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EX-32.2 - EXHIBIT 32.2 - RENAISSANCERE HOLDINGS LTDex3222018q3.htm
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EX-31.1 - EXHIBIT 31.1 - RENAISSANCERE HOLDINGS LTDex3112018q3.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-14428
RENAISSANCERE HOLDINGS LTD.
(Exact Name Of Registrant As Specified In Its Charter)
Bermuda
98-014-1974
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
Renaissance House, 12 Crow Lane
Pembroke, Bermuda
HM 19
(Address of Principal Executive Offices)
(Zip Code)

(441) 295-4513
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 for 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 Q  No o

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes Q  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
Large accelerated filer Q, Accelerated filer o, Non-accelerated filer o (do not check if a smaller reporting company), Smaller reporting company o, Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o  No Q

The number of Common Shares, par value US $1.00 per share, outstanding at October 26, 2018 was 40,265,961.
 




RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 
 
 


2



NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) of RenaissanceRe Holdings Ltd. (the “Company” or “RenaissanceRe”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us. In particular, statements using words such as “may”, “should”, “estimate”, “expect”, “anticipate”, “intend”, “believe”, “predict”, “potential”, or words of similar import generally involve forward-looking statements. For example, we may include certain forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” with regard to trends in results, prices, volumes, operations, investment results, margins, combined ratios, fees, reserves, market conditions, risk management and exchange rates. This Form 10-Q also contains forward-looking statements with respect to our business and industry, such as those relating to our strategy and management objectives, market standing and product volumes, competition and new entrants in our industry, industry capital, insured losses from loss events, government initiatives and regulatory matters affecting the reinsurance and insurance industries.
The inclusion of forward-looking statements in this report should not be considered as a representation by us or any other person that our current objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from those addressed by the forward-looking statements, including the following:
the failure to obtain regulatory approvals or satisfy other conditions to completion of the proposed TMR Stock Purchase (as defined herein);
risks that the TMR Stock Purchase disrupts or distracts from current plans and operations;
the ability to recognize the benefits of the TMR Stock Purchase;
the amount of the costs, fees, expenses and charges related to the TMR Stock Purchase;
the frequency and severity of catastrophic and other events we cover;
the effectiveness of our claims and claim expense reserving process;
our ability to maintain our financial strength ratings;  
the effect of climate change on our business;
collection on claimed retrocessional coverage, and new retrocessional reinsurance being available on acceptable terms and providing the coverage that we intended to obtain;
the effects of United States (“U.S.”) tax reform legislation and possible future tax reform legislation and regulations, including changes to the tax treatment of our shareholders or investors in our joint ventures or other entities we manage;
the effect of emerging claims and coverage issues;
continued soft reinsurance underwriting market conditions;
our reliance on a small and decreasing number of reinsurance brokers and other distribution services for the preponderance of our revenue;
our exposure to credit loss from counterparties in the normal course of business;
the effect of continued challenging economic conditions throughout the world;
a contention by the Internal Revenue Service (the “IRS”) that Renaissance Reinsurance Ltd. (“Renaissance Reinsurance”), or any of our other Bermuda subsidiaries, is subject to taxation in the U.S.;

3



the success of any of our strategic investments or acquisitions, including our ability to manage our operations as our product and geographical diversity increases;
our ability to retain our key senior officers and to attract or retain the executives and employees necessary to manage our business;
the performance of our investment portfolio;
losses we could face from terrorism, political unrest or war;
the effect of cybersecurity risks, including technology breaches or failure, on our business;
our ability to successfully implement our business strategies and initiatives;
our ability to determine the impairments taken on our investments;
the effects of inflation;
the ability of our ceding companies and delegated authority counterparties to accurately assess the risks they underwrite;
the effect of operational risks, including system or human failures;
our ability to effectively manage capital on behalf of investors in joint ventures or other entities we manage;
foreign currency exchange rate fluctuations;
our ability to raise capital if necessary;
our ability to comply with covenants in our debt agreements;
changes to the regulatory systems under which we operate, including as a result of increased global regulation of the insurance and reinsurance industries;
changes in Bermuda laws and regulations and the political environment in Bermuda;
our dependence on the ability of our operating subsidiaries to declare and pay dividends;
aspects of our corporate structure that may discourage third-party takeovers and other transactions;
the cyclical nature of the reinsurance and insurance industries;
adverse legislative developments that reduce the size of the private markets we serve or impede their future growth;
consolidation of competitors, customers and insurance and reinsurance brokers;
the effect on our business of the highly competitive nature of our industry, including the effect of new entrants to, competing products for and consolidation in the (re)insurance industry;
other political, regulatory or industry initiatives adversely impacting us;
increasing barriers to free trade and the free flow of capital;
international restrictions on the writing of reinsurance by foreign companies and government intervention in the natural catastrophe market;
the effect of Organisation for Economic Co-operation and Development (the “OECD”) or European Union (“EU”) measures to increase our taxes and reporting requirements;
the effect of the vote by the U.K. to leave the EU;
changes in regulatory regimes and accounting rules that may impact financial results irrespective of business operations; and
our need to make many estimates and judgments in the preparation of our financial statements.
As a consequence, our future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of us. The factors listed above, which are discussed in more detail in our filings with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2017, should not be construed as exhaustive. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to revise or update forward-looking statements to reflect new information, events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

4



PART I        FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except share and per share amounts)
 
September 30,
2018
 
December 31,
2017
Assets
(Unaudited)
 
(Audited)
Fixed maturity investments trading, at fair value – amortized cost $7,901,884
at September 30, 2018 (December 31, 2017 – $7,434,870)
$
7,814,779

 
$
7,426,555

Short term investments, at fair value
2,461,415

 
991,863

Equity investments trading, at fair value
413,271

 
388,254

Other investments, at fair value
738,919

 
594,793

Investments in other ventures, under equity method
117,307

 
101,974

Total investments
11,545,691

 
9,503,439

Cash and cash equivalents
453,041

 
1,361,592

Premiums receivable
1,787,095

 
1,304,622

Prepaid reinsurance premiums
795,496

 
533,546

Reinsurance recoverable
1,204,059

 
1,586,630

Accrued investment income
46,690

 
42,235

Deferred acquisition costs
497,733

 
426,551

Receivable for investments sold
406,062

 
103,145

Other assets
121,724

 
121,226

Goodwill and other intangible assets
238,803

 
243,145

Total assets
$
17,096,394

 
$
15,226,131

Liabilities, Noncontrolling Interests and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Reserve for claims and claim expenses
$
4,952,498

 
$
5,080,408

Unearned premiums
2,058,851

 
1,477,609

Debt
990,749

 
989,623

Reinsurance balances payable
1,970,913

 
989,090

Payable for investments purchased
555,556

 
208,749

Other liabilities
147,328

 
792,771

Total liabilities
10,675,895

 
9,538,250

Commitments and Contingencies


 


Redeemable noncontrolling interests
1,533,978

 
1,296,506

Shareholders’ Equity
 
 
 
