Third Point Reinsurance (TPRE)

FORM 10-Q | Quarterly Report
Jul. 31, 2018 4:36 PM
|
About: Third Point Reinsurance (TPRE)View as PDF
Third Point Reinsurance Ltd. (Form: 10-Q, Received: 07/31/2018 16:52:57)
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 June 30, 2018
 
OR
¨
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 001-35039
THIRD POINT REINSURANCE LTD.
(Exact name of registrant as specified in its charter)
Bermuda
 
98-1039994
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
Point House
3 Waterloo Lane
Pembroke HM 08, Bermuda
+1 441 542-3300
(Address, including Zip Code and Telephone Number, including Area Code of Registrant’s Principal Executive Office)

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     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 (§232.405 of this chapter) 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, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
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. Yes     ¨     No     x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes     ¨     No     x
The registrant’s common shares began trading on the New York Stock Exchange on August 15, 2013.
As of July 30, 2018, there were 99,627,399 common shares of the registrant’s common shares issued and outstanding, including 2,050,115 restricted shares.



Third Point Reinsurance Ltd.
INDEX
 
Page
PART I . FINANCIAL INFORMATION
   Item 1.  Financial Statements
   Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
   Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Item 4. Controls and Procedures
PART II . OTHER INFORMATION
   Item 1. Legal Proceedings
   Item 1A. Risk Factors
   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Item 3. Defaults Upon Senior Securities
   Item 4. Mine Safety Disclosures
   Item 5. Other Information
   Item 6. Exhibits



PART I - Financial Information
ITEM 1. Financial Statements

THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of June 30, 2018 and December 31, 2017
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
 
Equity securities, trading, at fair value (cost - $2,065,215; 2017 - $1,868,735)
 
$
2,427,768

 
$
2,283,050

Debt securities, trading, at fair value (cost - $674,673; 2017 - $711,322)
 
617,913

 
675,158

Other investments, at fair value
 
52,444

 
37,731

Total investments in securities
 
3,098,125

 
2,995,939

Cash and cash equivalents
 
17,451

 
8,197

Restricted cash and cash equivalents
 
569,968

 
541,136

Due from brokers
 
258,764

 
305,093

Derivative assets, at fair value
 
34,738

 
73,372

Interest and dividends receivable
 
4,385

 
3,774

Reinsurance balances receivable
 
631,952

 
476,008

Deferred acquisition costs, net
 
264,408

 
258,793

Unearned premiums ceded
 
17,606

 
1,049

Loss and loss adjustment expenses recoverable
 
1,414

 
1,113

Other assets
 
10,808

 
7,320

Total assets
 
$
4,909,619

 
$
4,671,794

Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
12,044

 
$
34,632

Reinsurance balances payable
 
74,013

 
41,614

Deposit liabilities
 
129,700

 
129,133

Unearned premium reserves
 
792,096

 
649,518

Loss and loss adjustment expense reserves
 
791,313

 
720,570

Securities sold, not yet purchased, at fair value
 
443,216

 
394,278

Securities sold under an agreement to repurchase
 

 
29,618

Due to brokers
 
926,588

 
770,205

Derivative liabilities, at fair value
 
12,380

 
14,503

Performance fee payable to related party
 
4,641

 

Interest and dividends payable
 
5,718

 
4,275

Senior notes payable, net of deferred costs
 
113,821

 
113,733

Total liabilities
 
3,305,530

 
2,902,079

Commitments and contingent liabilities
 

 

Redeemable noncontrolling interests in related party
 
7,179

 
108,219

Shareholders’ equity
 
 
 
 
Preference shares (par value $0.10; authorized, 30,000,000; none issued)
 

 

Common shares (Issued: 2018 - 99,627,399; 2017 - 107,227,347; Outstanding: 2018 - 99,627,399; 2017 - 103,282,427)
 
9,963

 
10,723

Treasury shares (2018 - 0; 2017 - 3,944,920)
 

 
(48,253
)
Additional paid-in capital
 
994,170

 
1,099,599

Retained earnings
 
587,621

 
594,020

Shareholders’ equity attributable to Third Point Re common shareholders
 
1,591,754

 
1,656,089

Noncontrolling interests in related party
 
5,156

 
5,407

Total shareholders’ equity
 
1,596,910

 
1,661,496

Total liabilities, noncontrolling interests and shareholders’ equity
 
$
4,909,619

 
$
4,671,794

 
 
 
 
 
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of the Condensed Consolidated Financial Statements.


1


THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
For the three and six months ended June 30, 2018 and 2017
(expressed in thousands of U.S. dollars, except per share and share amounts)
 
Three months ended
 
Six months ended
 
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Revenues
 
 
 
 
 
 
 
Gross premiums written
$
49,765

 
$
156,564

 
$
428,125

 
$
302,918

Gross premiums ceded
(3,479
)
 
(1,425
)
 
(18,125
)
 
(2,550
)
Net premiums written
46,286

 
155,139

 
410,000

 
300,368

Change in net unearned premium reserves
95,207

 
18,419

 
(126,021
)
 
11,199

Net premiums earned
141,493

 
173,558

 
283,979

 
311,567

Net investment income before management and performance fees to related parties
45,668

 
140,631

 
53,507

 
308,466

Management and performance fees to related parties
(14,493
)
 
(33,306
)
 
(24,540
)
 
(72,631
)
Net investment income
31,175

 
107,325

 
28,967

 
235,835

Total revenues
172,668

 
280,883

 
312,946

 
547,402

Expenses
 
 
 
 
 
 
 
Loss and loss adjustment expenses incurred, net
84,000

 
107,379

 
176,620

 
193,274

Acquisition costs, net
57,584

 
68,641

 
108,989

 
123,093

General and administrative expenses
9,696

 
15,014

 
19,177

 
25,586

Other expenses
3,983

 
2,105

 
7,978

 
5,006

Interest expense
2,051

 
2,051

 
4,080

 
4,077

Foreign exchange (gains) losses
(8,847
)
 
