

Additional paid-in capital
2,287,065

 
2,285,016

Accumulated other comprehensive loss
(17,070
)
 
(45,574
)
Retained earnings
5,842,239

 
5,715,504

Treasury shares, at cost (2015: 75,971; 2014: 76,052 shares)
(2,765,114
)
 
(2,763,859
)
Total shareholders’ equity attributable to AXIS Capital
5,977,163

 
5,821,121

Noncontrolling interests
69,072

 
58,819

Total shareholders’ equity
6,046,235

 
5,879,940

 
 
 
 
Total liabilities and shareholders’ equity
$
20,458,819

 
$
19,955,736



See accompanying notes to Consolidated Financial Statements.

5
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

 
Three months ended
 
2015
 
2014
 
(in thousands, except for per share amounts)
Revenues
 
 
 
Net premiums earned
$
906,222

 
$
945,949

Net investment income
92,110

 
82,744

Other insurance related income
7,676

 
3,082

Net realized investment gains (losses):
 
 
 
Other-than-temporary impairment (OTTI) losses
(17,568
)
 
(786
)
Other realized investment gains (losses)
(24,985
)
 
11,406

Total net realized investment gains (losses)
(42,553
)
 
10,620

Total revenues
963,455

 
1,042,395

 
 
 
 
Expenses
 
 
 
Net losses and loss expenses
518,937

 
544,207

Acquisition costs
171,702

 
172,036

General and administrative expenses
163,517

 
152,729

Foreign exchange losses (gains)
(63,220
)
 
4,233

Interest expense and financing costs
12,257

 
16,594

Total expenses
803,193

 
889,799

 
 
 
 
Income before income taxes
160,262

 
152,596

Income tax expense (benefit)
(690
)
 
4,125

Net income
160,952

 
148,471

Amounts attributable to (from) noncontrolling interests
(4,873
)
 
1,222

Net income attributable to AXIS Capital
165,825

 
147,249

Preferred share dividends
10,022

 
10,022

Net income available to common shareholders
$
155,803

 
$
137,227

 
 
 
 
Per share data
 
 
 
Net income per common share:
 
 
 
Basic net income
$
1.56

 
$
1.26

Diluted net income
$
1.54

 
$
1.24

Weighted average number of common shares outstanding - basic
99,910

 
109,053

Weighted average number of common shares outstanding - diluted
101,139

 
110,391

Cash dividends declared per common share
$
0.29

 
$
0.27




See accompanying notes to Consolidated Financial Statements.

6
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
 
 
Three months ended
 
2015
 
2014
 
(in thousands)
Net income
$
160,952

 
$
148,471

Other comprehensive income, net of tax:
 
 
 
Available for sale investments:
 
 
 
Unrealized gains (losses) arising during the period
(5,187
)
 
71,383

Adjustment for reclassification of net realized investment gains (losses) and OTTI losses recognized in net income
45,104

 
(9,613
)
Unrealized gains arising during the period, net of reclassification adjustment
39,917

 
61,770

Foreign currency translation adjustment
(13,278
)
 
2,659

Total other comprehensive income, net of tax
26,639

 
64,429

Comprehensive income
187,591

 
212,900

Amounts attributable (to) from noncontrolling interests
6,738

 
(1,222
)
Comprehensive income attributable to AXIS Capital
$
194,329

 
$
211,678




See accompanying notes to Consolidated Financial Statements.

7
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
 
2015
 
2014
 
(in thousands)
Preferred shares
 
 
 
Balance at beginning and end of period
$
627,843

 
$
627,843

 
 
 
 
Common shares (par value)
 
 
 
Balance at beginning of period
2,191

 
2,174

Shares issued
9

 
14

Balance at end of period
2,200

 
2,188

 
 
 
 
Additional paid-in capital
 
 
 
Balance at beginning of period
2,285,016

 
2,240,125

Shares issued - common shares
2,294

 
1,861

Cost of treasury shares reissued
(13,517
)
 
(8,128
)
Stock options exercised
560

 
392

Share-based compensation expense
12,712

 
12,852

Balance at end of period
2,287,065

 
2,247,102

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period
(45,574
)
 
117,825

Unrealized gains (losses) on available for sale investments, net of tax:
 
