UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): September 9, 2013

Enstar Group Limited
(Exact name of registrant as specified in its charter)

 
 	 	 	 	 	
Bermuda	 	001-33289	 	N/A	
(State or other jurisdiction
of incorporation)	 	(Commission
File Number)	 	(IRS Employer
Identification No.)	

P.O. Box HM 2267, Windsor Place, 3rd Floor
22 Queen Street, Hamilton HM JX Bermuda	 	N/A	
(Address of principal executive offices)	 	(Zip Code)	
Registrant’s telephone number, including area code: (441) 292-3645

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)	
 
¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)	
 
¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))	
 
¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))	

 

We are amending the Current Report on Form 8-K that we filed on September 11, 2013 to include the Financial Statements of Business Acquired in connection with the acquisition of Arden Reinsurance Company Ltd. (“Arden Re”) from Arden Holdings Ltd., and to include the Pro Forma Financial Information set forth below under Item 9.01 Financial Statements and Exhibits.
 
Item 9.01	Financial Statements and Exhibits.	
 
(a)	Financial Statements of Business Acquired.	
The required consolidated financial statements of Arden Re are attached hereto as Exhibits 99.1, 99.2 and 99.3 and are incorporated in their entirety herein by reference.
 
(b)	Pro Forma Combined Financial Information.	
The required pro forma financial information of Enstar Group Limited and Arden Re is attached hereto as Exhibit 99.4 and is incorporated in its entirety herein by reference.
 
(d)	Exhibits	

Exhibit
Number	  	Description	
 	 	
23.1	  	Consent of Ernst & Young Ltd.	
 	 	
99.1	  	Audited financial statements of Arden Reinsurance Company Ltd. as of and for the years ended December 31, 2012 and 2011.	
 	 	
99.2	  	Audited financial statements of Ariel Reinsurance Company Ltd. (company name subsequently changed to Arden Reinsurance Company Ltd.) as of and for the years ended December 31, 2011 and 2010.	
 	 	
99.3	  	Unaudited interim financial statements of Arden Reinsurance Company Ltd. as of June 30, 2013 and for the six months ended June 30, 2013 and 2012.	
 	 	
99.4	  	Unaudited pro forma condensed combined consolidated statements of earnings of Enstar Group Limited and Arden Reinsurance Company Ltd. for the six months ended June 30, 2013 and the year ended December 31, 2012.	
 
1

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	ENSTAR GROUP LIMITED	
 	 	 	
Date: November 25, 2013	 	By:	 	/s/ Richard J. Harris	
 	 	Richard J. Harris	
 	 	Chief Financial Officer	
 
2

EXHIBIT INDEX

Exhibit
Number	  	Description	
 	 	
23.1	  	Consent of Ernst & Young Ltd.	
 	 	
99.1	  	Audited financial statements of Arden Reinsurance Company Ltd. as of and for the years ended December 31, 2012 and 2011.	
 	 	
99.2	  	Audited financial statements of Ariel Reinsurance Company Ltd. (company name subsequently changed to Arden Reinsurance Company Ltd.) as of and for the years ended December 31, 2011 and 2010.	
 	 	
99.3	  	Unaudited interim financial statements of Arden Reinsurance Company Ltd. as of June 30, 2013 and for the six months ended June 30, 2013 and 2012.	
 	 	
99.4	  	Unaudited pro forma condensed combined consolidated statements of earnings of Enstar Group Limited and Arden Reinsurance Company Ltd. for the six months ended June 30, 2013 and the year ended December 31, 2012.	
 
3

Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements (S-8 No. 333-149551, 333-148863, 333-148862, 333-141793) pertaining to the Employee Share Purchase Plan of Enstar Group Limited, the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors, The Enstar Group, Inc. 1997 Omnibus Incentive Plan and The Enstar Group, Inc. 2001 Outside Directors Stock Option Plan, and Enstar Group Limited 2006 Equity Incentive Plan, of our reports dated March 21, 2013 and March 8, 2012, with respect to the consolidated financial statements of Arden Reinsurance Company Ltd. included in the Current Report on Form 8-K/A of Enstar Group Limited dated November 25, 2013, filed with the Securities and Exchange Commission.
/s/ Ernst & Young Ltd.
Hamilton, Bermuda
November 25, 2013

Exhibit 99.1
CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2012 and 2011
ARDEN REINSURANCE COMPANY LTD.
Purvis House, 2nd Floor, 29 Victoria Street, Hamilton HM10, Bermuda

Arden Reinsurance Company Ltd.
Index to the Consolidated Financial Statements

Consolidated Balance Sheets as at December 31, 2012, and 2011	  	 	3	  	
 	 	
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011	  	 	4	  	
 	 	
Consolidated Statements of Changes in Shareholder’s Equity for the years ended December 31, 2012 and 2011	  	 	5	  	
 	 	
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	  	 	6	  	
 	 	
Notes to the Consolidated Financial Statements	  	 	7	  	
 
2

Arden Reinsurance Company Ltd.
Consolidated Balance Sheets
At December 31, 2012 and 2011
(in thousands of United States Dollars)

 	  	December 31,
2012	 	 	December 31,
2011	 	
Assets	  	 	 	 	 	 	 	 	
Fixed maturity investments, at fair value (amortized cost 2012: $229,548; 2011: $1,301,519)	  	$	227,988	  	 	$	1,306,543	  	
Other investments, at fair value	  	 	3,612	  	 	 	198,685	  	
Short-term investments, at fair value (amortized cost 2012: nil; 2011: $100,167)	  	 	—  	  	 	 	100,167	  	
 	  	 	 	 	 	 	 	 	
Total investments	  	 	231,600	  	 	 	1,605,395	  	
Cash and cash equivalents	  	 	28,388	  	 	 	61,166	  	
Premiums receivable	  	 	146,985	  	 	 	218,015	  	
Accrued investment income	  	 	359	  	 	 	5,760	  	
Deferred acquisition costs	  	 	40	  	 	 	34,308	  	
Prepaid reinsurance premiums	  	 	33,956	  	 	 	17,735	  	
Paid losses recoverable	  	 	3,937	  	 	 	—  	  	
Loss reserves recoverable	  	 	379,603	  	 	 	41,448	  	
Other assets	  	 	44	  	 	 	5,327	  	
Balance due from Arden Holdings Ltd.	  	 	151	  	 	 	—  	  	
Receivable for investments sold	  	 	—  	  	 	 	22,457	  	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	825,063	  	 	$	2,011,611	  	

Liabilities	  	 	 	 	 	 	 	 	
Reserve for losses and loss adjustment expenses	  	 	474,915	  	 	 	563,997	  	
Unearned premiums	  	 	26,852	  	 	 	175,809	  	
Deposit liabilities	  	 	—  	  	 	 	26	  	
Reinsurance premiums payable	  	 	80,325	  	 	 	13,559	  	
Payable for investments purchased	  	 	—  	  	 	 	112,194	  	
Balance due to Arden Holdings Ltd.	  	 	—  	  	 	 	317	  	
Other liabilities	  	 	943	  	 	 	8,421	  	
 	  	 	 	 	 	 	 	 	
Total liabilities	  	 	583,035	  	 	 	874,323	  	

Shareholder’s Equity	  	 	 	 	 	 	 	 	
Ordinary share capital (Authorized 100,000,000 common shares, 2012: par value $10.00, 254,000 shares issued; 2011: par value $1.00, 1,000,000 shares issued)	  	 	2,540	  	 	 	1,000	  	
Additional paid-in capital	  	 	254,700	  	 	 	999,000	  	
(Deficit) retained earnings	  	 	(15,212	) 	 	 	137,288	  	
 	  	 	 	 	 	 	 	 	
Total shareholder’s equity	  	 	242,028	  	 	 	1,137,288	  	

 	  	 	 	 	 	 	 	 	
Total liabilities & shareholder’s equity	  	$	825,063	  	 	$	2,011,611	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
3

Arden Reinsurance Company Ltd.
Consolidated Statements of Operations
For the years ended December 31, 2012 and 2011
(in thousands of United States Dollars)

 	  	2012	 	 	2011	 	
Revenues	  	 	 	 	 	 	 	 	
Gross premiums written	  	$	128,100	  	 	$	492,664	  	
Reinsurance premiums ceded	  	 	(122,262	) 	 	 	(41,473	) 	
 	  	 	 	 	 	 	 	 	
Net premiums written	  	 	5,838	  	 	 	451,191	  	
Change in net unearned premiums	  	 	165,178	  	 	 	(10,410	) 	
 	  	 	 	 	 	 	 	 	
Net premiums earned	  	 	171,016	  	 	 	440,781	  	
Other underwriting income (loss)	  	 	25	  	 	 	(35	) 	
Gain on sale of assets	  	 	54,986	  	 	 	—  	  	
Net investment income	  	 	8,147	  	 	 	37,858	  	
Net realized gains on investments	  	 	36,191	  	 	 	3,835	  	
Net unrealized losses on investments	  	 	(15,440	) 	 	 	(12,285	) 	
Net foreign exchange losses	  	 	(1,071	) 	 	 	(1,847	) 	
 	  	 	 	 	 	 	 	 	
Total revenues	  	 	253,854	  	 	 	468,307	  	

Expenses	  	 	 	 	 	 	 	 	
Net losses and loss adjustment expenses	  	 	70,047	  	 	 	294,485	  	
Acquisition costs	  	 	14,520	  	 	 	64,611	  	
General and administrative expenses	  	 	22,388	  	 	 	49,631	  	
 	  	 	 	 	 	 	 	 	
Total expenses	  	 	106,955	  	 	 	408,727	  	

 	  	 	 	 	 	 	 	 	
Income before income taxes	  	 	146,899	  	 	 	59,580	  	

Income tax expense	  	 	159	  	 	 	460	  	
 	  	 	 	 	 	 	 	 	
Net income	  	$	146,740	  	 	$	59,120	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
4

Arden Reinsurance Company Ltd.
Consolidated Statements of Changes in Shareholder’s Equity
For the years ended December 31, 2012 and 2011
(in thousands of United States Dollars)

 	  	2012	 	 	2011	 	
Share capital	  	 	 	 	 	 	 	 	
Balance, beginning of year	  	$	1,000	  	 	$	1,000	  	
Increase in par value of common shares	  	 	9,000	  	 	 	—  	  	
Repurchase of common shares	  	 	(7,460	) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Balance, end of year	  	$	2,540	  	 	$	1,000	  	

Additional paid-in capital	  	 	 	 	 	 	 	 	
Balance, beginning of year	  	$	999,000	  	 	$	999,000	  	
Repurchase of common shares	  	 	(744,300	) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Balance, end of year	  	$	254,700	  	 	$	999,000	  	

(Deficit) retained earnings	  	 	 	 	 	 	 	 	
Balance, beginning of year	  	$	137,288	  	 	$	338,168	  	
Net income	  	 	146,740	  	 	 	59,120	  	
Dividends	  	 	(136,000	) 	 	 	(260,000	) 	
Allocation to share capital	  	 	(9,000	) 	 	 	—  	  	
Repurchase of common shares	  	 	(154,240	) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Balance, end of year	  	$	(15,212	) 	 	$	137,288	  	

 	  	 	 	 	 	 	 	 	
Total shareholder’s equity	  	$	242,028	  	 	$	1,137,288	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
5

Arden Reinsurance Company Ltd.
Consolidated Statements of Cash Flows
For the years ended December 31, 2012 and 2011
(in thousands of United States Dollars)

 	  	2012	 	 	2011	 	
Cash flows provided by operating activities:	  	 	 	 	 	 	 	 	
Net income	  	$	146,740	  	 	$	59,120	  	
Adjustments to reconcile net income to net cash (used in) provided by operating activities:	  	 	 	 	 	 	 	 	
Net realized gains on investments	  	 	(36,191	) 	 	 	(3,835	) 	
Net amortization on investments	  	 	2,163	  	 	 	5,195	  	
Net unrealized losses on investments	  	 	15,440	  	 	 	12,285	  	
Gain on sale of assets	  	 	(54,986	) 	 	 	—  	  	
Depreciation	  	 	383	  	 	 	4,093	  	
Other items	  	 	1,278	  	 	 	2,247	  	
Change in:	  	 	 	 	 	 	 	 	
Premiums receivable	  	 	71,030	  	 	 	(15,201	) 	
Accrued investment income	  	 	5,400	  	 	 	3,627	  	
Deferred acquisition costs	  	 	34,268	  	 	 	(3,345	) 	
Prepaid reinsurance premiums	  	 	(16,221	) 	 	 	(4,444	) 	
Paid loss recoverable	  	 	(3,937	) 	 	 	—  	  	
Loss reserves recoverable	  	 	(338,155	) 	 	 	(14,863	) 	
Other assets	  	 	1,074	  	 	 	(709	) 	
Reserve for losses and loss adjustment expenses	  	 	(89,082	) 	 	 	138,786	  	
Unearned premiums	  	 	(148,957	) 	 	 	14,914	  	
Reinsurance premiums payable	  	 	66,766	  	 	 	1,864	  	
Other liabilities	  	 	(7,478	) 	 	 	1,774	  	
 	  	 	 	 	 	 	 	 	
Net cash (used in) provided by operating activities	  	 	(350,465	) 	 	 	201,508	  	

Cash flows (used in) provided by investing activities:	  	 	 	 	 	 	 	 	
Purchases of fixed maturity investments	  	 	(1,135,845	) 	 	 	(2,913,652	) 	
Sales and maturities of fixed maturity investments	  	 	2,223,314	  	 	 	2,971,459	  	
Net (purchases) sales of short-term investments	  	 	100,198	  	 	 	(15,828	) 	
Net purchases of other investments	  	 	204,635	  	 	 	(26,743	) 	
Net change in receivable for investments sold	  	 	(89,737	) 	 	 	18,891	  	
Purchases of fixed assets	  	 	(52	) 	 	 	(1,125	) 	
Proceeds from sale of assets	  	 	58,754	  	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Net cash provided by investing activities	  	 	1,361,267	  	 	 	33,002	  	

Cash flows used in financing activities:	  	 	 	 	 	 	 	 	
Deposit liabilities	  	 	(26	) 	 	 	(13	) 	
Balance due from Arden Holdings Ltd.	  	 	(136,468	) 	 	 	(463	) 	
Repurchase of common shares	  	 	(906,000	) 	 	 	—  	  	
Dividends	  	 	—  	  	 	 	(260,000	) 	
 	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(1,042,494	) 	 	 	(260,476	) 	

 	  	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and cash equivalents	  	 	(1,086	) 	 	 	(713	) 	
 	  	 	 	 	 	 	 	 	
Net decrease in cash and cash equivalents	  	 	(32,778	) 	 	 	(26,679	) 	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents - beginning of year	  	 	61,166	  	 	 	87,845	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents - end of year	  	$	28,388	  	 	$	61,166	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
6

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
1. Organization
Arden Reinsurance Company Ltd., formerly known as Ariel Reinsurance Company Ltd., (“Arden Re” or collectively with its subsidiary the “Company”) was incorporated on November 4, 2005 under the laws of Bermuda. Arden Re is a wholly owned subsidiary of Arden Holdings Ltd. (“Arden Holdings”), an insurance holding company incorporated in Bermuda.
The Company’s operations are principally focused on catastrophe exposed property, marine, aviation, credit and surety reinsurance business. Catastrophe reinsurance covers unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, freezes, industrial explosions and other man-made or natural disasters. Loss experience associated with catastrophe reinsurance is characterized by infrequent events of high severity. Credit and surety reinsurance business is underwritten on a global basis through a branch office in Zurich, Switzerland that was established in 2009. Although catastrophe exposed business constitutes the majority of Arden Re’s business, the Company also underwrites property and, until 2010, professional liability insurance on a direct basis.
On March 11, 2010 Arden Re established a wholly-owned representative office in Brazil, Ariel Reinsurance Company Escritorió de Representçăo no Brasil Ltda. This office was opened to facilitate the underwriting of credit and surety lines of business.
During 2012, Arden Re sold assets, associated with its core property and marine reinsurance, property insurance and certain ancillary business underwritten to Arrow Corporate Member Holdings LLC (“Arrow”), a subsidiary of Goldman Sachs (“Goldman”). The Company also sold assets and rights associated with its credit and surety business based in Zurich to Arch Reinsurance Ltd. and Arch Reinsurance Europe Underwriting Limited (collectively “Arch”). (See Note 3)
2. Significant Accounting Policies
Basis of presentation and consolidation
The consolidated financial statements include Ariel Re and its wholly-owned subsidiary and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated in preparing these consolidated financial statements.
Use of estimates in consolidated financial statements
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. While the estimates included in the consolidated financial statements reflect the Company’s best estimates and assumptions, actual results could differ materially from these estimates. The significant estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss adjustment expenses, premium estimates for business written, and the fair value measurement of certain fixed maturities and other investments. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the periods in which they are determined.
Premiums
Premiums written are recorded in accordance with the terms of the underlying policies and contracts of insurance and reinsurance. Premiums written are recorded at the inception of the policy and are estimated based upon information received from insureds, ceding companies and their brokers. Subsequent differences arising on such estimates are recorded in the period in which they are determined. Premiums written are earned on a pro-rata basis over the period for which coverage is provided. The reserve for unearned premiums represents the portion of premiums written applicable to the unexpired risk period of policies and contracts and insurance and reinsurance in force.
 
7

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
For contracts and policies written on a losses occurring basis, the risk period is generally the same as the contract or policy term. For contracts written on a risks attaching basis, the risk period is based on the terms of the underlying contracts and policies.
Reinstatement premiums that reinstate coverage are estimated based on loss experience and are recorded in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Reinstatement premiums are generally written and earned at the time the associated loss event occurs.
Deferred acquisition costs
Acquisition expenses are costs that vary with, and are directly related to, the production of new and renewal business and consist principally of commissions and brokerage expenses incurred at the time a contract or policy is issued. These costs are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums. Anticipated loss and loss adjustment expenses and anticipated investment income related to those premiums are considered in determining the recoverability of deferred acquisition costs. Acquisition costs are shown net of commissions earned or reinsurance ceded.
Reinsurance ceded
In the normal course of business, the Company may seek to mitigate underwriting risk that could cause unfavorable results by reinsuring certain amounts of risk with other reinsurers. Reinsurance premiums ceded are expensed on a pro-rata basis over the period the reinsurance coverage is provided. Prepaid reinsurance premiums represent the portion of premiums ceded on the unexpired term of the policies purchased.
Reinsurance recoverables are presented on the Consolidated Balance Sheets net of any reserves for uncollectible reinsurance. The method for determining the reinsurance recoverable on unpaid losses and loss adjustment expenses involves actuarial estimates in a manner consistent with the determination of unpaid losses and loss adjustment expenses. Any reserve for uncollectible reinsurance is based on an estimate of the amount of the reinsurance recoverable balance that will ultimately not be recovered due to reinsurer insolvency, contractual dispute or other reason. The valuation of this reserve for uncollectible reinsurance includes several processes including a review of the credit ratings of the reinsurance recoverables by reinsurer, an analysis of default probabilities as well as coverage issues. These factors require considerable management judgment and the factors are reviewed in detail on a quarterly basis with any resulting adjustments recorded in earnings in the period that collection issues are identified.
Reserve for losses and loss adjustment expenses
The reserve for losses and loss adjustment expenses is established by management and includes estimates for unpaid claims and claim expenses on reported losses as well as an estimate of losses incurred but not reported. The reserve is based on individual claims, case reserves and other reserve estimates reported by insureds and ceding companies as well as management’s estimate of ultimate losses. The reserve for incurred but not reported losses and loss adjustment expenses is established by management based on actuarially determined estimates of ultimate losses and loss adjustment expenses. Inherent in the estimate of ultimate losses are expected trends in claim severity and frequency and other factors which could vary significantly as claims are settled.
Ultimate losses and loss adjustment expenses may vary materially from the amounts provided in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are recorded in earnings in the period in which they become known and are accounted for as changes in estimates.
Investments
The Company’s fixed maturity investments are reported as trading securities and are carried at estimated fair value with changes in fair value included in earnings in the consolidated statement of operations and comprehensive income. The Company determines fair value of its fixed maturity investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment.
 