4,781

 
(2,236
)
 
4,796

Total expenses
148,467

 
199,971

 
314,608

 
355,832

Income (loss) before income tax expense
24,201

 
80,912

 
(1,662
)
 
191,570

Income tax expense
(4,390
)
 
(5,307
)
 
(4,518
)
 
(10,605
)
Net income (loss)
19,811

 
75,605

 
(6,180
)
 
180,965

Net income attributable to noncontrolling interests in related party
(209
)
 
(1,027
)
 
(219
)
 
(2,201
)
Net income (loss) available to Third Point Re common shareholders
$
19,602

 
$
74,578

 
$
(6,399
)
 
$
178,764

Earnings (loss) per share available to Third Point Re common shareholders
 
 
 
 
 
 
 
Basic earnings (loss) per share available to Third Point Re common shareholders
$
0.20

 
$
0.73

 
$
(0.06
)
 
$
1.73

Diluted earnings (loss) per share available to Third Point Re common shareholders
$
0.19

 
$
0.71

 
$
(0.06
)
 
$
1.70

Weighted average number of common shares used in the determination of earnings (loss) per share
 
 
 
 
 
 
 
Basic
99,498,901

 
102,283,844

 
100,342,636

 
103,144,078

Diluted
102,032,485

 
104,569,226

 
100,342,636

 
105,149,710

 
 
 
 
 
 
 
 
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of the Condensed Consolidated Financial Statements.



2


THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
For the six months ended June 30, 2018 and 2017
(expressed in thousands of U.S. dollars)
 
2018
 
2017
Common shares
 
 
 
Balance, beginning of period
$
10,723

 
$
10,650

Issuance of common shares, net
67

 
83

Common shares repurchased and retired
(827
)
 

Balance, end of period
9,963

 
10,733

Treasury shares
 
 
 
Balance, beginning of period
(48,253
)
 
(7,389
)
Repurchase of common shares

 
(40,864
)
Retirement of treasury shares
48,253

 

Balance, end of period

 
(48,253
)
Additional paid-in capital
 
 
 
Balance, beginning of period
1,099,599

 
1,094,568

Issuance of common shares, net
(141
)
 
915

Share compensation expense
2,558

 
3,374

Common shares repurchased and retired
(107,846
)
 

Balance, end of period
994,170

 
1,098,857

Retained earnings
 
 
 
Balance, beginning of period
594,020

 
316,222

Net income (loss)
(6,180
)
 
180,965

Net income attributable to noncontrolling interests in related party
(219
)
 
(2,201
)
Balance, end of period
587,621

 
494,986

Shareholders’ equity attributable to Third Point Re common shareholders
1,591,754

 
1,556,323

Noncontrolling interests in related party
5,156

 
19,809

Total shareholders' equity
$
1,596,910

 
$
1,576,132

 
 
 
 
The accompanying Notes to the Condensed Consolidated Financial Statements are
an integral part of the Condensed Consolidated Financial Statements.



3


THIRD POINT REINSURANCE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2018 and 2017
(expressed in thousands of U.S. dollars)
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
(6,180
)
 
$
180,965

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Share compensation expense
2,558

 
3,374

Net interest expense on deposit liabilities
2,449

 
312

Net unrealized (gain) loss on investments and derivatives
95,513

 
(128,168
)
Net realized gain on investments and derivatives
(130,500
)
 
(154,504
)
Net foreign exchange (gains) losses
(2,236
)
 
4,796

Amortization of premium and accretion of discount, net
2,913

 
(122
)
Changes in assets and liabilities:
 
 
 
Reinsurance balances receivable
(157,498
)
 
(85,733
)
Deferred acquisition costs, net
(5,615
)
 
18,425

Unearned premiums ceded
(16,557
)
 
(1,938
)
Loss and loss adjustment expenses recoverable
(301
)
 
(1,712
)
Other assets
(3,537
)
 
6,158

Interest and dividends receivable, net
832

 
2,953

Unearned premium reserves
142,578

 
(9,261
)
Loss and loss adjustment expense reserves
74,655

 
63,769

Accounts payable and accrued expenses
(22,564
)
 
7,549

Reinsurance balances payable
32,208

 
22,237

Performance fee payable to related party
4,641

 
53,455

Net cash provided by (used in) operating activities
13,359

 
(17,445
)
Investing activities
 
 
 
Purchases of investments
(2,180,138
)
 
(1,712,929
)
Proceeds from sales of investments
2,156,754

 
1,966,027

Purchases of investments to cover short sales
(590,113
)
 
(306,237
)
Proceeds from short sales of investments
628,913

 
462,066

Change in due to/from brokers, net
202,712

 
(261,994
)
Decrease in securities sold under an agreement to repurchase
(29,618
)
 

Net cash provided by investing activities
188,510

 
146,933

Financing activities
 
 
 
Proceeds from issuance of Third Point Re common shares, net of costs

 
998

Taxes paid on withholding shares
(74
)
 

Purchases of Third Point Re common shares under share repurchase program
(60,420
)
 
(40,864
)
Decrease in deposit liabilities, net
(1,779
)
 
(124
)
Change in total noncontrolling interests in related party, net
(101,510
)
 
(18,066
)
Net cash used in financing activities
(163,783
)
 
(58,056
)
Net increase in cash, cash equivalents and restricted cash
38,086

 
71,432

Cash, cash equivalents and restricted cash at beginning of period
549,333

 
308,891

Cash, cash equivalents and restricted cash at end of period
$
587,419

 
$
380,323

Supplementary information
 
 
 
Interest paid in cash
$
13,939

 
$
10,262

Income taxes paid in cash
$
5,852

 
$
4,954

 
 
 
 
 The accompanying Notes to the Condensed Consolidated Financial Statements are
 an integral part of the Condensed Consolidated Financial Statements.


