4. Fair Value

(a) Fair Value of Financial Instrument Assets

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement.

The Company determines the appropriate level in the hierarchy for each financial instrument that it measures at fair value. In determining fair value, the Company uses various valuation approaches, including market, income and cost approaches. The hierarchy is broken down into three levels based on the observability of inputs as follows:


•	Level 1 inputs—Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

The Company’s financial instruments that it measures at fair value using Level 1 inputs generally include: equities and real estate investment trusts listed on a major exchange, exchange traded funds and exchange traded derivatives, including futures that are actively traded.


•	Level 2 inputs—Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and significant directly or indirectly observable inputs, other than quoted prices, used in industry accepted models.

The Company’s financial instruments that it measures at fair value using Level 2 inputs generally include: U.S. government issued bonds; U.S. government sponsored enterprises bonds; U.S. state, territory and municipal entities bonds; non-U.S. sovereign government, supranational and government related bonds consisting primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations; investment grade and high yield corporate bonds; asset-backed securities; mortgage-backed securities; short-term investments; certain equities traded on foreign exchanges; certain fixed income mutual funds; foreign exchange forward contracts and over-the-counter derivatives such as foreign currency option contracts, credit default swaps, interest rate swaps and to-be-announced mortgage-backed securities (TBAs).


•	Level 3 inputs—Unobservable inputs.

The Company’s financial instruments that it measures at fair value using Level 3 inputs generally include: inactively traded fixed maturities including U.S. state, territory and municipal bonds; special purpose financing asset-backed bonds; unlisted equities; real estate and certain other mutual fund investments; inactively traded weather derivatives; notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps.

The Company’s policy is to recognize transfers between the hierarchy levels at the beginning of the period.

The Company’s financial instruments measured at fair value include investments and the segregated investment portfolio underlying the funds held – directly managed account. At June 30, 2015 and December 31, 2014, the Company’s financial instruments measured at fair value were classified between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):



June 30, 2015	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Total
Fixed maturities
U.S. government and government sponsored enterprises	$	—		$	2,335,450		$	—		$	2,335,450
U.S. states, territories and municipalities	—			569,848			112,221			682,069
Non-U.S. sovereign government, supranational and government related	—			1,491,495			—			1,491,495
Corporate	—			5,510,022			—			5,510,022
Asset-backed securities	—			678,594			411,649			1,090,243
Residential mortgage-backed securities	—			2,186,376			—			2,186,376
Other mortgage-backed securities	—			54,117			—			54,117
Fixed maturities	$	—		$	12,825,902		$	523,870		$	13,349,772
Short-term investments	$	—		$	19,244		$	—		$	19,244
Equities
Real estate investment trusts	$	189,202		$	—		$	—		$	189,202
Insurance	119,690			5,175			—			124,865
Consumer noncyclical	121,091			—			—			121,091
Finance	79,914			7,809			20,964			108,687
Energy	94,517			—			—			94,517
Industrials	60,073			9,219			—			69,292
Technology	48,775			—			9,215			57,990
Consumer cyclical	48,034			—			—			48,034
Communications	43,976			—			2,580			46,556
Utilities	25,966			—			—			25,966
Other	19,031			—			—			19,031
Mutual funds and exchange traded funds	92,397			—			8,923			101,320
Equities	$	942,666		$	22,203		$	41,682		$	1,006,551
Other invested assets
Derivative assets
Foreign exchange forward contracts	$	—		$	17,643		$	—		$	17,643
Insurance-linked securities	—			—			14			14
Total return swaps	—			—			233			233
TBAs	—			11			—			11
Other
Notes and loan receivables and notes securitization	—			—			65,450			65,450
Annuities and residuals	—			—			11,096			11,096
Private equities	—			—			71,543			71,543
Derivative liabilities
Foreign exchange forward contracts	—			(5,927		)	—			(5,927		)
Foreign currency option contracts	—			(946		)	—			(946		)
Futures contracts	(7,811		)	—			—			(7,811		)
Insurance-linked securities	—			—			(359		)	(359		)
Total return swaps	—			—			(2,298		)	(2,298		)
Interest rate swaps	—			(15,912		)	—			(15,912		)
TBAs	—			(1,609		)	—			(1,609		)
Other invested assets	$	(7,811	)	$	(6,740	)	$	145,679		$	131,128
Funds held – directly managed
U.S. government and government sponsored enterprises	$	—		$	157,909		$	—		$	157,909
Non-U.S. sovereign government, supranational and government related	—			109,934			—			109,934
Corporate	—			137,451			—			137,451
Short-term investments	—			7,047			—			7,047
Other invested assets	—			—			12,348			12,348
Funds held – directly managed	$	—		$	412,341		$	12,348		$	424,689
Total	$	934,855		$	13,272,950		$	723,579		$	14,931,384