 
 
Balance at beginning of period
(28,192
)
 
124,945

Unrealized gains arising during the period, net of reclassification adjustment
39,917

 
61,770

Non-credit portion of OTTI losses
—

 
—

Balance at end of period
11,725

 
186,715

Cumulative foreign currency translation adjustments, net of tax:
 
 
 
Balance at beginning of period
(17,382
)
 
(7,120
)
Foreign currency translation adjustments
(13,278
)
 
2,659

Amounts attributable from noncontrolling interests
1,865

 
—

Balance at end of period
(28,795
)
 
(4,461
)
Balance at end of period
(17,070
)
 
182,254

 
 
 
 
Retained earnings
 
 
 
Balance at beginning of period
5,715,504

 
5,062,706

Net income
160,952

 
148,471

Amounts attributable (to) from noncontrolling interests
4,873

 
(1,222
)
Preferred share dividends
(10,022
)
 
(10,022
)
Common share dividends
(29,068
)
 
(28,985
)
Balance at end of period
5,842,239

 
5,170,948

 
 
 
 
Treasury shares, at cost
 
 
 
Balance at beginning of period
(2,763,859
)
 
(2,232,711
)
Shares repurchased for treasury
(14,772
)
 
(178,703
)
Cost of treasury shares reissued
13,517

 
8,128

Balance at end of period
(2,765,114
)
 
(2,403,286
)
 
 
 
 
Total shareholders’ equity attributable to AXIS Capital
5,977,163

 
5,827,049

Noncontrolling interests
69,072

 
51,222

Total shareholders' equity
$
6,046,235

 
$
5,878,271

 
 
 
 

See accompanying notes to Consolidated Financial Statements.

8
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
 
2015
 
2014
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
160,952

 
$
148,471

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Net realized investment losses (gains)
42,553

 
(10,620
)
Net realized and unrealized gains on other investments
(30,935
)
 
(16,759
)
Amortization of fixed maturities
31,372

 
30,919

Other amortization and depreciation
6,581

 
15,889

Share-based compensation expense, net of cash payments
4,834

 
8,700

Changes in:
 
 
 
Accrued interest receivable
3,101

 
7,626

Reinsurance recoverable balances
(10,133
)
 
18,305

Deferred acquisition costs
(149,947
)
 
(178,170
)
Prepaid reinsurance premiums
(6,926
)
 
31,308

Reserve for loss and loss expenses
(127,224
)
 
85,312

Unearned premiums
559,479

 
685,778

Insurance and reinsurance balances, net
(415,909
)
 
(630,861
)
Other items
(95,778
)
 
(44,630
)
Net cash provided by (used in) operating activities
(27,980
)
 
151,268

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of:
 
 
 
Fixed maturities
(3,036,497
)
 
(3,298,375
)
Equity securities
(41,239
)
 
(73,197
)
Other investments
(21,418
)
 
(19,850
)
Short-term investments
(14,513
)
 
(420,115
)
Proceeds from the sale of:
 
 
 
Fixed maturities
2,823,044

 
3,092,006

Equity securities
522

 
73,694

Other investments
78,812

 
76,657

Short-term investments
79,657

 
154,603

Proceeds from redemption of fixed maturities
280,864

 
279,815

Proceeds from redemption of short-term investments
4,632

 
14,548

Purchase of other assets
(4,647
)
 
(19,152
)
Change in restricted cash and cash equivalents
14,369

 
(24,405
)
Net cash provided by (used in) investing activities
163,586

 
(163,771
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Sales of shares to noncontrolling interests
56,991

 
—

Return of capital to noncontrolling interests
(40,000
)
 
—

Dividends paid - common shares
(30,103
)
 
(29,562
)
Repurchase of common shares
(22,581
)
 
(162,536
)
Dividends paid - preferred shares
(10,022
)
 
(10,022
)
Proceeds from issuance of common shares
2,863

 
2,266

Net proceeds from issuance of senior notes
—

 
494,344

Net cash provided by (used in) financing activities
(42,852
)
 
294,490

 
 
 
 
Effect of exchange rate changes on foreign currency cash and cash equivalents
(17,988
)
 
441

Increase in cash and cash equivalents
74,766

 
282,428

Cash and cash equivalents - beginning of period
921,830

 
923,326

Cash and cash equivalents - end of period
$
996,596

 
$
1,205,754

 
 
 
 

See accompanying notes to Consolidated Financial Statements.