Preference shares: $1.00 par value – 16,010,000 shares issued and outstanding at September 30, 2018 (December 31, 2017 – 16,000,000)
650,000

 
400,000

Common shares: $1.00 par value – 40,265,961 shares issued and outstanding at September 30, 2018 (December 31, 2017 – 40,023,789)
40,266

 
40,024

Additional paid-in capital
42,395

 
37,355

Accumulated other comprehensive (loss) income
(1,483
)
 
224

Retained earnings
4,155,343

 
3,913,772

Total shareholders’ equity attributable to RenaissanceRe
4,886,521

 
4,391,375

Total liabilities, noncontrolling interests and shareholders’ equity
$
17,096,394

 
$
15,226,131



See accompanying notes to the consolidated financial statements

5



RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three and nine months ended September 30, 2018 and 2017
(in thousands of United States Dollars, except per share amounts) (Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
625,677

 
$
640,269

 
$
2,762,672

 
$
2,389,774

Net premiums written
$
453,255

 
$
483,221

 
$
1,720,808

 
$
1,583,102

Decrease (increase) in unearned premiums
78,594

 
64,571

 
(319,292
)
 
(287,000
)
Net premiums earned
531,849

 
547,792

 
1,401,516

 
1,296,102

Net investment income
80,696

 
40,257

 
208,528

 
148,745

Net foreign exchange (losses) gains
(4,566
)
 
(156
)
 
(11,496
)
 
11,118

Equity in earnings of other ventures
7,648

 
1,794

 
14,331

 
5,830

Other income
497

 
2,996

 
480

 
7,053

Net realized and unrealized gains (losses) on investments
13,630

 
42,052

 
(86,415
)
 
143,538

Total revenues
629,754

 
634,735

 
1,526,944

 
1,612,386

Expenses
 
 
 
 
 
 
 
Net claims and claim expenses incurred
410,510

 
1,221,696

 
642,380

 
1,557,364

Acquisition expenses
109,761

 
76,761

 
312,524

 
248,294

Operational expenses
40,593

 
42,537

 
119,408

 
131,586

Corporate expenses
6,841

 
4,413

 
21,875

 
14,335

Interest expense
11,769

 
11,799

 
35,304

 
32,416

Total expenses
579,474

 
1,357,206

 
1,131,491

 
1,983,995

Income (loss) before taxes
50,280

 
(722,471
)
 
395,453

 
(371,609
)
Income tax (expense) benefit
(1,451
)
 
18,977

 
(2,550
)
 
14,739

Net income (loss)
48,829

 
(703,494
)
 
392,903

 
(356,870
)
Net (income) loss attributable to redeemable noncontrolling interests
(6,440
)
 
204,277

 
(90,822
)
 
132,338

Net income (loss) attributable to RenaissanceRe
42,389

 
(499,217
)
 
302,081

 
(224,532
)
Dividends on preference shares
(9,708
)
 
(5,595
)
 
(20,899
)
 
(16,786
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders
$
32,681

 
$
(504,812
)
 
$
281,182

 
$
(241,318
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – basic
$
0.82

 
$
(12.75
)
 
$
7.02

 
$
(6.04
)
Net income (loss) available (attributable) to RenaissanceRe common shareholders per common share – diluted
$
0.82

 
$
(12.75
)
 
$
7.02

 
$
(6.04
)
Dividends per common share
$
0.33

 
$
0.32

 
$
0.99

 
$
0.96











See accompanying notes to the consolidated financial statements

6



RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three and nine months ended September 30, 2018 and 2017
(in thousands of United States Dollars) (Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Comprehensive income (loss)
 
 
 
 
 
 
 
Net income (loss)
$
48,829

 
$
(703,494
)
 
$
392,903

 
$
(356,870
)
Change in net unrealized gains on investments
(382
)
 
300

 
(1,707
)
 
(972
)
Comprehensive income (loss)
48,447

 
(703,194
)
 
391,196

 
(357,842
)
Net (income) loss attributable to redeemable noncontrolling interests
(6,440
)
 
204,277

 
(90,822
)
 
132,338

Comprehensive (income) loss attributable to redeemable noncontrolling interests
(6,440
)
 
204,277

 
(90,822
)
 
132,338

Comprehensive income (loss) attributable to RenaissanceRe
$
42,007

 
$
(498,917
)
 
$
300,374

 
$
(225,504
)
 



































See accompanying notes to the consolidated financial statements

7



RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the nine months ended September 30, 2018 and 2017
(in thousands of United States Dollars) (Unaudited)
 
 
Nine months ended
 
September 30,
2018
 
September 30,
2017
Preference shares
 
 
 
Balance – January 1
$
400,000

 
$
400,000

Issuance of shares
250,000

 

Balance – September 30
650,000

 
400,000

Common shares
 
 
 
Balance – January 1
40,024

 
41,187

Repurchase of shares

 
(1,322
)
Exercise of options and issuance of restricted stock awards
242

 
164

Balance – September 30
40,266

 
40,029

Additional paid-in capital
 
 
 
Balance – January 1
37,355

 
216,558

Repurchase of shares

 
(187,269
)
Offering expenses
(7,883
)
 

Change in redeemable noncontrolling interests
340

 
(307
)
Exercise of options and issuance of restricted stock awards
12,583

 
3,870

Balance – September 30
42,395

 
32,852

Accumulated other comprehensive (loss) income
 
 
 
Balance – January 1
224

 
1,133

Change in net unrealized gains on investments
(1,707
)
 
(972
)
Balance – September 30
(1,483
)
 
161

Retained earnings
 
 
 
Balance – January 1
3,913,772

 
4,207,699

Cumulative effect of adoption of ASU 2016-09 (Note 2)

 
2,213

Net income (loss)
392,903

 
(356,870
)
Net (income) loss attributable to redeemable noncontrolling interests
(90,822
)
 
132,338

Dividends on common shares
(39,611
)
 
(38,624
)
Dividends on preference shares
(20,899
)
 
(16,786
)
Balance – September 30
4,155,343

 
3,929,970

Total shareholders’ equity
$
4,886,521

 
$
4,403,012

 












See accompanying notes to the consolidated financial statements

8



RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2018 and 2017
(in thousands of United States Dollars) (Unaudited)
 
Nine months ended
 
September 30,
2018
 
September 30,
2017
Cash flows provided by operating activities
 
 
 
Net income (loss)
$
392,903

 
$
(356,870
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Amortization, accretion and depreciation
30,936

 
18,586

Equity in undistributed earnings of other ventures
(13,016
)
 
19,559

Net realized and unrealized losses (gains) on investments
86,415

 
(143,538
)
Net unrealized gains included in net investment income
(17,778
)
 
(2,686
)
Change in:
 
 
 
Premiums receivable
(482,473
)
 
(533,943
)
Prepaid reinsurance premiums
(261,950
)
 
(194,496
)
Reinsurance recoverable
382,571

 
(1,308,740
)
Deferred acquisition costs
(71,182
)
 
(99,589
)
Reserve for claims and claim expenses
(127,910
)
 