December 31, 2014	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Total
Fixed maturities
U.S. government and government sponsored enterprises	$	—		$	2,315,422		$	—		$	2,315,422
U.S. states, territories and municipalities	—			380,875			149,728			530,603
Non-U.S. sovereign government, supranational and government related	—			1,976,202			—			1,976,202
Corporate	—			5,604,160			—			5,604,160
Asset-backed securities	—			681,502			449,918			1,131,420
Residential mortgage-backed securities	—			2,306,476			—			2,306,476
Other mortgage-backed securities	—			54,462			—			54,462
Fixed maturities	$	—		$	13,319,099		$	599,646		$	13,918,745
Short-term investments	$	—		$	25,678		$	—		$	25,678
Equities
Real estate investment trusts	$	213,770		$	—		$	—		$	213,770
Insurance	140,916			4,521			—			145,437
Energy	123,978			—			—			123,978
Consumer noncyclical	100,134			—			—			100,134
Finance	70,621			7,354			20,353			98,328
Technology	52,707			—			8,555			61,262
Communications	51,829			—			2,640			54,469
Industrials	49,983			—			—			49,983
Consumer cyclical	39,002			—			—			39,002
Utilities	31,748			—			—			31,748
Other	11,571			—			—			11,571
Mutual funds and exchange traded funds	118,246			—			8,586			126,832
Equities	$	1,004,505		$	11,875		$	40,134		$	1,056,514
Other invested assets
Derivative assets
Foreign exchange forward contracts	$	—		$	20,033		$	—		$	20,033
Futures contracts	846			—			—			846
Insurance-linked securities	—			—			3			3
Total return swaps	—			—			485			485
TBAs	—			154			—			154
Other
Notes and loan receivables and notes securitization	—			—			44,817			44,817
Annuities and residuals	—			—			13,243			13,243
Private equities	—			—			59,872			59,872
Derivative liabilities
Foreign exchange forward contracts	—			(7,446		)	—			(7,446		)
Foreign currency option contracts	—			(1,196		)	—			(1,196		)
Futures contracts	(467		)	—			—			(467		)
Insurance-linked securities	—			—			(339		)	(339		)
Total return swaps	—			—			(2,007		)	(2,007		)
Interest rate swaps	—			(16,282		)	—			(16,282		)
TBAs	—			(240		)	—			(240		)
Other invested assets	$	379		$	(4,977	)	$	116,074		$	111,476
Funds held – directly managed
U.S. government and government sponsored enterprises	$	—		$	153,483		$	—		$	153,483
U.S. states, territories and municipalities	—			—			132			132
Non-U.S. sovereign government, supranational and government related	—			128,233			—			128,233
Corporate	—			177,347			—			177,347
Other invested assets	—			—			13,398			13,398
Funds held – directly managed	$	—		$	459,063		$	13,530		$	472,593
Total	$	1,004,884		$	13,810,738		$	769,384		$	15,585,006

At June 30, 2015 and December 31, 2014, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $209.2 million and $187.3 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting or equity method of accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $424.7 million and $472.6 million at June 30, 2015 and December 31, 2014, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $58.1 million and $42.3 million, respectively, and accrued investment income of $4.8 million and $5.7 million, respectively. At June 30, 2015 and December 31, 2014, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $107.3 million and $88.3 million, respectively, which primarily related to other assets and liabilities held by Colisée Re related to the underlying business, which are carried at cost (see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).

At June 30, 2015 and December 31, 2014, substantially all of the accrued investment income in the Condensed Consolidated Balance Sheets relate to the Company’s investments and the investments underlying the funds held – directly managed account for which the fair value option was elected.

