FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2011

FAIR VALUE MEASUREMENTS [ABSTRACT]

FAIR VALUE MEASUREMENTS

4.       FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

Fair value is defined as the price to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:

• Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
• Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

• Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own assumptions about assumptions that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead us to change the selection of our valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels.

We used the following valuation techniques and assumptions in estimating the fair value of our financial instruments as well as the general classification of such financial instruments pursuant to the above fair value hierarchy.

Fixed Maturities

At each valuation date, we use the market approach valuation technique to estimate the fair value of our fixed maturities portfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services is sourced from multiple vendors, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise.

The following describes the significant inputs generally used to determine the fair value of our fixed maturities by asset class.

U.S. government and agency

U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as, but not limited to, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. As the fair values of our U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. 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 classified within Level 2.

Non-U.S. government

Non-U.S. government securities comprise bonds issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). The fair value of these securities is based on prices obtained from international indices or a valuation model that includes the following inputs: interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs are observable market inputs, the fair value of non-U.S. government securities are classified within Level 2.

Corporate debt

Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our corporate debt securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3 and consisted of private corporate debt securities at September 30, 2011.

MBS

Our portfolio of RMBS and CMBS are originated by both agencies and non-agencies. The fair values of these securities are determined through the use of a pricing model (including Option Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the MBS.These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the significant inputs used to price MBS are observable market inputs, the fair values of the MBS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3.

ABS

ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loan receivables, credit card receivables, and CLO debt tranched securities originated by a variety of financial institutions. Similar to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers or use of an internal cash flow model (income approach) to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly.

At September 30, 2011, we continue to use our internalcash flow modelto estimate the fair value of our investment in CLO debt tranched securities (CLO Debt) given the lack of observable, relevant market trades. During the current quarter, we modified our valuation model to place more weight on thecurrent implied credit spreadsfor similar securitiesrather than the underlying contractual cash flows of the respective CLO Debt. This change did not result in a significant change in the valuation for our CLO Debt for the current quarter. While the pricing from our valuation model is significantly driven by the current impliedyields for similar debt securities, these yields are based on observable offer prices due to the lack of observable market trades. Accordingly, we continue toclassifythese securities within Level 3 in the fair value hierarchy table below.

Municipals

Our municipal portfolio comprises bonds issued by U.S. states, municipalities and political subdivisions. The fair value of these securities is determined using spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2.

Equity Securities

Equity securities include U.S. and foreign common stocks, equity exchange traded funds (“ETFs”) and a foreign bond mutual fund. For common stocks and ETFs, we classified these within Level 1 as their fair values are based on unadjusted quoted market prices in active markets. Our investment in the foreign bond mutual fund has daily liquidity, with redemption based on the net asset value of the fund. Accordingly, we have classified this investment as Level 2.

Other Investments

As a practical expedient, we estimate fair values for hedge and credit funds using net asset values as advised by external fund managers or third party administrators. As our investment in hedge and credit funds have redemption restrictions (see Note 3 for further details), we have classified these investments as Level 3.

CLO Equitiesare classified within Level 3 as we estimated the fair value for these securities using an income approach valuation technique (internal discounted cash flow model) due to the lack of observable, relevant trades in the secondary markets. At September 30, 2011, we have not changed our significant inputs (default rates, loss severity rate and estimated maturity dates) in our valuation modelsinceDecember 31, 2010.

Derivative Instruments

Our foreign currency forward contracts and options are customized to our hedging strategies and trade in the over-the-counter derivative market. We use the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly, we classified these derivatives within Level 2.