8

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
Investment transactions are recorded on the trade date with balances pending settlement reflected separately in the balance sheet. Interest on fixed maturity investments is recorded in net investment income when earned and is adjusted for any amortization of premium or discount. Net investment income includes interest, dividend income and amortization of premiums or discounts and is recorded net of investment management fees. The amortization of premiums and accretion of discounts for fixed maturity investments is computed using the effective yield method. Premiums and discounts arising from the purchase of mortgage-backed securities are amortized using the effective yield method over the estimated remaining term of the securities, adjusted for anticipated prepayments.
Realized gains or losses on the sale of investments are determined on the basis of the first-in-first-out method and included in earnings when realized.
Short-term investments, which are managed as part of the Company’s investment portfolio and have a maturity of one year or less when purchased, are carried at fair value, which approximates amortized cost.
The Company participated in a securities lending program whereby blocks of securities, which are included in fixed maturity investments, are loaned to third parties, primarily major brokerage firms. The Company retains all economic interest in the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral is required at a rate of 102% - 105% of the market value of the loaned securities and is monitored daily and maintained by the lending agent. The collateral has not been recorded on the balance sheet as the Company does not have the right to sell or repledge the collateral. As at December 31, 2012, the Company does not participate in a securities lending program.
Other investments are carried at estimated fair value with interest, dividend income and income distributions included in net investment income. The fair value of the emerging market debt fund and hedge funds is generally established on the basis of the net valuation criteria established by the managers of the investments. These net valuations are determined based upon the valuation criteria established by the governing documents of such investments. The Company records the fair value of the hedge funds on a month lag as valuation information provided by the managers of the investments is not available on a timely basis. This lag in reporting is applied consistently until timely information becomes available. The fair value of catastrophe bonds is based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications. Such valuations may differ significantly from the values that would have been used had ready markets existed for the shares, partnership interests or notes of the other investments.
The Company enters into derivative instruments such as swaps, futures, options and forward foreign exchange contracts in order to manage its foreign currency exposure, obtain exposure to a particular financial market, or for managing the duration of the fixed maturity investment portfolio and yield curve. The Company records its derivatives at fair value on the Company’s Consolidated Balance Sheets as either assets or liabilities, depending on their rights or obligations, with changes in fair value included in unrealized gains (losses) on investments in the Consolidated Statements of Operations. The fair value of the Company’s derivatives is estimated by reference to quoted prices or broker quotes, where available, or in the absence of quoted prices or broker quotes, by the use of industry or internal valuation models.
Cash and cash equivalents
Cash and cash equivalents include highly liquid short-term deposits and securities with maturities of ninety days or less at the time of purchase.
Foreign exchange
The Company’s functional currency is the United States Dollar. Monetary assets and liabilities denominated in foreign currencies are re-measured into the functional currency at the exchange rates in effect at the balance sheet dates and revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date with the resulting foreign exchange gains and losses included in earnings.
 
9

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
Stock based compensation plans
Arden Holdings grants stock-based compensation awards which vest over a specified period or upon employees meeting certain performance. Arden Holdings recognizes the compensation expense for stock-based compensation based on the fair value of the award on the date of grant over the requisite service period, as appropriate. Arden Holdings charges the Company for the expense associated with stock-based compensation.
Taxation
The Company provides for income taxes for its branch office based in Zurich, Switzerland. The Company records deferred income taxes which reflect the tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases. A valuation allowance against a deferred tax asset is provided for if and when the Company believes that a portion, or all of the deferred tax asset may not be realized in the near term.
In addition, the Company is required to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained, assuming examination by tax authorities. The Company has not recognized any liabilities for unrecognized tax benefits as a result of this guidance. The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months and classifies all income tax associated with interest and penalties as income tax expense.
3. Sale of Arden Re Assets and Related Agreements
On February 29, 2012, Arden Holdings and Arden Re entered into a purchase agreement with Arrow, pursuant to which Arden Re sold assets in the amount of $3.3 million. The asset sold included intellectual property, trade name and rights associated with its core property and marine reinsurance, property insurance and certain ancillary business (together “subject lines”) underwritten by Arden Re. The Company recognized a gain on sale of assets of $47.2 million. The transaction closed on April 5, 2012. At closing, the Bermuda employees of Arden Re became employees of an Arrow or other Goldman affiliate.
Arden Re also reinsured its unexpired in-force business at closing in the subject lines on a 100% quota share basis to Ariel Syndicate 1910 at Lloyd’s, a subsidiary of Arrow. As at December 31, 2012, approximately 44% of its unexpired in-force business which was reinsured to Syndicate 1910 had been assigned effective April 1, 2012. Arden Re also reinsured its net loss reserves and loss expenses through a loss portfolio transfer in the subject lines to Arrow Indemnity Limited, a newly formed reinsurance subsidiary of Arrow. In addition, Arden Re agreed to participate in the development of the ceded loss reserves up to $55 million through December 31, 2012. As at December 31, 2012, there had been no adverse loss development on these net loss reserves and loss expenses.
On March 2, 2012, Arden Re also entered into a purchase agreement with Arch, pursuant to which Arden Re sold assets in the amount of $0.5 million. The assets sold include assets and rights associated with its credit and surety business based in Zurich. The Company recognized a gain on sale of assets of $7.7 million. The transaction closed on April 9, 2012. At closing, the Zurich-based employees of Arden Re became employees of the Zurich branch office of Arch.
Arden Re reinsured its credit and surety reinsurance business to Arch on a 100% quota share basis. As at December 31, 2012, approximately 65% of Arden Re’s credit and surety business had been novated. As part of the transaction, the Arden Re also reinsured its net credit and surety reinsurance loss reserves and loss expenses to Arch.
 
10

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
4. Fair Value Measurement
The Company determines the fair value of its fixed maturity investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. The Company estimates the estimated fair value of each individual security utilizing the highest level of inputs available. Current accounting guidance establishes three levels in the hierarchy as follows:

Level 1:	  	Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that
the reporting entity has the ability to access at the measurement date.	
 	 	
Level 2:	  	Inputs are other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement.	
 	 	
Level 3:	  	Inputs are unobservable inputs for the asset or liability.	
Fixed maturities
The Company uses quoted values and other data provided by an independent pricing service and its third party investment managers in determining fair values for its fixed maturity investments. Pricing from third party pricing services are sourced from multiple vendors. Each source has its own proprietary method for determining fair value of any security that is not actively traded. In general, the methods involve the use of “matrix pricing” in which the independent pricing sources use observable market inputs including, but not limited to, yield curves, trade execution data, market spreads, cash flows, credit risks and benchmarking like securities to determine a reasonable fair value.
The following describes the techniques generally used to determine the fair values of the Company’s fixed maturities by asset class:
U.S. government and agencies - These securities consist primarily of bonds issued by the U.S. Department of Treasury and mortgage agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of highly liquid U.S. Treasuries are based on quoted prices in active markets using real time trading systems and are classified within Level 1. The fair values of U.S. government agency securities are priced using yield curves, credit spreads and interest rate volatilities. These are considered to be observable market inputs and therefore the fair values of U.S. government agency securities are classified in Level 2.
Non-U.S. governments - These securities consist of securities issued primarily by governments, provinces, agencies and supranationals, as well as debt issued by financial institutions that is guaranteed by a non-U.S. government. The fair values of highly liquid European and Canadian Sovereign debt are based on quoted prices in active markets and are classified in Level 1. Other Non-U.S. government securities are priced using observable inputs, such as yield curves, credit spreads and interest rate volatilities and are classified in Level 2.
U.S. states and municipals - These securities consist of bonds issued by U.S. domiciled state and municipality entities. The fair value of these securities is determined using market approach pricing, which utilizes pricing models, mathematical tools and experienced pricing evaluators. The price for a security is based upon a hierarchy of market information regarding that security or securities with similar characteristics. The significant inputs used to price the municipals are observable market inputs and the fair value of these securities is classified in Level 2.
Corporate debt - These securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair value of these securities is determined using the spread above the risk-free yield curve, reported trades, broker / dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and fair value of these securities are classified within Level 2.
Residential and commercial mortgage-backed securities - These securities consists of residential and commercial mortgage-backed securities originated by both agencies and non-agencies. The fair values of these securities are determined through the use of pricing models which evaluate the underlying collateral performance,
 
11

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
and obtain prices from market makers and live trading systems. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. These are considered observable market inputs and the fair value of these securities are classified within Level 2.
Asset-backed securities - These securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The fair values of asset-backed securities are priced through the use of various models which evaluate the underlying collateral performance, as well as obtaining prices from market makers and live trading systems. As the significant inputs used to price these securities are observable market inputs, the fair values of asset-backed securities are classified in Level 2.
Other Investments
Catastrophe bonds - The fair value of catastrophe bonds is based on quoted market prices or when such prices are not available, by reference to broker or underwriter bid indications. As the significant inputs used to price these securities are observable market inputs, the fair values of catastrophe bonds are classified in Level 2.
Derivatives - The fair values of the Company’s over-the-counter derivatives such as interest rate swaps, credit default swaps and forward foreign exchange contracts are estimated by reference to quoted prices or broker quotes, where available, or in the absence of quoted prices or broker quotes, the use of industry or internal valuation models used by an independent pricing service. These are considered observable market inputs and therefore the fair value of these securities are classified in Level 2.
Emerging market debt fund and hedge funds - The fair value of the emerging market debt fund and hedge funds is generally determined on the basis of the net valuation criteria established by the managers of the investments. The Company believes the published net asset value represents the fair value that market participants would apply to an interest in the fund. Some of the hedge funds are subject to restrictions on redemptions and sale which are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short-term. The Company obtains the audited financial statements for every hedge fund annually and regularly reviews and discusses fund performance with fund managers to corroborate the reasonableness of the published net asset value. Due to the restrictions on redemptions and sale of these investments, the Company’s emerging market debt and hedge funds have been classified in Level 3.
Short-Term Investments
Short-term investments are comprised of fixed maturity investments that have a maturity of one year or less when purchased and a short-duration high quality fund. The fair value of the short-term fixed maturity investments is determined using the same principles as described above by asset class. The fair value of the short-term high quality fund is estimated using the net asset value reported by the investment manager. The Company’s short-term investments have been classified in Level 1 and Level 2.
 
 	a)	At December 31, 2012 and 2011, the Company’s investments were allocated between Levels 1, 2, and 3 as follows:	

 	  	December 31, 2012	 	
 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	
U.S. government and government agencies	  	$	122,824	  	  	$	—  	  	  	$	—  	  	  	$	122,824	  	
Non-U.S. governments	  	 	—  	  	  	 	65,909	  	  	 	—  	  	  	 	65,909	  	
Residential mortgage-backed securities	  	 	—  	  	  	 	39,051	  	  	 	—  	  	  	 	39,051	  	
Asset-backed securities	  	 	—  	  	  	 	204	  	  	 	—  	  	  	 	204	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total fixed maturity investments	  	$	122,824	  	  	$	105,164	  	  	$	—  	  	  	$	227,988	  	
Other investments	  	$	—  	  	  	$	—  	  	  	$	3,612	  	  	$	3,612	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	122,824	  	  	$	105,164	  	  	$	3,612	  	  	$	231,600	  	

12

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)

 	  	December 31, 2011	 	
 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	
U.S. government and government agencies	  	$	248,634	  	  	$	—  	  	  	$	—  	  	  	$	248,634	  	
Non-U.S. governments	  	 	—  	  	  	 	15,518	  	  	 	—  	  	  	 	15,518	  	
U.S. states and municipalities	  	 	—  	  	  	 	2,677	  	  	 	—  	  	  	 	2,677	  	
Corporate	  	 	—  	  	  	 	412,959	  	  	 	—  	  	  	 	412,959	  	
Residential mortgage-backed securities	  	 	—  	  	  	 	401,165	  	  	 	—  	  	  	 	401,165	  	
Asset-backed securities	  	 	—  	  	  	 	130,283	  	  	 	—  	  	  	 	130,283	  	
Commercial mortgage-backed securities	  	 	—  	  	  	 	95,307	  	  	 	—  	  	  	 	95,307	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total fixed maturity investments	  	$	248,634	  	  	$	1,057,909	  	  	$	—  	  	  	$	1,306,543	  	
Other investments	  	$	—  	  	  	$	50,754	  	  	$	147,931	  	  	$	198,685	  	
Short-term investments	  	$	4,968	  	  	$	95,199	  	  	$	—  	  	  	$	100,167	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	253,602	  	  	$	1,203,862	  	  	$	147,931	  	  	$	1,605,395	  	

 	b)	The following table presents a reconciliation of the beginning and ending balances for the emerging market debt fund and hedge funds, included in other investments that are measured at fair value using Level 3 inputs as at December 31, 2012 and 2011:	

Other investments	  	2012	 	 	2011	 	
 	 	 	
Beginning balance at January 1	  	$	147,931	  	 	$	96,542	  	
Transfers in/(out) of Level 3 assets, at fair value	  	 	—  	  	 	 	—  	  	
Purchases	  	 	—  	  	 	 	65,000	  	
Sales	  	 	(152,467	) 	 	 	(10,378	) 	
Net realized and unrealized (losses) gains included in earnings:	  	 	 	 	 	 	 	 	
Net realized gains (losses)	  	 	17,573	  	 	 	(3,366	) 	
Net unrealized (losses) gains	  	 	(9,425	) 	 	 	133	  	
 	  	 	 	 	 	 	 	 	
Ending balance at December 31	  	$	3,612	  	 	$	147,931	  	
 	  	 	 	 	 	 	 	 	
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in whether or not valuation inputs are observable may result in a reclassification for certain financial assets and liabilities. Reclassifications between Level 1, 2 and 3 of the fair value hierarchy are reported as transfers in and/or out as of the beginning of the quarter in which the reclassifications occur. There were no transfers in or out of Levels 1, 2 or 3 for the years ended December 31, 2012 and 2011.
Total net unrealized losses of $9.4 million from the emerging market debt and the hedge funds held at December 31, 2012 were included in earnings for the year ended December 31, 2012 (2011 - net unrealized gains of $0.1 million).
 
13

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
5.	Investments	
 
 	a)	The cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value of fixed maturity investments by category at December 31, 2012 and 2011 are as follows:	

 	  	December 31, 2012	 	
 	  	Amortized
Cost	 	  	Gross
Unrealized
Gains	 	  	Gross
Unrealized
Losses	 	 	Fair
Value	 	
 	 	 	 	 	
Fixed maturity investments, trading:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. government and government agencies	  	$	122,671	  	  	$	153	  	  	$	—  	  	 	$	122,824	  	
Non-U.S. governments	  	 	65,730	  	  	 	179	  	  	 	—  	  	 	 	65,909	  	
Residential mortgage-backed securities	  	 	38,765	  	  	 	286	  	  	 	—  	  	 	 	39,051	  	
Asset-backed securities	  	 	2,382	  	  	 	—  	  	  	 	(2,178	) 	 	 	204	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total	  	$	229,548	  	  	$	618	  	  	$	(2,178	) 	 	$	227,988	  	

 	  	December 31, 2011	 	
 	  	Amortized
Cost	 	  	Gross
Unrealized
Gains	 	  	Gross
Unrealized
Losses	 	 	Fair
Value	 	
 	 	 	 	 	
Fixed maturity investments:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. government and government agencies	  	$	247,702	  	  	$	947	  	  	$	(15	) 	 	$	248,634	  	
Non-U.S. governments	  	 	15,430	  	  	 	254	  	  	 	(166	) 	 	 	15,518	  	
U.S. states and municipalities	  	 	2,622	  	  	 	55	  	  	 	—  	  	 	 	2,677	  	
Corporate	  	 	411,368	  	  	 	5,380	  	  	 	(3,789	) 	 	 	412,959	  	
Residential mortgage-backed securities	  	 	399,628	  	  	 	8,190	  	  	 	(6,653	) 	 	 	401,165	  	
Asset-backed securities	  	 	134,772	  	  	 	1,379	  	  	 	(5,868	) 	 	 	130,283	  	
Commercial mortgage-backed securities	  	 	89,997	  	  	 	6,097	  	  	 	(787	) 	 	 	95,307	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total	  	$	1,301,519	  	  	$	22,302	  	  	$	(17,278	) 	 	$	1,306,543	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
The contractual maturity dates of fixed maturities trading at December 31, 2012 and 2011 are as follows:

 	  	December 31, 2012	 	  	December 31, 2011	 	
 	  	Amortized
Cost	 	  	Fair
Value	 	  	Amortized
Cost	 	  	Fair
Value	 	
 	 	 	 	 	
Due in one year or less	  	$	89,929	  	  	$	90,033	  	  	$	81,838	  	  	$	82,393	  	
Due after one year through five years	  	 	98,472	  	  	 	98,700	  	  	 	542,823	  	  	 	545,952	  	
Due after five years through ten years	  	 	—  	  	  	 	—  	  	  	 	48,122	  	  	 	47,728	  	
Due after ten years	  	 	—  	  	  	 	—  	  	  	 	4,339	  	  	 	3,715	  	
Residential mortgage-backed securities	  	 	38,765	  	  	 	39,051	  	  	 	399,628	  	  	 	401,165	  	
Asset-backed securities	  	 	2,382	  	  	 	204	  	  	 	134,772	  	  	 	130,283	  	
Commercial mortgage-backed securities	  	 	—  	  	  	 	—  	  	  	 	89,997	  	  	 	95,307	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	229,548	  	  	$	227,988	  	  	$	1,301,519	  	  	$	1,306,543	  	

14

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
 
 	b)	The following table summarizes the composition of the fixed maturity investment portfolio by investment ratings assigned by rating agencies at December 31, 2012:	

 	  	December 31, 2012	 	
 	  	Amortized
Cost	 	  	Fair
Value	 	
 	 	 	
AA/Aa	  	$	227,166	  	  	$	227,784	  	
C	  	 	490	  	  	 	118	  	
D	  	 	1,892	  	  	 	86	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	229,548	  	  	$	227,988	  	
 	  	 	 	 	  	 	 	 	
The primary rating source is Standard & Poor’s Corporation (“S&P”).
 
 	d)	Certain of the Company’s cash and fixed maturity investments are held in pledged accounts (see note 11c).	
 
 	e)	The following table reflects the Company’s other investments, at fair value, at December 31, 2012 and 2011:	

 	  	December 31, 2012	 	
 	  	Amortized
Cost	 	  	Fair
Value	 	
Other investments:	  	 	 	 	  	 	 	 	
Hedge funds	  	$	3,179	  	  	$	3,612	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	3,179	  	  	$	3,612	  	

 	  	December 31, 2011	 	
 	  	Amortized
Cost	 	  	Fair
Value	 	
Other investments:	  	 	 	 	  	 	 	 	
Catastrophe bonds	  	$	47,941	  	  	$	46,889	  	
Hedge funds	  	 	39,570	  	  	 	50,037	  	
Emerging Market Debt Fund	  	 	100,000	  	  	 	97,894	  	
Derivative instruments	  	 	3,863	  	  	 	3,865	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	191,374	  	  	$	198,685	  	
 	  	 	 	 	  	 	 	 	
The catastrophe bonds are variable rate notes where the return is contingent upon certain climatic or geological events. The emerging market debt fund provides exposure to higher interest rates and currency appreciation through its investments in fixed-income securities denominated in the local currencies of emerging countries. The hedge funds include the Company’s investment in credit, long and short equity, distressed capital, event-driven and other multi-strategy funds. These investments utilize a variety of different investment approaches, designed to maximize diversity. The fair values for the emerging market debt and hedge funds are determined by management using the net asset values provided by the third party administrators of these funds. The hedge funds are subject to restrictions on redemptions which are determined by the governing documents and may limit the Company’s ability to liquidate its investments in these funds.
 
15

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
 	f)	The components of net investment income for the years ended December 31, 2012 and 2011 are as follows:	

Year ended December 31,	  	2012	 	 	2011	 	
Fixed maturity and short-term investments	  	$	8,266	  	 	$	42,288	  	
Cash and cash equivalents	  	 	11	  	 	 	31	  	
Other investments	  	 	1,127	  	 	 	3,457	  	
 	  	 	 	 	 	 	 	 	
 	  	 	9,404	  	 	 	45,776	  	
Investment expenses	  	 	(1,257	) 	 	 	(7,918	) 	
 	  	 	 	 	 	 	 	 	
Net investment income	  	$	8,147	  	 	$	37,858	  	

 	g)	The analysis of realized gains and losses on sales of investments for the years ended December 31, 2012 and 2011 are as follows:	

Year ended December 31,	  	2012	 	 	2011	 	
Gross realized gains	  	$	50,125	  	 	$	23,895	  	
Gross realized losses	  	 	(13,934	) 	 	 	(20,060	) 	
 	  	 	 	 	 	 	 	 	
Net realized investment gains included in net income	  	$	36,191	  	 	$	3,835	  	
 	  	 	 	 	 	 	 	 	
6. Derivative instruments
The Company reports its derivatives at estimated fair value as either assets or liabilities on the Consolidated Balance Sheet, depending on their rights or obligations, with changes in fair value included in unrealized gains (losses) on investments in the Consolidated Statements of Operations. The fair value of the Company’s derivatives is estimated by reference to quoted prices or broker quotes, where available, or in the absence of quoted prices or broker quotes, by the use of industry or internal valuation models. The Company does not hold any derivatives designated as hedging instruments.
The Company’s investment guidelines permit investments in derivative instruments such as forward foreign exchange contracts, interest rate swaps, credit default swaps, options, repurchase agreements and swaptions. The Company principally has exposure to derivatives related to the following types of risks: foreign currency risk, interest rate risk and credit risk.
Forward foreign exchange contracts
Under the Company’s investment guidelines, the Company may invest in non-U.S. dollar denominated investments but is required to hedge any significant foreign currency exposure. The forward foreign exchange contracts in the Company’s investment portfolio are related to those hedges.
Interest rate swaps
The Company uses interest rate swaps to manage its exposure to interest rate risk, to manage the duration of its fixed maturities investment portfolio and yield curve without transacting in the underlying securities.
Futures
The Company uses futures to manage its exposure to interest rate risk, to manage the duration of its fixed maturities investment portfolio and yield curve.
 
