American International Reinsurance Company, Ltd. and Subsidiary. Consolidated Financial Statements for the Years Ended. December 31, 2014 and 2013

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1 Consolidated Financial Statements for the Years Ended December 31, 2014 and 2013

2 Page(s) Independent Auditor s Report.. 3 Financial Statements Consolidated Balance Sheets. 4 Consolidated Statements of Income... 5 Consolidated Statements of Comprehensive Income... 6 Consolidated Statements of Shareholder s Equity Consolidated Statements of Cash Flows

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4 Consolidated Balance Sheets (in millions) December 31, 2014 December 31, 2013 Assets: Bonds available for sale, at fair value (amortized cost: $2,357; $2,471) $ 2,544 $ 2,614 Equity securities available for sale, at fair value (cost: $5 ; $5) Short-term investments Other invested assets Total investments 2,910 2,860 Cash Accrued investment income Premiums and insurance balances receivable, net of allowance Reinsurance assets, net of allowance 2,970 2,865 Deferred policy acquisition costs Deferred income taxes Other assets Total assets $ 7,001 $ 6,808 Liabilities: Liability for unpaid claims and claims adjustment expenses $ 1,827 $ 2,000 Unearned premiums Future policy benefits for life and accident and health insurance contracts 1,180 1,002 Funds held under reinsurance treaties Premiums and insurance balances payable Other liabilities Total liabilities $ 5,703 $ 5,414 Shareholder's equity: Common stock ($1 par value, 10,000,000 shares authorized, issued and fully paid) $ 10 $ 10 Additional paid-in capital Accumulated deficit Accumulated other comprehensive income Total shareholder's equity 1,298 1,394 Total liabilities and shareholder's equity $ 7,001 $ 6,808 See accompanying notes to consolidated financial statements. 4

5 Consolidated Statements of Income Years Ended December 31, (in millions) Revenues: Net premium earned $ 633 $ 682 Net investment income Net realized capital gains (losses) Other Income (108) Total revenues Claims and expenses: Policyholders benefits 1 2 Claims and claims adjustment expenses incurred Policy acquisition and other operating expenses Total claims and expenses Income from continuing operations before income taxes Income taxes: Current - 4 Deferred Total income taxes Net income $ 66 $ 130 See accompanying notes to consolidated financial statements. 5

6 Consolidated Statements of Comprehensive Income Years Ended December 31, (in millions) Net income $ 66 $ 130 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments 44 (63) Change in foreign currency translation adjustments 1 1 Change in retirement plan liability adjustments (7) 9 38 (53) Income tax benefit (expense) (17) 26 Other comprehensive income (loss) 21 (27) Comprehensive income $ 87 $ 103 See accompanying notes to consolidated financial statements. 6

7 Consolidated Statements of Shareholder s Equity (in millions) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Shareholder's Equity Balance at December 31, (3) ,306 Dividend to shareholder - 3 (3) Return of capital - - (400) - - (400) Capital contribution Expenses paid by parent (See note 9) Net income Other comprehensive (loss) (27) (27) Balance at December 31, ,394 (in millions) Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Shareholder's Equity Balance at December 31, ,394 Dividend to shareholder (211) - (211) Capital contribution Net income Other comprehensive income Balance at December 31, ,298 See accompanying notes to consolidated financial statements. 7

8 Consolidated Statements of Cash Flows Years Ended December 31, (in millions) Cash flows from operating activities: Net income $ 66 $ 130 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash revenues, expenses, gains and losses included in income: Net loss on sales of securities available for sale and other assets (3) 2 Net unrealized losses on derivatives and other assets and liabilities Income from equity method investments (9) (3) Amortization of deferred policy acquisition costs Depreciation and other amortization 10 7 Other operating expenses paid by parent Changes in operating assets and liabilities: Insurance liabilities Premiums and other receivables and payables net Reinsurance assets and funds held under reinsurance treaties (105) (243) Capitalization of deferred policy acquisition costs (215) (232) Accrued investment income 4 4 Other policyholder funds - (5) Current and deferred income taxes net Commissions, expenses and taxes payable Other assets and liabilities net (32) (12) Total adjustments Net cash provided by operating activities $ 217 $ 316 Cash flows from investing activities: Proceeds from (payments for): Sales of fixed maturity securities available for sale $ 120 $ 225 Maturities of fixed maturity securities available for sale Sales of other invested assets Purchases of fixed maturity securities available for sale 18 (321) 4 (284) Net additions to real estate, fixed assets and other assets - 3 Net change in short-term investments (89) (28) Net change in derivative assets and liabilities (20) (33) Net cash provided by investing activities $ (30) $ 119 8