The table below presents the financial instruments measured at fair value on a recurring basis.
		Quoted Prices in		Significant		Significant
		Active Markets for		Other Observable		Unobservable
		Identical Assets		Inputs		Inputs		Total Fair
		(Level 1)		(Level 2)		(Level 3)		Value
	At September 30, 2011
	Assets
	Fixed maturities
	U.S. government and agency	$	839,376	$	270,067	$	-	$	1,109,443
	Non-U.S. government		-		1,000,578		-		1,000,578
	Corporate debt		-		3,718,550		1,550		3,720,100
	Agency RMBS		-		2,611,069		-		2,611,069
	CMBS		-		283,160		-		283,160
	Non-Agency RMBS		-		167,656		9,130		176,786
	ABS		-		590,305		48,237		638,542
	Municipals		-		1,197,051		-		1,197,051
			839,376		9,838,436		58,917		10,736,729
	Equity securities		488,646		79,235		-		567,881
	Other investments		-		-		643,270		643,270
	Other assets (see Note 6)		-		40,163		-		40,163
	Total	$	1,328,022	$	9,957,834	$	702,187	$	11,988,043
	Liabilities
	Other liabilities (see Note 6)	$	-	$	11,447	$	-	$	11,447
	At December 31, 2010
	Assets
	Fixed maturities
	U.S. government and agency	$	588,281	$	271,839	$	-	$	860,120
	Non-U.S. government		-		772,798		-		772,798
	Corporate debt		-		4,161,358		1,550		4,162,908
	Agency RMBS		-		2,593,582		-		2,593,582
	CMBS		-		474,785		-		474,785
	Non-Agency RMBS		-		224,524		19,678		244,202
	ABS		-		618,665		43,178		661,843
	Municipals		-		712,659		-		712,659
			588,281		9,830,210		64,406		10,482,897
	Equity securities		271,451		77,803		-		349,254
	Other investments		-		-		519,296		519,296
	Other assets (see Note 6)		-		6,641		-		6,641
	Total	$	859,732	$	9,914,654	$	583,702	$	11,358,088
	Liabilities
	Other liabilities (see Note 6)	$	-	$	14,986	$	-	$	14,986
During 2011 and 2010, we had no transfers between Levels 1 and 2.

Level 3 financial instruments
The following tables present changes in Level 3 for financial instruments measured at fair value on a recurring basis for the periods indicated:
			Fixed Maturities
			Corporate				Non-Agency						Other		Total
			Debt		CMBS		RMBS		ABS		Total		Investments		Assets
	Three months ended September 30, 2011
	Balance at beginning of period	$	1,550	$	-	$	11,268	$	44,733	$	57,551	$	623,650	$	681,201
	Total net realized and unrealized gains
	included in net income(1)		-		-		-		-		-		4,758		4,758
	Total net realized and unrealized losses
	included in net income(1)		-		-		-		-		-		(35,410)		(35,410)
	Change in net unrealized gains included
	in other comprehensive income		-		-		37		2,769		2,806		-		2,806
	Change in net unrealized losses included
	in other comprehensive income		-		-		(40)		(558)		(598)		-		(598)
	Purchases		-		-		-		-		-		60,000		60,000
	Sales		-		-		-		-		-		(729)		(729)
	Settlements / distributions		-		-		(610)		-		(610)		(8,999)		(9,609)
	Transfers into Level 3		-		-		-		1,293		1,293		-		1,293
	Transfers out of Level 3		-		-		(1,525)		-		(1,525)		-		(1,525)
	Balance at end of period	$	1,550	$	-	$	9,130	$	48,237	$	58,917	$	643,270	$	702,187
	Level 3 gains (losses) included in
	earnings attributable to the change
	in unrealized gains (losses) relating
	to those assets held at the
	reporting date	$	-	$	-	$	-	$	-	$	-	$	(30,376)	$	(30,376)
	Nine months ended September 30, 2011
	Balance at beginning of period	$	1,550	$	-	$	19,678	$	43,178	$	64,406	$	519,296	$	583,702
	Total net realized and unrealized gains
	included in net income(1)		-		-		-		-		-		47,598		47,598
	Total net realized and unrealized losses
	included in net income(1)		-		-		-		-		-		(41,709)		(41,709)
	Change in net unrealized gains included
	in other comprehensive income		-		-		124		4,624		4,748		-		4,748
	Change in net unrealized losses included
	in other comprehensive income		-		-		(55)		(858)		(913)		-		(913)
	Purchases		-		-		-		-		-		180,000		180,000
	Sales		-		-		-		-		-		(24,923)		(24,923)
	Settlements / distributions		-		-		(1,583)		-		(1,583)		(36,992)		(38,575)
	Transfers into Level 3		-		-		-		1,293		1,293		-		1,293
	Transfers out of Level 3		-		-		(9,034)		-		(9,034)		-		(9,034)
	Balance at end of period	$	1,550	$	-	$	9,130	$	48,237	$	58,917	$	643,270	$	702,187
	Level 3 gains (losses) included in
	earnings attributable to the change
	in unrealized gains (losses) relating
	to those assets held at the
	reporting date	$	-	$	-	$	-	$	-	$	-	$	6,732	$	6,732
(1) Realized gains and losses on fixed maturities are included in net realized investment gains (losses). Realized gains and (losses) on other investments are included in net investment income.