4


Third Point Reinsurance Ltd.
Notes to the Condensed Consolidated Financial Statements (UNAUDITED)
(Expressed in United States Dollars)
1. Organization
Third Point Reinsurance Ltd. (together with its wholly owned subsidiaries, “Third Point Re” or the “Company”) was incorporated under the laws of Bermuda on October 6, 2011.  Through its reinsurance subsidiaries, the Company is a provider of global specialty property and casualty reinsurance products.  The Company operates through two licensed reinsurance subsidiaries, Third Point Reinsurance Company Ltd. (“Third Point Re BDA”), a Bermuda reinsurance company that commenced operations in January 2012, and Third Point Reinsurance (USA) Ltd. (“Third Point Re USA”). 
Third Point Re USA is a Bermuda reinsurance company that was incorporated on November 21, 2014 and commenced operations in February 2015.  Third Point Re USA made an election under Section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be taxed as a U.S. entity.  Third Point Re USA prices and underwrites U.S. domiciled reinsurance business from an office in the United States.  Third Point Re USA is a wholly owned subsidiary of Third Point Re (USA) Holdings, Inc. (“TPRUSA”), an intermediate holding company based in the U.S., which is a wholly owned subsidiary of Third Point Re (UK) Holdings Ltd. (“Third Point Re UK”), an intermediate holding company based in the United Kingdom. Third Point Re UK is a wholly owned subsidiary of Third Point Re.
In August 2012, the Company established a wholly-owned subsidiary in the United Kingdom, Third Point Re Marketing (UK) Limited (“TPRUK”). In May 2013, TPRUK was licensed as an insurance intermediary by the UK Financial Conduct Authority.
These unaudited condensed consolidated financial statements include the results of Third Point Re and its wholly owned subsidiaries (together, the “Company”) and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “ 2017 10-K”), as filed with the U.S. Securities and Exchange Commission on March 1, 2018.
In the opinion of management, these unaudited condensed 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.
The results for the six months ended June 30, 2018 are not necessarily indicative of the results expected for the full calendar year.
Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2. Significant accounting policies
There have been no material changes to the Company’s significant accounting policies as described in its 2017 10-K.
Prior year changes in the presentation of condensed consolidated financial statements
The Company had previously included unearned premium ceded and loss and loss adjustment expenses recoverable in other assets in the condensed consolidated balance sheets and changes in these balances in the condensed consolidated statements of cash flows. These balances have grown and are now disclosed as separate line items in the condensed consolidated balance sheets and changes in these balances in the condensed consolidated statements of cash flows.


5



Recently issued accounting standards
Issued and effective as of June 30, 2018
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation and disclosure of financial instruments. The new standard affects all entities that hold financial assets or owe financial liabilities. ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. This new accounting standard did not have a material impact on the Company’s condensed consolidated financial statements since all of the Company’s investments are valued at fair market value as the Company's investments are classified as "trading securities" and therefore the change in unrealized is included in the consolidated statement of income (loss).
In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 is intended at reducing diversity in practice and addresses eight specific issues in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. To date, the Company has not entered into any of the eight types of transactions addressed in ASU 2016-15. As a result, the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows, specifically, the Company should include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and cash equivalents. An entity with a material balance of amounts generally described as restricted cash and cash equivalents must disclose information about the nature of the restrictions. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods therein. As a result of the adoption of ASU 2016-18, the Company retrospectively classified its restricted cash and cash equivalents within the condensed consolidated statement of cash flows and has included additional disclosures in accordance with ASU 2016-18 in its condensed consolidated financial statements. Prior to adoption, changes in restricted cash had been presented within cash flow from investing activities. Consequently, the condensed consolidated statement of cash flows for the six months ended June 30, 2017 includes adjustments to increase net cash used in investing activities by $73.1 million .
In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). ASU 2017-09 is intended to reduce diversity in practice and subsequent to its adoption, an entity will not apply modification accounting as a result of changes to terms and conditions of a share-based payment award if certain conditions are met. The amendments in ASU 2019-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. This new accounting standard did not have a material impact on the Company’s condensed consolidated financial statements.
Issued but not yet effective as of June 30, 2018
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842): Section A - Leases, Section B - Conforming Amendments Related to Leases and Section C - Background Information and Basis for Conclusions (ASU 2016-02). ASU 2016-02 intends to improve financial reporting related to leasing transactions.  The new standard affects all entities that lease assets such as real estate, airplanes and manufacturing equipment. ASU 2016-02 will require entities that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company’s condensed consolidated financial statements as a result of the limited number of leases the Company currently has in place.


6



In July 2018, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases (ASU 2018-10). The update makes improvements to clarify or to correct unintended application of guidance in ASC 842. Those items generally are not expected to have a significant effect on the Company. ASU 2018-18 will be effective when the Company adopts ASU 2016-02 in 2019.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends the guidance on the impairment of financial instruments. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements.
In March 2017, the FASB issued Accounting Standards Update 2017-08, Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). ASU 2017-08 is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities.The amendments are effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements.
In July 2017, the FASB issued Accounting Standards Update 2017-11, (Part I) Accounting for Certain Financial Instruments With Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception (ASU 2017-11). ASU 2017-11 is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. In addition, ASU 2017-11 re-characterizes the indefinite deferral of certain provisions of Topic 480 to a scope exception. The recharacterization has no accounting effect. The amendments are effective for interim and annual periods beginning after December 15, 2018. The Company does not currently have financial instruments with down round features, therefore, the Company does not expect any impact to the Company’s condensed consolidated financial statements.
3. Cash, cash equivalents, restricted cash and restricted investments
The following table provides a reconciliation of cash and cash equivalents, restricted cash and restricted investments as of June 30, 2018 and December 31, 2017 :
 
June 30,
2018
 
December 31,
2017
Cash and cash equivalents
$
17,451

 
$
8,197

Restricted cash securing letter of credit facilities (1)
240,545

 
250,487

Restricted cash securing other reinsurance contracts (2)
329,423

 
290,649

Total cash, cash equivalents and restricted cash (3)
587,419

 
549,333

Restricted investments securing other reinsurance contracts (2)
310,205

 
326,429

Total cash, cash equivalents, restricted cash and restricted investments
$
897,624