9 Consolidated Statements of Cash Flows Years Ended December 31, (in millions) Cash flows from financing activities: Return of capital $ - $ (400) Cash dividend paid to shareholder (211) - Net cash used in financing activities (211) (400) Effect of exchange rate changes on cash - - Change in cash (24) 35 Cash at beginning of period 38 3 Cash at end of period $ 14 $ 38 Supplementary disclosure of cash flow information: Non-cash financing/investing activities: Contribution of an affiliate (See Note 9) Dividend of treasury stock - (3) Contribution of partnership investments 49 - Expenses paid by Parent on Company s behalf (See Note 9) See accompanying notes to consolidated financial statements. 9

10 1. Organization and Nature of Operations American International Reinsurance Company, Ltd. ("AIRCO" or "the Company") is licensed in Bermuda as a Class 4 Insurer and a Class C Insurer. The Company is a wholly owned subsidiary of AIG Property Casualty International, LLC ( AIGPCIL ). AIGPCIL s ultimate holding company is American International Group, Inc. ("AIG") which is an SEC-registered company incorporated in the state of Delaware, U.S.A. In 2013, the Company acquired the assets, liabilities, policies, and renewal rights of the business of the Bermuda Branch of an affiliated company. As a result, the Company became a provider of catastrophic liability solutions with core lines of business including Excess Casualty, Financial Lines and Punitive Damages Wrap Policies. The Company has been primarily a reinsurer comprised of general insurance and life insurance businesses, including property and casualty, individual life, annuity and accident and health businesses. The Company provides risk management services to third party clients, whereby policies are issued by the Company, the risks under which are subsequently ceded to the third party clients captive insurance company. 2. Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements include the accounts of AIRCO and its wholly owned subsidiary, American International Company Limited ( AICO ). The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ). All material intercompany transactions have been eliminated. On September 1, 2014, AIRCO received a contribution from its parent of 100% ownership interest in AICO, which is the principal representative for Bermuda domiciled affiliated insurance entities and managed third party captives, provides management services to affiliated entities and third party captive insurance companies, and performs administrative services for affiliated and third party companies. Additionally, AICO is also the global employment company for AIG employees working outside of their home country on assignment. AIRCO recognized the contribution at the historical book value of AICO as of the contribution date, $73.9 million. For purposes of presenting the financial results in the Company s consolidated financial statements, AICO s results of operations, cash flows and assets and liabilities have been incorporated for all periods presented. The effect as of the beginning of the earliest period presented was reflected as if AICO was contributed at that time, with a net book value of $50.3 million. On September 3, 2014, AIRCO distributed to its parent 100% of its ownership interests in AIG Mexico Seguros, S.A. de C.V. ( AIG Mexico ), a company that has previously been included as a consolidated subsidiary. AIRCO recognized the distribution as a dividend of $126.9 million, equal in amount to AIG Mexico s net book value as of the distribution date. For purposes of presentation in these consolidated financial statements, AIG Mexico s results of operations, cash flows and assets and liabilities have been removed for all periods presented, and the effect as of the beginning of the earliest period presented is presented as if the company was distributed at that time, with a net book value of $85.7 million. Prior to this distribution during 2014, the Company made a capital contribution of approximately $11 million to AIG Mexico. This contribution is reflected as a return of capital in The Company has revised its December 31, 2013 consolidated balance sheet, consolidated statement of income, consolidated statement of changes in shareholder's equity, and consolidated statement of cash flows to correct errors which resulted in an increase in policy acquisition and other operating expenses to reflect expenses incurred by AIGPCIL on behalf of the Company; a decrease in claims and claims adjustment expenses incurred; and a correction of classification between retained earnings and additional paid-in-capital. Tax expense was decreased to reflect the tax benefit associated with the revisions which impact income. Opening 2013 retained earnings has been reduced by $43 million to reflect the cumulative corrections to policy acquisition costs and other operating expenses. AIGPCIL does not intend to seek reimbursement from the Company for the expenses incurred on the Company's behalf. Accordingly a deemed capital contribution has been recorded for these amounts resulting in an immaterial net impact on total shareholder's equity from this correction. Evaluating qualitative and quantitative aspects of the adjustments, these adjustments are not considered material to the previously issued consolidated financial 10

