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 common and preferred equities; certain fixed income mutual funds; notes and loan receivables; foreign exchange forward contracts and over-the-counter derivatives such as foreign currency option contracts, 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 March 31, 2016 and December 31, 2015, 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):



March 31, 2016	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	$	—		$	2,794,761		$	—		$	2,794,761
U.S. states, territories and municipalities	—			639,799			140,573			780,372
Non-U.S. sovereign government, supranational and government related	—			1,197,012			—			1,197,012
Corporate	—			4,977,795			—			4,977,795
Asset-backed securities	—			657,827			374,489			1,032,316
Residential mortgage-backed securities	—			2,189,843			—			2,189,843
Other mortgage-backed securities	—			47,915			—			47,915
Fixed maturities	$	—		$	12,504,952		$	515,062		$	13,020,014
Short-term investments	$	—		$	33,555		$	—		$	33,555
Equities
Finance	$	18,326		$	4,466		$	21,409		$	44,201
Consumer noncyclical	41,544			—			—			41,544
Insurance	27,382			2,651			—			30,033
Technology	21,366			—			6,984			28,350
Industrials	25,390			—			—			25,390
Consumer cyclical	25,191			—			—			25,191
Communications	21,109			—			2,037			23,146
Other	34,094			—			—			34,094
Mutual funds and exchange traded funds	70,142			—			2,336			72,478
Equities	$	284,544		$	7,117		$	32,766		$	324,427
Other invested assets
Derivative assets
Foreign exchange forward contracts	$	—		$	15,119		$	—		$	15,119
Foreign currency option contracts	—			1,977			—			1,977
Futures contracts	5,588			—			—			5,588
Insurance-linked securities	—			—			9,491			9,491
Total return swaps	—			—			2,953			2,953
TBAs	—			1,619			—			1,619
Other
Notes and loan receivables and notes securitization	—			1,000			175,970			176,970
Annuities and residuals	—			—			9,116			9,116
Private equities	—			—			71,899			71,899
Derivative liabilities
Foreign exchange forward contracts	—			(4,258		)	—			(4,258		)
Futures contracts	(1,441		)	—			—			(1,441		)
Insurance-linked securities	—			—			(5,830		)	(5,830		)
Total return swaps	—			—			(2,999		)	(2,999		)
Interest rate swaps	—			(25,280		)	—			(25,280		)
Other invested assets	$	4,147		$	(9,823	)	$	260,600		$	254,924
Funds held – directly managed
U.S. government and government sponsored enterprises	$	—		$	199,258		$	—		$	199,258
Non-U.S. sovereign government, supranational and government related	—			126,363			—			126,363
Corporate	—			90,624			—			90,624
Other invested assets	—			—			10,292			10,292
Funds held – directly managed	$	—		$	416,245		$	10,292		$	426,537
Total	$	288,691		$	12,952,046		$	818,720		$	14,059,457