During the three months and six months ended June 30, 2015 and 2014, there were no transfers between Level 1 and Level 2.

Disclosures about the fair value of financial instruments that the Company does not measure at fair value exclude insurance contracts and certain other financial instruments. At June 30, 2015 and December 31, 2014, the fair values of financial instrument assets recorded in the Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

The reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended June 30, 2015 and 2014, were as follows (in thousands of U.S. dollars):



For the three months ended June 30, 2015	Balance at beginning of period			Realized and unrealized investment (losses) gains included in net loss			Purchases and issuances ⁽¹⁾		Settlements and sales ⁽¹⁾			Net transfers into/ (out of) Level 3		Balance at end of period			Change in unrealized investment (losses) gains relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities	$	147,683		$	(8,390	)	$	16,440	$	(43,512	)	$	—	$	112,221		$	(8,392	)
Asset-backed securities	451,583			(7,711		)	17,280		(49,503		)	—		411,649			(7,566		)
Fixed maturities	$	599,266		$	(16,101	)	$	33,720	$	(93,015	)	$	—	$	523,870		$	(15,958	)
Equities
Finance	$	20,532		$	564		$	—	$	(132	)	$	—	$	20,964		$	564
Technology	8,602			613			—		—			—		9,215			613
Communications	2,723			(143		)	—		—			—		2,580			(143		)
Mutual funds and exchange traded funds	257,977			286			—		(249,340		)	—		8,923			286
Equities	$	289,834		$	1,320		$	—	$	(249,472	)	$	—	$	41,682		$	1,320
Other invested assets
Derivatives, net	$	(1,377	)	$	(1,033	)	$	—	$	—		$	—	$	(2,410	)	$	(1,033	)
Notes and loan receivables and notes securitization	51,103			(540		)	16,271		(1,384		)	—		65,450			(541		)
Annuities and residuals	12,155			90			—		(1,149		)	—		11,096			91
Private equities	64,642			1,055			6,754		(908		)	—		71,543			906
Other invested assets	$	126,523		$	(428	)	$	23,025	$	(3,441	)	$	—	$	145,679		$	(577	)
Funds held – directly managed
U.S. states, territories and municipalities	$	132		$	68		$	—	$	(200	)	$	—	$	—		$	—
Other invested assets	12,008			340			—		—			—		12,348			340
Funds held – directly managed	$	12,140		$	408		$	—	$	(200	)	$	—	$	12,348		$	340
Total	$	1,027,763		$	(14,801	)	$	56,745	$	(346,128	)	$	—	$	723,579		$	(14,875	)


(1)	There were no issuances or sales for the three months ended June 30, 2015.



For the three months ended June 30, 2014	Balance at beginning of period			Realized and unrealized investment gains (losses) included in net income			Purchases and issuances ⁽¹⁾			Settlements and sales⁽²⁾			Net transfers into/(out of) Level 3		Balance at end of period			Change in unrealized investment gains (losses) relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities	$	113,467		$	5,960		$	4,260		$	(70	)	$	—	$	123,617		$	5,959
Asset-backed securities	447,701			3,141			68,035			(29,771		)	—		489,106			3,184
Fixed maturities	$	561,168		$	9,101		$	72,295		$	(29,841	)	$	—	$	612,723		$	9,143
Equities
Finance	$	22,706		$	(3,142	)	$	—		$	—		$	—	$	19,564		$	(3,142	)
Communications	2,111			(44		)	—			—			—		2,067			(44		)
Technology	7,400			245			—			—			—		7,645			245
Other	—			(1		)	8			—			—		7			(1		)
Mutual funds and exchange traded funds	8,053			193			—			—			—		8,246			193
Equities	$	40,270		$	(2,749	)	$	8		$	—		$	—	$	37,529		$	(2,749	)
Other invested assets
Derivatives, net	$	(1,042	)	$	398		$	(208	)	$	—		$	—	$	(852	)	$	398
Notes and loan receivables and notes securitization	42,243			2,967			2,196			(8,803		)	—		38,603			4,486
Annuities and residuals	18,945			302			—			(2,113		)	—		17,134			303
Private equities	42,655			(2,264		)	15,478			(941		)	—		54,928			(2,264		)
Other invested assets	$	102,801		$	1,403		$	17,466		$	(11,857	)	$	—	$	109,813		$	2,923
Funds held – directly managed
U.S. states, territories and municipalities	$	301		$	4		$	—		$	—		$	—	$	305		$	4
Other invested assets	15,223			577			—			—			—		15,800			577
Funds held – directly managed	$	15,524		$	581		$	—		$	—		$	—	$	16,105		$	581
Total	$	719,763		$	8,336		$	89,769		$	(41,698	)	$	—	$	776,170		$	9,898