11 statements. However, since the correction of these errors as out of period adjustments in 2014 would have been material to 2014, the accompanying 2013 financial statements have been revised. The table below illustrates the effects of these adjustments on the Company's 2013 financial statements for those line items affected. (in millions) As revised As previously reported * Change Consolidated Statement of Income: Claims and claims adjustment expenses incurred (4) Policy acquisition and other operating expenses Income from continuing operations before income taxes (15) Total income taxes (5) Net income (10) Consolidated Balance Sheet: Liability for unpaid claims and claims adjustment expenses 2,000 2,004 (4) Total liabilities 5,414 5,418 (4) Deferred income tax asset Total assets 6,808 6,803 5 Additional paid-in capital 609 5,081 (4,472) Retained earnings (accumulated deficit) 617 (3,864) 4,481 Total shareholder's equity 1,394 1,385 9 Statement of Equity: Capital contribution Net income (10) Balance at December 31, ,394 1,385 9 Consolidated Statement of Cash Flows: Net income (10) Non-cash expense item operating expenses paid by parent Change in general and life insurance reserves (4) Change in current and deferred income taxes (5) *As previously reported amounts reflect adjustments due to the AICO contributions and AIG Mexico distribution, as described above. Use of Estimates The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. The Company considers that its accounting policies that are most dependent on the application of estimates and assumptions are those relating to items considered by management in the determination of: Liability for unpaid claims and claims adjustment expenses; Recoverability of deferred policy acquisition costs; Estimates with respect to income taxes, including recoverability of deferred income tax assets; Impairment charges, including other-than-temporary impairments and goodwill impairment; 11

12 Liabilities for legal contingencies; Fair value measurements of certain assets; and Allowance for doubtful accounts for Premiums Receivable and Reinsurance Recoverable. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, the Company s consolidated financial condition, results of operations and cash flows could be materially affected. Accounting Policies a) Revenue and expense recognition Premiums: Premiums on direct and assumed short duration contracts are generally earned on a pro rata basis over the term of the related coverage. The portion of premiums written and other considerations relating to the unexpired terms of coverage are recorded as unearned premiums. Premiums for long duration insurance products and life contingent annuities are recognized as revenues when due. Estimates for premiums due but not yet collected are accrued. Ceded premiums for prospective reinsurance contracts are considered prepaid reinsurance premiums and are recognized as a reduction of premiums earned over the contract period in proportion to the coverage received. Net investment income: Net investment income represents income primarily from the following sources: Interest income and related expenses on short-term and long-term fixed income securities, including amortization of premiums and accretion of discounts on bonds with changes in the timing and the amount of expected principal and interest cash flows reflected in the yield, as applicable. Dividend income and distributions from equity securities and other investments when receivable. Income from equity method investees, including earnings from investments in private equity partnerships and limited partnerships. Rental income of $6.3 million in 2014 and $6.2 million in 2013 relates to office space leased to third parties. Net realized capital gains (losses): Net realized capital gains (losses) are determined by specific identification of individual investments sold. The net realized capital gains and losses are generated primarily from the following sources: Sales of investments, real estate and other invested assets. Reductions to the cost basis of fixed maturities and equity securities and other invested assets for other-than-temporary impairments. Changes in fair value of derivatives. Exchange gains and losses resulting from foreign currency transactions. Claims and claims adjustment expenses incurred: Claims and claims adjustment expenses incurred for short duration insurance contracts consist of the estimated ultimate cost of settling claims incurred within the reporting period, including incurred but not reported claims, plus the changes in estimates of current and prior period losses, net of prospective reinsurance recoveries. The Company has entered into retroactive reinsurance agreements. When incurred losses and loss reserves exceed consideration paid for the retroactive reinsurance agreement, a gain results. Policy acquisition and other operating expenses: Policy acquisition and other operating expenses includes salaries, depreciation, and amortization of deferred policy acquisition costs. 12