December 31, 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	$	—		$	2,872,845		$	—		$	2,872,845
U.S. states, territories and municipalities	—			639,479			138,847			778,326
Non-U.S. sovereign government, supranational and government related	—			1,332,925			—			1,332,925
Corporate	—			5,086,199			—			5,086,199
Asset-backed securities	—			668,117			369,699			1,037,816
Residential mortgage-backed securities	—			2,290,640			—			2,290,640
Other mortgage-backed securities	—			49,511			—			49,511
Fixed maturities	$	—		$	12,939,716		$	508,546		$	13,448,262
Short-term investments	$	—		$	46,688		$	—		$	46,688
Equities
Insurance	$	72,226		$	7,799		$	—		$	80,025
Finance	29,422			5,497			22,760			57,679
Real estate investment trusts	46,379			—			—			46,379
Consumer noncyclical	43,375			—			—			43,375
Industrials	26,863			7,401			—			34,264
Technology	21,177			—			8,207			29,384
Consumer cyclical	25,871			—			—			25,871
Communications	20,939			—			1,985			22,924
Other	28,197			—			—			28,197
Mutual funds and exchange traded funds	71,159			—			4,604			75,763
Equities	$	385,608		$	20,697		$	37,556		$	443,861
Other invested assets
Derivative assets
Foreign exchange forward contracts	$	—		$	15,311		$	—		$	15,311
Futures contracts	5,675			—			—			5,675
Insurance-linked securities	—			—			9,428			9,428
Total return swaps	—			—			2,745			2,745
Other
Notes and loan receivables and notes securitization	—			—			125,922			125,922
Annuities and residuals	—			—			8,436			8,436
Private equities	—			—			71,298			71,298
Derivative liabilities
Foreign exchange forward contracts	—			(15,109		)	—			(15,109		)
Futures contracts	(140		)	—			—			(140		)
Insurance-linked securities	—			—			(3,944		)	(3,944		)
Total return swaps	—			—			(2,878		)	(2,878		)
Interest rate swaps	—			(24,383		)	—			(24,383		)
TBAs	—			(1,462		)	—			(1,462		)
Other invested assets	$	5,535		$	(25,643	)	$	211,007		$	190,899
Funds held – directly managed
U.S. government and government sponsored enterprises	$	—		$	169,951		$	—		$	169,951
Non-U.S. sovereign government, supranational and government related	—			119,487			—			119,487
Corporate	—			99,349			—			99,349
Short-term investments	—			966			—			966
Other invested assets	—			—			10,146			10,146
Funds held – directly managed	$	—		$	389,753		$	10,146		$	399,899
Total	$	391,143		$	13,371,211		$	767,255		$	14,529,609

At March 31, 2016 and December 31, 2015, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $203.8 million and $208.3 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 $426.5 million and $399.9 million at March 31, 2016 and December 31, 2015, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $39.0 million and $64.6 million, respectively, and accrued investment income of $4.4 million and $4.5 million, respectively. At March 31, 2016 and December 31, 2015, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $109.7 million and $70.7 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, 2015).

At March 31, 2016 and December 31, 2015, 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 ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31, 2015, 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 March 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):



For the three months ended March 31, 2016	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	$	138,847	$	1,876		$	—	$	(150	)	$	—	$	140,573	$	1,876
Asset-backed securities	369,699		7,110			21,835		(24,155		)	—		374,489		7,163
Fixed maturities	$	508,546	$	8,986		$	21,835	$	(24,305	)	$	—	$	515,062	$	9,039
Equities
Finance	$	22,760	$	(1,351	)	$	—	$	—		$	—	$	21,409	$	(1,351	)
Technology	8,207		(1,223		)	—		—			—		6,984		(1,223		)
Communications	1,985		52			—		—			—		2,037		52
Mutual funds and exchange traded funds	4,604		(48		)	—		(2,220		)	—		2,336		(781		)
Equities	$	37,556	$	(2,570	)	$	—	$	(2,220	)	$	—	$	32,766	$	(3,303	)
Other invested assets
Derivatives, net	$	5,351	$	(810	)	$	414	$	(1,340	)	$	—	$	3,615	$	(1,310	)
Notes and loan receivables and notes securitization	125,922		2,535			50,377		(2,864		)	—		175,970		2,535
Annuities and residuals	8,436		1,266			—		(586		)	—		9,116		1,266
Private equities	71,298		(481		)	1,940		(858		)	—		71,899		(481		)
Other invested assets	$	211,007	$	2,510		$	52,731	$	(5,648	)	$	—	$	260,600	$	2,010
Funds held – directly managed
Other invested assets	10,146		146			—		—			—		10,292		146
Funds held – directly managed	$	10,146	$	146		$	—	$	—		$	—	$	10,292	$	146
Total	$	767,255	$	9,072		$	74,566	$	(32,173	)	$	—	$	818,720	$	7,892


(1)	Purchases and issuances of derivatives include issuances of $0.4 million.


(2)	Settlements and sales of mutual funds and exchange traded funds include sales of $2.2 million during the three months ended March 31, 2016.



For the three months ended March 31, 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		$	(1,861	)	$	—	$	(184	)	$	—	$	147,683		$	(1,863	)
Asset-backed securities	449,918			1,261			43,422		(43,018		)	—		451,583			1,293
Fixed maturities	$	599,646		$	(600	)	$	43,422	$	(43,202	)	$	—	$	599,266		$	(570	)
Equities
Finance	$	20,353		$	179		$	—	$	—		$	—	$	20,532		$	179
Technology	8,555			47			—		—			—		8,602			47
Communications	2,640			83			—		—			—		2,723			83
Mutual funds and exchange traded funds	8,586			51			249,340		—			—		257,977			51
Equities	$	40,134		$	360		$	249,340	$	—		$	—	$	289,834		$	360
Other invested assets
Derivatives, net	$	(1,858	)	$	481		$	—	$	—		$	—	$	(1,377	)	$	481
Notes and loan receivables and notes securitization	44,817			1,104			6,411		(1,229		)	—		51,103			2,623
Annuities and residuals	13,243			231			—		(1,319		)	—		12,155			231
Private equities	59,872			497			5,184		(911		)	—		64,642			497
Other invested assets	$	116,074		$	2,313		$	11,595	$	(3,459	)	$	—	$	126,523		$	3,832
Funds held – directly managed
U.S. states, territories and municipalities	$	132		$	—		$	—	$	—		$	—	$	132		$	—
Other invested assets	13,398			(1,390		)	—		—			—		12,008			(1,390		)
Funds held – directly managed	$	13,530		$	(1,390	)	$	—	$	—		$	—	$	12,140		$	(1,390	)
Total	$	769,384		$	683		$	304,357	$	(46,661	)	$	—	$	1,027,763		$	2,232


(1)	There were no issuances or sales during the three months ended March 31, 2015.

The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at March 31, 2016 and December 31, 2015 were as follows (fair value in thousands of U.S. dollars):



March 31, 2016	Fair value			Valuation techniques	Unobservable inputs	Range (Weighted average)
Fixed maturities
U.S. states, territories and municipalities	$	140,573		Discounted cash flow	Credit spreads	1.8% -10.5% (6.0%)
Asset-backed securities	374,489			Discounted cash flow	Credit spreads	4.1% – 11.1% (7.8%)
Equities
Finance	15,172			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	-8.5% (-8.5%)
Finance	6,237			Profitability analysis	Projected return on equity	11.0% (11.0%)
Technology	6,984			Weighted market comparables	Revenue multiple	1.1 (1.1)
				Weighted market comparables	Adjusted earnings multiple	6.7 (6.7)
Communications	2,037			Weighted market comparables	Adjusted earnings multiple	9.4 (9.4)
				Weighted market comparables	Comparable return	2.6% (2.6%)
Other invested assets
Total return swaps, net	(46		)	Discounted cash flow	Credit spreads	3.2% – 29.8% (16.7%)
Insurance-linked securities – longevity swaps	9,491			Discounted cash flow	Credit spreads	2.9% (2.9%)
Notes and loan receivables	134,108			Discounted cash flow	Credit spreads	4.4% - 29.1% (5.5%)
Notes and loan receivables	10,426			Discounted cash flow	Credit spreads	17.5% (17.5%)
Notes and loan receivables				Discounted cash flow	Gross revenue/fair value	1.0 – 1.5 (1.5)
Notes securitization	31,436			Discounted cash flow	Credit spreads	3.0% – 7.2% (6.9%)
Annuities and residuals	9,116			Discounted cash flow	Credit spreads	5.4% – 11.2% (10.1%)
					Prepayment speed	0% – 15.0% (1.4%)
					Constant default rate	0.3% – 17.5% (3.4%)
Private equity – direct	7,978			Discounted cash flow and weighted market comparables	Net income multiple	8.4 (8.4)
					Tangible book value multiple	1.9 (1.9)
					Recoverability of intangible assets	0% (0%)
Private equity funds	31,495			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-5.6% – 6.4% (0.3%)
Private equity – other	32,426			Discounted cash flow	Effective yield	5.8% (5.8%)
Funds held – directly managed
Other invested assets	10,292			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-18.5% – 0% (-17.0%)



December 31, 2015	Fair value			Valuation techniques	Unobservable inputs	Range (Weighted average)
Fixed maturities
U.S. states, territories and municipalities	$	138,847		Discounted cash flow	Credit spreads	1.2% – 10.3% (4.1%)
Asset-backed securities	369,699			Discounted cash flow	Credit spreads	4.1% – 11.4% (7.7%)
Equities
Finance	16,627			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	7.9% (7.9%)
Finance	6,133			Profitability analysis	Projected return on equity	14.0% (14.0%)
Technology	8,207			Weighted market comparables	Revenue multiple	1.2 (1.2)
				Weighted market comparables	Adjusted earnings multiple	8.4 (8.4)
Communications	1,985			Weighted market comparables	Adjusted earnings multiple	9.4 (9.4)
				Weighted market comparables	Comparable return	0% (0%)
Other invested assets
Total return swaps, net	(133		)	Discounted cash flow	Credit spreads	3.0% – 29.3% (16.5%)
Insurance-linked securities – longevity swaps	9,428			Discounted cash flow	Credit spreads	2.4% (2.4%)
Notes and loan receivables	84,080			Discounted cash flow	Credit spreads	6.0% – 26.8% (7.4%)
Notes and loan receivables	10,415			Discounted cash flow	Credit spreads	17.5% (17.5%)
				Discounted cash flow	Gross revenue/fair value	1.1 – 1.5 (1.5)
Notes securitization	31,427			Discounted cash flow	Credit spreads	2.4% – 7.1% (6.9%)
Annuities and residuals	8,436			Discounted cash flow	Credit spreads	5.1% – 15.4% (12.7%)
					Prepayment speed	0% – 15.0% (2.1%)
					Constant default rate	0.3% – 17.5% (4.4%)
Private equity – direct	8,792			Discounted cash flow and weighted market comparables	Net income multiple	9.2 (9.2)
					Tangible book value multiple	1.9 (1.9)
					Recoverability of intangible assets	0% (0%)
Private equity funds	29,222			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-4.9% – 5.2% (-0.5%)
Private equity – other	33,284			Discounted cash flow	Effective yield	5.8% (5.8%)
Funds held – directly managed
Other invested assets	10,146			Reported market value	Net asset value, as reported	100.0% (100.0%)
				Reported market value	Market adjustments	-16.0% – 0% (-15.0%)

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 procedures, reviewing significant changes in the fair value measurements of securities classified as Level 3 from period to period, and ensuring that there is an appropriate independent internal peer analysis 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 Group Enterprise Risk Management Financial Risk Policy, which covers, among other items, invested asset valuation, is monitored by the Company’s Audit Committee of the Board of Directors (Board) and approved annually by the Company’s Board.

Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months ended March 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):



	For the three months ended
	March 31, 2016			March 31, 2015
Fixed maturities and short-term investments	$	211,916		$	76,971
Equities	(27,483		)	(7,016		)
Other invested assets	2,225			1,833
Funds held – directly managed	4,951			2,540
Total	$	191,609		$	74,328

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 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 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.

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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 securities, 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.

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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.

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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, certain common and preferred equities. 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, 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 March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015; 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 March 31, 2016 and December 31, 2015.

The carrying values and fair values of the Senior Notes and CENts at March 31, 2016 and December 31, 2015 were as follows (in thousands of U.S. dollars):



	March 31, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
Debt related to Senior Notes ⁽¹⁾	$	750,000	$	842,521	$	750,000	$	829,755
Debt related to CENts ⁽²⁾	63,384		64,394		63,384		63,265


(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 March 31, 2016 and December 31, 2015.


(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 March 31, 2016 and December 31, 2015.

At March 31, 2016 and December 31, 2015, 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.