(1)	Purchases and issuances of derivatives include issuances of $0.2 million.


(2)	There were no sales for the three months ended June 30, 2014.

The reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the six months ended June 30, 2015 and 2014, were as follows (in thousands of U.S. dollars):



For the six months ended June 30, 2015	Balance at beginning of period			Realized and unrealized investment (losses) gains included in net income			Purchases and issuances⁽¹⁾		Settlements and sales⁽¹⁾			Net transfers into/(out of) Level 3		Balance at end of period			Change in unrealized investment (losses) gains relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities	$	149,728		$	(10,251	)	$	16,440	$	(43,696	)	$	—	$	112,221		$	(10,258	)
Asset-backed securities	449,918			(6,450		)	60,702		(92,521		)	—		411,649			(6,187		)
Fixed maturities	$	599,646		$	(16,701	)	$	77,142	$	(136,217	)	$	—	$	523,870		$	(16,445	)
Equities
Finance	$	20,353		$	743		$	—	$	(132	)	$	—	$	20,964		$	743
Technology	8,555			660			—		—			—		9,215			660
Communications	2,640			(60		)	—		—			—		2,580			(60		)
Mutual funds and exchange traded funds	8,586			337			249,340		(249,340		)	—		8,923			337
Equities	$	40,134		$	1,680		$	249,340	$	(249,472	)	$	—	$	41,682		$	1,680
Other invested assets
Derivatives, net	$	(1,858	)	$	(552	)	$	—	$	—		$	—	$	(2,410	)	$	(552	)
Notes and loan receivables and notes securitization	44,817			564			22,682		(2,613		)	—		65,450			2,082
Annuities and residuals	13,243			321			—		(2,468		)	—		11,096			321
Private equities	59,872			1,552			11,938		(1,819		)	—		71,543			1,404
Other invested assets	$	116,074		$	1,885		$	34,620	$	(6,900	)	$	—	$	145,679		$	3,255
Funds held – directly managed
U.S. states, territories and municipalities	$	132		$	68		$	—	$	(200	)	$	—	$	—		$	—
Other invested assets	13,398			(1,050		)	—		—			—		12,348			(1,050		)
Funds held – directly managed	$	13,530		$	(982	)	$	—	$	(200	)	$	—	$	12,348		$	(1,050	)
Total	$	769,384		$	(14,118	)	$	361,102	$	(392,789	)	$	—	$	723,579		$	(12,560	)


(1)	There were no issuances or sales for the six months ended June 30, 2015.



For the six months ended June 30, 2014	Balance at beginning of period			Realized and unrealized investment gains (losses) included in net income			Purchases and issuances ⁽¹⁾			Settlements and sales ⁽²⁾			Net transfers into/(out of) Level 3		Balance at end of period			Change in unrealized investment gains (losses) relating to assets held at end of period
Fixed maturities
U.S. states, territories and municipalities	$	108,380		$	6,852		$	8,525		$	(140	)	$	—	$	123,617		$	6,849
Asset-backed securities	446,577			9,137			127,453			(94,061		)	—		489,106			9,444
Fixed maturities	$	554,957		$	15,989		$	135,978		$	(94,201	)	$	—	$	612,723		$	16,293
Equities
Finance	20,207			(643		)	—			—			—		19,564			(643		)
Communications	2,199			(132		)	—			—			—		2,067			(132		)
Technology	7,752			(107		)	—			—			—		7,645			(107		)
Other	—			(1		)	8			—			—		7			(1		)
Mutual funds and exchange traded funds	7,887			359			—			—			—		8,246			359
Equities	$	38,045		$	(524	)	$	8		$	—		$	—	$	37,529		$	(524	)
Other invested assets
Derivatives, net	$	(788	)	$	864		$	(928	)	$	—		$	—	$	(852	)	$	864
Notes and loan receivables and notes securitization	41,446			3,567			2,916			(9,326		)	—		38,603			5,086
Annuities and residuals	24,064			391			—			(7,321		)	—		17,134			431
Private equities	39,131			(1,831		)	20,544			(2,916		)	—		54,928			(1,863		)
Other invested assets	$	103,853		$	2,991		$	22,532		$	(19,563	)	$	—	$	109,813		$	4,518
Funds held – directly managed
U.S. states, territories and municipalities	$	286		$	19		$	—		$	—		$	—	$	305		$	19
Other invested assets	15,165			380			255			—			—		15,800			380
Funds held – directly managed	$	15,451		$	399		$	255		$	—		$	—	$	16,105		$	399
Total	$	712,306		$	18,855		$	158,773		$	(113,764	)	$	—	$	776,170		$	20,686