13 Other Income: Other Income represents the following sources: Agency Income: Agency income of $26.0 million in 2014 and $22.4 million in 2013 relates to fees earned by AICO for arranging and administering reinsurance programs. Fees included $6.6 million in 2014 and $7.1 million in 2013 from affiliated companies. Management Service Fees: AICO acts principally as a service company offering management services primarily to companies owned directly by AIG. In exchange for its services these affiliated companies pay AICO a fixed management fee in accordance with signed management agreements. AICO received management service fees of $2.0 million in 2014 and $6.0 million in b) Investments c) Cash Fixed maturities and equity securities: All fixed maturity and equity securities are classified as available for sale and are carried at fair value. Unrealized gains and losses from available for sale equity and fixed maturity securities are reported as accumulated other comprehensive income (loss) net of deferred income taxes. Investments in fixed maturities and equity securities are recorded on a trade-date basis. Premiums and discounts arising from the purchase of bonds are treated as yield adjustments over their estimated lives, until maturity, or call date, if applicable. For a discussion of the Company s other-thantemporary impairment policy, see Note 4. Other invested assets: Other invested assets consist primarily of private equity funds and limited partnerships and a real estate property. Private equity funds and limited partnerships in which the Company and AIG holds in the aggregate less than a three percent interest are reported at fair value. The change in fair value is recognized as a component of accumulated other comprehensive income (loss). With respect to private equity funds and limited partnerships in which the Company and AIG holds in the aggregate a three percent or greater interest or less than a three percent interest but in which the Company or AIG has more than a minor influence over the operations of the investee, the Company s carrying value is its share of the net asset value of the funds or the partnerships. In applying the equity method of accounting, the Company consistently uses the most recently available financial information provided by the general partner or manager of each of these investments, which is generally one to three months prior to December 31. The financial statements of these investees are generally audited on an annual basis. The Company classifies its property based upon its current predominant use. The Company currently uses this property as a real estate investment which generates monthly rental income from third party lessees. The current rental property is valued at historical cost. Short-term investments: Short-term investments consists of interest-bearing cash equivalents, time deposits, and investments with original maturities within one year from the date of purchase. Short-term investments are carried at amortized cost, which approximates fair value. Short-term investments include $10 million at December 31, 2014 and 2013, respectively, held as security for a letter of credit issued in favor of the IRS. See Note 8. Cash represents cash on hand and non-interest bearing demand deposits. 13

14 d) Premiums and insurance balances receivable, net of allowance Premiums and insurance balances receivable consist of premium balances due from agents, brokers and insureds. There was no allowance for uncollectible amounts at December 31, 2014 and e) Reinsurance assets, net of allowance Reinsurance assets include the balances due from affiliated and non-affiliated reinsurance companies under the terms of the Company s reinsurance agreements for paid and unpaid claims and claim adjustment expenses, ceded unearned premiums and ceded future policy benefits for life and accident and health insurance contracts and benefits paid and unpaid. The amounts presented are net of an allowance of $1.1 million and $0.2 million at December 31, 2014 and 2013, respectively. See Note 6 for additional information. f) Deferred policy acquisition costs Deferred policy acquisition costs ( DAC ) presented in the consolidated balance sheet represents the deferral of those costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. Such costs generally include agent or broker commissions and bonuses, premium taxes, medical and inspection fees, and a portion of employee total compensation and payroll related fringe benefits. DAC is amortized over the period in which the related premiums written are earned. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is not anticipated in assessing the recoverability of DAC. The Company assesses the recoverability of its DAC on an annual basis or more frequently if circumstances indicate an impairment may have occurred. g) Funds held by companies under reinsurance contracts Funds held by companies under reinsurance contracts primarily represents assets held by an affiliated cedant pursuant to a reinsurance agreement, in order to enable the cedant to recognize full credit for reinsurance it purchases from the Company under its local insurance regulations. h) Other assets Other assets consist primarily of derivative assets (see Note 12) and related party receivables. i) Depreciation Fixed assets are depreciated on the straight-line basis over the following estimated useful lives: Furniture and equipment Data Processing, Equipment & Software Real Estate Investment 5 years 2-5 years years j) Liability for unpaid claims and claims adjustment expenses Liability for unpaid claims and claims adjustment expenses primarily relate to the Company s property and casualty insurance operations and are charged to income as incurred. The liability for unpaid claims and claims adjustment expenses represents the accumulation of estimates for unpaid reported losses and includes provisions for losses incurred but not reported. The methods of determining such estimates and establishing reserves are reviewed regularly and updated. If the estimate of reserves is determined to be 14