 
$
875,762

(1)
Restricted cash securing letter of credit facilities primarily pertains to letters of credit issued to clients and cash securing these obligations that the Company will not be released until the underlying reserves have been settled. The time period for which the Company expects these letters of credit to be in place varies from contract to contract, but can last several years.
(2)
Restricted cash and restricted investments securing other reinsurance contracts pertain to trust accounts securing the Company’s contractual obligations under certain reinsurance contracts that the Company will not be released from until all underlying risks have expired or have been settled. Restricted investments include certain investments in debt securities including U.S. Treasury securities and sovereign debt. The time period for which the Company expects these trust accounts to be in place varies from contract to contract, but can last several years.
(3)
Cash, cash equivalents and restricted cash as reported in the Company’s condensed consolidated statements of cash flows.


7



4. Investments
The Company’s investments are managed by its investment manager, Third Point LLC (“Third Point LLC” or the “Investment Manager”), under long-term investment management contracts. The Company directly owns the investments that are held in separate accounts and managed by Third Point LLC. The following is a summary of the separate accounts managed by Third Point LLC:
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Total investments in securities
$
3,097,918

 
$
2,995,097

Cash and cash equivalents
43

 
8

Restricted cash and cash equivalents
569,968

 
541,136

Due from brokers
258,764

 
305,093

Derivative assets, at fair value
34,738

 
73,372

Interest and dividends receivable
4,385

 
3,774

Total assets
3,965,816

 
3,918,480

Liabilities and noncontrolling interests in related party
 
 
 
Accounts payable and accrued expenses
3,070

 
5,137

Securities sold, not yet purchased
443,216

 
394,278

Securities sold under an agreement to repurchase

 
29,618

Due to brokers
926,588

 
770,205

Derivative liabilities, at fair value
12,380

 
14,503

Performance fee payable to related party
4,641

 

Interest and dividends payable
2,696

 
1,218

Total noncontrolling interests in related party (1)
12,335

 
113,626

Total liabilities and noncontrolling interests in related party
1,404,926

 
1,328,585

Total net investments managed by Third Point LLC
$
2,560,890

 
$
2,589,895

(1)
See Note 17 for additional information.
Fair Value Measurements
The Company’s Investment Manager has a formal valuation policy that sets forth the pricing methodology for investments to be used in determining the fair value of each security in the Company’s portfolio. The valuation policy is updated and approved at least on an annual basis by Third Point LLC’s valuation committee (the “Committee”). The Committee meets monthly and is comprised of officers and employees who are senior business management personnel of Third Point LLC. The Committee’s role is to review and verify the propriety and consistency of the valuation methodology to determine the fair value of investments. The Committee also reviews any due diligence performed and approves any changes to current or potential external pricing vendors.
Investments are carried at fair value. The fair values of investments are estimated using prices obtained from third-party pricing services, when available. However, situations may arise where the Company believes that the fair value provided by the third-party pricing service does not represent current market conditions. In those situations, Third Point LLC may use dealer quotes to value the investments. The methodology for valuation is generally determined based on the investment’s asset class per the Company’s Investment Manager’s valuation policy. For investments where fair values from pricing services or brokers are unavailable, fair values are estimated using information obtained by the Company’s Investment Manager.


8



U.S. GAAP disclosure requirements establish a framework for measuring fair value, including a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. The three-level hierarchy of inputs is summarized below:
Level 1 – Quoted prices available in active markets/exchanges for identical investments as of the reporting date.
Level 2 – Observable inputs to the valuation methodology other than unadjusted quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include, but are not limited to, prices quoted for similar assets or liabilities in active markets/exchanges, prices quoted for identical or similar assets or liabilities in markets that are not active and fair values determined through the use of models or other valuation methodologies.
Level 3 – Pricing inputs unobservable for the investment and include activities where there is little, if any, market activity for the investment. The inputs applied in the determination of fair value require significant management judgment and estimation.
Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. For example, the risk inherent in a particular valuation technique used to measure fair value including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources other than those of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and considers factors specific to the investment.
The key inputs for corporate, government and sovereign bond valuation are coupon frequency, coupon rate and underlying bond spreads. The key inputs for ABS are yield, probability of default, loss severity and prepayment.
Key inputs for over-the-counter (“OTC”) valuations vary based on the type of underlying security on which the contract was written:
The key inputs for most OTC option contracts include notional, strike price, maturity, payout structure, current foreign exchange forward and spot rates, current market price of the underlying security and volatility of the underlying security.
The key inputs for most forward contracts include notional, maturity, forward rate, spot rate, various interest rate curves and discount factor.
The key inputs for swap valuation will vary based on the type of underlying security on which the contract was written. Generally, the key inputs for most swap contracts include notional, swap period, fixed rate, credit or interest rate curves, current market or spot price of the underlying security and the volatility of the underlying security.
Situations may arise when market quotations or valuations provided by external pricing vendors are available but the fair value may not represent current market conditions. In those cases, Third Point LLC may substitute valuations provided by external pricing vendors with multiple broker-dealer quotations.
Securities listed on a national securities exchange or quoted on NASDAQ are valued at their last sales price as of the last business day of the period. Listed securities with no reported sales on such date and OTC securities are valued at their last closing bid price if held long by the Company, and last closing ask price if held short by the Company. As of June 30, 2018 , securities valued at $158.2 million ( December 31, 2017 - $ 234.4 million), representing 5.1% ( December 31, 2017 - 7.6% ) of investments in securities and derivative assets, and $2.1 million ( December 31, 2017