2,344,019

Unearned premiums
581,242

 
481,496

Reinsurance balances payable
981,823

 
360,471

Other
(593,055
)
 
17,433

Net cash provided by operating activities
888,526

 
601,702

Cash flows used in investing activities
 
 
 
Proceeds from sales and maturities of fixed maturity investments trading
8,221,481

 
7,663,002

Purchases of fixed maturity investments trading
(8,692,688
)
 
(7,798,285
)
Net sales of equity investments trading
15,490

 
61,571

Net purchases of short term investments
(1,465,451
)
 
(146,326
)
Net (purchases) sales of other investments
(130,649
)
 
5,181

Net purchases of investments in other ventures
(20,952
)
 

Return of investment from investment in other ventures
8,464

 
20,000

Net cash used in investing activities
(2,064,305
)
 
(194,857
)
Cash flows provided by (used in) financing activities
 
 
 
Dividends paid – RenaissanceRe common shares
(39,611
)
 
(38,624
)
Dividends paid – preference shares
(20,899
)
 
(16,786
)
RenaissanceRe common share repurchases

 
(188,591
)
Issuance of debt, net of expenses

 
295,866

Repayment of debt

 
(250,000
)
Issuance of preference shares, net of expenses
242,371

 

Net third party redeemable noncontrolling interest share transactions
96,021

 
(44,193
)
Taxes paid on withholding shares
(7,079
)
 
(13,694
)
Net cash provided by (used in) financing activities
270,803

 
(256,022
)
Effect of exchange rate changes on foreign currency cash
(3,575
)
 
9,596

Net (decrease) increase in cash and cash equivalents
(908,551
)
 
160,419

Cash and cash equivalents, beginning of period
1,361,592

 
421,157

Cash and cash equivalents, end of period
$
453,041

 
$
581,576






See accompanying notes to the consolidated financial statements

9



RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unless otherwise noted, amounts in tables expressed in thousands of United States (“U.S.”) dollars,
except shares, per share amounts and percentages) (Unaudited)
NOTE 1.    ORGANIZATION
This report on Form 10-Q should be read in conjunction with the RenaissanceRe’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2017.
RenaissanceRe was formed under the laws of Bermuda on June 7, 1993. Together with its wholly owned and majority-owned subsidiaries and DaVinciRe (as defined below), the Company provides property, casualty and specialty reinsurance and certain insurance solutions to its customers.
Renaissance Reinsurance, a Bermuda-domiciled reinsurance company, is the Company’s principal reinsurance subsidiary and provides property, casualty and specialty reinsurance coverages to insurers and reinsurers on a worldwide basis.
Renaissance Reinsurance U.S. Inc. (“Renaissance Reinsurance U.S.”) is a reinsurance company domiciled in the state of Maryland that provides property, casualty and specialty reinsurance coverages to insurers and reinsurers, primarily in the Americas.
RenaissanceRe Underwriting Managers U.S. LLC, a specialty reinsurance agency domiciled in the state of Connecticut, provides specialty treaty reinsurance solutions on both a quota share and excess of loss basis; and writes business on behalf of RenaissanceRe Specialty U.S. Ltd. (“RenaissanceRe Specialty U.S.”), a Bermuda-domiciled reinsurer, which operates subject to U.S. federal income tax, and RenaissanceRe Syndicate 1458 (“Syndicate 1458”).
Syndicate 1458 is the Company’s Lloyd’s syndicate. RenaissanceRe Corporate Capital (UK) Limited (“RenaissanceRe CCL”), a wholly owned subsidiary of RenaissanceRe, is Syndicate 1458’s sole corporate member and RenaissanceRe Syndicate Management Ltd. (“RSML”), a wholly owned subsidiary of RenaissanceRe, is the managing agent for Syndicate 1458.
The Company also manages property, casualty and specialty reinsurance business written on behalf of joint ventures, which principally include Top Layer Reinsurance Ltd. (“Top Layer Re”), recorded under the equity method of accounting, and DaVinci Reinsurance Ltd. (“DaVinci”). Because the Company owns a noncontrolling equity interest in, but controls a majority of the outstanding voting power of DaVinci’s parent, DaVinciRe Holdings Ltd. (“DaVinciRe”), the results of DaVinci and DaVinciRe are consolidated in the Company’s financial statements and all significant intercompany transactions have been eliminated. Redeemable noncontrolling interest - DaVinciRe represents the interests of external parties with respect to the net income and shareholders’ equity of DaVinciRe. Renaissance Underwriting Managers, Ltd. (“RUM”), a wholly owned subsidiary of RenaissanceRe, acts as exclusive underwriting manager for these joint ventures in return for fee-based income and profit participation.
RenaissanceRe Medici Fund Ltd. (“Medici”) is an exempted fund, incorporated under the laws of Bermuda. Medici’s objective is to seek to invest substantially all of its assets in various insurance based investment instruments that have returns primarily tied to property catastrophe risk. Third-party investors have subscribed for a portion of the participating, non-voting common shares of Medici. Because the Company owns a noncontrolling equity interest in, but controls a majority of the outstanding voting power of Medici’s parent, RenaissanceRe Fund Holdings Ltd. (“Fund Holdings”), the results of Medici and Fund Holdings are consolidated in the Company’s financial statements and all significant inter-company transactions have been eliminated. Redeemable noncontrolling interest - Medici represents the interests of external parties with respect to the net income and shareholders’ equity of Medici.
Upsilon RFO Re Ltd., formerly known as Upsilon Reinsurance II Ltd. (“Upsilon RFO”), a Bermuda domiciled special purpose insurer (“SPI”), is a managed joint venture formed by the Company primarily to provide additional capacity to the worldwide aggregate and per-occurrence primary and retrocessional property catastrophe excess of loss market. Upsilon RFO is considered a variable