9

Table of Contents
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES 

Basis of Presentation

These interim consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (herein referred to as “we,” “us,” “our,” or the “Company”).

The consolidated balance sheet at March 31, 2015 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended March 31, 2015 and 2014 have not been audited. The balance sheet at December 31, 2014 is derived from our audited financial statements.

These financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission's (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.

The following information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars.

Significant Accounting Policies

There were no notable changes in our significant accounting policies subsequent to our Annual Report on Form 10-K for the year ended December 31, 2014.



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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2.
SEGMENT INFORMATION

Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. Therefore we have determined that we have two reportable segments, insurance and reinsurance. We do not allocate our assets by segment, with the exception of goodwill and intangible assets, as we evaluate the underwriting results of each segment separately from the results of our investment portfolio.

The following tables summarize the underwriting results of our reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
 
  
2015
 
2014
 
 
Three months ended and at March 31,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
602,724

 
$
1,076,208

 
$
1,678,932

 
$
601,721

 
$
1,219,678

 
$
1,821,399

 
 
Net premiums written
436,740

 
1,026,812

 
1,463,552

 
456,692

 
1,207,892

 
1,664,584

 
 
Net premiums earned
447,467

 
458,755

 
906,222

 
449,214

 
496,735

 
945,949

 
 
Other insurance related income
—

 
7,676

 
7,676

 
—

 
3,082

 
3,082

 
 
Net losses and loss expenses
(285,773
)
 
(233,164
)
 
(518,937
)
 
(279,423
)
 
(264,784
)
 
(544,207
)
 
 
Acquisition costs
(64,455
)
 
(107,247
)
 
(171,702
)
 
(65,057
)
 
(106,979
)
 
(172,036
)
 
 
General and administrative expenses
(87,689
)
 
(39,656
)
 
(127,345
)
 
(87,946
)
 
(36,076
)
 
(124,022
)
 
 
Underwriting income
$
9,550

 
$
86,364

 
95,914

 
$
16,788

 
$
91,978

 
108,766

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
(36,172
)
 
 
 
 
 
(28,707
)
 
 
Net investment income
 
 
 
 
92,110

 
 
 
 
 
82,744

 
 
Net realized investment gains (losses)
 
 
 
 
(42,553
)
 
 
 
 
 
10,620

 
 
Foreign exchange (losses) gains
 
 
 
 
63,220

 
 
 
 
 
(4,233
)
 
 
Interest expense and financing costs
 
 
 
 
(12,257
)
 
 
 
 
 
(16,594
)
 
 
Income before income taxes
 
 
 
 
$
160,262

 
 
 
 
 
$
152,596

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss and loss expense ratio
63.9
%
 
50.8
%
 
57.3
%
 
62.2
%
 
53.3
%
 
57.5
%
 
 
Acquisition cost ratio
14.4
%
 
23.4
%
 
18.9
%
 
14.5
%
 
21.5
%
 
18.2
%
 
 
General and administrative expense ratio
19.6
%
 
8.6
%
 
18.1
%
 
19.6
%
 
7.3
%
 
16.2
%
 
 
Combined ratio
97.9
%
 
82.8
%
 
94.3
%
 
96.3
%
 
82.1
%
 
91.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
88,508

 
$
—

 
$
88,508

 
$
90,350

 
$
—

 
$
90,350

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 




11
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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
Cost or
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit
OTTI
in AOCI(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,490,502

 
$
9,183

 
$
(5,528
)
 
$
1,494,157

 
$
—

 
 
Non-U.S. government
932,741

 
7,041

 
(66,685
)
 
873,097

 
—

 
 
Corporate debt
4,549,974

 
58,133

 
(73,829
)
 
4,534,278

 
—

 
 
Agency RMBS(1)
2,150,598

 
51,061

 
(1,416
)
 
2,200,243

 
—

 
 
CMBS(2)
1,111,327

 
21,219

 
(1,223
)
 