9



- $ 2.1 million), representing 0.5% ( December 31, 2017 - 0.5% ) of securities sold, not yet purchased and derivative liabilities, are valued based on broker quotes.
Private securities, real estate and related debt investments are those not registered for public sale and are carried at an estimated fair value at the end of the period, as determined by Third Point LLC. Valuation techniques used by Third Point LLC may include market approach, last transaction analysis, liquidation analysis and/or using discounted cash flow models where the significant inputs could include but are not limited to additional rounds of equity financing, financial metrics such as revenue multiples or price-earnings ratio, discount rates and other factors. In addition, third party valuation firms may be employed to conduct investment valuations of such private securities. The third party valuation firms provide written reports documenting their recommended valuation as of the determination date for the specified investments.
As of June 30, 2018 , the Company had $90.8 million ( December 31, 2017 - $ 83.4 million) of investments fair valued by the Company’s Investment Manager representing approximately 2.9% ( December 31, 2017 - 2.7% ) of total investments in securities and derivative assets of which 98.3% were also separately valued by third party valuation firms using information obtained from the Company’s Investment Manager. As a result of the inherent uncertainty of valuation for private securities, the estimated fair value may differ materially from the value that would have been used had a ready market existed for these investments. The actual value at which these securities could be sold or settled with a willing buyer or seller may differ from the Company’s estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.
The Company’s free standing derivatives are recorded at fair value, and are included in the condensed consolidated balance sheets in derivative assets and derivative liabilities. Third Point LLC values exchange-traded derivatives at their last sales price on the exchange where they are primarily traded. OTC derivatives, which include swap, option, swaption, forward, future and contract for differences, are valued by an industry recognized third party valuation vendor when available; otherwise, fair values are obtained from broker quotes that are based on pricing models that consider the time value of money, volatility, and the current market and contractual prices of the underlying financial instruments.
The Company values its investments in limited partnerships at fair value, which is estimated based on the Company’s share of the net asset value (“NAV”) of the limited partnerships as provided by the investment managers of the underlying investment funds. The resulting net gains or net losses are reflected in the condensed consolidated statements of income (loss) . These investments are included in investment in funds valued at NAV and excluded from the presentation of investments categorized by the level of the fair value hierarchy. These investments are non-redeemable and distributions are made by the investment funds as underlying investments are monetized.
As of June 30, 2018 and December 31, 2017 , the Company’s asset-backed securities (“ABS”) holdings were as follows:
 
June 30, 2018
 
December 31, 2017
Reperforming loans
$
109,117

 
60.4
%
 
$
160,354

 
71.1
%
Market place loans
60,664

 
33.6
%
 
52,584

 
23.3
%
Other (1)
10,990

 
6.0
%
 
12,561

 
5.6
%
 
$
180,771

 
100.0
%
 
$
225,499

 
100.0
%
(1)
Other includes: U.S. Alt-A positions, collateralized debt obligations, commercial mortgage-backed securities, non-U.S. RMBS and aircraft ABS.
As of June 30, 2018 , all of the Company’s ABS holdings were private-label issued, non-investment grade securities, and none of these securities were guaranteed by a government sponsored entity. These investments are valued using broker quotes or a recognized third-party pricing vendor. All of these classes of ABS are sensitive to changes in interest rates and any resulting change in the rate at which borrowers sell their properties, refinance, or otherwise pre-pay their loans. As an investor in these classes of ABS, the Company may be exposed to the credit risk of underlying borrowers not being able to make timely payments on loans or the likelihood of borrowers defaulting on their loans. In addition, the Company may be exposed to significant market and liquidity risks.


10



The following tables present the Company’s investments, categorized by the level of the fair value hierarchy as of June 30, 2018 and December 31, 2017 :
 
June 30, 2018
 
 Quoted prices in active markets
 
 Significant other observable inputs
 
 Significant unobservable inputs
 
 Total
 
 (Level 1)
 
 (Level 2)
 
 (Level 3)
 
Assets
 
 
 
 
 
 
 
Equity securities
$
2,360,825

 
$
5,812

 
$

 
$
2,366,637

Private common equity securities

 

 
4,362

 
4,362

Private preferred equity securities

 

 
56,769

 
56,769

Total equities
2,360,825


5,812


61,131

 
2,427,768

Asset-backed securities

 
152,632

 
28,139

 
180,771

Bank debt

 
22,566

 

 
22,566

Corporate bonds

 
43,207

 
9,968

 
53,175

Municipal bonds

 
40,432

 

 
40,432

U.S. Treasury securities

 
236,600

 

 
236,600

Sovereign debt

 
83,244

 

 
83,244

Other debt securities

 
1,125

 

 
1,125

Total debt securities

 
579,806

 
38,107

 
617,913

Options
962

 
8,443

 

 
9,405

Rights and warrants
214

 
1

 
424

 
639

Real estate

 

 
7,351

 
7,351

Trade claims

 
3,068

 

 
3,068

Total other investments
1,176

 
11,512

 
7,775

 
20,463

Derivative assets (free standing)

 
27,852

 
6,886

 
34,738


$
2,362,001

 
$
624,982

 
$
113,899

 
3,100,882

Investments in funds valued at NAV
 
 
 
 
 
 
31,981

Total assets
 
 
 
 
 
 
$
3,132,863

Liabilities
 
 
 
 
 
 
 
Equity securities
$
417,577

 
$

 
$

 
$
417,577

Corporate bonds

 
20,181

 

 
20,181

Options
1,396

 
4,062

 

 
5,458

Total securities sold, not yet purchased
418,973

 
24,243

 

 
443,216

Derivative liabilities (free standing)

 
10,541

 
1,839

 
12,380

Derivative liabilities (embedded)

 

 
164

 
164

Total liabilities
$
418,973

 
$
34,784

 
$
2,003

 
$
455,760





11



 
December 31, 2017
 
 Quoted prices in active markets
 
 Significant other observable inputs
 
 Significant unobservable inputs
 
 Total
 
 (Level 1)
 
 (Level 2)
 
 (Level 3)
 
Assets
 
 
 
 
 
 
 
Equity securities
$
2,200,379

 
$
20,751

 
$

 
$
2,221,130

Private common equity securities

 