10



interest entity (“VIE”) and the Company is considered the primary beneficiary. As a result, Upsilon RFO is consolidated by the Company and all significant inter-company transactions have been eliminated.
RenaissanceRe Upsilon Fund Ltd. (“Upsilon Fund”), an exempted Bermuda segregated accounts company, was formed by the Company to provide a fund structure through which third-party investors can invest in reinsurance risk managed by the Company. As a segregated accounts company, Upsilon Fund is permitted to establish segregated accounts to invest in and hold identified pools of assets and liabilities. Each pool of assets and liabilities in each segregated account is structured to be ring-fenced from any claims from the creditors of Upsilon Fund’s general account and from the creditors of other segregated accounts within Upsilon Fund. Third-party investors purchase redeemable, non-voting preference shares linked to specific segregated accounts of Upsilon Fund and own 100% of these shares. Upsilon Fund is an investment company and is considered a VIE. The Company is not considered the primary beneficiary of Upsilon Fund and, as a result, the Company does not consolidate the financial position and results of operations of Upsilon Fund.
Effective November 7, 2016, Fibonacci Reinsurance Ltd. ("Fibonacci Re"), a Bermuda-domiciled SPI, was formed to provide collateralized capacity to Renaissance Reinsurance and its affiliates. Fibonacci Re raises capital from third-party investors and the Company, via private placements of participating notes which are listed on the Bermuda Stock Exchange. Fibonacci Re is considered a VIE. The Company is not considered the primary beneficiary of Fibonacci Re and, as a result, the Company does not consolidate the financial position and results of operations of Fibonacci Re.
Effective December 22, 2017, the Company and Reinsurance Group of America, Incorporated closed an initiative (“Langhorne”) to source third party capital to support reinsurers targeting large in-force life and annuity blocks. Langhorne Holdings LLC (“Langhorne Holdings”) is a company that owns and manages certain reinsurance entities within Langhorne. Langhorne Partners LLC (“Langhorne Partners”) is the general partner for Langhorne and the entity which manages the third-party investors investing into Langhorne Holdings. The Company concluded that Langhorne Holdings meets the definition of a VIE. The Company is not the primary beneficiary of Langhorne Holdings and as a result, the Company does not consolidate the financial position or results of operations of Langhorne Holdings. The Company concluded that Langhorne Partners is not a VIE. The Company will account for its investments in Langhorne Holdings and Langhorne Partners under the equity method of accounting, one quarter in arrears.
NOTE 2.    SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company’s significant accounting policies as described in its Form 10-K for the year ended December 31, 2017, except as noted below.
BASIS OF PRESENTATION
These consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with the 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 GAAP for complete consolidated financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated from these statements.
Certain comparative information has been reclassified to conform to the current presentation. Because of the seasonality of the Company’s business, the results of operations and cash flows for any interim period will not necessarily be indicative of the results of operations and cash flows for the full fiscal year or subsequent quarters.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed amounts of assets and liabilities

11



and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The major estimates reflected in the Company’s consolidated financial statements include, but are not limited to, the reserve for claims and claim expenses; reinsurance recoverables, including allowances for reinsurance recoverables deemed uncollectible; estimates of written and earned premiums; fair value, including the fair value of investments, financial instruments and derivatives; impairment charges; and the Company’s deferred tax valuation allowance.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016, however in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as a result, ASU 2014-09 is effective for public business entities in annual and interim periods beginning after December 15, 2017. ASU 2014-09 notably excludes the accounting for insurance contracts, leases, financial instruments and guarantees. As a result, the Company’s implementation efforts primarily focused on other income and operational expenses on its consolidated statements of operations. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated statements of operations and financial position.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in the consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liabilities in accordance with the fair value option, requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and clarifies that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the organization’s other deferred tax assets. ASU 2016-01 is effective for public business entities in annual and interim periods beginning after December 15, 2017. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated statements of operations and financial position.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies the classification of receipts and payments in the statement of cash flows. ASU 2016-15 provides guidance related to (1) settlement and payment of zero coupon debt instruments, (2) contingent consideration, (3) proceeds from settlement of insurance claims, (4) proceeds from settlement of corporate and bank owned life insurance policies, (5) distributions from equity method investees, (6) cash receipts from beneficial interests obtained by a transferor, and (7) general guidelines for cash receipts and payments that have more than one aspect of classification. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-15 resulted in the reclassification of $20.0

12



million of cash inflows from cash flows provided by operating activities, to cash flows used in investing activities for the nine months ended September 30, 2017. This amount related to a return of investment associated with the Company’s investment in Top Layer Reinsurance Ltd, recorded under the equity method of accounting.
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 was issued to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification of taxes paid on the statements of cash flows. ASU 2016-09 became effective for the Company in annual and interim periods beginning after December 15, 2016. The cumulative effect of the adoption of ASU 2016-09 was a $2.2 million increase to opening retained earnings as of January 1, 2017.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous guidance. ASU 2016-02 is effective for public business entities for annual and interim periods beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 modifies the recognition of credit losses by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is applicable to financial assets such as loans, debt securities, trade receivables, off-balance sheet credit exposures, reinsurance receivables, and other financial assets that have the contractual right to receive cash. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The Company's invested assets are measured at fair value through net income, and therefore those invested assets would not be impacted by the adoption of ASU 2016-13. The Company has other financial assets, such as reinsurance recoverables, that could be impacted by the adoption of ASU 2016-13. ASU 2016-13 is effective for public business entities that are SEC filers for annual and interim periods beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.

Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfers occur; this is a change from current guidance which prohibits the recognition of current and deferred income taxes until the underlying assets have been sold to outside entities. ASU 2016-16 is effective for public business entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). Among other things, ASU 2017-04 requires the following: (1) the elimination of step two of the

13



goodwill impairment test; entities will no longer utilize the implied fair value of their assets and liabilities for purposes of testing goodwill for impairment, (2) the quantitative portion of the goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount; an impairment charge is to be recognized for the excess of carrying amount over fair value, but only to the extent of the amount of goodwill allocated to that reporting unit, and (3) foreign currency translation adjustments are not to be allocated to a reporting unit from an entity’s accumulated other comprehensive income; the reporting unit’s carrying amount should include only the currently translated balances of the assets and liabilities assigned to the reporting unit. ASU 2017-04 is effective for public business entities that are SEC filers for annual periods, or any interim goodwill impairment tests in annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s consolidated statements of operations and financial position.
NOTE 3.    INVESTMENTS
Fixed Maturity Investments Trading
The following table summarizes the fair value of fixed maturity investments trading:
 
 
 
 
 
 
 
 
September 30,
2018
 
December 31,
2017
 
 
U.S. treasuries
$
3,117,911

 
$
3,168,763

 
 
Agencies
143,980

 
47,646

 
 
Municipal
7,061

 
509,802

 
 
Non-U.S. government (Sovereign debt)
254,169

 
287,660

 
 
Non-U.S. government-backed corporate
137,512

 
163,651

 
 
Corporate
2,448,795

 
2,063,459

 
 
Agency mortgage-backed
836,376

 
500,456

 
 
Non-agency mortgage-backed
289,649

 
300,331

 
 
Commercial mortgage-backed
257,434

 
202,062

 
 
Asset-backed
321,892

 
182,725

 
 
Total fixed maturity investments trading
$
7,814,779

 
$
7,426,555

 
 
 
 
 
 
 
Contractual maturities of fixed maturity investments trading are described in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
 
 
 
 
September 30, 2018
Amortized 
Cost
 
Fair Value
 
 
Due in less than one year
$
303,364

 
$
301,817

 
 
Due after one through five years
4,759,113

 
4,694,059

 
 
Due after five through ten years
1,029,502

 
1,020,157

 
 
Due after ten years
96,311

 
93,395

 
 
Mortgage-backed
1,390,933

 
1,383,459

 
 
Asset-backed
322,661

 
321,892

 
 
Total
$
7,901,884

 
$
7,814,779

 
 
 
 
 
 
 

14



Equity Investments Trading
The following table summarizes the fair value of equity investments trading:
 
 
 
 
 
 
 
 
September 30,
2018
 
December 31,
2017
 
 
Financials
$
262,173

 
$
253,543

 
 
Communications and technology
60,235

 
49,526

 
 