1,131,323

 
—

 
 
Non-Agency RMBS
77,185

 
2,560

 
(1,744
)
 
78,001

 
(865
)
 
 
ABS(3)
1,500,493

 
3,438

 
(8,102
)
 
1,495,829

 
—

 
 
Municipals(4)
199,813

 
6,649

 
(496
)
 
205,966

 
—

 
 
Total fixed maturities
$
12,012,633

 
$
159,284

 
$
(159,023
)
 
$
12,012,894

 
$
(865
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Exchange-traded funds
453,978

 
46,224

 
(2,155
)
 
498,047

 
 
 
 
Non-U.S. bond mutual funds
118,339

 
—

 
(15,057
)
 
103,282

 
 
 
 
Total equity securities
$
572,317

 
$
46,224

 
$
(17,212
)
 
$
601,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,645,068

 
$
3,337

 
$
(28,328
)
 
$
1,620,077

 
$
—

 
 
Non-U.S. government
1,080,601

 
7,383

 
(54,441
)
 
1,033,543

 
—

 
 
Corporate debt
4,386,432

 
40,972

 
(66,280
)
 
4,361,124

 
—

 
 
Agency RMBS(1)
2,241,581

 
40,762

 
(4,235
)
 
2,278,108

 
—

 
 
CMBS(2)
1,085,618

 
13,289

 
(2,019
)
 
1,096,888

 
—

 
 
Non-Agency RMBS
71,236

 
2,765

 
(915
)
 
73,086

 
(889
)
 
 
ABS(3)
1,475,026

 
2,748

 
(16,188
)
 
1,461,586

 
—

 
 
Municipals(4)
200,411

 
5,282

 
(832
)
 
204,861

 
—

 
 
Total fixed maturities
$
12,185,973

 
$
116,538

 
$
(173,238
)
 
$
12,129,273

 
$
(889
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Exchange-traded funds
416,063

 
43,583

 
(4,756
)
 
454,890

 
 
 
 
Non-U.S. bond mutual funds
115,585

 
—

 
(2,768
)
 
112,817

 
 
 
 
Total equity securities
$
531,648

 
$
43,583

 
$
(7,524
)
 
$
567,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 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 funds) and CLO equity tranched



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
INVESTMENTS (CONTINUED)

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
Cost
 
Fair
Value
 
% of Total
Fair Value
 
 
 
 
 
 
 
 
 
 
At March 31, 2015
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
508,448

 
$
503,179

 
4.2
%
 
 
Due after one year through five years
4,387,194

 
4,349,800

 
36.2
%
 
 
Due after five years through ten years
2,042,045

 
2,016,713

 
16.8
%
 
 
Due after ten years
235,343

 
237,806

 
2.0
%
 
 
 
7,173,030

 
7,107,498

 
59.2
%
 
 
Agency RMBS
2,150,598

 
2,200,243

 
18.3
%
 
 
CMBS
1,111,327

 
1,131,323

 
9.4
%
 
 
Non-Agency RMBS
77,185

 
78,001

 
0.6
%
 
 
ABS
1,500,493

 
1,495,829

 
12.5
%
 
 
Total
$
12,012,633

 
$
12,012,894

 
100.0
%
 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
424,077

 
$
423,265

 
3.5
%
 
 
Due after one year through five years
4,925,780

 
4,892,411

 
40.3
%
 
 
Due after five years through ten years
1,755,248

 
1,695,641

 
14.0
%
 
 
Due after ten years
207,407

 
208,288

 
1.7
%
 
 
 
7,312,512

 
7,219,605

 
59.5
%
 
 
Agency RMBS
2,241,581

 
2,278,108

 
18.8
%
 
 
CMBS
1,085,618

 
1,096,888

 
9.0
%
 
 
Non-Agency RMBS
71,236

 
73,086

 
0.6
%
 
 
ABS
1,475,026

 
1,461,586

 
12.1
%
 
 
Total
$
12,185,973

 
$
12,129,273

 
100.0
%
 
 
 
 
 
 
 
 
 




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
INVESTMENTS (CONTINUED)

 Gross Unrealized Losses

The following table summarizes 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
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
94,248

 
$
(4,525
)
 