 
4,794

 
4,794

Private preferred equity securities

 

 
57,126

 
57,126

Total equities
2,200,379

 
20,751

 
61,920

 
2,283,050

Asset-backed securities

 
198,191

 
27,308

 
225,499

Bank debt

 
14,550

 

 
14,550

Corporate bonds

 
67,218

 
9,868

 
77,086

U.S. Treasury securities

 
249,994

 

 
249,994

Sovereign debt

 
102,569

 

 
102,569

Other debt securities

 
4,747

 
713

 
5,460

Total debt securities

 
637,269

 
37,889

 
675,158

Options
1,973

 
2,978

 

 
4,951

Rights and warrants

 
168

 
435

 
603

Real estate

 

 
6,831

 
6,831

Trade claims

 
7,496

 

 
7,496

Total other investments
1,973

 
10,642

 
7,266

 
19,881

Derivative assets (free standing)

 
73,372

 

 
73,372

 
$
2,202,352

 
$
742,034

 
$
107,075

 
3,051,461

Investments in funds valued at NAV
 
 
 
 
 
 
17,850

Total assets
 
 
 
 
 
 
$
3,069,311

Liabilities
 
 
 
 
 
 
 
Equity securities
$
364,215

 
$

 
$

 
$
364,215

Corporate bonds

 
21,699

 

 
21,699

Options
2,668

 
5,696

 

 
8,364

Total securities sold, not yet purchased
366,883

 
27,395

 

 
394,278

Derivative liabilities (free standing)

 
12,418

 
2,085

 
14,503

Derivative liabilities (embedded)

 

 
171

 
171

Total liabilities
$
366,883

 
$
39,813

 
$
2,256

 
$
408,952

During the six months ended June 30, 2018 , the Company made $0.2m ( December 31, 2017 - $nil ) of reclassifications of assets or liabilities between Levels 1 and 2.
The total change in unrealized gains (losses) on equity and debt securities held at the three months ended June 30, 2018 were $2.9 million and $(17.7) million , respectively ( 2017 - $71.2 million and $(10.8) million , respectively). The total change in unrealized gains (losses) on equity and debt securities held at the six months ended June 30, 2018 were $(21.0) million and $(18.4) million , respectively ( 2017 - $176.3 million and $(9.1) million , respectively).




12



The following table presents the reconciliation of all investments measured at fair value using Level 3 inputs for the three and six months ended June 30, 2018 and 2017 :
 
April 1,
2018
 
Transfers in to (out of) Level 3
 
Purchases
 
Sales
 
Realized and Unrealized Gains (Losses) (1)
 
June 30,
2018
Assets
 
 
 
 
 
 
 
 
 
 
 
Private common equity securities
$
4,352

 
$

 
$
21

 
$

 
$
(11
)
 
$
4,362

Private preferred equity securities
55,231

 

 
2,350

 
(977
)
 
165

 
56,769

Asset-backed securities
27,256

 
3,622

 
18,350

 
(21,188
)
 
99

 
28,139

Corporate bonds
10,081

 

 
512

 
(817
)
 
192

 
9,968

Rights and warrants
819

 
(1
)
 

 
(388
)
 
(6
)
 
424

Real estate
6,937

 

 

 

 
414

 
7,351

Derivative assets (free standing)

 
8,397

 

 
390

 
(1,901
)
 
6,886

Total assets
$
104,676

 
$
12,018

 
$
21,233

 
$
(22,980
)
 
$
(1,048
)
 
$
113,899

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (free standing)
$
(1,996
)
 
$
10

 
$

 
$

 
$
147

 
$
(1,839
)
Derivative liabilities (embedded)
(124
)
 

 

 

 
(40
)
 
(164
)
Total liabilities
$
(2,120
)
 
$
10

 
$

 
$

 
$
107

 
$
(2,003
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1,
2018
 
Transfers in to (out of) Level 3
 
Purchases
 
Sales
 
Realized and Unrealized Gains (Losses) (1)
 
June 30,
2018
Assets
 
 
 
 
 
 
 
 
 
 
 
Private common equity securities
$
4,794

 
$

 
$
22

 
$

 
$
(454
)
 
$
4,362

Private preferred equity securities
57,126

 

 
2,509

 
(992
)
 
(1,874
)
 
56,769

Asset-backed securities
27,308

 
6,104

 
30,610

 
(35,522
)
 
(361
)
 
28,139

Corporate bonds
9,868

 

 
532

 
(817
)
 
385

 
9,968

Other debt securities
713

 

 

 
(913
)
 
200

 

Rights and warrants
435

 
(1
)
 
582

 
(593
)
 
1

 
424

Real estate
6,831

 

 

 
(153
)
 
673

 
7,351

Derivative assets (free standing)

 
7,701

 

 
1,499

 
(2,314
)
 
6,886

Total assets
$
107,075

 
$
13,804

 
$
34,255

 
$
(37,491
)
 
$
(3,744
)
 
$
113,899

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (free standing)
$
(2,085
)
 
$
13

 
$

 
$

 
$
233

 
$
(1,839
)
Derivative liabilities (embedded)
(171
)
 

 

 

 
7

 
(164
)
Total liabilities
$
(2,256
)
 
$
13

 
$

 
$

 
$
240

 
$
(2,003
)
 
 
 
 
 
 
 
 
 
 
 
 


13



 
April 1,
2017
 
Transfers in to (out of) Level 3
 
Purchases
 
Sales
 
Realized and Unrealized Gains (Losses) (1)
 
June 30,
2017
Assets
 
 
 
 
 
 
 
 
 
 
 
Private common equity securities
$
4,745

 
$

 
$

 
$

 
$
30

 
$
4,775

Private preferred equity securities
48,350

 

 
939

 
(123
)
 
1,593

 
50,759

Asset-backed securities
20,785

 
15,642

 
22,038

 
(20,545
)
 
(2,209
)
 
35,711

Bank debt
8,722

 
(189
)
 