Industrial, utilities and energy
34,755

 
34,325

 
 
Consumer
26,649

 
24,779

 
 
Healthcare
25,250

 
21,364

 
 
Basic materials
4,209

 
4,717

 
 
Total
$
413,271

 
$
388,254

 
 
 
 
 
 
 
Pledged Investments
At September 30, 2018, $5.1 billion of cash and investments at fair value were on deposit with, or in trust accounts for the benefit of, various counterparties, including with respect to the Company’s letter of credit facilities (December 31, 2017 - $4.4 billion). Of this amount, $1.9 billion is on deposit with, or in trust accounts for the benefit of, U.S. state regulatory authorities (December 31, 2017 - $1.7 billion).
Reverse Repurchase Agreements
At September 30, 2018, the Company held $92.0 million (December 31, 2017 - $30.0 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 short term investments on the Company’s consolidated balance sheets. The required collateral for these loans typically includes high-quality, readily marketable instruments at a minimum amount of 102% of the loan principal. Upon maturity, the Company receives principal and interest income.
Net Investment Income
The components of net investment income are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
 
Fixed maturity investments
$
55,725

 
$
45,305

 
$
151,784

 
$
133,080

 
 
Short term investments
9,403

 
2,771

 
22,340

 
7,476

 
 
Equity investments
903

 
930

 
3,091

 
2,630

 
 
Other investments
 
 
 
 
 
 
 
 
 
Private equity investments
8,723

 
6,371

 
12,149

 
20,784

 
 
Other
8,665

 
(11,491
)
 
27,346

 
(4,520
)
 
 
Cash and cash equivalents
1,104

 
352

 
2,708

 
836

 
 
 
84,523

 
44,238

 
219,418

 
160,286

 
 
Investment expenses
(3,827
)
 
(3,981
)
 
(10,890
)
 
(11,541
)
 
 
Net investment income
$
80,696

 
$
40,257

 
$
208,528

 
$
148,745

 
 
 
 
 
 
 
 
 
 
 

15



Net Realized and Unrealized Gains (Losses) on Investments
Net realized and unrealized gains (losses) on investments are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
 
Gross realized gains
$
5,229

 
$
16,343

 
$
14,945

 
$
43,053

 
 
Gross realized losses
(15,327
)
 
(6,126
)
 
(67,699
)
 
(29,902
)
 
 
Net realized (losses) gains on fixed maturity investments
(10,098
)
 
10,217

 
(52,754
)
 
13,151

 
 
Net unrealized (losses) gains on fixed maturity investments trading
(8,730
)
 
5,545

 
(73,522
)
 
48,940

 
 
Net realized and unrealized gains (losses) on investments-related derivatives
2,563

 
(4,020
)
 
(763
)
 
(4,344
)
 
 
Net realized gains on equity investments trading sold during the period
21,259

 
13,675

 
21,841

 
49,736

 
 
Net unrealized gains on equity investments trading still held at reporting date
8,636

 
16,635

 
18,783

 
36,055

 
 
Net realized and unrealized gains on equity investments trading
29,895

 
30,310

 
40,624

 
85,791

 
 
Net realized and unrealized gains (losses) on investments
$
13,630

 
$
42,052

 
$
(86,415
)
 
$
143,538

 
 
 
 
 
 
 
 
 
 
 

16



NOTE 4.    FAIR VALUE MEASUREMENTS
The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within the Company’s consolidated financial statements. Fair value is defined under accounting guidance currently applicable to the Company to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. The Company recognizes the change in unrealized gains and losses arising from changes in fair value in its consolidated statements of operations.
FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that use at least one significant input that is unobservable (Level 3). The three levels of the fair value hierarchy are described below:
Fair values determined by Level 1 inputs utilize unadjusted quoted prices obtained from active markets for identical assets or liabilities for which the Company has access. The fair value is determined by multiplying the quoted price by the quantity held by the Company;
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals, broker quotes and certain pricing indices; and
Level 3 inputs are based all or in part on significant unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management’s best estimate of the assumptions used by other market participants in determining the fair value of the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability.
In order to determine if a market is active or inactive for a security, the Company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity. 
There have been no material changes in the Company’s valuation techniques, nor have there been any transfers between Level 1 and Level 2, or Level 2 and Level 3 during the period represented by these consolidated financial statements.

17



Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis and also represents the carrying amount on the Company’s consolidated balance sheets:
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2018
Total
 
Quoted
Prices in Active
Markets for
Identical 
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
3,117,911

 
$
3,117,911

 
$

 
$

 
 
Agencies
143,980

 

 
143,980

 

 
 
Municipal
7,061

 

 
7,061

 

 
 
Non-U.S. government (Sovereign debt)
254,169

 

 
254,169

 

 
 
Non-U.S. government-backed corporate
137,512

 

 
137,512

 

 
 
Corporate
2,448,795

 

 
2,448,795

 

 
 
Agency mortgage-backed
836,376

 

 
836,376

 

 
 
Non-agency mortgage-backed
289,649

 

 
289,649

 

 
 
Commercial mortgage-backed
257,434

 

 
257,434

 

 
 
Asset-backed
321,892

 

 
321,892

 

 
 
Total fixed maturity investments
7,814,779

 
3,117,911

 
4,696,868

 

 
 
Short term investments
2,461,415

 

 
2,461,415

 

 
 
Equity investments trading
413,271

 
413,271

 

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
525,126

 

 
525,126

 

 
 
Private equity partnerships (1)
185,121

 

 

 

 
 
Senior secured bank loan funds (1)
17,057

 

 

 

 
 
Hedge funds (1)
11,615

 

 

 

 
 
Total other investments
738,919

 

 
525,126

 

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts (2)
(8,949
)
 

 

 
(8,949
)
 
 
Derivatives (3)
1,594

 
249

 
1,345

 

 
 
Total other assets and (liabilities)
(7,355
)
 
249

 
1,345

 
(8,949
)
 
 
 
$
11,421,029

 
$
3,531,431

 
$
7,684,754

 
$
(8,949
)
 
 
 
 
 
 
 
 
 
 
 
(1)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.
(2)
Included in assumed and ceded (re)insurance contracts at September 30, 2018 was $5.3 million and $14.2 million of other assets and other liabilities, respectively.
(3)
See “Note 13. Derivative Instruments” for additional information related to the fair value by type of contract, of derivatives entered into by the Company.


