In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:

• Level 1: Observable inputs to the valuation methodology that are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2: Observable inputs to the valuation methodology other than quoted market prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets in markets that are not active and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

• Level 3: Inputs to the valuation methodology that are unobservable for the asset or liability.

The following table shows the fair value of the Company's financial instruments and where in the fair value hierarchy the fair value measurements are included as of the dates indicated below:

		Carrying		Total
June 30, 2013		Amount		Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
	U.S. Government and Government agencies	$	2,049,212	$	2,049,212	$	1,709,513	$	339,699	$	0
	Non-U.S. Government and Government agencies		233,301		233,301		0		233,301		0
	States, municipalities and political subdivisions		33,621		33,621		0		33,621		0
	Corporate debt		1,951,140		1,951,140		0		1,951,140		0
	Mortgage-backed		1,589,021		1,589,021		0		1,391,018		198,003
	Asset-backed		429,483		429,483		0		368,198		61,285
Total fixed maturity investments			6,285,778		6,285,778		1,709,513		4,316,977		259,288
Equity securities			640,925		640,925		587,426		0		53,499
Other invested assets			714,391		714,391		0		0		714,391
Total investments		$	7,641,094	$	7,641,094	$	2,296,939	$	4,316,977	$	1,027,178

Derivative assets:
	Foreign exchange contracts	$	9,248	$	9,248	$	0	$	9,248	$	0

Derivative liabilities:
	Foreign exchange contracts	$	4,612	$	4,612	$	0	$	4,612	$	0
	Interest rate swaps		161		161		0		161		0

Senior notes		$	798,355	$	903,660	$	0	$	903,660	$	0

		Carrying		Total
December 31, 2012		Amount		Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
	U.S. Government and Government agencies	$	1,865,913	$	1,865,913	$	1,529,158	$	336,755	$	0
	Non-U.S. Government and Government agencies		261,627		261,627		0		261,627		0
	States, municipalities and political subdivisions		40,444		40,444		0		40,444		0
	Corporate debt		2,089,202		2,089,202		0		2,089,202		0
	Mortgage-backed		1,958,373		1,958,373		0		1,790,548		167,825
	Asset-backed		410,895		410,895		0		348,649		62,246
Total fixed maturity investments			6,626,454		6,626,454		1,529,158		4,867,225		230,071
Equity securities			523,949		523,949		469,269		0		54,680
Other invested assets			655,888		655,888		0		0		655,888
Total investments		$	7,806,291	$	7,806,291	$	1,998,427	$	4,867,225	$	940,639

Derivative assets:
	Foreign exchange contracts	$	1,713	$	1,713	$	0	$	1,713	$	0

Derivative liabilities:
	Foreign exchange contracts	$	2,656	$	2,656	$	0	$	2,656	$	0

Senior notes		$	798,215	$	918,627	$	0	$	918,627	$	0

“Other invested assets” excluded assets that the Company did not measure at fair value related to the Company's investments that are accounted for using the equity method of accounting. Derivative assets and derivative liabilities relating to foreign exchange contracts and interest rate swaps are classified within “other assets” or “accounts payable and accrued liabilities” on the consolidated balance sheets.

The following describes the valuation techniques used by the Company to determine the fair value of financial instruments held as of the balance sheet date.

U.S. Government and Government agencies: Comprised primarily of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. The fair values of the Company's U.S. government securities are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The Company believes the market for U.S. Treasury securities is an actively traded market given the high level of daily trading volume. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are included in the Level 2 fair value hierarchy.

Non-U.S. Government and Government agencies: Comprised of fixed income obligations of non-U.S. governmental entities. The fair values of these securities are based on prices obtained from international indices and are included in the Level 2 fair value hierarchy.

States, municipalities and political subdivisions: Comprised of fixed income obligations of U.S. domiciled state and municipality entities. The fair values of these securities are based on prices obtained from the new issue market, and are included in the Level 2 fair value hierarchy.

Corporate debt: Comprised of bonds issued by corporations that are diversified across a wide range of issuers and industries. The fair values of corporate bonds that are short-term are priced using spread above the London Interbank Offered Rate yield curve, and the fair value of corporate bonds that are long-term are priced using the spread above the risk-free yield curve. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price corporate bonds are observable market inputs, the fair values of corporate bonds are included in the Level 2 fair value hierarchy.

Mortgage-backed: Primarily comprised of residential and commercial mortgages originated by both U.S. government agencies (such as the Federal National Mortgage Association) and non-U.S. government agencies. The fair values of mortgage-backed securities originated by U.S. government agencies and non-U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the mortgage-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

Asset-backed: Principally comprised of bonds backed by pools of automobile loan receivables, home equity loans, credit card receivables and collateralized loan obligations originated by a variety of financial institutions. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market or broker-dealer quotes. As the significant inputs used to price the asset-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy, unless the significant inputs used to price the asset-backed securities are broker-dealer quotes and the Company is not able to determine if those quotes are based on observable market inputs, in which case the fair value is included in the Level 3 hierarchy.

Equity securities: Comprised of common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Non-U.S. mutual funds where the net asset value is not provided on a daily basis are included in the Level 3 fair value hierarchy.

Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the net asset value of the funds as reported by the fund manager that the Company believes is an unobservable input, and as such, the fair values of those funds are included in the Level 3 fair value hierarchy. The Company does not measure investments that are accounted for using the equity method of accounting at fair value.

Derivative instruments: The fair value of foreign exchange contracts, interest rate futures and interest rate swaps are priced from quoted market prices for similar exchange-traded derivatives and pricing valuation models that utilize independent market data inputs. The fair value of derivatives are included in the Level 2 fair value hierarchy.

Senior notes: The fair value of the senior notes is based on reported trades. The fair value of the senior notes is included in the Level 2 fair value hierarchy.

The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, goodwill and intangible assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:

Investments accounted for using the equity method: When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using discounted cash flow models.

Goodwill and intangible assets: The Company tests goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, but at least annually for goodwill and indefinite-lived intangibles. If the Company determines that goodwill and intangible assets may be impaired, the Company uses techniques, including discounted expected future cash flows and market multiple models, to measure fair value.

The following is a reconciliation of the beginning and ending balance of financial instruments using significant unobservable inputs (Level 3):

	Other invested assets		Mortgage-backed		Asset-backed		Equities
Three Months Ended June 30, 2013
Opening balance	$	710,140	$	155,420	$	40,903	$	57,787
Realized and unrealized gains (losses) included in net income		11,709		(6,188)		(289)		(4,288)
Purchases		96,742		72,261		23,527		0
Sales		(104,200)		(27,887)		(1,727)		0
Transfers into Level 3 from Level 2		0		11,197		0		0
Transfers out of Level 3 into Level 2 (1)		0		(6,800)		(1,129)		0
Ending balance	$	714,391	$	198,003	$	61,285	$	53,499
Three Months Ended June 30, 2012
Opening balance	$	522,065	$	178,374	$	242,394	$	0
Realized and unrealized (losses) gains included in net income		(641)		1,780		(220)		0
Purchases		16,728		40,352		23,267		0
Sales		(17,262)		(34,755)		(47,537)		0
Transfers into Level 3 from Level 2		0		3,707		8,654		0
Transfers out of Level 3 into Level 2 (1)		0		(31,499)		(108,972)		0
Ending balance	$	520,890	$	157,959	$	117,586	$	0

	Other invested assets		Mortgage-backed		Asset-backed		Equities
Six Months Ended June 30, 2013
Opening balance	$	655,888	$	167,825	$	62,246	$	54,680
Realized and unrealized gains (losses) included in net income		43,962		(7,613)		(382)		(1,181)
Purchases		169,952		71,752		24,782		0
Sales		(155,411)		(29,864)		(18,478)		0
Transfers into Level 3 from Level 2		0		7,109		0		0
Transfers out of Level 3 into Level 2 (1)		0		(11,206)		(6,883)		0
Ending balance	$	714,391	$	198,003	$	61,285	$	53,499
Six Months Ended June 30, 2012
Opening balance	$	540,409	$	249,204	$	94,745	$	0
Realized and unrealized gains included in net income		14,882		4,324		904		0
Purchases		17,778		41,376		31,580		0
Sales		(52,179)		(108,165)		(48,133)		0
Transfers into Level 3 from Level 2		0		4,495		55,498		0
Transfers out of Level 3 into Level 2 (1)		0		(33,275)		(17,008)		0
Ending balance	$	520,890	$	157,959	$	117,586	$	0

(1) Transfers out of Level 3 are primarily attributable to the availability of market observable information.

The Company attempts to verify the significant inputs used by broker-dealers in determining the fair value of the securities priced by them. If the Company could not obtain sufficient information to determine if the broker-dealers were using significant observable inputs, then such securities have been transferred to the Level 3 fair value hierarchy. The Company believes the prices obtained from the broker-dealers are the best estimate of fair value of the securities being priced as the broker-dealers are typically involved in the initial pricing of the security, and the Company has compared the price per the broker-dealer to other pricing sources and noted no material differences. The Company recognizes transfers between levels at the end of the reporting period. There were no transfers between Level 1 and Level 2 during the period.

The Company's external investment accounting service provider receives prices from internationally recognized independent pricing services to measure the fair values of its fixed maturity investments. Pricing sources are evaluated and selected in a manner to ensure that the most reliable sources are used. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. The Company obtains multiple quotes for the majority of its securities. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each pricing service has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing service uses observable market inputs, including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value.

All of the Company's securities classified as Level 3, other than investments in other invested assets, are valued based on unadjusted broker-dealer quotes. This includes less liquid securities such as lower quality asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities. The primary valuation inputs include monthly payment information, the probability of default, loss severity rates and estimated prepayment rates. Significant changes in these inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity in an event of default and prepayment rates.

The Company records the unadjusted price provided and validates this price through a process that includes, but is not limited to, monthly and/or quarterly: (i) comparison of prices between two independent sources, with significant differences requiring additional price sources; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to their target benchmark, with significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value, including a review of the inputs used for pricing; (iv) comparing the price to the Company's knowledge of the current investment market; and (v) back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company's external investment accounting service provider (supported by a Statement on Standards for Attestation Engagements No. 16 report) in conjunction with regular discussion and analysis of the investment portfolio's structure and performance.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

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-Name Statement of Financial Accounting Standard (FAS)

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