3

 
(23
)
 
1,733

 
10,246

Corporate bonds
8,984

 

 
92

 
(320
)
 
339

 
9,095

Other debt securities

 

 
3,312

 

 

 
3,312

Total assets
$
91,586

 
$
15,453

 
$
26,384

 
$
(21,011
)
 
$
1,486

 
$
113,898

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (free standing)
$
(1,326
)
 
$

 
$

 
$
(41
)
 
$

 
$
(1,367
)
Derivative liabilities (embedded)
(111
)
 

 

 

 
(69
)
 
(180
)
Total liabilities
$
(1,437
)
 
$

 
$

 
$
(41
)
 
$
(69
)
 
$
(1,547
)
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1,
2017
 
Transfers in to (out of) Level 3
 
Purchases
 
Sales
 
Realized and Unrealized Gains (Losses) (1)
 
June 30,
2017
Assets
 
 
 
 
 
 
 
 
 
 
 
Private common equity securities
$
4,799

 
$

 
$

 
$

 
$
(24
)
 
$
4,775

Private preferred equity securities
48,834

 

 
939

 
(495
)
 
1,481

 
50,759

Asset-backed securities
17,628

 
20,016

 
31,958

 
(32,237
)
 
(1,654
)
 
35,711

Bank debt
8,350

 
(446
)
 
4

 
(272
)
 
2,610

 
10,246

Corporate bonds
9,255

 

 
93

 
(587
)
 
334

 
9,095

Other debt securities

 

 
3,312

 

 

 
3,312

Total assets
$
88,866

 
$
19,570

 
$
36,306

 
$
(33,591
)
 
$
2,747

 
$
113,898

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities (free standing)
$
(1,326
)
 
$

 
$

 
$
(41
)
 
$

 
$
(1,367
)
Derivative liabilities (embedded)
(92
)
 

 

 

 
(88
)
 
(180
)
Total liabilities
$
(1,418
)
 
$

 
$

 
$
(41
)
 
$
(88
)
 
$
(1,547
)
(1)
Total change in realized and unrealized gains (losses) recorded on Level 3 financial instruments is included in net investment income in the condensed consolidated statements of income (loss) .
Total change in unrealized gains (losses) on fair value of assets using significant unobservable inputs (Level 3) held at the three and six months ended June 30, 2018 were $(2.9) million and $(6.9) million , respectively ( 2017 - $ 1.9 million and $0.6 million , respectively).
For assets and liabilities that were transferred into Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred into Level 3 at the beginning of the period; similarly, for assets and liabilities that were transferred out of Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred out of Level 3 at the beginning of the period.


14



The following table summarizes information about the significant unobservable inputs used in determining the fair value of the Level 3 investments held by the Company.  Level 3 investments not presented in the table are insignificant or do not have any unobservable inputs to disclose, as they are valued primarily using dealer quotes or at cost.
June 30, 2018
Assets
 
Fair value
 
Valuation technique
 
Unobservable input
 
Range
Private equity investments
 
$
4,969

 
Market approach
 
Volatility
 
40.0% - 45.0%

 
 
 
 
 
 
Multiple
 
6.5 - 10.0x

Real estate
 
7,054

 
Discounted cash flow
 
Discount rate
 
9.5
%
 
 
 
 
 
 
Capitalization rate
 
6.5
%
Rights and warrants
 
424

 
Discounted cash flow
 
Discount rate
 
15.5
%
 
 
 
 
 
 
Time to exit
 
5.0 years

 
 
 
 
Market approach
 
Multiple
 
3.0 - 3.6x

December 31, 2017
Assets
 
Fair value
 
Valuation technique
 
Unobservable input
 
Range
Private equity investments
 
$
37,507

 
Market approach
 
Volatility
 
35.0% - 65.0%

 
 
 
 
 
 
Time to exit
 
0.5 - 1.8 years

 
 
 
 
 
 
Multiple
 
7.8 - 24.4x

Real estate
 
6,831

 
Discounted cash flow
 
Discount rate
 
9.5
%
 
 
 
 
 
 
Capitalization rate
 
6.5% - 10.0%

Other debt securities
 
713

 
Discounted cash flow
 
Capitalization rate
 
10.0
%
Rights and warrants
 
433

 
Discounted cash flow
 
Discount rate
 
13.5
%
 
 
 
 
 
 
Time to exit
 
5.0 years

 
 
 
 
Market approach
 
Multiple
 
3.8 - 4.6x

Private equity investments
T he Company measures the fair value of these investments using a market approach which typically utilizes guideline comparable company trading multiples and/or a discounted cash flow analysis. Under the guideline comparable company multiples approach, the Company determines comparable public companies based on industry, size, developmental stage, strategy, etc., and then calculates a trading multiple for each comparable company. The trading multiple may then be discounted for various considerations as appropriate. The concluded multiple is then applied to the subject company to calculate the value of the subject company. The discounted cash flow model involves using the financial information of the portfolio companies to develop revenue and income projections for the subject company for future years based on information on growth rates relative to the company’s development stage. The enterprise value of the subject company is calculated by discounting the projected cash flows and the terminal value to net present value. The fair value of the company’s debt is reduced from the enterprise value to determine the equity value.
Real estate and other debt securities
The values of the investments are based upon available information concerning the market for real estate property investments and the underlying assets of the other debt investments. The valuation methods include, but are not limited to the following: (1) forecasts of future net cash flows based on the Investment Manager’s analysis of future earnings from the investment plus anticipated net proceeds from the sale, disposition or resolution of the investment; (2) discounted earnings multiples applied to stabilized income or adjusted earnings from the investment; (3) recent sales of comparable investments.
Rights and warrants
The values of the investments are based on the valuation techniques discussed in private equity investments above as they relate to the same underlying securities.
For the six months ended June 30, 2018 and 2017 , there were no changes in the valuation techniques as they relate to the above.