$
329,487

 
$
(1,003
)
 
$
423,735

 
$
(5,528
)
 
 
Non-U.S. government
112,581

 
(31,924
)
 
349,284

 
(34,761
)
 
461,865

 
(66,685
)
 
 
Corporate debt
53,901

 
(5,679
)
 
1,263,181

 
(68,150
)
 
1,317,082

 
(73,829
)
 
 
Agency RMBS
55,492

 
(748
)
 
208,699

 
(668
)
 
264,191

 
(1,416
)
 
 
CMBS
54,293

 
(719
)
 
145,716

 
(504
)
 
200,009

 
(1,223
)
 
 
Non-Agency RMBS
5,685

 
(762
)
 
17,917

 
(982
)
 
23,602

 
(1,744
)
 
 
ABS
449,335

 
(6,367
)
 
544,239

 
(1,735
)
 
993,574

 
(8,102
)
 
 
Municipals
14,528

 
(139
)
 
16,297

 
(357
)
 
30,825

 
(496
)
 
 
Total fixed maturities
$
840,063

 
$
(50,863
)
 
$
2,874,820

 
$
(108,160
)
 
$
3,714,883

 
$
(159,023
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-traded funds
—

 
—

 
80,230

 
(2,155
)
 
80,230

 
(2,155
)
 
 
Non-U.S. bond mutual funds
—

 
—

 
103,282

 
(15,057
)
 
103,282

 
(15,057
)
 
 
Total equity securities
$
—

 
$
—

 
$
183,512

 
$
(17,212
)
 
$
183,512

 
$
(17,212
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
388,551

 
$
(24,319
)
 
$
786,850

 
$
(4,009
)
 
$
1,175,401

 
$
(28,328
)
 
 
Non-U.S. government
143,602

 
(29,171
)
 
435,670

 
(25,270
)
 
579,272

 
(54,441
)
 
 
Corporate debt
26,708

 
(2,221
)
 
2,199,672

 
(64,059
)
 
2,226,380

 
(66,280
)
 
 
Agency RMBS
259,914

 
(3,084
)
 
333,288

 
(1,151
)
 
593,202

 
(4,235
)
 
 
CMBS
68,624

 
(925
)
 
256,225

 
(1,094
)
 
324,849

 
(2,019
)
 
 
Non-Agency RMBS
6,689

 
(613
)
 
13,442

 
(302
)
 
20,131

 
(915
)
 
 
ABS
425,663

 
(10,325
)
 
750,679

 
(5,863
)
 
1,176,342

 
(16,188
)
 
 
Municipals
34,462

 
(644
)
 
25,284

 
(188
)
 
59,746

 
(832
)
 
 
Total fixed maturities
$
1,354,213

 
$
(71,302
)
 
$
4,801,110

 
$
(101,936
)
 
$
6,155,323

 
$
(173,238
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Exchange-traded funds
—

 
—

 
91,275

 
(4,756
)
 
91,275

 
(4,756
)
 
 
Non-U.S. bond mutual funds
—

 
—

 
112,817

 
(2,768
)
 
112,817

 
(2,768
)
 
 
Total equity securities
$
—

 
$
—

 
$
204,092

 
$
(7,524
)
 
$
204,092

 
$
(7,524
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Fixed Maturities

At March 31, 2015, 1,004 fixed maturities (2014: 1,388) were in an unrealized loss position of $159 million (2014: $173 million), of which $17 million (2014: $36 million) was related to securities below investment grade or not rated.




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3.
INVESTMENTS (CONTINUED)

At March 31, 2015, 180 (2014: 223) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $840 million (2014: $1,354 million). Following our credit impairment review, we concluded that these securities as well as the remaining securities in an unrealized loss position in the above table were temporarily impaired at March 31, 2015, and were expected to recover in value as the securities approach maturity. Further, at March 31, 2015, 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 March 31, 2015, 8 securities (2014: 9) were in an unrealized loss position of $17 million (2014: $8 million).