			Fixed Maturities
			Corporate				Non-Agency						Other		Total
			Debt		CMBS		RMBS		ABS		Total		Investments		Assets
	Three months ended September 30, 2010
	Balance at beginning of period	$	3,100	$	3,600	$	2,973	$	46,816	$	56,489	$	496,087	$	552,576
	Total net realized and unrealized
	gains included in net income(1)		-		-		-		-		-		23,469		23,469
	Total net realized and unrealized
	losses included in net income(1)		-		-		-		-		-		-		-
	Change in net unrealized gains
	included in other
	comprehensive income		-		180		92		-		272		-		272
	Change in net unrealized losses
	included in other
	comprehensive income		-		-		(7)		(47)		(54)		-		(54)
	Purchases		-		-		-		-		-		25,000		25,000
	Sales		-		-		-		-		-		(3,588)		(3,588)
	Settlements / distributions		-		-		(207)		(356)		(563)		(7,896)		(8,459)
	Transfers into Level 3		-		-		-		-		-		-		-
	Transfers out of Level 3		-		(3,780)		(2,851)		(4,190)		(10,821)		-		(10,821)
	Balance at end of period	$	3,100	$	-	$	-	$	42,223	$	45,323	$	533,072	$	578,395
	Level 3 gains (losses) included in
	earnings attributable to the
	change in unrealized gains
	(losses) relating to those assets
	and liabilities held at
	the reporting date	$	-	$	-	$	-	$	-	$	-	$	23,469	$	23,469
	Nine months ended September 30, 2010
	Balance at beginning of period	$	18,130	$	2,409	$	6,639	$	43,585	$	70,763	$	520,188	$	590,951
	Total net realized and unrealized
	gains included in net income(1)		-		-		-		-		-		35,818		35,818
	Total net realized and unrealized
	losses included in net income(1)		(1,550)		(119)		(581)		(1,134)		(3,384)		-		(3,384)
	Change in net unrealized gains
	included in other
	comprehensive income		3,751		1,273		1,238		2,406		8,668		-		8,668
	Change in net unrealized losses
	included in other
	comprehensive income		(34)		(238)		(27)		(71)		(370)		-		(370)
	Purchases		-		3,474		-		4,000		7,474		45,000		52,474
	Sales		(12)		(206)		(211)		(2,004)		(2,433)		(47,992)		(50,425)
	Settlements / distributions		-		(694)		(692)		(369)		(1,755)		(19,942)		(21,697)
	Transfers into Level 3		-		-		780		-		780		-		780
	Transfers out of Level 3		(17,185)		(5,899)		(7,146)		(4,190)		(34,420)		-		(34,420)
	Balance at end of period	$	3,100	$	-	$	-	$	42,223	$	45,323	$	533,072	$	578,395
	Level 3 gains (losses) included in
	earnings attributable to the
	change in unrealized gains
	(losses) relating to those assets
	and liabilities held at
	the reporting date	$	(1,550)	$	-	$	-	$	-	$	(1,550)	$	35,818	$	34,268
(1) Realized gains and losses on fixed maturities are included in net realized investment gains (losses). Realized gains and (losses) on other investments are included in net investment income. Losses on other liabilities are included in other insurance related income (loss).

Transfers into Level 3 from Level 2

The transfers to Level 3 from Level 2 made in 2010 and 2011 were due to a reduction in the volume of recently executed transactions or a lack of available quotes from pricing vendors and broker-dealers.None of the transfers were as a result of changes in valuation methodology that we made.

Transfers out of Level 3 into Level 2

The transfers to Level 2 from Level 3 made in 2010 and 2011 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors and broker-dealers as a result of the return of liquidity in the credit markets.

Fair Values of Financial Instruments

The carrying amount of financial assets and liabilities presented on the Consolidated Balance Sheets as at September 30, 2011, and December 31, 2010 approximated their fair values with the exception of senior notes. At September 30, 2011, the senior notes are recorded at amortized cost with a carrying value of $994 million (2010: $994 million) and have a fair value of $1,046million (2010: $1,018 million).