(1) Purchases and issuances of derivatives include issuances of $0.9 million.

(2) There were no sales for the six months ended June 30, 2014.

The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at June 30, 2015 and December 31, 2014 were as follows (fair value in thousands of U.S. dollars):



June 30, 2015	Fair value			Valuation techniques	Unobservable inputs	Range (Weighted average)
Fixed maturities
U.S. states, territories and municipalities	$	112,221		Discounted cash flow	Credit spreads	2.5% – 11.5% (7.2%)
Asset-backed securities – other	411,649			Discounted cash flow	Credit spreads	4.0% – 12.1% (7.6%)
Equities
Finance	14,570			Weighted market comparables	Net income multiple	14.4 (14.4)
				Weighted market comparables	Tangible book value multiple	1.5 (1.5)
					Liquidity discount	25.0% (25.0%)
					Comparable return	0% (0%)
Finance	6,394			Profitability analysis	Projected return on equity	14.0% (14.0%)
Technology	9,215			Weighted market comparables	Revenue multiple	1.8 (1.8)
				Weighted market comparables	Adjusted earnings multiple	10.7 (10.7)
Communications	2,580			Weighted market comparables	Adjusted earnings multiple	9.4 (9.4)
				Weighted market comparables	Comparable return	-2.2% (-2.2%)
Other invested assets
Total return swaps	(2,065		)	Discounted cash flow	Credit spreads	4.0% – 21.7% (20.0%)
Notes and loan receivables	21,296			Discounted cash flow	Credit spreads	6.4% – 13.4% (8.9%)
Notes and loan receivables	12,599			Discounted cash flow	Credit spreads	17.5% (17.5%)
Notes and loan receivables				Discounted cash flow	Gross revenue/fair value	1.4 – 1.6 (1.6)
Notes securitization	31,555			Discounted cash flow	Credit spreads	4.3% – 6.7% (6.6%)
Annuities and residuals	11,096			Discounted cash flow	Credit spreads	5.1% – 8.8% (7.7%)
					Prepayment speed	0% – 15.0% (2.9%)
					Constant default rate	0.3% – 17.5% (5.0%)
Private equity – direct	9,552			Discounted cash flow and weighted market comparables	Net income multiple	9.6 (9.6)
					Tangible book value multiple	2.1 (2.1)
					Recoverability of intangible assets	0% (0%)
Private equity funds	26,704			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-10.1% – 1.1% (-0.8%)
Private equity – other	35,287			Discounted cash flow	Effective yield	5.8% (5.8%)
Funds held – directly managed
Other invested assets	12,348			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-7.0% – 0% (-6.1%)