At March 31, 2015 and December 31, 2014, there were no securities that had been in a continuous unrealized loss position for 12 months or greater. Based on our impairment 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 March 31, 2015.
 
b) Other Investments

The following table provides a breakdown of our investments in hedge funds, direct lending funds and CLO Equities, together with additional information relating to the liquidity of each category:
 
 
Fair Value
 
Redemption Frequency
(if currently eligible)
 
  Redemption  
  Notice Period  
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2015
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
242,096

 
26
%
 
Quarterly, Semi-annually
 
30-60 days
 
 
Multi-strategy funds
336,342

 
36
%
 
Quarterly, Semi-annually
 
60-95 days
 
 
Event-driven funds
189,212

 
20
%
 
Quarterly, Annually
 
45-60 days
 
 
Leveraged bank loan funds
9,616

 
1
%
 
Quarterly
 
65 days
 
 
Direct lending funds
69,682

 
7
%
 
n/a
 
n/a
 
 
CLO - Equities
92,058

 
10
%
 
n/a
 
n/a
 
 
Total other investments
$
939,006

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
298,907

 
31
%
 
Quarterly, Semi-annually
 
30-60 days
 
 
Multi-strategy funds
324,020

 
34
%
 
Quarterly, Semi-annually
 
60-95 days
 
 
Event-driven funds
185,899

 
19
%
 
Quarterly, Annually
 
45-60 days
 
 
Leveraged bank loan funds
9,713

 
1
%
 
Quarterly
 
65 days
 
 
Direct lending funds
54,438

 
6
%
 
n/a
 
n/a
 
 
CLO - Equities
92,488

 
9
%
 
n/a
 
n/a
 
 
Total other investments
$
965,465

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
n/a - not applicable

The investment strategies for the above funds are as follows:

•
Long/short equity funds: Seek to achieve attractive returns primarily by executing an equity trading strategy involving both long and short investments in publicly-traded equities.

•
Multi-strategy funds: Seek to achieve above-market returns by pursuing multiple investment strategies to diversify risks and reduce volatility. This category includes funds of hedge funds which invest in a large pool of hedge funds across a diversified range of hedge fund strategies.



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3.
INVESTMENTS (CONTINUED)


•
Event-driven funds: Seek to achieve attractive returns by exploiting situations where announced or anticipated events create opportunities.

•
Leveraged bank loan funds: Seek to achieve attractive returns by investing primarily in bank loan collateral that has limited interest rate risk exposure.

•
Direct lending funds: Seek to achieve attractive risk-adjusted returns, including current income generation, by investing in funds which provide financing directly to borrowers.

Two common redemption restrictions which may impact our ability to redeem our hedge funds are gates and lockups. A gate is a suspension of redemptions 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 which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2015 and 2014, neither of these restrictions impacted our redemption requests. At March 31, 2015, $95 million (2014: $87 million), representing 12% (2014: 11%) of our total hedge funds, relate to holdings where we are still within the lockup period. The expiration of these lockup periods range from June 2015 to March 2016. 

At March 31, 2015, $6 million (2014: $6 million) was invested in hedge funds that are not accepting redemption requests. Of this amount, substantially all relates to a leveraged bank loan fund in a period of planned principal distributions. Based on market conditions and payments made to date, management's current expectation is that the distribution process will be completed in 2015.

At March 31, 2015, we have $72 million (2014: $88 million) of unfunded commitments within our other investments portfolio relating to our future investments in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to three years.
During 2013, we made a $60 million commitment as a limited partner in a multi-strategy hedge fund. Once the full amount of committed capital has been called by the General Partner, the assets will not be fully returned until the completion of the fund's investment term which ends in December, 2018. The General Partner then has the option to extend the term by up to three years. At March 31, 2015, $29 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the multi-strategy funds line of the table above.
During 2015, we made a $100 million commitment as a limited partner in a fund which invests in real estate and real estate securities and businesses. The fund is subject to a 3 year commitment period and a total fund life of 8 years during which time we are not eligible to redeem our investment. At March 31, 2015 our commitment remains unfunded.