15



5. Due from/to brokers
The Company holds substantially all of its investments through prime brokers pursuant to agreements between the Company and each prime broker. The brokerage arrangements differ from broker to broker, but generally cash and investments in securities are available as collateral against investments in securities sold, not yet purchased and derivative positions, if required.
As of June 30, 2018 and December 31, 2017 , the Company’s due from/to brokers were comprised of the following:
 
June 30,
2018
 
December 31,
2017
Due from brokers
 
 
 
Cash held at brokers
$
247,145

 
$
295,467

Receivable from unsettled trades (1)
11,619

 
9,626

 
$
258,764

 
$
305,093

Due to brokers
 
 
 
Borrowing from prime brokers
$
862,774

 
$
759,267

Payable from unsettled trades
63,814

 
10,938

 
$
926,588

 
$
770,205

(1) Receivables relating to securities sold by the Company are recorded as receivable from unsettled trades in due from brokers in the Company’s condensed consolidated balance sheets.
Due from/to brokers include cash balances maintained with the Company’s prime brokers, receivables and payables from unsettled trades and proceeds from securities sold, not yet purchased. In addition, due from/to brokers includes cash collateral received and posted from OTC and repurchase agreement counterparties. As of June 30, 2018 , the Company’s borrowing from prime brokers includes a total non-U.S. currency balance of $100.3 million ( December 31, 2017 - $70.1 million ).
The Company uses prime brokerage borrowing arrangements to provide collateral for its letter of credit facilities and to fund trust accounts securing certain reinsurance contracts.  As of June 30, 2018 , the Company had $880.2 million ( December 31, 2017 - $867.6 million ) of restricted cash and investments securing letter of credit facilities and certain reinsurance contracts. Margin debt balances were collateralized by cash held by the broker and certain of the Company’s securities. Margin interest was paid either at the daily broker call rate or based on London Inter-bank Offered Rate. Amounts are borrowed through committed facilities with terms of up to 90 days, secured by assets of the Company held by the prime broker, and incur interest based on the Company’s negotiated rates. This interest expense is reflected in net investment income in the condensed consolidated statements of income (loss) .


16



6. Derivatives
The following tables identify the listing currency, fair value and notional amounts of derivative instruments included in the condensed consolidated balance sheets, categorized by primary underlying risk. Balances are presented on a gross basis.
 
As of June 30, 2018
 
 Listing currency (1)
 
 Fair Value
 
 Notional Amounts (2)
Derivative Assets by Primary Underlying Risk
 
 
 
 
 
Credit
 
 
 
 
 
Credit Default Swaps - Protection Purchased
EUR/USD
 
$
7,426

 
$
72,960

Total Return Swaps - Long Contracts
EGP
 
6,681

 
6,681

Equity Price
 
 
 
 
 
Contracts for Differences - Long Contracts
BRL/EUR/USD
 
9,641

 
104,549

Contracts for Differences - Short Contracts
CHF/EUR/JPY
 
3,062

 
19,382

Interest Rates
 
 
 
 
 
Interest Rate Swaptions
JPY/USD
 
452

 
488,780

Foreign Currency Exchange Rates
 
 
 
 
 
Foreign Currency Forward Contracts
BRL/CHF/CNH/EUR/HKD/JPY
 
6,386

 
613,867

Foreign Currency Options - Purchased
USD
 
1,090

 
69,438

Total Derivative Assets
 
 
$
34,738

 
$
1,375,657

 
 
 
 
 
 
 
 
 
 
 
 
 
 Listing currency (1)
 
 Fair Value
 
 Notional Amounts (2)
Derivative Liabilities by Primary Underlying Risk
 
 
 
 
 
Credit
 
 
 
 
 
Credit Default Swaps - Protection Purchased
USD
 
$
95

 
$
17,004

Credit Default Swaps - Protection Sold
USD
 
2,147

 
5,003

Equity Price
 
 
 
 
 
Contracts for Differences - Long Contracts
BRL/EUR/GBP
 
3,726

 
79,109

Contracts for Differences - Short Contracts
CHF/EUR/GBP/JPY/SEK/USD
 
1,528

 
58,391

Interest Rates
 
 
 
 
 
Interest Rate Swaptions
JPY/USD
 
89

 
488,417

Sovereign Debt Futures - Short Contracts
EUR
 
644

 
106,600

Total Return Swaps - Long Contracts
ARS
 
3,277

 
19,175

Foreign Currency Exchange Rates
 
 
 
 
 
Foreign Currency Forward Contracts
ARS/HKD/SAR
 
347

 
221,008

Foreign Currency Options - Sold
USD
 
527

 
107,312

Total Derivative Liabilities (free standing)
 
 
$
12,380

 
$
1,102,019

 
 
 
 
 
 
Embedded derivative liabilities in reinsurance contracts (3)
USD
 
$
164

 
$
20,000

Total Derivative Liabilities (embedded)
 
 
$
164

 
$
20,000

(1)
ARS = Argentine peso, BRL = Brazilian Real, CHF = Swiss Franc, CNH = Chinese Yuan, EGP = Egyptian Pound, EUR = Euro, HKD = Hong Kong Dollar, GBP = British Pound, JPY = Japanese Yen, SAR = Saudi Arabian Riyal, SEK = Swedish Krona, USD = US Dollar.
(2)
The absolute notional exposure represents the Company’s derivative activity as of June 30, 2018 , which is representative of the volume of derivatives held during the period.
(3)
The fair value of embedded derivatives in reinsurance contracts is included in reinsurance balances payable in the condensed consolidated balance sheets.


17



 
As of December 31, 2017
 
 Listing currency (1)
 
 Fair Value
 
 Notional Amounts (2)
Derivative Assets by Primary Underlying Risk
 
Credit
 
 
 
 
 
Credit Default Swaps - Protection Purchased
USD
 
$
8,205

 
$
50,593

Total Return Swaps - Long Contracts
EGP
 
25,245

 
25,245

Equity Price
 
 
 
 
 
Contracts for Differences - Long Contracts