December 31, 2014	Fair value			Valuation techniques	Unobservable inputs	Range (Weighted average)
Fixed maturities
U.S. states, territories and municipalities	$	149,728		Discounted cash flow	Credit spreads	2.2% – 10.1% (4.6%)
Asset-backed securities – other	449,918			Discounted cash flow	Credit spreads	4.0% – 12.1% (7.1%)
Equities
Finance	14,561			Weighted market comparables	Net income multiple	19.0 (19.0)
				Weighted market comparables	Tangible book value multiple	1.3 (1.3)
					Liquidity discount	25.0% (25.0%)
					Comparable return	7.3% (7.3%)
Finance	5,792			Profitability analysis	Projected return on equity	14.0% (14.0%)
Technology	8,555			Weighted market comparables	Revenue multiple	1.6 (1.6)
				Weighted market comparables	Adjusted earnings multiple	10.2 (10.2)
Communications	2,640			Weighted market comparables	Adjusted earnings multiple	9.4 (9.4)
				Weighted market comparables	Comparable return	-10.6% (-10.6%)
Other invested assets
Total return swaps	(1,522		)	Discounted cash flow	Credit spreads	3.6% – 19.3% (16.3%)
Notes and loan receivables	8,068			Discounted cash flow	Credit spreads	12.6% (12.6%)
Notes and loan receivables	13,237			Discounted cash flow	Credit spreads	17.5% (17.5%)
Notes and loan receivables				Discounted cash flow	Gross revenue/fair value	1.5 – 1.7 (1.7)
Notes securitization	23,512			Discounted cash flow	Credit spreads	3.5% – 6.6% (6.4%)
Annuities and residuals	13,243			Discounted cash flow	Credit spreads	4.9% – 9.6% (7.8%)
					Prepayment speed	0% – 15.0% (4.3%)
					Constant default rate	0.3% – 17.5% (6.3%)
Private equity – direct	8,536			Discounted cash flow and weighted market comparables	Net income multiple	9.0 (9.0)
					Tangible book value multiple	2.0 (2.0)
					Recoverability of intangible assets	0% (0%)
Private equity funds	18,494			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-7.6% – 11.0% (-1.6%)
Private equity – other	32,842			Discounted cash flow	Effective yield	5.8% (5.8%)
Funds held – directly managed
Other invested assets	13,398			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-15.4% – 0% (-14.5%)

The tables above do not include financial instruments that are measured using unobservable inputs (Level 3) where the unobservable inputs were obtained from external sources and used without adjustment. These financial instruments include mutual fund investments (included within equities) and certain derivatives.

The Company has established a Valuation Committee which is responsible for determining the Company’s invested asset valuation policy and related procedures, for reviewing significant changes in the fair value measurements of securities classified as Level 3 from period to period, and for reviewing in accordance with the invested asset valuation policy an independent internal peer analysis that is performed on the fair value measurements of significant securities that are classified as Level 3. The Valuation Committee is comprised of members of the Company’s senior management team and meets on a quarterly basis. The Company’s invested asset valuation policy is monitored by the Company’s Audit Committee of the Board of Directors (Board) and approved annually by the Company’s Risk and Finance Committee of the Board.

Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months and six months ended June 30, 2015 and 2014 were as follows (in thousands of U.S. dollars):



	For the three months ended					For the six months ended
	June 30, 2015			June 30, 2014		June 30, 2015			June 30, 2014
Fixed maturities and short-term investments	$	(253,918	)	$	123,434	$	(176,947	)	$	243,233
Equities	(45,523		)	6,322		(52,539		)	16,647
Other invested assets	880			2,515		2,713			3,558
Funds held – directly managed	(6,298		)	741		(3,758		)	1,477
Total	$	(304,859	)	$	133,012	$	(230,531	)	$	264,915

Substantially all of the above changes in fair value are included in the Condensed Consolidated Statements of Operations under the caption Net realized and unrealized investment (losses) gains.

The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument recorded in the Condensed Consolidated Balance Sheets. There have been no material changes in the Company’s valuation techniques during the periods presented.

Fixed maturities

•

U.S. government and government sponsored enterprises—U.S. government and government sponsored enterprises securities consist primarily of bonds issued by the U.S. Treasury and corporate debt securities issued by government sponsored enterprises and federally owned or established corporations. These securities are generally priced by independent pricing services. The independent pricing services may use actual transaction prices for securities that have been actively traded. For securities that have not been actively traded, each pricing source has its own proprietary method to determine the fair value, which may incorporate option adjusted spreads (OAS), interest rate data and market news. The Company generally classifies these securities in Level 2.