18



 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
Total
 
Quoted
Prices in Active
Markets for
Identical
 Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Fixed maturity investments
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
3,168,763

 
$
3,168,763

 
$

 
$

 
 
Agencies
47,646

 

 
47,646

 

 
 
Municipal
509,802

 

 
509,802

 

 
 
Non-U.S. government (Sovereign debt)
287,660

 

 
287,660

 

 
 
Non-U.S. government-backed corporate
163,651

 

 
163,651

 

 
 
Corporate
2,063,459

 

 
2,063,459

 

 
 
Agency mortgage-backed
500,456

 

 
500,456

 

 
 
Non-agency mortgage-backed
300,331

 

 
300,331

 

 
 
Commercial mortgage-backed
202,062

 

 
202,062

 

 
 
Asset-backed
182,725

 

 
182,725

 

 
 
Total fixed maturity investments
7,426,555

 
3,168,763

 
4,257,792

 

 
 
Short term investments
991,863

 

 
991,863

 

 
 
Equity investments trading
388,254

 
388,254

 

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
380,475

 

 
380,475

 

 
 
Private equity partnerships (1)
196,220

 

 

 

 
 
Senior secured bank loan funds (1)
17,574

 

 

 

 
 
Hedge funds (1)
524

 

 

 

 
 
Total other investments
594,793

 

 
380,475

 

 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts (2)
(2,952
)
 

 

 
(2,952
)
 
 
Derivatives (3)
4,636

 
(45
)
 
4,681

 

 
 
Total other assets and (liabilities)
1,684

 
(45
)
 
4,681

 
(2,952
)
 
 
 
$
9,403,149

 
$
3,556,972

 
$
5,634,811

 
$
(2,952
)
 
 
 
 
 
 
 
 
 
 
 
(1)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.
(2)
Included in assumed and ceded (re)insurance contracts at December 31, 2017 was $2.5 million and $5.5 million of other assets and other liabilities, respectively.
(3)
See “Note 13. Derivative Instruments” for additional information related to the fair value by type of contract, of derivatives entered into by the Company.
Level 1 and Level 2 Assets and Liabilities Measured at Fair Value
Fixed Maturity Investments
Fixed maturity investments included in Level 1 consist of the Company’s investments in U.S. treasuries. Fixed maturity investments included in Level 2 are agencies, municipal, non-U.S. government, non-U.S. government-backed corporate, corporate, agency mortgage-backed, non-agency mortgage-backed, commercial mortgage-backed and asset-backed.
The Company’s fixed maturity investments are primarily priced using pricing services, such as index providers and pricing vendors, as well as broker quotations. In general, the pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing

19



models to determine month end prices. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers, reference data and industry and economic events. Index pricing generally relies on market traders as the primary source for pricing; however, models are also utilized to provide prices for all index eligible securities. The models use a variety of observable inputs such as benchmark yields, transactional data, dealer runs, broker-dealer quotes and corporate actions. Prices are generally verified using third-party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets. The Company considers these broker quotations to be Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company’s fixed maturity investments are detailed below by asset class.
U.S. treasuries
Level 1 - At September 30, 2018, the Company’s U.S. treasuries fixed maturity investments were primarily priced by pricing services and had a weighted average yield to maturity of 2.8% and a weighted average credit quality of AA (December 31, 2017 - 1.9% and AA, respectively). When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers. Certain data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue and maturity date.
Agencies
Level 2 - At September 30, 2018, the Company’s agency fixed maturity investments had a weighted average yield to maturity of 3.1% and a weighted average credit quality of AA (December 31, 2017 - 2.1% and AA, respectively). The issuers of the Company’s agency fixed maturity investments primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Fixed maturity investments included in agencies 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 which incorporate option adjusted spreads and other daily interest rate data.
Municipal
Level 2 - At September 30, 2018, the Company’s municipal fixed maturity investments had a weighted average yield to maturity of 4.0% and a weighted average credit quality of BBB (December 31, 2017 - 2.2% and AA, respectively). The Company’s municipal fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information regarding the security from third-party sources such as trustees, paying agents or issuers. 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 which may influence risk. In certain instances, securities are individually evaluated using a spread over widely accepted market benchmarks.
Non-U.S. government (Sovereign debt)
Level 2 - At September 30, 2018, the Company’s non-U.S. government fixed maturity investments had a weighted average yield to maturity of 2.9% and a weighted average credit quality of AAA (December 31, 2017 - 2.0% and AAA, respectively). The issuers of securities in this sector are non-U.S. governments and their respective agencies as well as supranational organizations. 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

20



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.
Non-U.S. government-backed corporate
Level 2 - At September 30, 2018, the Company’s non-U.S. government-backed corporate fixed maturity investments had a weighted average yield to maturity of 3.2% and a weighted average credit quality of AA (December 31, 2017 - 2.3% and AA, respectively). Non-U.S. government-backed fixed maturity investments 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 to the respective curve 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
Level 2 - At September 30, 2018, the Company’s corporate fixed maturity investments principally consisted of U.S. and international corporations and had a weighted average yield to maturity of 4.3% and a weighted average credit quality of BBB (December 31, 2017 - 3.8% and BBB, respectively). The Company’s 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 which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.
Agency mortgage-backed
Level 2 - At September 30, 2018, the Company’s agency mortgage-backed fixed maturity investments included agency residential mortgage-backed securities with a weighted average yield to maturity of 3.7%, a weighted average credit quality of AA and a weighted average life of 8.2 years (December 31, 2017 - 3.0%, AA and 6.4 years, respectively). The Company’s agency mortgage-backed fixed maturity investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.
Non-agency mortgage-backed
Level 2 - The Company’s non-agency mortgage-backed fixed maturity investments include non-agency prime, non-agency Alt-A and other non-agency residential mortgage-backed securities. At September 30, 2018, the Company’s non-agency prime residential mortgage-backed fixed maturity investments had a weighted average yield to maturity of 4.2%, a weighted average credit quality of non-investment grade, and a weighted average life of 5.5 years (December 31, 2017 - 3.7%, BBB and 5.1 years, respectively). The Company’s non-agency Alt-A fixed maturity investments held at September 30, 2018 had a weighted average yield to maturity of 4.1%, a weighted average credit quality of non-investment grade and a weighted average life of 6.3 years (December 31, 2017 - 3.7%, non-investment grade and 6.2 years, respectively). Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.

21



Commercial mortgage-backed
Level 2 - At September 30, 2018, the Company’s commercial mortgage-backed fixed maturity investments had a weighted average yield to maturity of 3.6%, a weighted average credit quality of AAA, and a weighted average life of 5.0 years (December 31, 2017 - 2.9%, AAA and 4.5 years, respectively). Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services discount the expected cash flows for each security held in this sector using a spread adjusted benchmark yield based on the characteristics of the security.
Asset-backed
Level 2 - At September 30, 2018, the Company’s asset-backed fixed maturity investments had a weighted average yield to maturity of 3.7%, a weighted average credit quality of AAA and a weighted average life of 3.3 years (December 31, 2017 - 2.8%, AAA and 3.0 years, respectively). The underlying collateral for the Company’s asset-backed fixed maturity investments primarily consists of bank loans, student loans, credit card receivables, auto loans and other receivables. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.
Short Term Investments
Level 2 - At September 30, 2018, the Company’s short term investments had a weighted average yield to maturity of 1.8% and a weighted average credit quality of AAA (December 31, 2017 - 1.4% and AAA, respectively). The fair value of the Company’s portfolio of short term investments is generally determined using amortized cost which approximates fair value and, in certain cases, in a manner similar to the Company’s fixed maturity investments noted above.
Equity Investments, Classified as Trading
Level 1 - The fair value of the Company’s portfolio of equity investments, classified as trading is primarily priced by pricing services, reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing services utilize daily data from many real time market sources, including applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source was used for each security.
Other investments
Catastrophe bonds
Level 2 - The Company’s other investments include investments in catastrophe bonds which are recorded at fair value based on broker or underwriter bid indications.
Other assets and liabilities
Derivatives
Level 1 and Level 2 - Other assets and liabilities include certain derivatives entered into by the Company. The fair value of these transactions includes certain exchange traded futures contracts which are considered Level 1, and foreign currency contracts and certain credit derivatives, determined using standard industry valuation models and considered Level 2, as the inputs to the valuation model are based on observable market inputs. For credit derivatives, these inputs include credit spreads, credit ratings of the underlying referenced security, the risk free rate and the contract term. For foreign currency contracts, these inputs include spot rates and interest rate curves.