15 inadequate or redundant, the increase or decrease is reflected in income in the period in which the estimate is changed. k) Future policy benefits The liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. l) Funds held under reinsurance treaties Funds held under reinsurance treaties consist of a balance due to an affiliated insurance company under a retrocession agreement. Under the terms of the agreement, the Company retained the premium that would have been paid to the affiliated company. See Note 6. m) Premiums and insurance balances payable Premiums and insurance balances payable consist of premium balances due to agents, brokers and insureds. n) Other liabilities Other liabilities consist of derivative liabilities (See Note 12), a payable to AIG related to an AIG sponsored pension plan (see Note 11), deposit liabilities, deferred gains, other policyholders funds, postretirement benefits, management expenses payable, share based compensation accruals, salaries payable and other payables. Deposit liabilities: The Company has entered into certain insurance and reinsurance contracts that do not contain sufficient insurance risk to be accounted for as insurance. Accordingly, the premiums received on such contracts, after deduction for certain related expenses, are recorded as deposits within other liabilities on the consolidated balance sheet. See Note 6 for additional information. Derivative assets and Derivative liabilities, at fair value: Derivative financial instruments are entered into in the normal course of business to reduce the Company s exposure to fluctuations in foreign currency exchange rates and interest rates. The Company is neither a dealer nor a trader in derivative financial instruments. Collateral is required, at the discretion of the Company, on certain transactions based on the creditworthiness of the counterparty. These instruments are not designated as hedges, and accordingly are recognized on a trade-date basis and are carried at fair value as a part of Other assets or Other liabilities. Gains and losses in the fair value of derivatives are recognized in net realized capital gains (losses) in the Consolidated Statement of Income. In certain instances, a contract s transaction price is the best indication of initial fair value. Aggregate asset or liability positions are netted on the Consolidated Balance Sheet only to the extent permitted by qualifying master netting arrangements in place with each respective counterparty. See Note 12 for additional information. A bifurcated embedded derivative is measured at fair value and accounted for in the same manner as a free standing derivative contract. The corresponding host contract is accounted for according to the accounting guidance applicable for that instrument. A bifurcated embedded derivative is generally presented with the host contract in the Consolidated Balance Sheets. See Note 6 herein for additional information on embedded policy derivatives. Payroll liabilities: AICO is the global employment company for AIG employees working outside of their home country on assignment. AICO acts as a payroll agent for affiliates of AIG. AICO paid and recovered payroll costs totaling approximately $197 million and $155 million in 2014 and 2013 respectively. 15

16 o) Contingent liabilities Amounts are accrued for legal claims outside of the normal course of business that either have been asserted or are deemed probable of assertion if, in the opinion of management, it is both probable that a liability has been incurred, and the liability can be reasonably estimated. In many cases, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until years after the contingency arises. p) Securities lending arrangement Securities borrowed under the security lending arrangement may be sold or repledged. The collateral that the company posts can be cash or noncash. Collateral levels are monitored weekly and are generally maintained at an agreed-upon percentage of the fair value of the loaned securities during the life of the transactions. At the termination of the transactions, both parties are obliged to return the collateral provided and securities transferred. The company treats this arrangement as secured borrowings, the loaned securities should continue to be accounted for and presented by the lender (the transferor) as part of investments. The Company entered into a security lending agreement with AIG Markets, Inc. to borrow securities required to meet third party collateral requirements for a reinsurance arrangement. In return, the Company will post eligible USD fixed income securities (Permitted Collateral) to AIG Financial Products Corp. ( AIGFPC ) via AIG Markets, Inc. as collateral for an amount equal to the value of loaned securities of GBP fixed income securities for standard market fees. The transactions related to this arrangement have no material impact to the 2014 and 2013 financial statements. q) Income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to an amount that in the opinion of management, is more likely than not to be realized. The guidance on accounting for uncertainty in income taxes describes how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. This guidance requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company s financial statements to determine whether the tax positions are more likely than not to be realized as a tax benefit or expense in the current year. See below and Note 8 for a further discussion of income taxes. In 2010 the Company elected to be treated as a United States corporation for purposes of its United States tax return. As a result, the Company files as a member of the consolidated U.S. federal income tax return of its ultimate parent, AIG Inc. Effective January 1, 2010, under a written tax allocation agreement, U.S. federal taxes are allocated to the Company as if it were filing its own separate company return except that benefits for tax losses and attributes are recorded when utilized in the AIG consolidated tax return to the extent they would not have already been utilized on a separate return basis. In addition, the Internal Revenue Code relating to Alternative Minimum Tax ( AMT ) is applied, but only if the AIG consolidated group is subject to Alternative Minimum Tax in the Consolidated Tax Liability. Interest and penalties related to unrecognized tax benefits and tax authority assessments are recognized in income tax expense. 16