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3.
INVESTMENTS (CONTINUED)

c) Net Investment Income

Net investment income was derived from the following sources:
 
  
Three months ended March 31,
 
 
  
2015
 
2014
 
 
 
 
 
 
 
 
Fixed maturities
$
66,101

 
$
72,957

 
 
Other investments
30,935

 
16,760

 
 
Equity securities
1,676

 
2,286

 
 
Cash and cash equivalents
1,102

 
863

 
 
Short-term investments
69

 
214

 
 
Gross investment income
99,883

 
93,080

 
 
Investment expenses
(7,773
)
 
(10,336
)
 
 
Net investment income
$
92,110

 
$
82,744

 
 
 
 
 
 
 

d) Net Realized Investment Gains (Losses)

The following table provides an analysis of net realized investment gains (losses):
 
  
Three months ended March 31,
 
 
  
2015
 
2014
 
 
 
 
 
 
 
 
Gross realized gains
 
 
 
 
 
Fixed maturities and short-term investments
$
15,661

 
$
33,770

 
 
Equities
38

 
19,267

 
 
Gross realized gains
15,699

 
53,037

 
 
Gross realized losses
 
 
 
 
 
Fixed maturities and short-term investments
(43,091
)
 
(33,704
)
 
 
Equities
(124
)
 
(2,438
)
 
 
Gross realized losses
(43,215
)
 
(36,142
)
 
 
Net OTTI recognized in earnings
(17,568
)
 
(786
)
 
 
Change in fair value of investment derivatives(1)
2,531

 
(5,489
)
 
 
Net realized investment gains (losses)
$
(42,553
)
 
$
10,620

 
 
 
 
 
 
 
(1) Refer to Note 5 – Derivative Instruments




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3.
INVESTMENTS (CONTINUED)

The following table summarizes the OTTI recognized in earnings by asset class:
 
  
Three months ended March 31,
 
 
  
2015
 
2014
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
Non-U.S. government
$
1,422

 
$
38

 
 
Corporate debt
16,120

 
15

 
 
Non-Agency RMBS
4

 
—

 
 
ABS
22

 
56

 
 
 
17,568

 
109

 
 
Equity Securities
 
 
 
 
 
Common stocks
—

 
677

 
 
 
—

 
677

 
 
Total OTTI recognized in earnings
$
17,568

 
$
786

 
 
 
 
 
 
 

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 March 31,
 
 
  
2015
 
2014
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1,531

 
$
1,594

 
 
Credit impairments recognized on securities not previously impaired
—

 
—

 
 
Additional credit impairments recognized on securities previously impaired
10

 
—

 
 
Change in timing of future cash flows on securities previously impaired
—

 
—

 
 
Intent to sell of securities previously impaired
—

 
—

 
 
Securities sold/redeemed/matured
—

 
(4
)
 
 
Balance at end of period
$
1,541

 
$
1,590

 
 
 
 
 
 
 

e) Reverse Repurchase Agreements

At March 31, 2015, we held $123 million (2014: $110 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents on our consolidated balance sheet. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, we receive principal and interest income.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

Fair value is defined as the price to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. We use 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 we have the ability to access.

•
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 our own judgments about assumptions that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of 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 transaction. 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 us to change the selection of our valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy.

We used the following valuation techniques and assumptions in estimating the fair value of our financial instruments as well as the general classification of such financial instruments pursuant to the above fair value hierarchy.

Fixed Maturities

At each valuation date, we use the market approach valuation technique to estimate the fair value of our fixed maturities portfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services is sourced from multiple vendors, when available, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, we obtain non-binding quotes from broker-dealers who are active in the corresponding markets.

The following describes the significant inputs generally used to determine the fair value of our fixed maturities by asset class.

U.S. government and agency

U.S. government and agency securities consist primarily of bonds 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. As the fair values of our U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
FAIR VALUE MEASUREMENTS (CONTINUED)

Non-U.S. government

Non-U.S. government securities comprise bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair value of these securities is based on prices obtained from international indices or a valuation model that includes the following inputs: interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs are observable market inputs, the fair value of non-U.S. government securities are classified within Level 2.

Corporate debt

Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our corporate debt securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. 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.

MBS

Our portfolio of RMBS and CMBS are originated by both agencies and non-agencies. The fair values of these securities are determined through the use of a pricing model (including Option Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the MBS. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the significant inputs used to price MBS are observable market inputs, the fair values of the MBS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3.

ABS

ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO Debt originated by a variety of financial institutions. Similarly to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. These securities are classified within Level 3.

Municipals