22



Level 3 Assets and Liabilities Measured at Fair Value
Below is a summary of quantitative information regarding the significant observable and unobservable inputs (Level 3) used in determining the fair value of assets and liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2018
Fair Value
(Level 3)
 
Valuation Technique
 
Unobservable (U)
and Observable (O)
Inputs
 
Low
 
High
 
Weighted Average or Actual
 
 
Other assets and (liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
 
Assumed and ceded (re)insurance contracts
$
994

 
Internal valuation model
 
Bond price (O)
 
$
101.31

 
$
111.12

 
$
106.80

 
 
 
 
 
 
 
Liquidity discount (U)
 
n/a

 
n/a

 
1.3
%
 
 
Assumed and ceded (re)insurance contracts
(9,943
)
 
Internal valuation model
 
Net undiscounted cash flows (U)
 
n/a

 
n/a

 
$
10,180

 
 
 
 
 
 
 
Expected loss ratio (U)
 
n/a

 
n/a

 
38.2
%
 
 
 
 
 
 
 
Net acquisition expense ratio (O)
 
n/a

 
n/a

 
4.9
%
 
 
 
 
 
 
 
Contract period (O)
 
2.0 years

 
5.0 years

 
4.7 years

 
 
 
 
 
 
 
Discount rate (U)
 
n/a

 
n/a

 
3.0
%
 
 
Total other assets and (liabilities)
$
(8,949
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Below is a reconciliation of the beginning and ending balances, for the periods shown, of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs. Interest and dividend income are included in net investment income and are excluded from the reconciliation.
 
 
 
 
 
  
Other assets
and
(liabilities)
 
 
Balance - January 1, 2018
$
(2,952
)
 
 
Total realized and unrealized gains
 
 
 
Included in other income
2,399

 
 
Purchases
(9,379
)
 
 
Settlements
983

 
 
Balance - September 30, 2018
$
(8,949
)
 
 
 
 
 
 
 
 
 
 
  
Other assets  and (liabilities)
 
 
Balance - January 1, 2017
$
(13,004
)
 
 
Total realized and unrealized gains
 
 
 
Included in other income
3,525

 
 
Purchases
49

 
 
Settlements
5,937

 
 
Balance - September 30, 2017
$
(3,493
)
 
 
 
 
 
Other assets and liabilities
Assumed and ceded (re)insurance contracts
Level 3 - At September 30, 2018, the Company had a $1.0 million net asset related to an assumed reinsurance contract accounted for at fair value, with the fair value obtained through the use of an internal valuation model. The inputs to the internal valuation model are principally based on indicative pricing

23



obtained from independent brokers and pricing vendors for similarly structured marketable securities. The most significant unobservable inputs include prices for similar marketable securities and a liquidity premium. The Company considers the prices for similar securities to be unobservable, as there is little, if any market activity for these similar assets. In addition, the Company has estimated a liquidity premium that would be required if the Company attempted to effectively exit its position by executing a short sale of these securities. Generally, an increase in the prices for similar marketable securities or a decrease in the liquidity premium would result in an increase in the expected profit and ultimate fair value of this assumed reinsurance contract.
Level 3 - At September 30, 2018, the Company had a $9.9 million net liability related to assumed and ceded (re)insurance contracts accounted for at fair value, with the fair value obtained through the use of an internal valuation model. The inputs to the internal valuation model are principally based on proprietary data as observable market inputs are generally not available. The most significant unobservable inputs include the assumed and ceded expected net cash flows related to the contracts, including the expected premium, acquisition expenses and losses; the expected loss ratio and the relevant discount rate used to present value the net cash flows. The contract period and acquisition expense ratio are considered an observable input as each is defined in the contract. Generally, an increase in the net expected cash flows and expected term of the contract and a decrease in the discount rate, expected loss ratio or acquisition expense ratio, would result in an increase in the expected profit and ultimate fair value of these assumed and ceded (re)insurance contracts.
Financial Instruments Disclosed, But Not Carried, at Fair Value
The Company uses various financial instruments in the normal course of its business. The Company’s insurance contracts are excluded from the fair value of financial instruments accounting guidance, unless the Company elects the fair value option, and therefore, are not included in the amounts discussed herein. The carrying values of cash and cash equivalents, accrued investment income, receivables for investments sold, certain other assets, payables for investments purchased, certain other liabilities, and other financial instruments not included herein approximated their fair values.
Debt
Included on the Company’s consolidated balance sheet at September 30, 2018 were debt obligations of $990.7 million (December 31, 2017 - $989.6 million). At September 30, 2018, the fair value of the Company’s debt obligations was $980.3 million (December 31, 2017$1,018.2 million).
The fair value of the Company’s debt obligations is determined using indicative market pricing obtained from third-party service providers, which the Company considers Level 2 in the fair value hierarchy. There have been no changes during the period in the Company’s valuation technique used to determine the fair value of the Company’s debt obligations.
The Fair Value Option for Financial Assets and Financial Liabilities
The Company has elected to account for certain financial assets and financial liabilities at fair value using the guidance under FASB ASC Topic Financial Instruments as the Company believes it represents the most meaningful measurement basis for these assets and liabilities. Below is a summary of the balances the Company has elected to account for at fair value:
 
 
 
 
 
 
 
 
September 30,
2018
 
December 31,
2017
 
 
Other investments
$
738,919

 
$
594,793

 
 
Other assets
$
5,259

 
$
2,542

 
 
Other liabilities
$
14,208

 
$
5,494

 
 
 
 
 
 
 
Included in net investment income for the three and nine months ended September 30, 2018 were net unrealized gains of $9.1 million and $17.8 million, respectively, related to the changes in fair value of other investments (2017gains of $9.8 million and $2.7 million, respectively). Included in other income for the three and nine months ended September 30, 2018 were net unrealized gains of $Nil and $Nil, respectively, related to the changes in the fair value of other assets and liabilities (2017 - $Nil and $Nil, respectively).