17 r) Foreign currency Financial statement accounts expressed in foreign currencies are translated into U.S. dollars. Functional currency assets and liabilities are translated into U.S. dollars generally using rates of exchange prevailing at the balance sheet date of each respective subsidiary and the related translation adjustments are recorded as a separate component of Accumulated other comprehensive income, net of any related taxes, in total shareholder's equity. Functional currencies are generally the currencies of the local operating environment. Financial statement accounts expressed in currencies other than the functional currency of a consolidated entity are translated into that entity's functional currency. Income statement accounts expressed in functional currencies are translated using average exchange rates during the period. The adjustments resulting from translation of financial statements of foreign entities operating in highly inflationary economies are recorded in income. Exchange gains and losses resulting from foreign currency transactions are recorded in income. s) Future Application of Accounting Standards Reporting Discontinued Operations In April 2014, the FASB issued an accounting standard that changes the requirements for presenting a component or group of components of an entity as a discontinued operation and requires new disclosures. Under the standard, the disposal of a component or group of components of an entity should be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity s operations and financial results. Disposals of equity method investments, or those reported as held-for-sale, must be presented as a discontinued operation if they meet the new definition. The standard also requires entities to provide disclosures about the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation. The standard is effective prospectively for all disposals of components (or classification of components as held-for-sale) of an entity that occur within interim and annual periods beginning on or after December 15, Early adoption is permitted, but only for disposals (or classifications of components as held-for-sale) that have not been reported in financial statements previously issued. We plan to adopt the standard on its required effective date of January 1, 2015 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows. Revenue Recognition In May 2014, the FASB issued an accounting standard that supersedes most existing revenue recognition guidance. The standard excludes from its scope the accounting for insurance contracts, leases, financial instruments, and other agreements that are governed under other GAAP guidance, but affects the revenue recognition for certain of the Company s other activities. The standard is effective for interim and annual reporting periods beginning after December 15, 2016 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. Early adoption is not permitted. We plan to adopt the standard on its required effective date of January 1, 2017 and are assessing the impact of the standard on our consolidated financial condition, results of operations and cash flows. Accounting for Share-Based Payments with Performance Targets In June 2014, the FASB issued an accounting standard that clarifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The standard requires that performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The standard is effective for interim and annual reporting periods beginning after December 15, Early adoption is permitted. The standard may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the 17

18 earliest annual period presented in the financial statements and to all new or modified awards thereafter. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows. t) Accounting Standards Adopted During the Twelve Months Ended December 31, 2014 Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of an Investment within a Foreign Entity or of an Investment in a Foreign Entity In March 2013, the FASB issued an accounting standard addressing whether consolidation guidance or foreign currency guidance applies to the release of the cumulative translation adjustment into net income when a parent sells all or a part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or net assets that are a business (other than a sale of in-substance real estate) within a foreign entity. The guidance also resolves the diversity in practice for the cumulative translation adjustment treatment in business combinations achieved in stages involving foreign entities. Under this standard, the entire amount of the cumulative translation adjustment associated with the foreign entity should be released into earnings when there has been: (i) a sale of a subsidiary or group of net assets within a foreign entity and the sale represents a complete or substantially complete liquidation of the foreign entity in which the subsidiary or the net assets had resided; (ii) a loss of a controlling financial interest in an investment in a foreign entity; or (iii) a change in accounting method from applying the equity method to an investment in a foreign entity to consolidating the foreign entity. The standard is effective for fiscal years and interim periods beginning after December 15, 2013, and will be applied prospectively. We adopted the standard on its required effective date of January 1, 2014 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows. Presentation of Unrecognized Tax Benefits In July 2013, the FASB issued an accounting standard that requires a liability related to unrecognized tax benefits to be presented as a reduction to the related deferred tax asset for a net operating loss carryforward or a tax credit carryforward. When the carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. The standard is effective for fiscal years and interim periods beginning after December 15, 2013, but earlier adoption is permitted. Upon adoption, the standard should be applied prospectively to unrecognized tax benefits that existed at the effective date. Retrospective application is permitted. We adopted the standard on its required effective date of January 1, 2014 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows. 3. Fair Value Measurements Fair Value Measurements on a Recurring Basis The Company carries certain of its financial instruments at fair value. The fair value of a financial instrument is the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more 18