•

U.S. states, territories and municipalities—U.S. states, territories and municipalities securities consist primarily of bonds issued by U.S. states, territories and municipalities and the Federal Home Loan Mortgage Corporation. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2. Certain of the bonds that are issued by municipal housing authorities and the Federal Home Loan Mortgage Corporation are not actively traded and are priced based on internal models using unobservable inputs. Accordingly, the Company classifies these securities in Level 3. The significant unobservable input used in the fair value measurement of these U.S. states, territories and municipalities securities classified as Level 3 is credit spreads. A significant increase (decrease) in credit spreads in isolation could result in a significantly lower (higher) fair value measurement.

•

Non-U.S. sovereign government, supranational and government related—Non-U.S. sovereign government, supranational and government related securities consist primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2.

•

Corporate—Corporate securities consist primarily of bonds issued by U.S. and foreign corporations covering a variety of industries and issuing countries. These securities are generally priced by independent pricing services and brokers. The pricing provider incorporates information including credit spreads, interest rate data and market news into the valuation of each security. The Company generally classifies these securities in Level 2. When a corporate security is inactively traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3.

•

Asset-backed securities—Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are predominantly backed by student loans, automobile loans, credit card receivables, equipment leases, and special purpose financing. With the exception of special purpose financing, these asset-backed securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. Special purpose financing securities are generally inactively traded and are priced based on valuation models using unobservable inputs. The Company generally classifies these securities in Level 3. The significant unobservable input used in the fair value measurement of these asset-backed securities classified as Level 3 is credit spreads. A significant increase (decrease) in credit spreads in isolation could result in a significantly lower (higher) fair value measurement.

•

Residential mortgage-backed securities—Residential mortgage-backed securities primarily consist of bonds issued by the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, as well as private, non-agency issuers. These residential mortgage-backed securities are generally priced by independent pricing services and brokers. When current market trades are not available, the pricing provider or the Company will employ proprietary models with observable inputs including other trade information, prepayment speeds, yield curves and credit spreads. The Company generally classifies these securities in Level 2.

•

Other mortgage-backed securities—Other mortgage-backed securities primarily consist of commercial mortgage-backed securities. These securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2.

In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not been actively traded primarily involve the use of “matrix pricing” in which the independent pricing source applies the credit spread for a comparable security that has traded recently to the current yield curve to determine a reasonable fair value. The Company generally uses one pricing source per security and uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. When fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Most of the Company’s fixed maturities are priced from the pricing services or dealer quotes. The Company will typically not make adjustments to prices received from pricing services or dealer quotes; however, in instances where the quoted external price for a security uses significant unobservable inputs, the Company will classify that security as Level 3. The methods used to develop and substantiate the unobservable inputs used are based on the Company’s valuation policy and are dependent upon the facts and circumstances surrounding the individual investments which are generally transaction specific. The Company’s inactively traded fixed maturities are classified as Level 3. For all fixed maturity investments, the bid price is used for estimating fair value.

To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. The Company also reviews an internally generated fixed maturity price validation report which converts prices received for fixed maturity investments from the independent pricing sources and from broker-dealers quotes and plots OAS and duration on a sector and rating basis. The OAS is calculated using established algorithms developed by an independent risk analytics platform vendor. The OAS on the fixed maturity price validation report are compared for securities in a similar sector and having a similar rating, and outliers are identified and investigated for price reasonableness. In addition, the Company completes quantitative analyses to compare the performance of each fixed maturity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.

Short-term investments

Short-term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2.

Equities

Equity securities include U.S. and foreign common and preferred stocks, real estate investment trusts, mutual funds and exchange traded funds. Equities, real estate investment trusts and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted prices in active markets. Equities classified as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on a daily basis, and common stocks traded in inactive markets. Equities classified as Level 3 are generally mutual funds invested in securities other than the common stock of publicly traded companies, where the net asset value is not provided on a daily basis, and inactively traded common stocks. The significant unobservable inputs used in the fair value measurement of inactively traded common stocks classified as Level 3 include market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size, including net income multiples, tangible book value multiples, comparable returns, revenue multiples, adjusted earnings multiples and projected return on equity ratios. Significant increases (decreases) in any of these inputs could result in a significantly higher (lower) fair value measurement. Significant unobservable inputs used in measuring the fair value measurement of inactively traded common stocks also include a liquidity discount. A significant increase (decrease) in the liquidity discount could result in a significantly lower (higher) fair value measurement.