16

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
Swaptions
The Company uses swaptions or options on interest rate swaps to manage its exposure to interest rate risk and to hedge the duration of the Company’s investment portfolio and yield curve.
Options
The Company uses options on U.S. Treasury futures to manage its exposure to interest rate risk, to hedge the duration of the Company’s investment portfolio and yield curve.
Repurchase agreements
The Company uses repurchase agreements to earn an enhanced return over cash.
Credit default swaps
The Company uses credit default swaps to manage its exposure to credit risk included in its fixed maturities investment portfolio and short-term investments and to obtain certain credit exposure more efficiently than purchasing the fixed maturities with the same credit risk.
The following table shows the location on the Consolidated Balance Sheet and fair value of the Company’s derivative instruments at December 31, 2011:

 	  	December 31, 2011	 	
 	  	Derivative Assets	 	  	Derivative Liabilities	 	
 	  	Balance Sheet
Location	  	Fair
Value	 	  	Balance Sheet
Location	  	Fair
Value	 	
Forward foreign exchange contracts	  	Other investments	  	$	778	  	  	Other investments	  	$	377	  	
Futures	  	Other investments	  	 	124	  	  	Other investments	  	 	124	  	
Interest rate swaps	  	Other investments	  	 	—  	  	  	Other investments	  	 	989	  	
Credit default swaps	  	Other investments	  	 	265	  	  	Other investments	  	 	205	  	
Repurchase agreements	  	Other investments	  	 	4,400	  	  	Other investments	  	 	—  	  	
Swaptions	  	Other investments	  	 	53	  	  	Other investments	  	 	60	  	
 	  	 	  	 	 	 	  	 	  	 	 	 	
Total	  	 	  	$	5,620	  	  	 	  	$	1,755	  	
 	  	 	  	 	 	 	  	 	  	 	 	 	
The location and amount of the (losses) gains recognized in the Company’s Consolidated Statements of Operations related to its derivative instruments for the years ended December 31, 2012 and 2011 are shown in the following table:

 	  	Location of gains (losses) recognized on
derivatives	  	Amount of gains (losses)
recognized on derivatives	 	
 	  	 	  	2012	 	 	2011	 	
Forward foreign exchange contracts	  	Net foreign exchange (losses) gains	  	$	(556	) 	 	$	85	  	
Swaps	  	Net investment income (losses)	  	 	607	  	 	 	(1,161	) 	
Swaps	  	Net unrealized gains (losses) on investments	  	 	808	  	 	 	(1,570	) 	
Swaps	  	Net realized losses on investments	  	 	(578	) 	 	 	(1,710	) 	
Swaps	  	Net foreign exchange (losses) gains	  	 	(29	) 	 	 	22	  	
Futures	  	Net realized gains (losses) on investments	  	 	106	  	 	 	(660	) 	
Futures	  	Net foreign exchange gains	  	 	1	  	 	 	—  	  	
Swaptions	  	Net unrealized (losses) gains on investments	  	 	(380	) 	 	 	494	  	
Swaptions	  	Net realized gains on investments	  	 	421	  	 	 	169	  	
Options	  	Net realized gains on investments	  	 	—  	  	 	 	8	  	
Repurchase agreements	  	Net investment income	  	 	2	  	 	 	4	  	
 	  	 	  	 	 	 	 	 	 	 	
Total	  	 	  	$	402	  	 	$	(4,319	) 	

17

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
7. Reserve for losses and loss adjustment expenses
The reserve for losses and loss adjustment expenses is an estimate which is subject to material variability. The variability arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Variability can be caused by the receipt of additional claim information, changes in judicial interpretation of contracts or significant differences in the severity or frequency of claims from historical trends. Also, the Company does not have the benefit of its own historical loss experience due to its short operating history. Accordingly, the Company’s reserves for losses and loss adjustment expenses may be subject to greater variability than a more mature company.
Loss and loss adjustment expenses reserve estimates are based on all relevant information available to the Company. The Company believes that the reserve for losses and loss adjustment expenses is sufficient to cover losses that fall within coverages assumed by the Company; however, there can be no assurance that actual losses will not exceed the Company’s total reserves for losses and loss adjustment expenses.
Activity in the reserve for losses and loss adjustment expenses for the years ended December 31, 2012 and 2011 was as follows:

 	  	2012	 	 	2011	 	
 	 	 	
Gross reserves for losses and loss expenses, beginning of year	  	$	563,997	  	 	$	425,211	  	
Loss reserves recoverable, beginning of year	  	 	41,448	  	 	 	26,585	  	
 	  	 	 	 	 	 	 	 	
Total net reserves for losses and loss expenses	  	 	522,549	  	 	 	398,626	  	
Net losses incurred related to:	  	 	 	 	 	 	 	 	
Current year	  	 	70,709	  	 	 	323,210	  	
Prior years	  	 	(662	) 	 	 	(28,725	) 	
 	  	 	 	 	 	 	 	 	
Total net incurred losses	  	 	70,047	  	 	 	294,485	  	
Net paid losses related to:	  	 	 	 	 	 	 	 	
Current year	  	 	1,205	  	 	 	(77,090	) 	
Prior years	  	 	(100,254	) 	 	 	(93,031	) 	
 	  	 	 	 	 	 	 	 	
Total net paid losses	  	 	(99,049	) 	 	 	(170,121	) 	
Effect of foreign exchange movements	  	 	1,553	  	 	 	(441	) 	
Net reserves for losses and loss expenses ceded under loss portfolio transfer	  	 	(399,788	) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Total net reserves for losses and loss expenses, end of year	  	 	95,312	  	 	 	522,549	  	
Loss reserves recoverable, end of year	  	 	379,603	  	 	 	41,448	  	
 	  	 	 	 	 	 	 	 	
Gross reserves for losses and loss expenses, end of year	  	$	474,915	  	 	$	563,997	  	
 	  	 	 	 	 	 	 	 	
During 2012, the Company experienced net favorable development on prior accident years of $0.7 million primarily due to reductions in attritional reinsurance loss reserves of $5.3 million and natural catastrophes of $8.6 million, respectively, offset by adverse development from special property and casualty insurance and surplus lines of $13.1 million. Favorable attritional developments were primarily from credit & surety, marine & aviation, property reinsurance, and property insurance of $2.2 million, $2.3 million, $1.8 million and $0.9 million, respectively, with an offset from professional lines of $1.9 million. Natural catastrophes saw positive development primarily from reserve releases from the Japan Earthquake of $3.3 million, Hurricane Ike of $2.3 million, various other smaller named storms from 2011 of $1.4 million and the West Atlas spill of $0.9 million. This was partially offset by adverse development on the Enbridge spill of $1.3 million.
During 2011, the Company experienced net favorable development on prior accident years of $28.7 million primarily due to reductions in attritional reinsurance reserves and natural catastrophes of $9.8 million and $18.9 million, respectively. Attritional developments were primarily from property reinsurance, marine & aviation, and professional lines of $9.4 million, $3.0 million and $1.7 million, respectively, with an offset from property insurance of $5.6 million. Natural catastrophes saw positive development primarily from reserve releases on Hurricanes Gustav and Ike of $7.9 million, the Chilean earthquake of $3.4 million and various other smaller named storms from 2009 and 2010 of $7.3 million and $4.0 million, respectively. This was partially offset by adverse development on various smaller named storms that occurred in 2007 of $4.0 million and the 2010 Queensland floods of $1.2 million.
 
18

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
As disclosed in Note 3, during 2012 Arden Re reinsured its net loss reserves and loss expenses through a loss portfolio transfer to Arrow Indemnity Limited in the amount of $368.2 million and reinsured its net credit and surety reinsurance loss reserves and loss expenses to Arch in the amount of $31.6 million.
8. Reinsurance ceded
The effects of reinsurance ceded on premiums written and premiums earned during the years ended December 31, 2012 and 2011 are as follows:

 	  	2012	 	 	2011	 	
Premiums written	  	 	 	 	 	 	 	 	
Direct	  	$	5,624	  	 	$	22,201	  	
Assumed	  	 	122,476	  	 	 	470,463	  	
Ceded	  	 	(122,262	) 	 	 	(41,473	) 	
 	  	 	 	 	 	 	 	 	
Net	  	$	5,838	  	 	$	451,191	  	

Premiums earned	  	 	 	 	 	 	 	 	
Direct	  	$	13,997	  	 	$	21,495	  	
Assumed	  	 	263,061	  	 	 	456,291	  	
Ceded	  	 	(106,042	) 	 	 	(37,005	) 	
 	  	 	 	 	 	 	 	 	
Net	  	$	171,016	  	 	$	440,781	  	
 	  	 	 	 	 	 	 	 	
The Company uses reinsurance ceded contracts to reduce its exposure to risk of loss on certain reinsurance contracts. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains primarily liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. At December 31, 2012, reinsurance recoverables amounted to $379.6 million (2011 - $41.4 million).
9. Share-based compensation
Arden Holdings granted restricted stock and options to certain employees at the time of the Arden Holdings initial financing, as well as providing for future awards of stock-based compensation. All such awards are subject to, or operate under terms broadly similar to, the Arden Holdings Long Term Incentive Plan (“LTIP”). The LTIP provides the Compensation Committee of the Board of Directors with the sole discretion to grant awards to employees and to determine the exercise price, vesting period and other applicable terms of such awards. The maximum option term is 10 years for all options awarded. Arden Holdings has charged the Company $3.3 million in 2012 and $4.6 million in 2011 related to the LTIP, recorded in general and administrative expenses.
10. Pension plan
The Company provides pension benefits to eligible employees through a defined contribution plan sponsored by the Company. Under the Company’s defined contribution plan, the Company makes contributions to its employees’ accounts of up to 15% of its employees’ eligible earnings. The contributions in the defined contribution plans are to be invested at the election of each employee in one or more of several investment funds offered by third party investment advisors. Contributions paid or accrued for the years ended December 31, 2012 and 2011 resulted in an expense of $0.4 million and $2.0 million, respectively, being recorded in general and administrative expenses.
 
19

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
11. Commitments and contingencies
 
 	a)	Concentrations of credit risk	
As of December 31, 2012, the Company’s cash and investments were held by two custodians. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of fixed maturity investments. The fixed maturity investment portfolio is managed by external advisors in accordance with prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue or issuers. The Company did not have an aggregate exposure in a single entity, other than in the U.S. Government and U.S. Government agency securities and U.S. Government sponsored enterprises, of more than nil% (2011 - 1%) of consolidated shareholder’s equity at December 31, 2012.
Concentration of credit risk with respect to reinsurance recoverable balances is limited due to the number of reinsureds used on the Company’s reinsurance programs. As at December 31, 2012, one reinsurer accounted for 70% of the reinsurance balances recoverable. This reinsurance recoverable balance is fully collateralized by cash and investments held in a trust under the terms of the loss portfolio transfer reinsurance agreement with Ariel Indemnity Limited. Another six reinsurers account for 24% of the reinsurance balances recoverable, all of these reinsurers are either rated A- or better by A.M. Best or fully collateralized.
As referred to in (b) the Company sources its business through certain major brokers. The Company is exposed to the credit risk of the brokers in respect of premium income due from policy holders that are remitted via the brokers.
 
 	b)	Major production sources	
During the year ended December 31, 2012, the Company obtained 46%, of its gross premiums written through two brokers:

Aon Benfield	  	 	25	% 	
Marsh and McLennan Companies, Inc.	  	 	21	% 	
 
 	c)	Investment commitments	
As of December 31, 2012, the Company had pledged $0.3 million of cash as collateral to secure a $0.3 million letter of credit. As of December 31, 2011, the Company has pledged $87.6 million of its fixed maturity investments and cash as collateral to secure $82.3 million of letters of credit outstanding under its credit facility.
Cash and fixed maturity investments of $6.2 million (2011 - $6.1 million) were held in trust for the benefit of Arden Re’s United States surplus line policyholders.
Under the terms of the reinsurance agreements with Valiant Insurance Company and Valiant Specialty Insurance Company (“Valiant”), as referred to in note 13, Arden Re has deposited $67.6 million (2011 - $73.0 million) in a trust for the benefit of Valiant.
As of December 31, 2012, the Company has pledged $83.3 million (2011 - $53.2 million) of its fixed maturity investments and cash as collateral to secure $74.0 million (2011 - $35.1 million) of letters of credit outstanding under the FALLOC as referred to in note 13.
 
 	d)	Employment agreements	
The Company has entered into employment agreements with certain officers that provide for option awards, executive benefits and severance payments under certain circumstances.
 
 	e)	Operating leases	
The Company leased office space and office equipment under operating leases. There are no future minimum lease commitments at December 31, 2012.
 
20

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
Total rent under operating leases for the years ended December 31, 2012 and 2011 was $0.6 million and $1.8 million, respectively.
 
 	f)	Securities lending	
The Company no longer participates in a securities lending program. As part of the Company’s securities lending program the Company had $59.5 million of securities on loan at December 31, 2011 for which $60.8 million of collateral had been posted by the borrowers.
12. Debt and financing arrangements
On November 28, 2011, the Company renewed its standby letter of credit facility (“FALLOC”). The new $100.0 million FALLOC was entered among Atrium Underwriting Group Limited (“the Borrower”), Arden Holdings, as Guarantor, the Company, as Reinsurer, and ING Bank N.V., London Branch (the “Lender”).
Proceeds of the FALLOC may be used by the Borrower for the provision of Funds at Lloyd’s to support the underwriting capacity of the corporate members owned by the Borrower, for the 2013, 2012 and prior years of account. The Company guarantees the obligations of the Borrower under the FALLOC. Collateral cover must be provided by the Company in support of its obligations as Reinsurer under certain quota share reinsurance agreements with Atrium’s corporate members, and/or by the Borrower, in an aggregate value not less than the aggregate face amounts of the letters of credit issued under the FALLOC, subject to certain collateral advance rates. The collateral cover is provided in the form of investment collateral held in collateral accounts pledged in favor of the Lender, as security trustee.
The FALLOC requires Arden Holdings to comply with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a maximum debt to capital ratio (no greater than 0.35:1.00 at any time) and a consolidated net worth of the Company (2012: $150 million, 2011: $500 million). In addition, Arden Re must maintain a financial strength rating from A.M. Best of at least B++ at all times.
The FALLOC also contains restrictions on Atrium’s ability to incur additional indebtedness, the Arden Holding’s ability to merge with or be acquired by another entity, and Arden Holding’s and its subsidiaries’ ability to dispose of certain assets, incur liens other than permitted liens, or cease its business.
On May 14, 2007, the Company replaced its $350 million Credit Facility (the “Facility”) among the Company and a syndicate of lending institutions (the “Facility Lenders”). The transaction was led by HSBC and JP Morgan Securities Inc. (“JP Morgan”). Proceeds of the Facility may be used by the Company for general corporate and working capital purposes. The Facility comprised of two tranches. The first tranche of $100 million was available for three years on unsecured revolving loans or secured letters of credit and was not renewed in 2011. The second tranche of $250 million was available for five years for the issuance of secured letters of credit and was not renewed in 2012.
13. Related party transactions
a) Stock compensation. The stock compensation expense charged during the year by Arden Holdings, and included within general and administrative expense was $3.3 million (2011 - $4.6 million).
b) Intercompany reinsurance agreements. Effective January 1, 2009, the Company entered into reinsurance agreements with various Lloyd’s corporate member underwriting subsidiaries of Atrium Underwriting Group Limited (“Atrium”), a wholly owned subsidiary of Arden Holdings. These agreements provide that Arden Re assumes a 65% quota share of all insurance and reinsurance risks earned by the corporate member subsidiaries of Atrium during 2012 and 2011. In addition to the insurance and reinsurance risks, Arden Re assumed 65% of foreign exchange gains or losses, investment returns and operating expenses. The Company pays the Atrium subsidiaries a 2% commission on all amounts ceded as well as a 20% profit commission. For the year ended December 31, 2012, the Atrium subsidiaries ceded $67.3 million (2011 - $56.9 million) of premiums written and earned and losses of $39.8 million (2011 - $47.7 million) were incurred under these quota share agreements.
 
21

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
On October 1, 2007, the Company entered into reinsurance agreements with Valiant Insurance Company (“Valiant”), a Delaware-domiciled insurance company that is wholly owned by Valiant Insurance Group, Inc. (“VIG”) a former subsidiary of Arden Holdings. These agreements included a pro-rata reinsurance agreement, whereby Arden Re assumed a 75% quota share of all business written by Valiant, provided that the business written is not being indemnified by other reinsurers. The Company pays Valiant a 30% commission on all premiums ceded. For the year ended December 31, 2012, Valiant ceded negative $0.6 million (2011: $0.9 million) and negative $0.6 million (2011: $16.0 million) of premiums written and earned, respectively and losses of $12.1 million (2011: $10.6 million) were incurred under the quota share agreement.
On October 1, 2007, the Company entered into a stop loss reinsurance agreement with Valiant. Under the terms of the agreement, the Company would indemnify Valiant for incurred losses that exceed 80% of Valiant’s net earned premium. The Company would receive 5% of Valiant’s net earned premium on the reinsured business as premium. For the year ended December 31, 2011, the Company received no premiums from Valiant, and incurred no losses.
On October 1, 2007, the Company agreed to guarantee Valiant’s third party reinsurance recoverable balances. Under the terms of the agreement Arden Re agreed to pay Valiant for all third party reinsurance recoveries that are 90 days overdue. In return, the Company was entitled to receive quarterly premium payments based on a percentage of Valiant’s total reinsurance recoverable at the end of each quarter. For the year ended December 31, 2011, the Company received no premiums from Valiant under this agreement as Valiant had not entered into any third party reinsurance arrangements during the applicable period.
On November 25, 2008 the Company entered into reinsurance agreements with Valiant Specialty Insurance Company (“Valiant Specialty”), a Delaware-domiciled insurance company that is wholly owned by VIG. These agreements included a pro-rata reinsurance agreement, whereby Arden Re assumed a 75% quota share of all business written by Valiant Specialty, provided that the business written is not being indemnified by other reinsurers. The Company pays Valiant Specialty a 30% commission on all premiums ceded. For the year ended December 31, 2012, Valiant Specialty ceded $nil (2011: $20 thousand) and $nil (2011: $0.3 million) of premiums written and earned, respectively and $0.1 million (2011: $0.1 million) of losses were incurred under the quota share agreement.
On November 25, 2008, the Company entered into a stop loss reinsurance agreement with Valiant Specialty. Under the terms of the agreement, the Company would indemnify Valiant Specialty for incurred losses that exceed 80% of Valiant Specialty’s net earned premium. The Company would receive 5% of Valiant Specialty’s net earned premium on the reinsured business as premium. For the year ended December 31, 2011, the Company received no premiums from Valiant Specialty, and incurred no losses.
On November 25, 2008, the Company agreed to guarantee Valiant Specialty’s third party reinsurance recoverable balances. Under the terms of the agreement Arden Re agreed to pay Valiant Specialty for all third party reinsurance recoveries that are 90 days overdue. In return, the Company is entitled to receive quarterly premium payments based on a percentage of Valiant Specialty’s total reinsurance recoverable at the end of each quarter. For the year ended December 31, 2011, the Company received no premiums from Valiant Specialty under this agreement as Valiant Specialty had not entered into any third party reinsurance arrangements during the applicable period.
On July 1, 2010, Arden Holdings executed an agreement to sell the stock of VIG for which the sale closed on November 8, 2010. In connection with this sale the pro-rata reinsurance agreements with Valiant and Valiant Specialty were terminated and cancelled on a run-off basis effective November 5, 2010. In addition, the stop loss reinsurance agreements with Valiant and Valiant Specialty and the guarantee of Valiant’s third party reinsurance recoverable balances were commuted effective October 31, 2010. These commutations resulted in a payment to Valiant and Valiant Specialty of $0.6 million in 2010.
On November 5, 2010, following the sale of VIG the Company entered into an excess of loss reinsurance agreement with Valiant and Valiant Specialty. Under the terms of this agreement Arden Re agreed to indemnify Valiant and Valiant Specialty for net loss payments that are in excess of net loss reserves at the date of closing and for net loss payments that are in excess of 62.5% of net unearned premiums as at the date of closing. In addition, Arden Re
 
22

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
agreed to indemnify Valiant and Valiant Specialty for net loss payments in excess of 60% of net earned premiums for policies written by Valiant and Valiant Specialty prior to the closing date but incepting after the closing date. There was $1.0 million of losses incurred related to these indemnifications for the year ended December 31, 2012 and nil for December 31, 2011.
c) Balance due to Arden Holdings Ltd. The intercompany balance due to Arden Holdings is unsecured and non-interest bearing. The amount is due upon demand.
14. Shareholders’ equity
In February 2012, the Company increased its authorized share capital from $1.0 million to $10.0 million and increased the par value of its common shares from $1.00 per share to $10.00 per share. The increase in share capital was funded by converting retained earnings to share capital.
In May 2012, the Company repurchased 640,000 of its common shares for cash in the amount of $800.0 million from its parent, Arden Holdings Ltd.
In December 2012, the Company repurchased 106,000 of its common shares for cash in the amount of $106.0 million from its parent, Arden Holdings Ltd.
15. Statutory requirements and dividend restrictions
Arden Re’s ability to pay dividends and make capital distributions is subject to certain regulatory restrictions. Under the Insurance Act 1978, amendments thereto and Related Regulations of Bermuda (the “Act”), Arden Re is required to prepare statutory consolidated financial statements and to file in Bermuda a statutory financial return. The Act also requires Arden Re to maintain certain measures of solvency and liquidity. At December 31, 2012, the statutory capital and surplus of Arden Re was $241.9 million (2011 - $1,100.6 million) which exceeds the statutory capital and surplus required to be maintained under the Act.
Under the Act, Arden Re is classified as a Class 4 insurer, and is therefore restricted as to the payment of dividends in the amount of 25% of the prior year’s statutory capital and surplus, unless at least two members of the Board of Directors attest that a dividend in excess of this amount would not cause Arden Re to fail to meet its relevant margins. During 2012, Arden Re declared dividends of $136.0 million (2011 - $260.0 million).
In 2008, the Bermuda Solvency Capital Requirement (“BSCR”) was enacted in Bermuda, which included, among other things, a standard mathematical model designed to give the Bermuda Monetary Authority (“BMA”) more advanced methods for determining an insurer’s capital adequacy. Underlying the BSCR is the philosophy that all insurers should operate on an ongoing basis with a view to maintaining their capital at a prudent level in excess of the minimum solvency margin otherwise prescribed under the Insurance Act. The BMA requires all Class 4 insurers to maintain their capital at a target level which is set at 120% of the minimum amount calculated in accordance with the BSCR or an approved in-house model.
The principal differences in Bermuda between statutory basis consolidated financial statements and consolidated financial statements prepared in accordance with U.S. GAAP are that statutory consolidated financial statements do not reflect deferred acquisition costs or prepaid assets. Also, reinsurance assets and liabilities are presented net of reinsurance and there is no cash flow statement.
The Company’s Zurich branch has no statutory filing requirement at, or for, the year-end December 31, 2012.
 
23

Arden Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in thousands of United States dollars, except share amounts)
 
16. Taxation
The Company provides for income taxes based upon amounts reported in the consolidated financial statements and the provisions of currently enacted tax laws. The Company is registered in Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not taxed on any Bermuda income or capital gains taxes and has received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, the Company will be exempt from those taxes until March 2035.
The Company’s Swiss branch is subject to both Swiss Federal tax and Zurich Cantonal tax. The income tax benefit is all current and is all attributable to the Zurich branch.
Reconciliation between the expected tax rate of zero under Bermuda law and the actual tax expense per the consolidated financial statements is as follows:

 	  	Year ended
December 31
2012	 	  	Year ended
December 31
2011	 	
Computed expected tax expense	  	$	—  	  	  	$	—  	  	
Foreign taxes at local expected rates	  	 	159	  	  	 	460	  	
 	  	 	 	 	  	 	 	 	
Actual income tax expense	  	$	159	  	  	$	460	  	
 	  	 	 	 	  	 	 	 	
17. Subsequent events
The Company has evaluated subsequent events through March 21, 2013, the date these financial statements were available to be issued, and concluded that there are no material subsequent events requiring recognition or disclosure.
 
24

 	 	 	 	 	
 	  	Ernst & Young Ltd.
#3 Bermudiana Road
Hamilton HM 11, Bermuda
P.O. Box 463,
Hamilton, HM BX, Bermuda	
 	  	 
Direct: +1 441 295 7000
Direct Fax: +1 441 295 5193
www.ey.com/bermuda	
Report of Independent Auditors
The Shareholders
Arden Reinsurance Company Ltd.
We have audited the accompanying consolidated financial statements of Arden Reinsurance Company Ltd., which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related statements of comprehensive income, changes in shareholders’ equity, and cash flows for the years ended December 31 2012 and 2011, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
 
1

 
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arden Reinsurance Company Ltd. as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the years ended December 31 2012 and 2011 in conformity with U.S. generally accepted accounting principles.

March 21, 2013
 
2

Exhibit 99.2
ARIEL REINSURANCE COMPANY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2011 AND 2010

 	 	 	 	
 	  	 
Ernst & Young Ltd.
3 Bermudiana Road
Hamilton HM08, Bermuda
P.O. Box HM 463
Hamilton, HM BX, Bermuda
 
Direct: +1 441 295 7000
Direct fax: +1 441 295 5193
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Report of Independent Auditors
The Shareholder
Ariel Reinsurance Company Ltd.
We have audited the accompanying consolidated balance sheets of Ariel Reinsurance Company Ltd. (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholder’s equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ariel Reinsurance Company Ltd. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

March 8, 2012

Ariel Reinsurance Company Ltd.
Index to the Consolidated Financial Statements

Consolidated Balance Sheets as at December 31, 2011, and 2010	  	 	3	  	
 	 	
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010	  	 	4	  	
 	 	
Consolidated Statements of Changes in Shareholder’s Equity for the years ended December 31, 2011 and 2010	  	 	5	  	
 	 	
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010	  	 	6	  	
 	 	
Notes to the Consolidated Financial Statements	  	 	7	  	
 
2

Ariel Reinsurance Company Ltd.
Consolidated Balance Sheets
At December 31, 2011 and 2010
(in thousands of United States Dollars)

 	  	December 31,
2011	 	  	December 31,
2010	 	
Assets	  	 	 	 	  	 	 	 	
Fixed maturity investments, at fair value (amortized cost 2011: $1,301,519; 2010: $1,350,855)	  	$	1,306,543	  	  	$	1,363,479	  	
Other investments, at fair value	  	 	198,685	  	  	 	188,473	  	
Short-term investments, at fair value (amortized cost 2011:$100,167; 2010: $83,830)	  	 	100,167	  	  	 	83,857	  	
 	  	 	 	 	  	 	 	 	
Total investments	  	 	1,605,395	  	  	 	1,635,809	  	
Cash and cash equivalents	  	 	61,166	  	  	 	87,845	  	
Premiums receivable	  	 	218,015	  	  	 	202,814	  	
Accrued investment income	  	 	5,760	  	  	 	9,387	  	
Deferred acquisition costs	  	 	34,308	  	  	 	30,963	  	
Prepaid reinsurance premiums	  	 	17,735	  	  	 	13,291	  	
Loss reserves recoverable	  	 	41,448	  	  	 	26,585	  	
Other assets	  	 	5,327	  	  	 	7,586	  	
Receivable for investments sold	  	 	22,457	  	  	 	2,698	  	
 	  	 	 	 	  	 	 	 	
Total assets	  	$	2,011,611	  	  	$	2,016,978	  	

Liabilities	  	 	 	 	  	 	 	 	
Reserve for losses and loss adjustment expenses	  	 	563,997	  	  	 	425,211	  	
Unearned premiums	  	 	175,809	  	  	 	160,895	  	
Deposit liabilities	  	 	26	  	  	 	39	  	
Reinsurance premiums payable	  	 	13,559	  	  	 	11,695	  	
Payable for investments purchased	  	 	112,194	  	  	 	73,543	  	
Balance due to Ariel Holdings Ltd.	  	 	317	  	  	 	780	  	
Other liabilities	  	 	8,421	  	  	 	6,647	  	
 	  	 	 	 	  	 	 	 	
Total liabilities	  	 	874,323	  	  	 	678,810	  	

Shareholder’s Equity	  	 	 	 	  	 	 	 	
Ordinary share capital (Authorized 100,000,000 common shares, par value $1.00, 1,000,000 shares issued)	  	 	1,000	  	  	 	1,000	  	
Additional paid-in capital	  	 	999,000	  	  	 	999,000	  	
Retained earnings	  	 	137,288	  	  	 	338,168	  	
 	  	 	 	 	  	 	 	 	
Total shareholder’s equity	  	 	1,137,288	  	  	 	1,338,168	  	

 	  	 	 	 	  	 	 	 	
Total liabilities & shareholder’s equity	  	$	2,011,611	  	  	$	2,016,978	  	
 	  	 	 	 	  	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
3

Ariel Reinsurance Company Ltd.
Consolidated Statements of Operations
For the years ended December 31, 2011 and 2010
(in thousands of United States Dollars)

 	  	2011	 	 	2010	 	
Revenues	  	 	 	 	 	 	 	 	
Gross premiums written	  	$	492,664	  	 	$	531,724	  	
Reinsurance premiums ceded	  	 	(41,473	) 	 	 	(36,161	) 	
 	  	 	 	 	 	 	 	 	
Net premiums written	  	 	451,191	  	 	 	495,563	  	
Change in net unearned premiums	  	 	(10,410	) 	 	 	(5,206	) 	
 	  	 	 	 	 	 	 	 	
Net premiums earned	  	 	440,781	  	 	 	490,357	  	
Other underwriting loss	  	 	(35	) 	 	 	(60	) 	
Net investment income	  	 	37,858	  	 	 	50,722	  	
Net realized gains on investments	  	 	3,835	  	 	 	22,005	  	
Net unrealized (losses) gains on investments	  	 	(12,285	) 	 	 	16,127	  	
Net foreign exchange losses	  	 	(1,847	) 	 	 	(1,487	) 	
 	  	 	 	 	 	 	 	 	
Total revenues	  	 	468,307	  	 	 	577,664	  	

Expenses	  	 	 	 	 	 	 	 	
Net losses and loss adjustment expenses	  	 	294,485	  	 	 	244,979	  	
Acquisition costs	  	 	64,611	  	 	 	67,854	  	
General and administrative expenses	  	 	49,631	  	 	 	48,836	  	
 	  	 	 	 	 	 	 	 	
Total expenses	  	 	408,727	  	 	 	361,669	  	

 	  	 	 	 	 	 	 	 	
Income before income taxes	  	 	59,580	  	 	 	215,995	  	

Income tax (expense) benefit	  	 	(460	) 	 	 	214	  	
 	  	 	 	 	 	 	 	 	
Net income	  	$	59,120	  	 	$	216,209	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
4

Ariel Reinsurance Company Ltd.
Consolidated Statements of Changes in Shareholder’s Equity
For the years ended December 31, 2011 and 2010
(in thousands of United States Dollars)

 	  	2011	 	 	2010	 	
Share capital	  	 	 	 	 	 	 	 	
Balance, beginning of year	  	$	1,000	  	 	$	1,000	  	
 	  	 	 	 	 	 	 	 	
Balance, end of year	  	$	1,000	  	 	$	1,000	  	

Additional paid-in capital	  	 	 	 	 	 	 	 	
Balance, beginning of year	  	$	999,000	  	 	$	999,000	  	
 	  	 	 	 	 	 	 	 	
Balance, end of year	  	$	999,000	  	 	$	999,000	  	

Retained earnings	  	 	 	 	 	 	 	 	
Balance, beginning of year	  	$	338,168	  	 	$	521,959	  	
Net income	  	 	59,120	  	 	 	216,209	  	
Dividends declared and paid	  	 	(260,000	) 	 	 	(400,000	) 	
 	  	 	 	 	 	 	 	 	
Balance, end of year	  	$	137,288	  	 	$	338,168	  	

 	  	 	 	 	 	 	 	 	
Total shareholder’s equity	  	$	1,137,288	  	 	$	1,338,168	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
5

Ariel Reinsurance Company Ltd.
Consolidated Statements of Cash Flows
For the years ended December 31, 2011 and 2010
(in thousands of United States Dollars)

 	  	2011	 	 	2010	 	
Cash flows provided by operating activities:	  	 	 	 	 	 	 	 	
Net income	  	$	59,120	  	 	$	216,209	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	
Net realized gains on investments	  	 	(3,835	) 	 	 	(22,005	) 	
Net amortization on investments	  	 	5,195	  	 	 	2,799	  	
Net unrealized losses / (gains) on investments	  	 	12,285	  	 	 	(16,127	) 	
Depreciation	  	 	4,093	  	 	 	4,379	  	
Other items	  	 	2,247	  	 	 	885	  	
Change in:	  	 	 	 	 	 	 	 	
Premiums receivable	  	 	(15,201	) 	 	 	(41,715	) 	
Accrued investment income	  	 	3,627	  	 	 	592	  	
Deferred acquisition costs	  	 	(3,345	) 	 	 	(9,067	) 	
Prepaid reinsurance premiums	  	 	(4,444	) 	 	 	(11,828	) 	
Loss reserves recoverable	  	 	(14,863	) 	 	 	(25,036	) 	
Other assets	  	 	(709	) 	 	 	222	  	
Reserve for losses and loss adjustment expenses	  	 	138,786	  	 	 	170,004	  	
Unearned premiums	  	 	14,914	  	 	 	16,974	  	
Reinsurance premiums payable	  	 	1,864	  	 	 	11,007	  	
Other liabilities	  	 	1,774	  	 	 	(1,865	) 	
 	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	201,508	  	 	 	295,428	  	

Cash flows provided by investing activities:	  	 	 	 	 	 	 	 	
Purchases of fixed maturity investments	  	 	(2,913,652	) 	 	 	(2,487,788	) 	
Sales and maturities of fixed maturity investments	  	 	2,971,459	  	 	 	2,417,877	  	
Net (purchases) sales of short-term investments	  	 	(15,828	) 	 	 	235,215	  	
Net purchases of other investments	  	 	(26,743	) 	 	 	(23,694	) 	
Net change in receivable for investments sold	  	 	18,891	  	 	 	19,974	  	
Purchases of fixed assets	  	 	(1,125	) 	 	 	(1,641	) 	
 	  	 	 	 	 	 	 	 	
Net cash provided by investing activities	  	 	33,002	  	 	 	159,943	  	

Cash flows used in financing activities:	  	 	 	 	 	 	 	 	
Deposit liabilities	  	 	(13	) 	 	 	33	  	
Balance due (from) / to Ariel Holdings Ltd.	  	 	(463	) 	 	 	280	  	
Dividends declared and paid	  	 	(260,000	) 	 	 	(400,000	) 	
 	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(260,476	) 	 	 	(399,687	) 	

 	  	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and cash equivalents	  	 	(713	) 	 	 	(324	) 	
 	  	 	 	 	 	 	 	 	
Net (decrease) / increase in cash and cash equivalents	  	 	(26,679	) 	 	 	55,360	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents - beginning of year	  	 	87,845	  	 	 	32,485	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents - end of year	  	$	61,166	  	 	$	87,845	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the Consolidated Financial Statements
 
6

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
1. Organization
Ariel Reinsurance Company Ltd. (“Ariel Re” or collectively with its subsidiary the “Company”) was incorporated on November 4, 2005 under the laws of Bermuda. Ariel Re is a wholly owned subsidiary of Ariel Holdings Ltd. (“Ariel Holdings”), an insurance holding company incorporated in Bermuda.
The Company’s operations are principally focused on catastrophe exposed property, marine, aviation, credit and surety reinsurance business. Catastrophe reinsurance covers unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, freezes, industrial explosions and other man-made or natural disasters. Loss experience associated with catastrophe reinsurance is characterized by infrequent events of high severity. Credit and surety reinsurance business is underwritten on a global basis through a branch office in Zurich, Switzerland that was established in 2009. Although catastrophe exposed business constitutes the majority of Ariel Re’s business, the Company also underwrites property and, until 2010, professional liability insurance on a direct basis.
On March 11, 2010 Ariel Re established a wholly-owned representative office in Brazil, Ariel Reinsurance Company Escritorió de Representçăo no Brasil Ltda. This office was opened to facilitate the underwriting of credit and surety lines of business.
2. Significant Accounting Policies
Basis of presentation and consolidation
The consolidated financial statements include Ariel Re and its wholly-owned subsidiary and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated in preparing these consolidated financial statements.
Certain comparative financial information has been reclassified to conform to the current year presentation.
Use of estimates in consolidated financial statements
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. While the estimates included in the consolidated financial statements reflect the Company’s best estimates and assumptions, actual results could differ materially from these estimates. The significant estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss adjustment expenses, premium estimates for business written, and the fair value measurement of certain fixed maturities and other investments. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the consolidated financial statements in the periods in which they are determined.
Premiums
Premiums written are recorded in accordance with the terms of the underlying policies and contracts of insurance and reinsurance. Premiums written are recorded at the inception of the policy and are estimated based upon information received from insureds, ceding companies and their brokers. Subsequent differences arising on such estimates are recorded in the period in which they are determined. Premiums written are earned on a pro-rata basis over the period for which coverage is provided. The reserve for unearned premiums represents the portion of premiums written applicable to the unexpired risk period of policies and contracts and insurance and reinsurance in force.
For contracts and policies written on a losses occurring basis, the risk period is generally the same as the contract or policy term. For contracts written on a risks attaching basis, the risk period is based on the terms of the underlying contracts and policies.
 
7

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
Reinstatement premiums that reinstate coverage are estimated based on loss experience and are recorded in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Reinstatement premiums are generally written and earned at the time the associated loss event occurs.
A portion of the Company’s assumed reinsurance agreements contain loss sensitive or loss limiting provisions, such as adjustable or sliding scale commissions or occurrence limitations, that may impact the ultimate amounts paid to or received from ceding companies. In some loss scenarios, these features would result in the ceding company’s results not being proportional to the Company’s results under the proportional reinsurance agreement, and such differences may be meaningful. The Company has recorded these agreements as deposits and is included in Deposit liabilities on the Consolidated Balance Sheets. These contracts were deemed as either transferring only significant timing risk or transferring only significant underwriting risk.
Deferred acquisition costs
Acquisition expenses are costs that vary with, and are directly related to, the production of new and renewal business and consist principally of commissions and brokerage expenses incurred at the time a contract or policy is issued. These costs are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums. Anticipated loss and loss adjustment expenses and anticipated investment income related to those premiums are considered in determining the recoverability of deferred acquisition costs. Acquisition costs are shown net of commissions earned or reinsurance ceded.
Reinsurance ceded
In the normal course of business, the Company may seek to mitigate underwriting risk that could cause unfavorable results by reinsuring certain amounts of risk with other reinsurers. Reinsurance premiums ceded are expensed on a pro-rata basis over the period the reinsurance coverage is provided. Prepaid reinsurance premiums represent the portion of premiums ceded on the unexpired term of the policies purchased.
Reinsurance recoverables are presented on the Consolidated Balance Sheets net of any reserves for uncollectible reinsurance. The method for determining the reinsurance recoverable on unpaid losses and loss adjustment expenses involves actuarial estimates in a manner consistent with the determination of unpaid losses and loss adjustment expenses. Any reserve for uncollectible reinsurance is based on an estimate of the amount of the reinsurance recoverable balance that will ultimately not be recovered due to reinsurer insolvency, contractual dispute or other reason. The valuation of this reserve for uncollectible reinsurance includes several processes including a review of the credit ratings of the reinsurance recoverables by reinsurer, an analysis of default probabilities as well as coverage issues. These factors require considerable management judgment and the factors are reviewed in detail on a quarterly basis with any resulting adjustments recorded in earnings in the period that collection issues are identified.
Reserve for losses and loss adjustment expenses
The reserve for losses and loss adjustment expenses is established by management and includes estimates for unpaid claims and claim expenses on reported losses as well as an estimate of losses incurred but not reported. The reserve is based on individual claims, case reserves and other reserve estimates reported by insureds and ceding companies as well as management’s estimate of ultimate losses. The reserve for incurred but not reported losses and loss adjustment expenses is established by management based on actuarially determined estimates of ultimate losses and loss adjustment expenses. Inherent in the estimate of ultimate losses are expected trends in claim severity and frequency and other factors which could vary significantly as claims are settled.
Ultimate losses and loss adjustment expenses may vary materially from the amounts provided in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are recorded in earnings in the period in which they become known and are accounted for as changes in estimates.
 
8

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
Investments
The Company’s fixed maturity investments are reported as trading securities and are carried at estimated fair value with changes in fair value included in earnings in the consolidated statement of operations and comprehensive income. The Company determines fair value of its fixed maturity investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment.
Investment transactions are recorded on the trade date with balances pending settlement reflected separately in the balance sheet. Interest on fixed maturity investments is recorded in net investment income when earned and is adjusted for any amortization of premium or discount. Net investment income includes interest, dividend income and amortization of premiums or discounts and is recorded net of investment management fees. The amortization of premiums and accretion of discounts for fixed maturity investments is computed using the effective yield method. Premiums and discounts arising from the purchase of mortgage-backed securities are amortized using the effective yield method over the estimated remaining term of the securities, adjusted for anticipated prepayments
Realized gains or losses on the sale of investments are determined on the basis of the first-in-first-out method and included in earnings when realized.
Short-term investments, which are managed as part of the Company’s investment portfolio and have a maturity of one year or less when purchased, are carried at fair value, which approximates amortized cost.
The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity investments, are loaned to third parties, primarily major brokerage firms. The Company retains all economic interest in the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. Collateral is required at a rate of 102% - 105% of the market value of the loaned securities and is monitored daily and maintained by the lending agent. The collateral has not been recorded on the balance sheet as the Company does not have the right to sell or repledge the collateral.
Other investments are carried at estimated fair value with interest, dividend income and income distributions included in net investment income. The fair value of the emerging market debt fund and hedge funds is generally established on the basis of the net valuation criteria established by the managers of the investments. These net valuations are determined based upon the valuation criteria established by the governing documents of such investments. The Company records the fair value of the hedge funds on a month lag as valuation information provided by the managers of the investments is not available on a timely basis. This lag in reporting is applied consistently until timely information becomes available. The fair value of catastrophe bonds is based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications. Such valuations may differ significantly from the values that would have been used had ready markets existed for the shares, partnership interests or notes of the other investments.
The Company enters into derivative instruments such as swaps, futures, options and forward foreign exchange contracts in order to manage its foreign currency exposure, obtain exposure to a particular financial market, or for managing the duration of the fixed maturity investment portfolio and yield curve. The Company records its derivatives at fair value on the Company’s Consolidated Balance Sheets as either assets or liabilities, depending on their rights or obligations, with changes in fair value included in unrealized gains (losses) on investments in the Consolidated Statements of Operations. The fair value of the Company’s derivatives is estimated by reference to quoted prices or broker quotes, where available, or in the absence of quoted prices or broker quotes, by the use of industry or internal valuation models.
Cash and cash equivalents
Cash and cash equivalents include highly liquid short-term deposits and securities with maturities of ninety days or less at the time of purchase.
 
9

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
Foreign exchange
The Company’s functional currency is the United States Dollar. Monetary assets and liabilities denominated in foreign currencies are re-measured into the functional currency at the exchange rates in effect at the balance sheet dates and revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date with the resulting foreign exchange gains and losses included in earnings.
Stock based compensation plans
Ariel Holdings grants stock-based compensation awards which vest over a specified period or upon employees meeting certain performance and retirement eligibility criteria. Ariel Holdings amortizes the fair value of the awards over the specified vesting period and recognizes any previously unrecognized compensation cost at the date of retirement. Compensation cost is recognized either over the vesting period or from the grant date to the date on which retirement eligibility provisions has been met and additional service is no longer required, as appropriate. Ariel Holdings charges the Company for the expense associated with stock-based compensation.
Taxation
The Company provides for income taxes for its branch office based in Zurich, Switzerland. The Company records deferred income taxes which reflect the tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases. A valuation allowance against a deferred tax asset is provided for if and when the Company believes that a portion, or all of the deferred tax asset may not be realized in the near term.
In addition, the Company is required to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained, assuming examination by tax authorities. The Company has not recognized any liabilities for unrecognized tax benefits as a result of this guidance. The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months and classifies all income tax associated with interest and penalties as income tax expense.
Recent accounting pronouncements
In 2010, new accounting guidance was issued for deferred acquisition costs incurred by insurance entities when issuing and renewing insurance contracts. The standard requires costs that are incrementally or directly related to the successful acquisition of new or renewal insurance contracts to be capitalized as deferred acquisition costs. The standard is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect this standard to have an impact on the Company’s financial position or results of operations.
In May 2011, new accounting guidance was issued to provide largely identical guidance about fair value measurement and disclosure requirements with International Accounting Standards Board’s new International Financial Reporting Standards relating to fair value measurement. The new guidance does not extend the use of fair value, but, rather, provides guidance about how fair value should be applied where it is already required or permitted under U.S. GAAP and requires enhanced disclosures covering all transfers between Level 1 and 2 of the fair value hierarchy. Additional disclosures covering Level 3 assets are also required. The standard is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance is not expected to have an impact to the Company’s financial position and results of operations.
 
10

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
3. Fair Value Measurement
The Company determines the fair value of its fixed maturity investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. The Company estimates the estimated fair value of each individual security utilizing the highest level of inputs available. Current accounting guidance establishes three levels in the hierarchy as follows:

Level 1:	  	Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.	
 	 	
Level 2:	  	Inputs are other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement.	
 	 	
Level 3:	  	Inputs are unobservable inputs for the asset or liability.	
Fixed maturities
The Company uses quoted values and other data provided by an independent pricing service and its third party investment managers in determining fair values for its fixed maturity investments. Pricing from third party pricing services are sourced from multiple vendors. Each source has its own proprietary method for determining fair value of any security that is not actively traded. In general, the methods involve the use of “matrix pricing” in which the independent pricing sources use observable market inputs including, but not limited to, yield curves, trade execution data, market spreads, cash flows, credit risks and benchmarking like securities to determine a reasonable fair value.
The following describes the techniques generally used to determine the fair values of the Company’s fixed maturities by asset class:
U.S. government and agencies - These securities consist primarily of bonds issued by the U.S. Department of Treasury and mortgage agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of highly liquid U.S. Treasuries are based on quoted prices in active markets using real time trading systems and are classified within Level 1. The fair values of U.S. government agency securities are priced using yield curves, credit spreads and interest rate volatilities. These are considered to be observable market inputs and therefore the fair values of U.S. government agency securities are classified in Level 2.
Non-U.S. governments - These securities consist of securities issued primarily by governments, provinces, agencies and supranationals, as well as debt issued by financial institutions that is guaranteed by a non-U.S. government. The fair values of highly liquid European and Canadian Sovereign debt are based on quoted prices in active markets and are classified in Level 1. Other Non-U.S. government securities are priced using observable inputs, such as yield curves, credit spreads and interest rate volatilities and are classified in Level 2.
U.S. states and municipals - These securities consist of bonds issued by U.S. domiciled state and municipality entities. The fair value of these securities is determined using market approach pricing, which utilizes pricing models, mathematical tools and experienced pricing evaluators. The price for a security is based upon a hierarchy of market information regarding that security or securities with similar characteristics. The significant inputs used to price the municipals are observable market inputs and the fair value of these securities is classified in Level 2.
Corporate debt - These securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair value of these securities is determined using the spread above the risk-free yield curve, reported trades, broker / dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and fair value of these securities are classified within Level 2.
Residential and commercial mortgage-backed securities - These securities consists of residential and commercial mortgage-backed securities originated by both agencies and non-agencies. The fair values of these securities are determined through the use of pricing models which evaluate the underlying collateral performance, and obtain prices from market makers and live trading systems. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. These are considered observable market inputs and the fair value of these securities are classified within Level 2.
 
11

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
Asset-backed securities - These securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The fair values of asset-backed securities are priced through the use of various models which evaluate the underlying collateral performance, as well as obtaining prices from market makers and live trading systems. As the significant inputs used to price these securities are observable market inputs, the fair values of asset-backed securities are classified in Level 2.
Other Investments
Catastrophe bonds - The fair value of catastrophe bonds is based on quoted market prices or when such prices are not available, by reference to broker or underwriter bid indications. As the significant inputs used to price these securities are observable market inputs, the fair values of catastrophe bonds are classified in Level 2.
Derivatives - The fair values of the Company’s over-the-counter derivatives such as interest rate swaps, credit default swaps and forward foreign exchange contracts are estimated by reference to quoted prices or broker quotes, where available, or in the absence of quoted prices or broker quotes, the use of industry or internal valuation models used by an independent pricing service. These are considered observable market inputs and therefore the fair value of these securities are classified in Level 2.
Emerging market debt fund and hedge funds - The fair value of the emerging market debt fund and hedge funds is generally determined on the basis of the net valuation criteria established by the managers of the investments. The Company believes the published net asset value represents the fair value that market participants would apply to an interest in the fund. Some of the hedge funds are subject to restrictions on redemptions and sale which are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short-term. The Company obtains the audited financial statements for every hedge fund annually and regularly reviews and discusses fund performance with fund managers to corroborate the reasonableness of the published net asset value. Due to the restrictions on redemptions and sale of these investments, the Company’s emerging market debt and hedge funds have been classified in Level 3.
Short-Term Investments
Short-term investments are comprised of fixed maturity investments that have a maturity of one year or less when purchased and a short-duration high quality fund. The fair value of the short-term fixed maturity investments is determined using the same principles as described above by asset class. The fair value of the short-term high quality fund is estimated using the net asset value reported by the investment manager. The Company’s short-term investments have been classified in Level 1 and Level 2.
 
 	a)	At December 31, 2011 and 2010, the Company’s investments were allocated between Levels 1, 2, and 3 as follows:	

 	  	December 31, 2011	 	
 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	
 	 	 	 	 	
U.S. government and government agencies	  	$	248,634	  	  	$	—  	  	  	$	—  	  	  	$	248,634	  	
Non-U.S. governments	  	 	—  	  	  	 	15,518	  	  	 	—  	  	  	 	15,518	  	
U.S. states and municipalities	  	 	—  	  	  	 	2,677	  	  	 	—  	  	  	 	2,677	  	
Corporate	  	 	—  	  	  	 	412,959	  	  	 	—  	  	  	 	412,959	  	
Residential mortgage-backed securities	  	 	—  	  	  	 	401,165	  	  	 	—  	  	  	 	401,165	  	
Asset-backed securities	  	 	—  	  	  	 	130,283	  	  	 	—  	  	  	 	130,283	  	
Commercial mortgage-backed securities	  	 	—  	  	  	 	95,307	  	  	 	—  	  	  	 	95,307	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total fixed maturity investments	  	$	248,634	  	  	$	1,057,909	  	  	$	—  	  	  	$	1,306,543	  	
Other investments	  	$	—  	  	  	$	50,754	  	  	$	147,931	  	  	$	198,685	  	
Short-term investments	  	$	4,968	  	  	$	95,199	  	  	$	—  	  	  	$	100,167	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	253,602	  	  	$	1,203,862	  	  	$	147,931	  	  	$	1,605,395	  	

12

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)

 	  	December 31, 2010	 	
 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	
 	 	 	 	 	
U.S. government and government agencies	  	$	135,041	  	  	$	—  	  	  	$	—  	  	  	$	135,041	  	
Non-U.S. governments	  	 	—  	  	  	 	10,731	  	  	 	—  	  	  	 	10,731	  	
U.S. states and municipalities	  	 	—  	  	  	 	9,653	  	  	 	—  	  	  	 	9,653	  	
Corporate	  	 	—  	  	  	 	576,428	  	  	 	—  	  	  	 	576,428	  	
Residential mortgage-backed securities	  	 	—  	  	  	 	395,896	  	  	 	—  	  	  	 	395,896	  	
Asset-backed securities	  	 	—  	  	  	 	132,771	  	  	 	—  	  	  	 	132,771	  	
Commercial mortgage-backed securities	  	 	—  	  	  	 	102,959	  	  	 	—  	  	  	 	102,959	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total fixed maturity investments	  	$	135,041	  	  	$	1,228,438	  	  	$	—  	  	  	$	1,363,479	  	
Other investments	  	$	—  	  	  	$	91,931	  	  	$	96,542	  	  	$	188,473	  	
Short-term investments	  	$	5,324	  	  	$	78,533	  	  	$	—  	  	  	$	83,857	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	140,365	  	  	$	1,398,902	  	  	$	96,542	  	  	$	1,635,809	  	

 	b)	The following table presents a reconciliation of the beginning and ending balances for the emerging market debt fund and hedge funds, included in other investments that are measured at fair value using Level 3 inputs as at December 31, 2011 and 2010:	

Other investments	  	2011	 	 	2010	 	
 	 	 	
Beginning balance at January 1	  	$	96,542	  	 	$	59,934	  	
Transfers in/(out) of Level 3 assets, at fair value	  	 	—  	  	 	 	—  	  	
Purchases	  	 	65,000	  	 	 	35,000	  	
Sales	  	 	(10,378	) 	 	 	(8,512	) 	
Net realized and unrealized (losses) gains included in earnings:	  	 	 	 	 	 	 	 	
Net realized losses	  	 	(3,366	) 	 	 	(201	) 	
Net unrealized gains	  	 	133	  	 	 	10,321	  	
 	  	 	 	 	 	 	 	 	
Ending balance at December 31	  	$	147,931	  	 	$	96,542	  	
 	  	 	 	 	 	 	 	 	
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in whether or not valuation inputs are observable may result in a reclassification for certain financial assets and liabilities. Reclassifications between Level 1, 2 and 3 of the fair value hierarchy are reported as transfers in and/or out as of the beginning of the quarter in which the reclassifications occur. There were no transfers in or out of Levels 1, 2 or 3 for the years ended December 31, 2011 and 2010.
Total net unrealized losses of $3.4 million from the emerging market debt and the hedge funds held at December 31, 2011 were included in earnings for the year ended December 31, 2011 (2010 - net unrealized gains of $10.3 million).
 
13

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
4.	Investments	
 
 	a)	The cost or amortized cost, gross unrealized gains, gross unrealized losses and fair value of fixed maturity investments by category at December 31, 2011 and 2010 are as follows:	

 	  	December 31, 2011	 	
 	  	Amortized
Cost	 	  	Gross
Unrealized
Gains	 	  	Gross
Unrealized
Losses	 	 	Fair
Value	 	
 	 	 	 	 	
Fixed maturity investments, trading:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. government and government agencies	  	$	247,702	  	  	$	947	  	  	$	(15	) 	 	$	248,634	  	
Non-U.S. governments	  	 	15,430	  	  	 	254	  	  	 	(166	) 	 	 	15,518	  	
U.S. states and municipalities	  	 	2,622	  	  	 	55	  	  	 	—  	  	 	 	2,677	  	
Corporate	  	 	411,368	  	  	 	5,380	  	  	 	(3,789	) 	 	 	412,959	  	
Residential mortgage-backed securities	  	 	399,628	  	  	 	8,190	  	  	 	(6,653	) 	 	 	401,165	  	
Asset-backed securities	  	 	134,772	  	  	 	1,379	  	  	 	(5,868	) 	 	 	130,283	  	
Commercial mortgage-backed securities	  	 	89,997	  	  	 	6,097	  	  	 	(787	) 	 	 	95,307	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total	  	$	1,301,519	  	  	$	22,302	  	  	$	(17,278	) 	 	$	1,306,543	  	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	December 31, 2010	 	
 	  	Amortized
Cost	 	  	Gross
Unrealized
Gains	 	  	Gross
Unrealized
Losses	 	 	Fair
Value	 	
 	 	 	 	 	
Fixed maturity investments:	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. government and government agencies	  	$	132,406	  	  	$	2,707	  	  	$	(72	) 	 	$	135,041	  	
Non-U.S. governments	  	 	9,461	  	  	 	192	  	  	 	—  	  	 	 	9,653	  	
U.S. states and municipalities	  	 	10,485	  	  	 	256	  	  	 	(10	) 	 	 	10,731	  	
Corporate	  	 	565,387	  	  	 	12,745	  	  	 	(1,704	) 	 	 	576,428	  	
Residential mortgage-backed securities	  	 	396,642	  	  	 	6,785	  	  	 	(7,531	) 	 	 	395,896	  	
Asset-backed securities	  	 	137,942	  	  	 	1,867	  	  	 	(7,038	) 	 	 	132,771	  	
Commercial mortgage-backed securities	  	 	98,532	  	  	 	6,480	  	  	 	(2,053	) 	 	 	102,959	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total	  	$	1,350,855	  	  	$	31,032	  	  	$	(18,408	) 	 	$	1,363,479	  	

14

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
 	b)	The contractual maturity dates of fixed maturities trading at December 31, 2011 and 2010 are as follows:	

 	  	December 31, 2011	 	  	December 31, 2010	 	
 	  	Amortized
Cost	 	  	Fair
Value	 	  	Amortized
Cost	 	  	Fair
Value	 	
 	 	 	 	 	
Due in one year or less	  	$	81,838	  	  	$	82,393	  	  	$	69,056	  	  	$	70,024	  	
Due after one year through five years	  	 	542,823	  	  	 	545,952	  	  	 	596,201	  	  	 	608,306	  	
Due after five years through ten years	  	 	48,122	  	  	 	47,728	  	  	 	47,483	  	  	 	48,371	  	
Due after ten years	  	 	4,339	  	  	 	3,715	  	  	 	4,999	  	  	 	5,152	  	
Residential mortgage-backed securities	  	 	399,628	  	  	 	401,165	  	  	 	396,642	  	  	 	395,896	  	
Asset-backed securities	  	 	134,772	  	  	 	130,283	  	  	 	137,942	  	  	 	132,771	  	
Commercial mortgage-backed securities	  	 	89,997	  	  	 	95,307	  	  	 	98,532	  	  	 	102,959	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	1,301,519	  	  	$	1,306,543	  	  	$	1,350,855	  	  	$	1,363,479	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
 
 	c)	The following table summarizes the composition of the fixed maturity investment portfolio by investment ratings assigned by rating agencies at December 31, 2011:	

 	  	December 31, 2011	 	
 	  	Amortized
Cost	 	  	Fair
Value	 	
 	 	 	
AAA/Aaa	  	$	236,590	  	  	$	241,072	  	
AA/Aa	  	 	643,118	  	  	 	650,407	  	
A/A	  	 	170,140	  	  	 	171,291	  	
BBB/Baa	  	 	155,549	  	  	 	156,845	  	
BB/Ba	  	 	30,635	  	  	 	29,830	  	
B/B	  	 	31,986	  	  	 	30,346	  	
CCC	  	 	14,420	  	  	 	11,483	  	
CC	  	 	8,023	  	  	 	6,117	  	
C	  	 	3,066	  	  	 	1,328	  	
D	  	 	1,446	  	  	 	1,309	  	
NR	  	 	6,546	  	  	 	6,515	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	1,301,519	  	  	$	1,306,543	  	
 	  	 	 	 	  	 	 	 	
The primary rating source is Standard & Poor’s Corporation (“S&P”).
 
 	d)	Certain of the Company’s cash and fixed maturity investments are held in pledged accounts (see note 10c).	
 
15

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
 	e)	The following table reflects the Company’s other investments, at fair value, at December 31, 2011 and 2010:	

 	  	December 31, 2011	 	
 	  	Amortized
Cost	 	 	Fair
Value	 	
Other investments:	  	 	 	 	 	 	 	 	
Catastrophe bonds	  	$	47,941	  	 	$	46,889	  	
Hedge funds	  	 	39,570	  	 	 	50,037	  	
Emerging Market Debt Fund	  	 	100,000	  	 	 	97,894	  	
Derivative instruments	  	 	(537	) 	 	 	(535	) 	
Repurchase agreements	  	 	4,400	  	 	 	4,400	  	
 	  	 	 	 	 	 	 	 	
Total	  	$	191,374	  	 	$	198,685	  	

 	  	December 31, 2010	 	
 	  	Amortized
Cost	 	 	Fair
Value	 	
Other investments:	  	 	 	 	 	 	 	 	
Catastrophe bonds	  	$	83,907	  	 	$	84,788	  	
Hedge funds	  	 	49,814	  	 	 	59,130	  	
Emerging Market Debt Fund	  	 	35,000	  	 	 	37,412	  	
Derivative instruments	  	 	(540	) 	 	 	543	  	
Repurchase agreements	  	 	6,600	  	 	 	6,600	  	
 	  	 	 	 	 	 	 	 	
Total	  	$	174,781	  	 	$	188,473	  	
 	  	 	 	 	 	 	 	 	
The catastrophe bonds are variable rate notes where the return is contingent upon certain climatic or geological events. The emerging market debt fund provides exposure to higher interest rates and currency appreciation through its investments in fixed-income securities denominated in the local currencies of emerging countries. The hedge funds include the Company’s investment in credit, long and short equity, distressed capital, event-driven and other multi-strategy funds. These investments utilize a variety of different investment approaches, designed to maximize diversity. The fair values for the emerging market debt and hedge funds are determined by management using the net asset values provided by the third party administrators of these funds. The hedge funds are subject to restrictions on redemptions which are determined by the governing documents and may limit the Company’s ability to liquidate its investments in these funds.
 
 	f)	The components of net investment income for the years ended December 31, 2011 and 2010 are as follows:	

Year ended December 31,	  	2011	 	 	2010	 	
Fixed maturity and short-term investments	  	$	42,288	  	 	$	50,615	  	
Cash and cash equivalents	  	 	31	  	 	 	40	  	
Other investments	  	 	3,457	  	 	 	6,753	  	
 	  	 	 	 	 	 	 	 	
 	  	 	45,776	  	 	 	57,408	  	
Investment expenses	  	 	(7,918	) 	 	 	(6,686	) 	
 	  	 	 	 	 	 	 	 	
Net investment income	  	$	37,858	  	 	$	50,722	  	

16

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
 	g)	The analysis of realized gains and losses on sales of investments for the years ended December 31, 2011 and 2010 are as follows:	

Year ended December 31,	  	2011	 	 	2010	 	
Gross realized gains	  	$	23,895	  	 	$	35,850	  	
Gross realized losses	  	 	(20,060	) 	 	 	(13,845	) 	
 	  	 	 	 	 	 	 	 	
Net realized investment gains included in net income	  	$	3,835	  	 	$	22,005	  	
 	  	 	 	 	 	 	 	 	
5. Derivative instruments
The Company reports its derivatives at estimated fair value as either assets or liabilities on the Consolidated Balance Sheet, depending on their rights or obligations, with changes in fair value included in unrealized gains (losses) on investments in the Consolidated Statements of Operations. The fair value of the Company’s derivatives is estimated by reference to quoted prices or broker quotes, where available, or in the absence of quoted prices or broker quotes, by the use of industry or internal valuation models. The Company does not hold any derivatives designated as hedging instruments.
The Company’s investment guidelines permit investments in derivative instruments such as forward foreign exchange contracts, interest rate swaps, credit default swaps, options, repurchase agreements and swaptions. The Company principally has exposure to derivatives related to the following types of risks: foreign currency risk, interest rate risk and credit risk.
Forward foreign exchange contracts
Under the Company’s investment guidelines, the Company may invest in non-U.S. dollar denominated investments but is required to hedge any significant foreign currency exposure. The forward foreign exchange contracts in the Company’s investment portfolio are related to those hedges.
Interest rate swaps
The Company uses interest rate swaps to manage its exposure to interest rate risk, to manage the duration of its fixed maturities investment portfolio and yield curve without transacting in the underlying securities.
Futures
The Company uses futures to manage its exposure to interest rate risk, to manage the duration of its fixed maturities investment portfolio and yield curve.
Credit default swaps
The Company uses credit default swaps to manage its exposure to credit risk included in its fixed maturities investment portfolio and short-term investments and to obtain certain credit exposure more efficiently than purchasing the fixed maturities with the same credit risk.
Swaptions
The Company uses swaptions or options on interest rate swaps to manage its exposure to interest rate risk and to hedge the duration of the Company’s investment portfolio and yield curve.
Options
The Company uses options on U.S. Treasury futures to manage its exposure to interest rate risk, to hedge the duration of the Company’s investment portfolio and yield curve.
Repurchase agreements
The Company uses repurchase agreements to earn an enhanced return over cash.
 
17

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
The following table shows the location on the Consolidated Balance Sheets and fair value of the Company’s derivative instruments at December 31, 2011 and 2010:

 	  	December 31, 2011	 	
 	  	Derivative Assets	 	  	Derivative Liabilities	 	
 	  	Balance Sheet
Location	  	Fair
Value	 	  	Balance Sheet
Location	  	Fair
Value	 	
Forward foreign exchange contracts	  	Other investments	  	$	778	  	  	Other investments	  	$	376	  	
Futures	  	Other investments	  	 	124	  	  	Other investments	  	 	124	  	
Interest rate swaps	  	Other investments	  	 	265	  	  	Other investments	  	 	1,194	  	
Repurchase agreements	  	Other investments	  	 	4,400	  	  	Other investments	  	 	—  	  	
Swaptions	  	Other investments	  	 	53	  	  	Other investments	  	 	60	  	
 	  	 	  	 	 	 	  	 	  	 	 	 	
Total	  	 	  	$	5,620	  	  	 	  	$	1,754	  	

 	  	December 31, 2010	 	
 	  	Derivative Assets	 	  	Derivative Liabilities	 	
 	  	Balance Sheet
Location	  	Fair
Value	 	  	Balance Sheet
Location	  	Fair
Value	 	
Forward foreign exchange contracts	  	Other investments	  	$	503	  	  	Other investments	  	$	73	  	
Futures	  	Other investments	  	 	567	  	  	Other investments	  	 	567	  	
Interest rate swaps	  	Other investments	  	 	646	  	  	Other investments	  	 	97	  	
Repurchase agreements	  	Other investments	  	 	6,600	  	  	Other investments	  	 	—  	  	
Swaptions	  	Other investments	  	 	—  	  	  	Other investments	  	 	436	  	
 	  	 	  	 	 	 	  	 	  	 	 	 	
Total	  	 	  	$	8,316	  	  	 	  	$	1,173	  	
 	  	 	  	 	 	 	  	 	  	 	 	 	
The location and amount of the (losses) gains recognized in the Company’s Consolidated Statements of Operations related to its derivative instruments for the years ended December 31, 2011 and 2010 are shown in the following table:

 	  	Location of (losses) gains recognized on
derivatives	  	Amount of (losses) gains
recognized on derivatives	 	
 	  	 	  	2011	 	 	2010	 	
Forward foreign exchange contracts	  	Net foreign exchange gains	  	$	85	  	 	$	704	  	
Swaps	  	Net investment (losses) income	  	 	(1,161	) 	 	 	50	  	
Swaps	  	Net unrealized (losses) gains on investments	  	 	(1,570	) 	 	 	987	  	
Swaps	  	Net realized losses on investments	  	 	(1,710	) 	 	 	(264	) 	
Swaps	  	Net foreign exchange gains	  	 	22	  	 	 	13	  	
Futures	  	Net realized (losses) gains on investments	  	 	(660	) 	 	 	1,599	  	
Futures	  	Net foreign exchange losses	  	 	—  	  	 	 	(2	) 	
Swaptions	  	Net unrealized gains (losses) on investments	  	 	494	  	 	 	(713	) 	
Swaptions	  	Net realized gains on investments	  	 	169	  	 	 	883	  	
Options	  	Net unrealized gains on investments	  	 	—  	  	 	 	5	  	
Options	  	Net realized gains on investments	  	 	8	  	 	 	38	  	
Repurchase agreements	  	Net investment income	  	 	4	  	 	 	17	  	
 	  	 	  	 	 	 	 	 	 	 	
Total	  	 	  	$	(4,319	) 	 	$	3,317	  	

18

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
6. Reserve for losses and loss adjustment expenses
The reserve for losses and loss adjustment expenses is an estimate which is subject to material variability. The variability arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Variability can be caused by the receipt of additional claim information, changes in judicial interpretation of contracts or significant differences in the severity or frequency of claims from historical trends. Also, the Company does not have the benefit of its own historical loss experience due to its short operating history. Accordingly, the Company’s reserves for losses and loss adjustment expenses may be subject to greater variability than a more mature company.
Loss and loss adjustment expenses reserve estimates are based on all relevant information available to the Company. The Company believes that the reserve for losses and loss adjustment expenses is sufficient to cover losses that fall within coverages assumed by the Company; however, there can be no assurance that actual losses will not exceed the Company’s total reserves for losses and loss adjustment expenses.
Activity in the reserve for losses and loss adjustment expenses for the years ended December 31, 2011 and 2010 was as follows:

 	  	2011	 	 	2010	 	
 	 	 	
Gross reserves for losses and loss expenses, beginning of year	  	$	425,211	  	 	$	255,207	  	
Loss reserves recoverable, beginning of year	  	 	26,585	  	 	 	1,549	  	
 	  	 	 	 	 	 	 	 	
Total net reserves for losses and loss expenses	  	 	398,626	  	 	 	253,658	  	
Net losses incurred related to:	  	 	 	 	 	 	 	 	
Current year	  	 	323,210	  	 	 	256,278	  	
Prior years	  	 	(28,725	) 	 	 	(11,299	) 	
 	  	 	 	 	 	 	 	 	
Total net incurred losses	  	 	294,485	  	 	 	244,979	  	
Net paid losses related to:	  	 	 	 	 	 	 	 	
Current year	  	 	(77,090	) 	 	 	(18,046	) 	
Prior years	  	 	(93,031	) 	 	 	(81,496	) 	
 	  	 	 	 	 	 	 	 	
Total net paid losses	  	 	(170,121	) 	 	 	(99,542	) 	
Effect of foreign exchange movements	  	 	(441	) 	 	 	(469	) 	
 	  	 	 	 	 	 	 	 	
Total net reserves for losses and loss expenses, end of year	  	 	522,549	  	 	 	398,626	  	
Loss reserves recoverable, end of year	  	 	41,448	  	 	 	26,585	  	
 	  	 	 	 	 	 	 	 	
Gross reserves for losses and loss expenses, end of year	  	$	563,997	  	 	$	425,211	  	
 	  	 	 	 	 	 	 	 	
During 2011, the Company experienced net favorable development on prior accident years of $28.7m primarily due to reductions in attritional reinsurance reserves and natural catastrophes of $9.8 million and $18.9 million, respectively. Attritional developments were primarily from property reinsurance, marine & aviation, and professional lines of $9.4 million, $3.0 million and $1.7 million, respectively, with an offset from property insurance of $5.6 million. Natural catastrophes saw positive development primarily from reserve releases on Hurricanes Gustav and Ike of $7.9 million, the Chilean earthquake of $3.4 million and various other smaller named storms from 2009 and 2010 of $7.3 million and $4.0 million, respectively. This is partially offset by adverse development on various smaller named storms that occurred in 2007 of $4.0 million and the 2010 Queensland floods of $1.2 million.
During 2010, the Company experienced net favorable development on prior accident years primarily due to reductions in attritional reinsurance reserves of approximately $10.3 million, which is offset by an increase in attritional property insurance of $0.8 million. In addition, natural catastrophes decreased by $1.8 million, which consist primarily of reductions in the reserves relating to aviation of $6.0 million and Storm Klaus of $3.9 million offset by an increase in our reserves for Hurricane Ike of $7.1 million.
 
19

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
7. Reinsurance ceded
The effects of reinsurance ceded on premiums written, premiums earned and on losses and loss adjustment expenses, during the years ended December 31, 2011 and 2010, are as follows:

 	  	2011	 	 	2010	 	
Premiums written	  	 	 	 	 	 	 	 	
Direct	  	$	22,201	  	 	$	21,664	  	
Assumed	  	 	470,463	  	 	 	510,060	  	
Ceded	  	 	(41,473	) 	 	 	(36,161	) 	
 	  	 	 	 	 	 	 	 	
Net	  	$	451,191	  	 	$	495,563	  	

Premiums earned	  	 	 	 	 	 	 	 	
Direct	  	$	21,495	  	 	$	27,828	  	
Assumed	  	 	456,291	  	 	 	486,961	  	
Ceded	  	 	(37,005	) 	 	 	(24,432	) 	
 	  	 	 	 	 	 	 	 	
Net	  	$	440,781	  	 	$	490,357	  	

Losses and loss adjustment expenses	  	 	 	 	 	 	 	 	
Gross losses and loss adjustment expenses	  	$	318,281	  	 	$	280,498	  	
Losses and loss adjustment expenses recoverable	  	 	(23,796	) 	 	 	(35,519	) 	
 	  	 	 	 	 	 	 	 	
Net losses and loss adjustment expenses	  	$	294,485	  	 	$	244,979	  	
 	  	 	 	 	 	 	 	 	
The Company uses reinsurance ceded contracts to reduce its exposure to risk of loss on certain reinsurance contracts. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains primarily liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. At December 31, 2011, reinsurance recoverables amounted to $41.4 million (2010 - $26.6 million).
8. Share-based compensation
Ariel Holdings granted restricted stock and options to certain employees at the time of the Ariel Holdings initial financing, as well as providing for future awards of stock-based compensation. All such awards are subject to, or operate under terms broadly similar to, the Ariel Holdings Long Term Incentive Plan (“LTIP”). The LTIP provides the Compensation Committee of the Board of Directors with the sole discretion to grant awards to employees and to determine the exercise price, vesting period and other applicable terms of such awards. The maximum option term is 10 years for all options awarded. Ariel Holdings has charged the Company $4.6 million in 2011 and $4.8 million in 2010 related to the LTIP, recorded in general and administrative expenses.
9. Pension plan
The Company provides pension benefits to eligible employees through a defined contribution plan sponsored by the Company. Under the Company’s defined contribution plan, the Company makes contributions to its employees’ accounts of up to 15% of its employees’ eligible earnings. The contributions in the defined contribution plans are to be invested at the election of each employee in one or more of several investment funds offered by third party investment advisors. Contributions paid or accrued for the years ended December 31, 2011 and 2010 resulted in an expense of $2.0 million and $1.9 million, respectively, being recorded in general and administrative expenses.
 
20

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
10. Commitments and contingencies
 
 	a)	Concentrations of credit risk	
As of December 31, 2011, substantially all of the Company’s cash and investments were held by one custodian. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of fixed maturity investments. The fixed maturity investment portfolio is managed by external advisors in accordance with prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue or issuers. The Company did not have an aggregate exposure in a single entity, other than in the U.S. Government and U.S. Government agency securities and U.S. Government sponsored enterprises, of more than 1% (2010 - 2%) of consolidated shareholder’s equity at December 31, 2011.
Concentration of credit risk with respect to reinsurance recoverable balances is limited due to the number of reinsureds used on the Company’s reinsurance programs. As at December 31, 2011, sixteen reinsurers accounted for 100% of the reinsurance balances recoverable, all of these reinsurers are either rated A- or better by A.M. Best or fully collateralized.
As referred to in (b) the Company sources its business through certain major brokers. The Company is exposed to the credit risk of the brokers in respect of premium income due from policy holders that are remitted via the brokers.
 
 	b)	Major production sources	
During the year ended December 31, 2011, the Company obtained 73%, of its gross premiums written through three brokers:

Aon Benfield	  	 	42	% 	
Marsh and McLennan Companies, Inc.	  	 	24	% 	
Willis Companies	  	 	9	% 	
 
 	c)	Investment commitments	
As of December 31, 2011, the Company has pledged $87.6 million (2010 - $85.0 million) of its fixed maturity investments and cash as collateral to secure $82.3 million (2010 - $66.8 million) of letters of credit outstanding under its credit facility.
Invested assets with a carrying value of $6.1 million (2010 - $6.0 million) were held in trust for the benefit of Ariel Re’s United States surplus line policyholders.
Under the terms of the reinsurance agreements with Valiant Insurance Company (“Valiant”), as referred to in note 12, Ariel Re has deposited $73.0 million (2010 - $70.8 million) in a trust for the benefit of Valiant.
As of December 31, 2011, the Company has pledged $53.2 million (2010 - $41.2 million) of its fixed maturity investments and cash as collateral to secure $35.1 million (2010 - $31.9 million) of letters of credit outstanding under the FALLOC as referred to in note 11.
 
 	d)	Employment agreements	
The Company has entered into employment agreements with certain officers that provide for option awards, executive benefits and severance payments under certain circumstances.
 
21

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
 	e)	Operating leases	
The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2011 are as follows:

Year ended December 31	  	Amount $000’s	 	
2012	  	 	2,288	  	
2013	  	 	2,175	  	
2014	  	 	2,230	  	
2015	  	 	2,286	  	
2016 and thereafter	  	 	5,419	  	
Total rent under operating leases for the years ended December 31, 2011 and 2010 was $1.8 million and $2.1 million, respectively.
 
 	f)	Securities lending	
As part of the Company’s securities lending program the Company had $59.5 million (2010 - $33.6 million) of securities on loan at December 31, 2011 for which $60.8 million (2010 - $36.7 million) of collateral had been posted by the borrowers.
11. Debt and financing arrangements
On November 28, 2011, the Company renewed its standby letter of credit facility (“FALLOC”). The new $100.0 million FALLOC was entered among Atrium Underwriting Group Limited (“the Borrower”), Ariel Holdings, as Guarantor, the Company, as Reinsurer, and ING Bank N.V., London Branch (the “Lender”).
Proceeds of the FALLOC may be used by the Borrower for the provision of Funds at Lloyd’s to support the underwriting capacity of the corporate members owned by the Borrower, for the 2013, 2012 and prior years of account. The Company guarantees the obligations of the Borrower under the FALLOC. Collateral cover must be provided by the Company in support of its obligations as Reinsurer under certain quota share reinsurance agreements with Atrium’s corporate members, and/or by the Borrower, in an aggregate value not less than the aggregate face amounts of the letters of credit issued under the FALLOC, subject to certain collateral advance rates. The collateral cover is provided in the form of investment collateral held in collateral accounts pledged in favor of the Lender, as security trustee.
The FALLOC requires Ariel Holdings to comply with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a maximum debt to capital ratio (no greater than 0.35:1.00 at any time) and a consolidated net worth of the Company ($500 million). In addition, Ariel Re must maintain a financial strength rating from A.M. Best of at least B++ at all times.
The FALLOC also contains restrictions on Atrium’s ability to incur additional indebtedness, the Ariel Holding’s ability to merge with or be acquired by another entity, and Ariel Holding’s and its subsidiaries’ ability to dispose of certain assets, incur liens other than permitted liens, or cease its business.
On May 14, 2007, the Company replaced its $350 million Credit Facility (the “Facility”) among the Company and a syndicate of lending institutions (the “Facility Lenders”). The transaction was led by HSBC and JP Morgan Securities Inc. (“JP Morgan”).
Proceeds of the Facility may be used by the Company for general corporate and working capital purposes. The Facility comprises two tranches. The first tranche of $100 million was available for three years on unsecured revolving loans or secured letters of credit and was not renewed in 2011. The second tranche of $250 million is available for five years for the issuance of secured letters of credit. Collateral security will be provided from the invested assets of Ariel Re, subject to certain collateral advance rates. The Company guarantees the obligations of the Facility.
 
22

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
The Facility requires the Company to comply with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a maximum debt to capital ratio (no greater than 0.35:1.00 at any time), a consolidated tangible net worth (70% of actual net worth at the date of closing, plus 50% of positive quarterly net income plus 70% of new equity raised) and a maximum amount of net premiums written to net equity of Ariel Re (no greater than 1.5 to 1.0). In addition, Ariel Re must maintain a financial strength rating from A.M. Best of at least B++ at all times.
The Facility also includes covenants and default provisions consistent with the FALLOC covenant and default provisions. Upon the occurrence of an event of default under the Facility, the Facility Lenders can terminate their commitments under the revolving loans, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the Facility Lenders under the Facility.
12. Related party transactions
a) Stock compensation. The stock compensation expense charged during the year by Ariel Holdings, and included within general and administrative expense was $4.6 million (2010 - $4.8 million).
b) Intercompany reinsurance agreements. Effective January 1, 2009, the Company entered into reinsurance agreements with various Lloyd’s corporate member underwriting subsidiaries of Atrium Underwriting Group Limited (“Atrium”), a wholly owned subsidiary of Ariel Holdings. These agreements provide that Ariel Re assumes a 65% quota share of all insurance and reinsurance risks earned by the corporate member subsidiaries of Atrium during 2011 and 2010. In addition to the insurance and reinsurance risks, Ariel Re assumed 65% of foreign exchange gains or losses, investment returns and operating expenses. The Company pays the Atrium subsidiaries a 2% commission on all amounts ceded as well as a 20% profit commission. For the year ended December 31, 2011, the Atrium subsidiaries ceded $56.9 million (2010 - $68.0 million) of premiums written and earned and losses of $47.7 million (2010 - $33.6 million) were incurred under these quota share agreements.
On October 1, 2007, the Company entered into reinsurance agreements with Valiant Insurance Company (“Valiant”), a Delaware-domiciled insurance company that is wholly owned by Valiant Insurance Group, Inc. (“VIG”) a former subsidiary of Ariel Holdings. These agreements included a pro-rata reinsurance agreement, whereby Ariel Re assumes a 75% quota share of all business written by Valiant, provided that the business written is not being indemnified by other reinsurers. The Company pays Valiant a 30% commission on all premiums ceded. For the year ended December 31, 2011, Valiant ceded $0.9 million (2010 - $37.9 million) and $16.0 million (2010: $35.8 million) of premiums written and earned, respectively and losses of $10.6 million (2010 - $27.4 million) were incurred under the quota share agreement.
On October 1, 2007, the Company entered into a stop loss reinsurance agreement with Valiant. Under the terms of the agreement, the Company will indemnify Valiant for incurred losses that exceed 80% of Valiant’s net earned premium. The Company will receive 5% of Valiant’s net earned premium on the reinsured business as premium. For the year ended December 31, 2011, the Company received premium of nil (2010 - $0.6 million) from Valiant, and incurred no losses (2010 - $0.2 million of expense).
On October 1, 2007, the Company agreed to guarantee Valiant’s third party reinsurance recoverable balances. Under the terms of the agreement Ariel Re agrees to pay Valiant for all third party reinsurance recoveries that are 90 days overdue. In return, the Company is entitled to receive quarterly premium payments based on a percentage of Valiant’s total reinsurance recoverable at the end of each quarter. For the years ended December 31, 2011 and 2010, the Company received no premiums from Valiant under this agreement as Valiant had not entered into any third party reinsurance arrangements during the applicable period.
 
23

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
On November 25, 2008 the Company entered into reinsurance agreements with Valiant Specialty Insurance Company (“Valiant Specialty”), a Delaware-domiciled insurance company that is wholly owned by VIG. These agreements included a pro-rata reinsurance agreement, whereby Ariel Re assumes a 75% quota share of all business written by Valiant Specialty, provided that the business written is not being indemnified by other reinsurers. The Company pays Valiant Specialty a 30% commission on all premiums ceded. For the year ended December 31, 2011, Valiant Specialty ceded $20 thousand and $0.3 million of premiums written and earned (2010 - $1.3 million and $1.3 million), respectively and losses of $0.1 million (2010 - $0.9 million) were incurred under the quota share agreement.
On November 25, 2008, the Company entered into a stop loss reinsurance agreement with Valiant Specialty. Under the terms of the agreement, the Company will indemnify Valiant Specialty for incurred losses that exceed 80% of Valiant Specialty’s net earned premium. The Company will receive 5% of Valiant Specialty’s net earned premium on the reinsured business as premium. For the year ended December 31, 2011, the Company received no premiums (2010 - $21 thousand) from Valiant Specialty, and incurred no losses (2010: $nil).
On November 25, 2008, the Company agreed to guarantee Valiant Specialty’s third party reinsurance recoverable balances. Under the terms of the agreement Ariel Re agrees to pay Valiant Specialty for all third party reinsurance recoveries that are 90 days overdue. In return, the Company is entitled to receive quarterly premium payments based on a percentage of Valiant Specialty’s total reinsurance recoverable at the end of each quarter. For the year ended December 31, 2011, the Company received no premiums (2010 - $nil) from Valiant Specialty under this agreement as Valiant Specialty had not entered into any third party reinsurance arrangements during the applicable period.
On July 1, 2010, Ariel Holdings executed an agreement to sell the stock of VIG for which the sale closed on November 8, 2010. In connection with this sale the pro-rata reinsurance agreements with Valiant and Valiant Specialty were terminated and cancelled on a run-off basis effective November 5, 2010. In addition, the stop loss reinsurance agreements with Valiant and Valiant Specialty and the guarantee of Valiant’s third party reinsurance recoverable balances were commuted effective October 31, 2010. These commutations resulted in a payment to Valiant and Valiant Specialty of $0.6 million in 2010.
On November 5, 2010, following the sale of VIG the Company entered into an excess of loss reinsurance agreement with Valiant and Valiant Specialty. Under the terms of this agreement Ariel Re agreed to indemnify Valiant and Valiant Specialty for net loss payments that are in excess of net loss reserves at the date of closing and for net loss payments that are in excess of 62.5% of net unearned premiums as at the date of closing. In addition, Ariel Re agreed to indemnify Valiant and Valiant Specialty for net loss payments in excess of 60% of net earned premiums for policies written by Valiant and Valiant Specialty prior to the closing date but incepting after the closing date. There were no amounts incurred under either of these indemnifications for either the year ending December 31, 2011 or 2010.
c) Balance due to Ariel Holdings Ltd. The intercompany balance due to Ariel Holdings is unsecured and non-interest bearing. The amount is due upon demand.
13. Statutory requirements and dividend restrictions
Ariel Re’s ability to pay dividends and make capital distributions is subject to certain regulatory restrictions. Under the Insurance Act 1978, amendments thereto and Related Regulations of Bermuda (the “Act”), Ariel Re is required to prepare statutory consolidated financial statements and to file in Bermuda a statutory financial return. The Act also requires Ariel Re to maintain certain measures of solvency and liquidity. At December 31, 2011, the statutory capital and surplus of Ariel Re was $1,100.6 million (2010 - $1,305.5 million) which exceeds the statutory capital and surplus required to be maintained under the Act.
Under the Act, Ariel Re is classified as a Class 4 insurer, and is therefore restricted as to the payment of dividends in the amount of 25% of the prior year’s statutory capital and surplus, unless at least two members of the Board of Directors attest that a dividend in excess of this amount would not cause Ariel Re to fail to meet its relevant margins.
 
24

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
During 2011, Ariel Re declared dividends of $260.0 million (2010 - $400.0 million).
In 2008, the Bermuda Solvency Capital Requirement (“BSCR”) was enacted in Bermuda, which included, among other things, a standard mathematical model designed to give the Bermuda Monetary Authority (“BMA”) more advanced methods for determining an insurer’s capital adequacy. Underlying the BSCR is the philosophy that all insurers should operate on an ongoing basis with a view to maintaining their capital at a prudent level in excess of the minimum solvency margin otherwise prescribed under the Insurance Act. The BMA requires all Class 4 insurers to maintain their capital at a target level which is set at 120% of the minimum amount calculated in accordance with the BSCR or an approved in-house model. Ariel Re is currently completing the 2011 BSCR and at this time believes that Ariel Re will exceed the target level of capital.
The principal differences in Bermuda between statutory basis consolidated financial statements and consolidated financial statements prepared in accordance with U.S. GAAP are that statutory consolidated financial statements do not reflect deferred acquisition costs or prepaid assets. Also, reinsurance assets and liabilities are presented net of reinsurance and there is no cash flow statement.
The Company’s Zurich branch has no statutory filing requirement at, or for, the year-end December 31, 2011.
14. Taxation
The Company provides for income taxes based upon amounts reported in the consolidated financial statements and the provisions of currently enacted tax laws. The Company is registered in Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not taxed on any Bermuda income or capital gains taxes and has received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, the Company will be exempt from those taxes until March 2035.
The Company’s Swiss branch is subject to both Swiss Federal tax and Zurich Cantonal tax. The income tax benefit is all current and is all attributable to the Zurich branch.
Reconciliation between the expected tax rate of zero under Bermuda law and the actual tax benefit per the consolidated financial statements is as follows:

 	  	Year ended
December 31
2011	 	 	Year ended
December 31
2010	 	
Computed expected tax benefit	  	$	—  	  	 	$	—  	  	
Foreign taxes at local expected rates	  	 	(460	) 	 	 	214	  	
 	  	 	 	 	 	 	 	 	
Actual income tax (expense) benefit	  	$	(460	) 	 	$	214	  	
 	  	 	 	 	 	 	 	 	
15. Subsequent events
On January 13, 2012, the cruise liner Costa Concordia ran aground off the coast of Italy. Based on a total industry insured loss estimate of $845 million to $950 million, the Company expects its loss to be in the range of $12.0 million to $17.0 million, net of reinstatement premiums and reinsurance. The Company’s assessment of its loss from the event is based on current information available. Due to the preliminary nature of reports and estimates of loss to date, the Company’s actual losses from this event may vary from these estimates.
On March 2, 2012, Ariel Holdings and Ariel Re entered into a purchase agreement with Arrow Corporate Member Holdings LLC (“Arrow”), a subsidiary of Goldman Sachs (“Goldman”), pursuant to which Ariel Re will sell assets, including intellectual property, trade name and rights associated with its core property and marine reinsurance, property insurance and certain ancillary business (together “subject lines”) underwritten by its Bermuda office to Arrow. The transaction is expected to close, subject to certain closing conditions and regulatory approval, on April 1, 2012.
 
25

Ariel Reinsurance Company Ltd.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Expressed in thousands of United States dollars, except share amounts)
 
Ariel Re will also reinsure its unexpired in-force business at closing in the subject lines on a 100% quota share basis to Syndicate 1910 at Lloyd’s, a subsidiary of Arrow, and will transfer its net loss reserves and loss expenses through a loss portfolio transfer in the subject lines to a newly formed reinsurance subsidiary of Arrow.
At closing, the Bermuda employees of Ariel Re will become employees of an Arrow affiliate or other Goldman affiliates.
On March 3, 2012 Ariel Re entered into a purchase agreement with Arch Reinsurance Ltd and Arch Reinsurance Europe Underwriting Limited (collectively “Arch”), pursuant to which Ariel Re will sell certain assets and rights associated with its credit and surety business based in Zurich, Switzerland. The transaction is expected to close, subject to certain closing conditions and regulatory approval, by April 1, 2012.
Ariel Re will also reinsure its unexpired in-force business at closing in the credit and surety lines of business on a 100% quota share basis to Arch and will also transfer its net loss reserves and loss expenses through a loss portfolio transfer in the s credit and surety lines to Arch.
At closing, the Zurich employees of Ariel Re will become employees of Arch or other Arch affiliates.
Also at closing or as soon as practicable thereafter, Ariel Holdings and Ariel Re will change company names.
As a result of these transactions, Ariel Re will exit all lines of business but continue to underwrite intragroup reinsurance of Atrium. The operations of Atrium are unaffected by the transaction.
These transactions will substantially reduce Ariel Re’s risk positions, and Ariel Re expects accordingly, subject to the approval of the Bermuda Monetary Authority, to make a distribution to Ariel Holdings of a substantial percentage of its statutory capital and surplus. During the second quarter of 2012, Ariel Holdings, in turn, expects to make a distribution to its shareholders in an amount equal to substantially all of the distribution that it receives from Ariel Re.
The Company has evaluated subsequent events through March 8, 2012, the date these financial statements were available to be issued, and concluded that, other than the subsequent events disclosed above, there are no material subsequent events requiring recognition or disclosure.
 
26

Exhibit 99.3
ARDEN REINSURANCE COMPANY LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2013 and December 31, 2012

 	  	June 30,
2013	 	 	December 31,
2012	 	
 	  	 	 	 	
 	  	(expressed in thousands of U.S. dollars)	 	
Assets	  	 	 	 	 	 	 	 	
Fixed maturity investments, at fair value (amortized cost 2013: $96,738; 2012: $229,548)	  	$	94,475	  	 	$	227,988	  	
 	 	 	
Other investments, at fair value	  	 	2,753	  	 	 	3,612	  	
 	  	 	 	 	 	 	 	 	
Total investments	  	 	97,228	  	 	 	231,600	  	
Cash and cash equivalents	  	 	38,936	  	 	 	28,388	  	
Premiums receivable	  	 	116,560	  	 	 	146,985	  	
Accrued investment income	  	 	197	  	 	 	359	  	
Deferred acquisition costs	  	 	10	  	 	 	40	  	
Prepaid reinsurance premiums	  	 	10,312	  	 	 	33,956	  	
Paid losses recoverable	  	 	5,653	  	 	 	3,937	  	
Loss reserves recoverable	  	 	349,211	  	 	 	379,603	  	
Other assets	  	 	180	  	 	 	44	  	
Balance due from Arden Holdings Ltd.	  	 	227	  	 	 	151	  	
Receivable for investments sold	  	 	5,604	  	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Total assets	  	$	624,118	  	 	$	825,063	  	

Liabilities	  	 	 	 	 	 	 	 	
Reserve for losses and loss adjustment expenses	  	$	454,798	  	 	$	474,915	  	
Unearned premiums	  	 	10,412	  	 	 	26,852	  	
Reinsurance premiums payable	  	 	59,304	  	 	 	80,325	  	
Other liabilities	  	 	341	  	 	 	943	  	
 	  	 	 	 	 	 	 	 	
Total liabilities	  	 	524,855	  	 	 	583,035	  	

Shareholder’s Equity	  	 	 	 	 	 	 	 	
Ordinary share capital (Authorized 100,000 common shares, 2013: par value $10.00, 103,700 shares issued; 2012: par value $10.00, 254,000 shares issued )	  	 	1,037	  	 	 	2,540	  	
Additional paid-in capital	  	 	196,203	  	 	 	254,700	  	
Deficit	  	 	(97,977	) 	 	 	(15,212	) 	
 	  	 	 	 	 	 	 	 	
Total shareholder’s equity	  	 	99,263	  	 	 	242,028	  	

 	  	 	 	 	 	 	 	 	
Total liabilities & shareholder’s equity	  	$	624,118	  	 	$	825,063	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the unaudited condensed consolidated financial statements
 
1

ARDEN REINSURANCE COMPANY LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Month Periods Ended June 30, 2013 and 2012

 	  	Six Months Ended June 30,	 	
 	  	2013	 	 	2012	 	
 	  	(expressed in thousands of U.S. dollars)	 	
Revenues	  	 	 	 	 	 	 	 	
Gross premium written	  	$	24,630	  	 	$	185,997	  	
Reinsurance premium ceded	  	 	(2,114	) 	 	 	(242,637	) 	
 	  	 	 	 	 	 	 	 	
Net premium written	  	 	22,516	  	 	 	(56,640	) 	
Change in net unearned premiums	  	 	(7,202	) 	 	 	179,871	  	
 	  	 	 	 	 	 	 	 	
Net premiums earned	  	 	15,314	  	 	 	123,231	  	
Other underwriting income	  	 	40	  	 	 	—  	  	
Net investment income	  	 	371	  	 	 	7,710	  	
Net realized gains on investments	  	 	782	  	 	 	31,518	  	
Net unrealized losses on investments	  	 	(628	) 	 	 	(12,086	) 	
Net foreign exchange gains (losses)	  	 	174	  	 	 	(1,634	) 	
 	  	 	 	 	 	 	 	 	
Total revenues	  	 	16,053	  	 	 	148,739	  	

Expenses	  	 	 	 	 	 	 	 	
Net losses and loss adjustment expenses	  	 	16,954	  	 	 	44,073	  	
Acquisition costs	  	 	1,720	  	 	 	18,913	  	
General and administrative expenses	  	 	105	  	 	 	(32,874	) 	
 	  	 	 	 	 	 	 	 	
Total expenses	  	 	18,779	  	 	 	30,112	  	

 	  	 	 	 	 	 	 	 	
(Loss) income before income taxes	  	 	(2,726	) 	 	 	118,627	  	

Income tax expense	  	 	40	  	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Net (loss) income	  	$	(2,766	) 	 	$	118,627	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the unaudited condensed consolidated financial statements
 
2

ARDEN REINSURANCE COMPANY LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended June 30, 2013 and 2012

 	  	Six Months Ended June 30,	 	
 	  	2013	 	 	2012	 	
 	  	(expressed in thousands of U.S. dollars)	 	
Cash flows provided by (used in) operating activities:	  	 	 	 	 	 	 	 	
Net (loss) income	  	$	(2,766	) 	 	$	118,627	  	
 	 	 	
Adjustments to reconcile net income to net cash provided by (used in) operating activities:	  	 	 	 	 	 	 	 	
Net realized gains on investments	  	 	(783	) 	 	 	(32,084	) 	
Net amortization on investments	  	 	—  	  	 	 	1,577	  	
Net unrealized losses on investments	  	 	628	  	 	 	12,086	  	
Depreciation	  	 	360	  	 	 	(27,084	) 	
Other items	  	 	227	  	 	 	1,670	  	
 	 	 	
Changes in:	  	 	 	 	 	 	 	 	
Premium receivable	  	 	30,425	  	 	 	43,577	  	
Accrued investment income	  	 	163	  	 	 	5,311	  	
Prepaid reinsurance premiums	  	 	23,642	  	 	 	(153,087	) 	
Loss reserves recoverable	  	 	28,676	  	 	 	(335,336	) 	
Other assets	  	 	(235	) 	 	 	2,428	  	
Reserve for losses and loss adjustment expenses	  	 	(20,117	) 	 	 	(26,605	) 	
Unearned premiums	  	 	(16,440	) 	 	 	(26,683	) 	
Reinsurance premiums payable	  	 	(21,021	) 	 	 	117,650	  	
Accounts payable and accrued liabilities	  	 	(548	) 	 	 	(7,027	) 	
 	  	 	 	 	 	 	 	 	
Net cash provided by (used in) operating activities	  	 	22,211	  	 	 	(304,980	) 	
 	 	 	
Cash flows (used in) provided by investing activities:	  	 	 	 	 	 	 	 	
Purchase of fixed maturity investments	  	 	—  	  	 	 	(1,068,743	) 	
Sales and maturities of fixed maturity investments	  	 	132,662	  	 	 	2,134,759	  	
Net (purchases) sales of short term investments	  	 	—  	  	 	 	100,199	  	
Net purchase of other investments	  	 	1,505	  	 	 	186,866	  	
Net change in receivables for investments sold	  	 	(5,604	) 	 	 	(64,832	) 	
Purchase of fixed assets	  	 	—  	  	 	 	29,992	  	
 	  	 	 	 	 	 	 	 	
Net cash provided by investing activities	  	 	128,563	  	 	 	1,318,241	  	

Cash flows used in financing activities:	  	 	 	 	 	 	 	 	
Dividends	  	 	—  	  	 	 	(136,000	) 	
Distribution of capital	  	 	(140,000	) 	 	 	(800,000	) 	
 	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(140,000	) 	 	 	(936,000	) 	

 	  	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and cash equivalents	  	 	(226	) 	 	 	(1,039	) 	
 	  	 	 	 	 	 	 	 	
Net increase in cash and cash equivalents	  	 	10,548	  	 	 	76,222	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents, beginning of period	  	 	28,388	  	 	 	61,166	  	
 	  	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	  	$	38,936	  	 	$	137,388	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the unaudited condensed consolidated financial statements
 
3

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013 and December 31, 2012
(Tabular information expressed in thousands of U.S. dollars)
 
1.	BASIS OF PREPARATION AND CONSOLIDATION	
The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring 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. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. Inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Arden Reinsurance Company Ltd. The following information should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2012.
 
2.	SALE OF ARDEN RE SHARE CAPITAL	
On June 5, 2013, Arden Holdings Ltd. (“Arden Holdings”) entered into a definitive agreement with two subsidiaries of Enstar Group Limited (“Enstar”) under which Enstar agreed to acquire the entire issued share capital of the Company. The purchase price for the Company is approximately $79.6 million. As at June 30, 2013, completion of the transaction remained conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. Enstar subsequently announced that Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P. (collectively, “Trident”) had acquired a 40% interest in the holding company for the acquisition subsidiary on July 3, 2013 and had agreed to provide 40% of the purchase price and related expenses for the acquisition of the Company. On September 9, 2013, Arden Holdings completed its sale of the Company’s entire issued share capital to Enstar’s wholly-owned subsidiary and Trident.
In addition, on June 5, 2013, Arden Holdings entered into a definitive agreement with two subsidiaries of Enstar under which Enstar agreed to acquire the entire issued share capital of Atrium Underwriting Group Limited (“Atrium”), which is also a subsidiary of Arden Holdings. The Company provides reinsurance to Atrium. The two transactions are governed by separate purchase agreements and Enstar’s acquisition of the Company was not conditioned on its acquisition of Atrium.
 
3.	INVESTMENTS	
Fixed Maturities
The estimated fair values of the Company’s investments in fixed maturity investments classified as trading securities were as follows:

 	  	June 30, 2013	 	  	December 31, 2012	 	
 	 	 	
U.S. government and government agencies	  	$	66,548	  	  	$	122,824	  	
 	 	 	
Non-U.S. governments	  	 	—  	  	  	 	65,909	  	
 	 	 	
Residential mortgage-backed securities	  	 	27,531	  	  	 	39,051	  	
 	 	 	
Asset-backed securities	  	 	396	  	  	 	204	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	94,475	  	  	$	227,988	  	

4

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS — (cont’d)	
 
The following tables summarize the composition of the fixed maturity investment portfolio by investment ratings assigned by rating agencies:

As at June 30, 2013	  	Fair
Value	 	  	% of Total
Fair Value	 	
AA/Aa	  	$	94,079	  	  	 	99.6	% 	
 	 	 	
C	  	 	100	  	  	 	0.1	% 	
 	 	 	
D	  	 	296	  	  	 	0.3	% 	
 	  	 	 	 	  	 	 	 	
 	  	$	94,475	  	  	 	100.0	% 	

 	 	 	 	 	 	 	 	 	
As at December 31, 2012	  	Fair
Value	 	  	% of Total
Fair Value	 	
AA/Aa	  	$	227,784	  	  	 	99.8	% 	
 	 	 	
C	  	 	118	  	  	 	0.1	% 	
 	 	 	
D	  	 	86	  	  	 	0.1	% 	
 	  	 	 	 	  	 	 	 	
 	  	$	227,988	  	  	 	100.0	% 	
 	  	 	 	 	  	 	 	 	
Other Investments
The estimated fair value of the Company’s investments in hedge funds as at June 30, 2013 and December 31, 2012 was $2,753 and $3,612, respectively. The hedge funds include the Company’s investment in credit, long and short equity, distressed capital, event-driven and other multi-strategy funds. These investments utilize a variety of different investment approaches, designed to maximize diversity. The fair values for the hedge funds are determined by management using the net asset values provided by the third party administrators of these funds. The hedge funds are subject to restrictions on redemptions which are determined by the governing documents and may limit the Company’s ability to liquidate its investments in these funds. The hedge funds are not currently eligible for redemption due to imposed lock-up periods of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice. The first investment in the funds will be eligible for redemption in March 2014.
At June 30, 2013, the hedge fund investments were subject to side-pockets. Management has not made any adjustments to the fair value estimate reported by the fund managers for the side-pocketed investments.
 
5

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS — (cont’d)	
 
Fair Value of Financial Instruments
The Company determines the fair value of its fixed maturity investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. The Company estimates the estimated fair value of each individual security utilizing the highest level of inputs available. Current accounting guidance establishes three levels in the hierarchy as follows:
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2: Inputs are other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement.
Level 3: Inputs are unobservable inputs for the asset or liability.
The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.
Fixed Maturities Investments
The Company uses quoted values and other data provided by an independent pricing service and its third party investment managers in determining fair values for its fixed maturity investments. Pricing from third party pricing services are sourced from multiple vendors. Each source has its own proprietary method for determining fair value of any security that is not actively traded. In general, the methods involve the use of “matrix pricing” in which the independent pricing sources use observable market inputs including, but not limited to, yield curves, trade execution data, market spreads, cash flows, credit risks and benchmarking like securities to determine a reasonable fair value.
The following describes the techniques generally used to determine the fair values of the Company’s fixed maturities by asset class:
U.S. government and government agencies - These securities consist primarily of bonds issued by the U.S. Department of Treasury and mortgage agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of highly liquid U.S. Treasuries are based on quoted prices in active markets using real time trading systems and are classified within Level 1. The fair values of U.S. government agency securities are priced using yield curves, credit spreads and interest rate volatilities. These are considered to be observable market inputs and therefore the fair values of U.S. government agency securities are classified in Level 2.
Non-U.S. governments - These securities consist of securities issued primarily by governments, provinces, agencies and supranationals, as well as debt issued by financial institutions that is guaranteed by a non-U.S. government. The fair values of highly liquid European and Canadian Sovereign debt are based on quoted prices in active markets and are classified in Level 1. Other Non-U.S. government securities are priced using observable inputs, such as yield curves, credit spreads and interest rate volatilities and are classified in Level 2.
Residential mortgage-backed securities - These securities consists of residential mortgage-backed securities originated by both agencies and non-agencies. The fair values of these securities are determined through the use of pricing models which evaluate the underlying collateral performance, and obtain prices from market makers and live trading systems. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. These are considered observable market inputs and the fair value of these securities are classified within Level 2.
Asset-backed securities - These securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The fair values of asset-backed securities are priced through the use of various models which evaluate the underlying collateral performance, as well as obtaining prices from market makers and live trading systems. As the significant inputs used to price these securities are observable market inputs, the fair values of asset-backed securities are classified in Level 2.
 
6

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS — (cont’d)	
 
Other Investments
Hedge funds - The fair value of the hedge funds is generally determined on the basis of the net valuation criteria established by the managers of the investments. The Company believes the published net asset value represents the fair value that market participants would apply to an interest in the fund. Some of the hedge funds are subject to restrictions on redemptions and sale which are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short-term. The Company obtains the audited financial statements for every hedge fund annually and regularly reviews and discusses fund performance with fund managers to corroborate the reasonableness of the published net asset value. Due to the restrictions on redemptions and sale of these investments, the Company’s hedge funds have been classified in Level 3.
Fair Value Measurements
As at June 30, 2013 and December 31, 2012, the Company has categorized its investments that are recorded at fair value among levels as follows:

 	  	June 30, 2013	 	
 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	
U.S. government and government agencies	  	$	—  	  	  	$	66,548	  	  	$	—  	  	  	$	66,548	  	
Residential mortgage-backed securities	  	 	—  	  	  	 	27,531	  	  	 	—  	  	  	 	27,531	  	
 	 	 	 	 	
Asset-backed securities	  	 	—  	  	  	 	396	  	  	 	—  	  	  	 	396	  	
 	 	 	 	 	
Other investments	  	 	—  	  	  	 	—  	  	  	 	2,753	  	  	 	2,753	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	—  	  	  	$	94,475	  	  	$	2,753	  	  	$	97,228	  	

7

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS — (cont’d)	

 	  	December 31, 2012	 	
 	  	Level 1	 	  	Level 2	 	  	Level 3	 	  	Total	 	
U.S. government and government agencies	  	$	122,824	  	  	$	—  	  	  	$	—  	  	  	$	122,824	  	
 	 	 	 	 	
Non-U.S. governments	  	 	 	 	  	 	65,909	  	  	 	 	 	  	 	65,909	  	
 	 	 	 	 	
Residential mortgage-backed securities	  	 	—  	  	  	 	39,051	  	  	 	—  	  	  	 	39,051	  	
 	 	 	 	 	
Asset-backed securities	  	 	—  	  	  	 	204	  	  	 	—  	  	  	 	204	  	
 	 	 	 	 	
Other investments	  	 	—  	  	  	 	—  	  	  	 	3,612	  	  	 	3,612	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	122,824	  	  	$	105,164	  	  	$	3,612	  	  	$	231,600	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
The following table presents a reconciliation of the beginning and ending balances for the hedge funds, included in other investments that are measured at fair value using Level 3 inputs as at June 30, 2013 and December 31, 2012:

 	  	June 30,
2013	 	 	December 31,
2012	 	
Beginning balance as of January 1	  	$	3,612	  	 	$	147,931	  	
 	 	 	
Transfers in/(out) of Level 3 assets, at fair value	  	 	 	 	 	 	 	 	
 	 	 	
Purchases	  	 	—  	  	 	 	—  	  	
 	 	 	
Sales	  	 	—  	  	 	 	(152,467	) 	
 	 	 	
Net realized and unrealized gains (losses) included in earnings	  	 	 	 	 	 	 	 	
 	 	 	
Net realized (losses) gains	  	 	(977	) 	 	 	17,573	  	
 	 	 	
Net unrealized gains (losses)	  	 	118	  	 	 	(9,425	) 	
 	  	 	 	 	 	 	 	 	
Ending balance	  	$	2,753	  	 	$	3,612	  	
 	  	 	 	 	 	 	 	 	
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in whether or not valuation inputs are observable may result in a reclassification for certain financial assets and liabilities. Reclassifications between Level 1, 2 and 3 of the fair value hierarchy are reported as transfers in and/or out as of the beginning of the quarter in which the reclassifications occur. There were no transfers in or out of Levels 1, 2 or 3 for the six months ended June 30, 2013.
 
8

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	REINSURANCE CEDED	
The effects of reinsurance ceded on premiums written and earned during the six months ended June 30, 2013 and year ended December 31, 2012, respectively, were as follows:

 	  	     June 30,     
2013	 	 	December 31,
2012	 	
Net premiums written	  	 	 	 	 	 	 	 	
Direct	  	$	7,109	 	 	$	5,624	 	
Assumed	  	 	17,521	 	 	 	122,476	 	
Ceded	  	 	(2,114	)	 	 	(122,262	)	

 	  	$	22,516	 	 	$	5,838	  	

Net premiums earned	  	 	 	 	 	 	 	 	
Direct	  	 	22,516	 	 	 	13,997	 	
Assumed	  	 	16,439	 	 	 	263,061	 	
Ceded	  	 	(23,641	)	 	 	(106,042	)	

 	  	$	15,314	 	 	$	171,016	 	
 	  	 	 	 	 	 	 	 	
The Company uses reinsurance ceded contracts to reduce its exposure to risk of loss on certain reinsurance contracts. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains primarily liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. As at June 30, 2013 and December 31, 2012, reinsurance loss reserves recoverable amounted to $349.2 million and $379.6 million, respectively.
 
9

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.	RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES	
The reserve for losses and loss adjustment expenses is an estimate which is subject to material variability. The variability arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Variability can be caused by the receipt of additional claim information, changes in judicial interpretation of contracts or significant differences in the severity or frequency of claims from historical trends. Also, the Company does not have the benefit of its own historical loss experience due to its short operating history. Accordingly, the Company’s reserves for losses and loss adjustment expenses may be subject to greater variability than a more mature company.
Loss and loss adjustment expenses reserve estimates are based on all relevant information available to the Company. The Company believes that the reserve for losses and loss adjustment expenses is sufficient to cover losses that fall within coverages assumed by the Company; however, there can be no assurance that actual losses will not exceed the Company’s total reserves for losses and loss adjustment expenses.
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the six months ended June 30, 2013 and 2012. Losses incurred and paid are reflected net of reinsurance recoverables.

 	  	Six Months Ended June 30,	 	
 	  	2013	 	 	2012	 	
Gross reserves for losses and loss expenses, beginning of year	  	$	474,915	  	 	$	563,997	  	
Loss reserves recoverable, beginning of year	  	 	379,603	  	 	 	41,448	  	
 	  	 	 	 	 	 	 	 	
Total net reserves for losses and loss expenses	  	 	95,312	  	 	 	522,549	  	
 	 	 	
Net losses incurred related to:	  	 	 	 	 	 	 	 	
Current period	  	 	17,114	  	 	 	44,489	  	
Prior periods	  	 	(160	) 	 	 	(416	)	

Total net incurred losses	  	 	16,954	  	 	 	44,073	  	

Net paid losses related to:	  	 	 	 	 	 	 	 	
Current period	  	 	2,029	  	 	 	603	  	
Prior periods	  	 	(4,373	) 	 	 	(93,428	)	

Total net paid losses	  	 	(2,344	) 	 	 	(92,645	)	

Effect of foreign exchange movements	  	 	(4,335	) 	 	 	1,055	  	
Net reserves for losses and loss expenses ceded under loss portfolio transfer	  	 	—  	  	 	 	(399,788	) 	

Total net reserves for losses and loss expenses, end of period	  	 	105,587	  	 	 	75,244	  	
Loss reserves recoverable, end of period	  	 	349,211	  	 	 	411,828	  	

Gross reserves for losses and loss expenses, end of period	  	$	454,798	  	 	$	487,072	  	

10

ARDEN REINSURANCE COMPANY LTD.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
6.	COMMITMENTS AND CONTINGENCIES	
Concentrations of credit risk
Concentration of credit risk with respect to reinsurance recoverable balances is limited due to the number of reinsurers used on the Company’s reinsurance programs. As at June 30, 2013, one reinsurer accounted for approximately 72% of the reinsurance balances recoverable. This reinsurance recoverable balance is fully collateralized by cash and investments held in a trust under the terms of the loss portfolio transfer reinsurance agreement with Ariel Indemnity Limited. Another six reinsurers account for 20% of the reinsurance balances recoverable; all of these reinsurers are either rated A- or better by A.M. Best or fully collateralized.
Acquisitions
As discussed above in Note 2, as at June 30, 2013, the sale by Arden Holdings of the Company’s entire issued share capital was subject to a definitive agreement with subsidiaries of Enstar.
 
7.	SUBSEQUENT EVENT	
As stated above in Note 2, on September 9, 2013, Arden Holdings completed its sale of the Company’s entire issued share capital to Enstar’s wholly-owned subsidiary and Trident.
 
11

Exhibit 99.4
ENSTAR GROUP LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined consolidated statements of earnings are based on the historical financial statements of Enstar Group Limited (“Enstar”) and the consolidated results of Arden Reinsurance Company Ltd. (“Arden Re”).
The unaudited condensed combined consolidated pro forma statement of earnings for the six months ended June 30, 2013 is presented as if Enstar had completed the acquisition of Arden Re as of January 1, 2013. The unaudited condensed combined consolidated pro forma statement of earnings for the year ended December 31, 2012 is presented as if Enstar had completed the acquisition of Arden Re as of January 1, 2012.
The unaudited condensed combined consolidated pro forma financial information reflects the purchase of Arden Re under the purchase method of accounting for business combinations and represents a current estimate of the financial information based on information available as of the date of this Current Report on Form 8-K/A.
The unaudited pro forma condensed combined consolidated balance sheet as of June 30, 2013 has not been included in this filing because the acquisition was reflected in Enstar’s actual balance sheet as of September 30, 2013, which was included within Enstar’s Quarterly Report on Form 10-Q filed with the U.S Securities and Exchange Commission (“SEC”) on November 7, 2013.
The pro forma information includes adjustments to record the assets and liabilities of Arden Re at their estimated fair values under the purchase method of accounting for business combinations. To the extent there are significant changes to Arden Re’s business, the assumptions and estimates herein could change significantly. The pro forma financial information is presented for informational purposes only under one set of assumptions and does not reflect the financial results of the combined companies had consideration been given to other assumptions or to the impact of possible operating efficiencies, asset dispositions, and other factors. Further, the pro forma financial information does not necessarily reflect the historical results of the combined company that actually would have occurred had the transaction been in effect during the period indicated or that may be obtained in the future.
The unaudited pro forma condensed combined consolidated statements of earnings should be read in conjunction with: (i) Enstar’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and historical financial statements, including the related notes, with respect to the year ended December 31, 2012 included in Enstar’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which was filed with the SEC on February 28, 2013; (ii) Enstar’s subsequent Quarterly Reports on Form 10-Q filed with the SEC; and (iii) the historical financial statements of Arden Re included in Exhibits 99.1, 99.2 and 99.3 to this Current Report on Form 8-K/A.

ENSTAR GROUP LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31, 2012
(Expressed in thousands of U.S dollars)

 	  	Enstar	 	 	Arden Re	 	 	Adjustment
Entries	 	 	Combined	 	
INCOME	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	—  	  	 	$	171,016	  	 	$	—  	  	 	$	171,016	  	
Consulting fees	  	 	8,570	  	 	 	—  	  	 	 	—  	  	 	 	8,570	  	
Other income	  	 	—  	  	 	 	55,011	  	 	 	—  	  	 	 	55,011	  	
Net investment income	  	 	77,760	  	 	 	8,147	  	 	 	—  	  	 	 	85,907	  	
Net realized and unrealized gains	  	 	73,612	  	 	 	20,751	  	 	 	—  	  	 	 	94,363	  	
Net foreign exchange losses	  	 	—  	  	 	 	(1,071	) 	 	 	1,071	(a) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	 	159,942	  	 	 	253,854	  	 	 	1,071	  	 	 	414,867	  	

EXPENSES	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (reduction) increase in losses and loss adjustment expense liabilities	  	 	(241,764	) 	 	 	70,047	  	 	 	(3,568	)(b) 	 	 	(175,285	) 	
Acquisition costs	  	 	—  	  	 	 	14,520	  	 	 	—  	  	 	 	14,520	  	
Salaries and benefits	  	 	100,473	  	 	 	—  	  	 	 	6,791	(c) 	 	 	107,264	  	
General and administrative expenses	  	 	56,592	  	 	 	22,388	  	 	 	(6,791	)(c) 	 	 	72,189	  	
Interest expense	  	 	8,426	  	 	 	—  	  	 	 	1,855	(d) 	 	 	10,281	  	
Net foreign exchange losses	  	 	406	  	 	 	—  	  	 	 	1,071	(a) 	 	 	1,477	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	 	(75,867	) 	 	 	106,955	  	 	 	(642	) 	 	 	30,446	  	

EARNINGS BEFORE INCOME TAXES AND NONCONTROLLING INTEREST	  	 	235,809	  	 	 	146,899	  	 	 	1,713	  	 	 	384,421	  	
 	 	 	 	 	
INCOME TAXES	  	 	(44,290	) 	 	 	(159	) 	 	 	—  	  	 	 	(44,449	) 	
 	 	 	 	 	
NONCONTROLLING INTEREST	  	 	(23,502	) 	 	 	—  	  	 	 	(59,381	)(e) 	 	 	(82,883	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
NET EARNINGS	  	$	168,017	  	 	$	146,740	  	 	$	(57,668	) 	 	$	257,089	  	

Earnings per share - basic	  	$	10.22	  	 	 	 	 	 	 	 	 	 	$	15.64	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per share - diluted	  	$	10.10	  	 	 	 	 	 	 	 	 	 	$	15.45	  	

Weighted average ordinary shares outstanding - basic	  	 	16,441,461	  	 	 	 	 	 	 	 	 	 	 	16,441,461	  	
Weighted average ordinary shares outstanding - diluted	  	 	16,638,021	  	 	 	 	 	 	 	 	 	 	 	16,638,021	  	
Notes
 
(a)	Adjustments to reclassify Arden Re’s net foreign exchange losses to conform to Enstar’s accounting presentation.	
(b)	Represents amortization of fair value adjustments of losses and loss adjustment expenses.	
(c)	Adjustments to reclassify Arden Re’s salaries and benefits out of general and administrative expenses to conform to Enstar’s accounting presentation.	
(d)	Represents interest expense on the borrowing under Enstar’s revolving credit facility based on the assumption that the borrowing used to fund the acquisition was made as at January 1, 2012.	
(e)	Represents the 40% share of Arden Re’s net earnings for the year ended December 31, 2012 that is attributable to noncontrolling interest, as well as the noncontrolling interest’s 40% share of the cumulative adjustment entries.	

ENSTAR GROUP LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF EARNINGS
For the Six Months Ended June 30, 2013
(Expressed in thousands of U.S dollars)

 	  	Enstar	 	 	Arden Re	 	 	Adjustment
Entries	 	 	Combined	 	
INCOME	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	107,257	  	 	$	15,314	  	 	$	—  	  	 	$	122,571	  	
Consulting fees	  	 	5,407	  	 	 	—  	  	 	 	—  	  	 	 	5,407	  	
Other income	  	 	—  	  	 	 	40	  	 	 	—  	  	 	 	40	  	
Net investment income	  	 	45,215	  	 	 	371	  	 	 	—  	  	 	 	45,586	  	
Net realized and unrealized gains	  	 	2,201	  	 	 	154	  	 	 	—  	  	 	 	2,355	  	
Net foreign exchange gains	  	 	—  	  	 	 	174	  	 	 	(174	)(a) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	 	160,080	  	 	 	16,053	  	 	 	(174	) 	 	 	175,959	  	

EXPENSES	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (reduction) increase in loss and loss adjustment expense liabilities	  	 	(10,162	) 	 	 	16,954	  	 	 	(1,784	)(b) 	 	 	5,008	  	
Life and annuity policy benefits	  	 	30,223	  	 	 	—  	  	 	 	—  	  	 	 	30,223	  	
Acquisition costs	  	 	—  	  	 	 	1,720	  	 	 	—  	  	 	 	1,720	  	
Salaries and benefits	  	 	49,297	  	 	 	—  	  	 	 	—  	  	 	 	49,297	  	
General and administrative expenses	  	 	37,948	  	 	 	105	  	 	 	—  	  	 	 	38,053	  	
Interest expense	  	 	5,526	  	 	 	—  	  	 	 	778	(c) 	 	 	6,304	  	
Net foreign exchange gains	  	 	(3,321	) 	 	 	—  	  	 	 	(174	)(a) 	 	 	(3,495	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	 	109,511	  	 	 	18,779	  	 	 	(1,180	) 	 	 	127,110	  	

EARNINGS (LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST	  	 	50,569	  	 	 	(2,726	) 	 	 	1,006	  	 	 	48,849	  	
 	 	 	 	 	
INCOME TAXES	  	 	(12,386	) 	 	 	(40	) 	 	 	—  	  	 	 	(12,426	) 	
 	 	 	 	 	
NONCONTROLLING INTEREST	  	 	(7,027	) 	 	 	—  	  	 	 	704	(d) 	 	 	(6,323	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
NET EARNINGS (LOSS)	  	$	31,156	  	 	$	(2,766	) 	 	$	1,710	  	 	$	30,100	  	

Earnings per share - basic	  	$	1.89	  	 	 	 	 	 	 	 	 	 	$	1.82	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per share - diluted	  	$	1.87	  	 	 	 	 	 	 	 	 	 	$	1.80	  	

Weighted average ordinary shares outstanding - basic	  	 	16,519,640	  	 	 	 	 	 	 	 	 	 	 	16,519,640	  	
Weighted average ordinary shares outstanding - diluted	  	 	16,685,444	  	 	 	 	 	 	 	 	 	 	 	16,685,444	  	
Notes
 
(a)	Adjustments to reclassify Arden Re’s net foreign exchange losses to conform to Enstar’s accounting presentation.	
(b)	Represents amortization of fair value adjustments of losses and loss adjustment expenses.	
(c)	Represents interest expense on the borrowing under Enstar’s revolving credit facility based on the assumption that the borrowing used to fund the acquisition was made as at January 1, 2013.	
(d)	Represents the 40% share of Arden Re’s net loss for the six months ended June 30, 2013 that is attributable to noncontrolling interest, as well as the noncontrolling interest’s 40% share of the cumulative adjustment entries.