19 pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions. Fair Value Hierarchy Assets and liabilities recorded at fair value in the consolidated balance sheet are measured and classified for disclosure purposes in accordance with a fair value hierarchy established in U.S. GAAP. The hierarchy consists of three levels based on the observability of inputs available in the marketplace used to measure the fair values as discussed below: Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that the Company has the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. The Company does not adjust the quoted price for such instruments. Assets and liabilities measured at fair value on a recurring basis and classified as Level 1 include certain government and agency securities, corporate bonds, listed equities and most mutual funds. Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets and liabilities measured at fair value on a recurring basis and classified as Level 2 could include certain government and agency securities, most investment-grade and high-yield corporate bonds, certain listed equities, mutual fund investments and certain derivative contracts. Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. These measurements include circumstances in which there is little, if any, market activity for the asset or liability. Therefore, the Company must make certain assumptions as to the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, the Company considers factors specific to the asset or liability. The Company s non-financial instrument assets that are measured at fair value on a non-recurring basis generally are classified as Level 3. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the levels noted above, and it is the observability of the inputs used that determines the appropriate level in the fair value hierarchy for the respective asset or liability. Valuation Methodologies Fixed Maturity Securities Available for Sale Whenever available, the Company obtains quoted prices in active markets for identical assets at the balance sheet date to measure fixed maturity securities at fair value in its available for sale portfolio. Market price data is generally obtained from dealer markets. Management is responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions. The Company employs independent third-party valuation service 19

20 providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments, based upon market-accepted methodologies and assumptions. The methodologies used by these independent third-party valuation services are reviewed and understood by Company management, via periodic discussion with and information provided by the valuation services. When the Company s valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, which may utilize matrix pricing, financial models, accompanying model inputs and various assumptions, provide a single fair value measurement for individual securities. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, benchmark yields, interest rate yield curves, credit spreads, currency rates, quoted prices for similar securities and other market-observable information, as applicable. If fair value is determined using financial models, these models take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. The Company has processes designed to ensure that the values received or internally estimated are accurately recorded, that the data inputs and the valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. The Company assesses the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from the Company s valuation service providers to other third-party valuation sources for selected securities. The Company also validates prices for selected securities obtained from brokers through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions. The methodology above is relevant for all fixed maturity securities. The following are discussions of certain valuation procedures unique to specific classes of securities. Fixed Maturity Securities issued by Government Entities For most debt securities issued by government entities, the Company obtains fair value information from independent third-party valuation service providers, as quoted prices in active markets are generally only available for limited debt securities issued by government entities. The fair values received from these valuation service providers may be based on a market approach using matrix pricing, which considers a security s relationship to other securities for which a quoted price in an active market may be available, or alternatively based on an income approach, which uses valuation techniques to convert future cash flows to a single present value amount. Fixed Maturity Securities issued by Corporate Entities For most debt securities issued by corporate entities, the Company obtains fair value information from third-party valuation service providers. For certain corporate debt securities, the Company obtains fair value information from brokers. For those corporate debt instruments (for example, private placements) that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments generally are based on available market evidence. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, adjusted for illiquidity and structure. 20

21 Equity Securities Traded in Active Markets Whenever available, the Company obtains quoted prices in active markets for identical assets at the balance sheet date to measure at fair value marketable equity securities. Market price data generally is obtained from exchange or dealer markets. Non-Traded Equity Investments Other Invested Assets The Company initially estimates the fair value of equity instruments not traded in active markets by reference to the transaction price. This valuation is adjusted for changes in inputs and assumptions which are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity capital markets, and/or changes in financial ratios or cash flows. For equity securities that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments generally are based on available market evidence. In the absence of such evidence, management s best estimate is used. Private Limited Partnership Other Invested Assets The Company initially estimates the fair value of investments in certain private limited partnerships by reference to the transaction price. Subsequently, the Company generally obtains the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are generally audited annually. The Company considers observable market data and performs diligence procedures in validating the appropriateness of using the net asset value as a fair value measurement. Freestanding Derivatives Other Assets and Other Liabilities Derivative assets and liabilities can be exchange-traded or traded over the-counter ( OTC ). The Company generally values exchange-traded derivatives using quoted prices in active markets for identical derivatives at the balance sheet date. OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in, the instrument, as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment. Short-term Investments Short-term investments are carried at amortized cost, which approximates fair value. 21