24



Measuring the Fair Value of Other Investments Using Net Asset Valuations
The table below shows the Company’s portfolio of other investments measured using net asset valuations as a practical expedient:
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2018
Fair Value
 
Unfunded
Commitments
 
Redemption Frequency
 
Redemption
Notice Period (Minimum Days)
 
Redemption
Notice Period (Maximum Days)
 
 
Private equity partnerships
$
185,121

 
$
416,847

 
See below
 
See below
 
See below
 
 
Senior secured bank loan funds
17,057

 
20,262

 
See below
 
See below
 
See below
 
 
Hedge funds
11,615

 

 
See below
 
See below
 
See below
 
 
Total other investments measured using net asset valuations
$
213,793

 
$
437,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity partnerships – The Company’s investments in private equity partnerships included alternative asset limited partnerships (or similar corporate structures) that invest in certain private equity asset classes, including U.S. and global leveraged buyouts, mezzanine investments, distressed securities, real estate, and oil, gas and power. The Company generally has no right to redeem its interest in any of these private equity partnerships in advance of dissolution of the applicable private equity partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the liquidation of the underlying assets of the respective private equity partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 7 to 10 years from inception of the respective limited partnership.
Senior secured bank loan funds – At September 30, 2018, the Company had $17.1 million invested in closed end funds which invest primarily in loans. The Company has no right to redeem its investment in these funds. It is estimated that the majority of the underlying assets in these closed end funds would begin to liquidate over 4 to 5 years from inception of the applicable fund.
Hedge funds – The Company invests in hedge funds that pursue multiple strategies. At September 30, 2018, the Company had $11.6 million of investments in hedge funds that pursue multiple strategies. This included an investment of $11.3 million in a fund primarily focused on global credit opportunities which is redeemable at the option of the shareholder. The remainder of the Company’s hedge fund investments consisted of so called “side pocket” investments which are not redeemable at the option of the shareholder.
NOTE 5.    REINSURANCE
The Company purchases reinsurance and other protection to manage its risk portfolio and to reduce its exposure to large losses. The Company currently has in place contracts that provide for recovery of a portion of certain claims and claim expenses, generally in excess of various retentions or on a proportional basis. In addition to loss recoveries, certain of the Company’s ceded reinsurance contracts provide for payments of additional premiums, for reinstatement premiums and for lost no-claims bonuses, which are incurred when losses are ceded to the respective reinsurance contracts. The Company remains liable to the extent that any reinsurer fails to meet its obligations.

25



The following table sets forth the effect of reinsurance and retrocessional activity on premiums written and earned and on net claims and claim expenses incurred:
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
 
Premiums written
 
 
 
 
 
 
 
 
 
Direct
$
74,635

 
$
64,040

 
$
250,375

 
$
205,253

 
 
Assumed
551,042

 
576,229

 
2,512,297

 
2,184,521

 
 
Ceded
(172,422
)
 
(157,048
)
 
(1,041,864
)
 
(806,672
)
 
 
Net premiums written
$
453,255

 
$
483,221

 
$
1,720,808

 
$
1,583,102

 
 
Premiums earned
 
 
 
 
 
 
 
 
 
Direct
$
73,356

 
$
61,908

 
$
213,292

 
$
176,433

 
 
Assumed
760,920

 
712,499

 
1,968,138

 
1,731,845

 
 
Ceded
(302,427
)
 
(226,615
)
 
(779,914
)
 
(612,176
)
 
 
Net premiums earned
$
531,849

 
$
547,792

 
$
1,401,516

 
$
1,296,102

 
 
Claims and claim expenses
 
 
 
 
 
 
 
 
 
Gross claims and claim expenses incurred
$
514,873

 
$
2,482,510

 
$
817,560

 
$
2,924,217

 
 
Claims and claim expenses recovered
(104,363
)
 
(1,260,814
)
 
(175,180
)
 
(1,366,853
)
 
 
Net claims and claim expenses incurred
$
410,510

 
$
1,221,696

 
$
642,380

 
$
1,557,364

 
 
 
 
 
 
 
 
 
 
 
At September 30, 2018, the Company’s reinsurance recoverable balance was $1.2 billion (December 31, 2017 - $1.6 billion). Of this amount, 52.5% is fully collateralized by our reinsurers, 46.4% is recoverable from reinsurers rated A- or higher by major rating agencies and 1.1% is recoverable from reinsurers rated lower than A- by major rating agencies (December 31, 2017 - 54.5%, 44.5% and 1.0%, respectively). The reinsurers with the three largest balances accounted for 12.2%, 12.0% and 9.2%, respectively, of the Company’s reinsurance recoverable balance at September 30, 2018 (December 31, 2017 - 10.4%, 7.5% and 7.3%, respectively). The valuation allowance recorded against reinsurance recoverable was $6.3 million at September 30, 2018 (December 31, 2017 - $7.0 million). The three largest company-specific components of the valuation allowance represented 19.9%, 19.8% and 18.0%, respectively, of the Company’s total valuation allowance at September 30, 2018 (December 31, 2017 - 11.1%, 9.2% and 8.4%, respectively).
NOTE 6.     RESERVE FOR CLAIMS AND CLAIM EXPENSES
The Company believes the most significant accounting judgment made by management is its estimate of claims and claim expense reserves. Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts the Company sells. The Company establishes its claims and claim expense reserves by taking claims reported to the Company by insureds and ceding companies, but which have not yet been paid (“case reserves”), adding estimates for the anticipated cost of claims incurred but not yet reported to the Company, or incurred but not enough reported to the Company (collectively referred to as “IBNR”) and, if deemed necessary, adding costs for additional case reserves which represent the Company’s estimates for claims related to specific contracts previously reported to the Company which it believes may not be adequately estimated by the client as of that date, or adequately covered in the application of IBNR.

26



The following table summarizes the Company’s claims and claim expense reserves by segment, allocated between case reserves, additional case reserves and IBNR:
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2018
Case
Reserves
 
Additional
Case Reserves
 
IBNR
 
Total
 
 
Property
$
610,932

 
$
744,391

 
$
774,220

 
$
2,129,543

 
 
Casualty and Specialty
773,732

 
102,631

 
1,940,244

 
2,816,607

 
 
Other
3,240

 

 
3,108

 
6,348

 
 
Total
$
1,387,904

 
$
847,022

 
$
2,717,572

 
$
4,952,498

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
Property
$
696,285

 
$
896,522

 
$
893,583

 
$
2,486,390

 
 
Casualty and Specialty
689,962

 
124,923

 
1,760,607

 
2,575,492

 
 
Other
6,605

 

 
11,921

 
18,526

 
 
Total
$
1,392,852

 
$
1,021,445

 
$
2,666,111

 
$
5,080,408

 
 
 
 
 
 
 
 
 
 
 
Activity in the liability for unpaid claims and claim expenses is summarized as follows:
 
 
 
 
 
 
 
Nine months ended September 30,
2018
 
2017
 
 
Net reserves as of January 1
$
3,493,778

 
$
2,568,730

 
 
Net incurred related to:
 
 
 
 
 
Current year
839,360

 
1,561,027

 
 
Prior years
(196,980
)
 
(3,663
)
 
 
Total net incurred
642,380