To validate prices, the Company completes quantitative analyses to compare the performance of each equity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.

Other invested assets

The Company’s exchange traded derivatives, such as futures, are generally classified as Level 1 as their fair values are quoted prices in active markets. The Company’s foreign exchange forward contracts, foreign currency option contracts, credit default swaps, interest rate swaps and TBAs are generally classified as Level 2 within the fair value hierarchy and are priced by independent pricing services.

Included in the Company’s Level 3 classification, in general, are certain inactively traded weather derivatives, notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps. For Level 3 instruments, the Company will generally (i) receive a price based on a manager’s or trustee’s valuation for the asset; (ii) develop an internal discounted cash flow model to measure fair value; or (iii) use market return information, adjusted if necessary and weighted using management’s judgment, from comparable selected publicly traded equity funds in a similar region and of a similar size. Where the Company receives prices from the manager or trustee, these prices are based on the manager’s or trustee’s estimate of fair value for the assets and are generally audited on an annual basis. Where the Company develops its own discounted cash flow models, the inputs will be specific to the asset in question, based on appropriate historical information, adjusted as necessary, and using appropriate discount rates. The significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 include credit spreads, prepayment speeds, constant default rates, gross revenue to fair value ratios, net income multiples, effective yields, tangible book value multiples and other valuation ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) fair value measurement. Significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 also include an assessment of the recoverability of intangible assets and market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size. Significant increases (decreases) in these inputs in isolation could result in a significantly higher (lower) fair value measurement. As part of the Company’s modeling to determine the fair value of an investment, the Company considers counterparty credit risk as an input to the model, however, the majority of the Company’s counterparties are investment grade rated institutions and the failure of any one counterparty would not have a significant impact on the Company’s consolidated financial statements.

To validate prices, the Company will compare them to benchmarks, where appropriate, or to the business results generally within that asset class and specifically to those particular assets.

Funds held – directly managed

The segregated investment portfolio underlying the funds held – directly managed account is comprised of fixed maturities, short-term investments and other invested assets which are fair valued on a basis consistent with the methods described above. Substantially all fixed maturities and short-term investments within the funds held – directly managed account are classified as Level 2 within the fair value hierarchy.

The other invested assets within the segregated investment portfolio underlying the funds held – directly managed account, which are classified as Level 3 investments, are primarily real estate mutual fund investments carried at fair value. For the real estate mutual fund investments, the Company receives a price based on the real estate fund manager’s valuation for the asset and further adjusts the price, if necessary, based on appropriate current information on the real estate market. A significant increase (decrease) to the adjustment to the real estate fund manager’s valuation could result in a significantly lower (higher) fair value measurement.

To validate prices within the segregated investment portfolio underlying the funds held – directly managed account, the Company utilizes the methods described above.

(b) Fair Value of Financial Instrument Liabilities

At June 30, 2015 and December 31, 2014, the fair values of financial instrument liabilities recorded in the Condensed Consolidated Balance Sheets approximate their carrying values, with the exception of the debt related to senior notes (Senior Notes) and the debt related to capital efficient notes (CENts).

The methods and assumptions used by the Company in estimating the fair value of each class of financial instrument liability recorded in the Condensed Consolidated Balance Sheets for which the Company does not measure that instrument at fair value were as follows:


•	the fair value of the Senior Notes was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $250 million from PartnerRe Finance A LLC and $500 million from PartnerRe Finance B LLC at June 30, 2015 and December 31, 2014; and


•	the fair value of the CENts was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $63 million from PartnerRe Finance II Inc. at June 30, 2015 and December 31, 2014.

The carrying values and fair values of the Senior Notes and CENts at June 30, 2015 and December 31, 2014 were as follows (in thousands of U.S. dollars):



	June 30, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
Debt related to Senior Notes ⁽¹⁾	$	750,000	$	839,877	$	750,000	$	853,792
Debt related to CENts ⁽²⁾	63,384		62,515		63,384		62,309


(1)	PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the Senior Notes, do not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $750 million in its Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014.


(2)	PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014.

At June 30, 2015 and December 31, 2014, the Company’s debt related to the Senior Notes and CENts was classified as Level 2 in the fair value hierarchy.

Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments.