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 listed on a major exchange, exchange traded funds and exchange traded derivatives, such as futures and certain weather derivatives 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 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. Treasury bonds; U.S. Government Sponsored Entities bonds; Organization for Economic Co-operation and Development Sovereign Treasury bonds; investment grade and high yield corporate bonds; catastrophe bonds; mortality bonds; mortgage-backed securities; asset-backed securities; certain fixed income mutual funds; foreign exchange forward contracts and over-the-counter derivatives such as foreign currency option contracts, equity put and call options, credit default swaps, non-exchange traded futures and interest rate swaps.

The Company's financial instruments that it measures at fair value using Level 3 inputs generally include: unlisted equities; inactively traded fixed maturities including bonds issued by U.S. domiciled state and municipal entities, privately issued corporate securities and special purpose financing asset-backed bonds; real estate mutual fund investments; inactively traded weather derivatives; notes receivable and total return swaps.

The Company's financial instruments measured at fair value include investments classified as trading securities, certain other invested assets and the segregated investment portfolio underlying the funds held – directly managed account. At June 30, 2011 and December 31, 2010, the Company's financial instruments measured at fair value were categorized between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):

			Quoted prices in				Significant
			active markets for		Significant other		unobservable
			identical assets		observable inputs		inputs
June 30, 2011			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and agencies		$	—	$	1,486,790	$	86,782	$	1,573,572
	Non-U.S. sovereign government,
		supranational and government related		—		3,258,355		—		3,258,355
	Corporate			—		5,713,985		116,428		5,830,413
	Asset-backed securities			—		394,046		261,843		655,889
	Residential mortgage-backed securities			—		2,999,005		—		2,999,005
	Other mortgage-backed securities			—		89,710		1		89,711
Fixed maturities			$	—	$	13,941,891	$	465,054	$	14,406,945
Short-term investments			$	—	$	212,769	$	2,923	$	215,692
Equities
	Consumer noncyclical		$	138,638	$	178	$	—	$	138,816
	Energy			96,782		1,051		—		97,833
	Finance			89,054		617		163		89,834
	Technology			78,939		—		—		78,939
	Communications			76,188		33		—		76,221
	Industrials			71,405		—		—		71,405
	Consumer cyclical			57,087		86		—		57,173
	Insurance			38,447		—		—		38,447
	Other			70,343		408		—		70,751
	Mutual funds and exchange traded funds			58,736		210,216		6,542		275,494
Equities			$	775,619	$	212,589	$	6,705	$	994,913
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	—	$	11,634	$	—	$	11,634
		Foreign currency option contracts		—		2,921		—		2,921
		Futures contracts		6,179		219		—		6,398
		Credit default swaps (protection purchased)		—		4		—		4
		Credit default swaps (assumed risks)		—		906		—		906
		Insurance-linked securities		23		—		251		274
		Total return swaps		—		379		4,306		4,685
		Interest rate swaps		—		52		—		52
	Other assets			—		—		74,018		74,018
	Derivative liabilities
		Foreign exchange forward contracts		—		(4,512)		—		(4,512)
		Foreign currency option contracts		—		(470)		—		(470)
		Futures contracts		(19,126)		(487)		—		(19,613)
		Credit default swaps (protection purchased)		—		(2,162)		—		(2,162)
		Insurance-linked securities		(493)		—		(14,633)		(15,126)
		Total return swaps		—		—		(11,459)		(11,459)
		Interest rate swaps		—		(5,203)		—		(5,203)
	Other liabilities			—		(1,570)		—		(1,570)
Other invested assets			$	(13,417)	$	1,711	$	52,483	$	40,777
Funds held – directly managed
	U.S. government and agencies		$	—	$	230,481	$	355	$	230,836
	Non-U.S. sovereign government,
		supranational and government related		—		313,284		—		313,284
	Corporate			—		550,644		—		550,644
	Short-term investments			—		42,330		—		42,330
	Other invested assets			—		—		21,720		21,720
Funds held – directly managed			$	—	$	1,136,739	$	22,075	$	1,158,814
Total			$	762,202	$	15,505,699	$	549,240	$	16,817,141

			Quoted prices in				Significant
			active markets for		Significant other		unobservable
			identical assets		observable inputs		inputs
December 31, 2010			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and agencies		$	—	$	917,600	$	55,124	$	972,724
	Non-U.S. sovereign government,
		supranational and government related		—		2,819,193		—		2,819,193
	Corporate			—		6,066,865		76,982		6,143,847
	Asset-backed securities			—		343,518		213,139		556,657
	Residential mortgage-backed securities			—		2,305,525		—		2,305,525
	Other mortgage-backed securities			—		26,153		290		26,443
Fixed maturities			$	—	$	12,478,854	$	345,535	$	12,824,389
Short-term investments			$	—	$	49,397	$	—	$	49,397
Equities
	Consumer noncyclical		$	186,016	$	—	$	—	$	186,016
	Technology			119,214		—		—		119,214
	Energy			118,372		—		—		118,372
	Finance			112,309		—		2,486		114,795
	Communications			110,982		—		—		110,982
	Industrials			100,572		—		—		100,572
	Consumer cyclical			81,595		—		—		81,595
	Insurance			48,611		—		—		48,611
	Other			90,220		—		—		90,220
	Mutual funds and exchange traded funds			60,372		—		40,927		101,299
Equities			$	1,028,263	$	—	$	43,413	$	1,071,676
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	—	$	27,880	$	—	$	27,880
		Foreign currency option contracts		—		3,516		—		3,516
		Futures contracts		30,593		—		—		30,593
		Credit default swaps (protection purchased)		—		93		—		93
		Credit default swaps (assumed risks)		—		533		—		533
		Insurance-linked securities		1,320		—		—		1,320
		Total return swaps		—		449		5,592		6,041
		Interest rate swaps		—		246		—		246
	Other assets			—		—		86,278		86,278
	Derivative liabilities
		Foreign exchange forward contracts		—		(13,647)		—		(13,647)
		Futures contracts		(7,956)		—		—		(7,956)
		Credit default swaps (protection purchased)		—		(2,407)		—		(2,407)
		Credit default swaps (assumed risks)		—		(401)		—		(401)
		Insurance-linked securities		(695)		—		(698)		(1,393)
		Total return swaps		—		—		(12,848)		(12,848)
		Interest rate swaps		—		(6,033)		—		(6,033)
	Other liabilities			—		(441)		—		(441)
Other invested assets			$	23,262	$	9,788	$	78,324	$	111,374
Funds held – directly managed
	U.S. government and agencies		$	—	$	288,164	$	368	$	288,532
	Non-U.S. sovereign government,
		supranational and government related		—		384,553		—		384,553
	Corporate			—		798,587		—		798,587
	Mortgage/asset-backed securities			—		—		12,118		12,118
	Short-term investments			—		38,613		—		38,613
	Other invested assets			—		—		20,528		20,528
Funds held – directly managed			$	—	$	1,509,917	$	33,014	$	1,542,931
Total			$	1,051,525	$	14,047,956	$	500,286	$	15,599,767

At June 30, 2011 and December 31, 2010, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $297.6 million and $241.0 million, respectively, which related to the Company's investments that are accounted for using the cost method of accounting, equity method of accounting or investment company accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $1,158.8 million and $1,542.9 million at June 30, 2011 and December 31, 2010, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $149.3 million and $129.2 million, respectively, and accrued investment income of $14.9 million and $19.9 million, respectively. At June 30, 2011 and December 31, 2010, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $56.5 million and $80.1 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, 2010).

At June 30, 2011 and December 31, 2010, substantially all of the accrued investment income in the Unaudited Condensed Consolidated Balance Sheets related 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, 2011, there were no significant transfers between Levels 1 and 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, 2011 and December 31, 2010, the fair values of financial instrument assets recorded in the Unaudited Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

The following tables are 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, 2011 and 2010 (in thousands of U.S. dollars):

															Change in
						Realized and										unrealized
						unrealized										investment
						investment						Net				gains (losses)
				Balance at		gains (losses)						transfers		Balance		relating to
For the three months ended			beginning		included in						(out of)/into		at end		assets held at
June 30, 2011			of period		net income		Purchases		Sales		Level 3 ^(a)		of period		end of period
Fixed maturities
	U.S. government and agencies		$	55,929	$	819	$	30,064	$	(30)	$	—	$	86,782	$	819
	Corporate			115,107		2,049		84		(812)		—		116,428		2,049
	Asset-backed securities			262,408		7,707		47,130		(55,402)		—		261,843		(2,660)
	Residential mortgage-backed
		securities		4,301		846		—		(5,147)		—		—		—
	Other mortgage-backed securities			576		(191)		—		(384)		—		1		(166)
Fixed maturities			$	438,321	$	11,230	$	77,278	$	(61,775)	$	—	$	465,054	$	42
Short-term investments			$	1,204	$	(730)	$	2,449	$	—	$	—	$	2,923	$	(730)
Equities
	Finance		$	161	$	2	$	—	$	—	$	—	$	163	$	2
	Mutual funds and exchange
		traded funds		41,451		594		—		(35,503)		—		6,542		(804)
Equities			$	41,612	$	596	$	—	$	(35,503)	$	—	$	6,705	$	(802)
Other invested assets
	Derivatives, net		$	(17,042)	$	322	$	(4,815)	$	—	$	—	$	(21,535)	$	234
	Other			84,662		(1,303)		3,568		(12,909)		—		74,018		(1,016)
Other invested assets			$	67,620	$	(981)	$	(1,247)	$	(12,909)	$	—	$	52,483	$	(782)
Funds held – directly managed
	U.S. government and agencies		$	366	$	(11)	$	—	$	—	$	—	$	355	$	(11)
	Other invested assets			22,456		(736)		—		—		—		21,720		(736)
Funds held – directly managed			$	22,822	$	(747)	$	—	$	—	$	—	$	22,075	$	(747)
Total			$	571,579	$	9,368	$	78,480	$	(110,187)	$	—	$	549,240	$	(3,019)
____________
(a) The Company’s policy is to recognize the transfers between the hierarchy levels at the beginning of the period.

				Realized and								Change in
					unrealized								unrealized
					investment		Net		Net				investment gains
			Balance at		gains (losses)		purchases,		transfers		Balance		(losses) relating
For the three months ended		beginning		included in		sales and		(out of)/into		at end of		to assets held
June 30, 2010		of period		net income		settlements		Level 3 ^(a)		period		at end of period
Fixed maturities
	U.S. government and agencies	$	9,720	$	272	$	7	$	—	$	9,999	$	272
	Corporate		10,057		300		5,080		—		15,437		300
	Asset-backed securities		84,984		7,359		133,615		—		225,958		7,359
	Residential mortgage-backed securities		95,029		—		(95,029)		—		—		—
	Other mortgage-backed securities		811		123		(80)		—		854		123
Fixed maturities		$	200,601	$	8,054	$	43,593	$	—	$	252,248	$	8,054
Equities
	Finance	$	2,459	$	(1,039)	$	695	$	—	$	2,115	$	(1,039)
	Mutual funds and exchange traded funds		35,670		(1,058)		5,000		—		39,612		(1,058)
Equities		$	38,129	$	(2,097)	$	5,695	$	—	$	41,727	$	(2,097)
Other invested assets
	Derivatives, net	$	(7,998)	$	1,772	$	(8,353)	$	—	$	(14,579)	$	1,772
	Other		25,918		(253)		24,624		—		50,289		(253)
Other invested assets		$	17,920	$	1,519	$	16,271	$	—	$	35,710	$	1,519
Funds held – directly managed
	U.S. government and agencies	$	204	$	153	$	—	$	—	$	357	$	153
	Mortgage/asset-backed securities		13,260		(683)		—		—		12,577		(683)
	Other invested assets		30,348		(3,523)		—		—		26,825		(3,523)
Funds held – directly managed		$	43,812	$	(4,053)	$	—	$	—	$	39,759	$	(4,053)
Total		$	300,462	$	3,423	$	65,559	$	—	$	369,444	$	3,423

During the three months ended June 30, 2011 and 2010, there were no transfers into or out of Level 3.

The following tables are 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, 2011 and 2010 (in thousands of U.S. dollars):

															Change in
						Realized and										unrealized
						unrealized										investment
						investment						Net				gains (losses)
				Balance at		gains (losses)						transfers		Balance		relating to
For the six months ended			beginning		included in						into		at end		assets held at
June 30, 2011			of period		net loss		Purchases		Sales		Level 3 ^(a)		of period		end of period
Fixed maturities
	U.S. government and agencies		$	55,124	$	1,624	$	30,064	$	(30)	$	—	$	86,782	$	1,624
	Corporate			76,982		(37,066)		40,878		(4,546)		40,180		116,428		2,368
	Asset-backed securities			213,139		10,678		101,644		(63,618)		—		261,843		4,257
	Residential mortgage-backed
		securities		—		1,385		4,212		(5,597)		—		—		—
	Other mortgage-backed securities			290		(224)		408		(473)		—		1		(203)
Fixed maturities			$	345,535	$	(23,603)	$	177,206	$	(74,264)	$	40,180	$	465,054	$	8,046
Short-term investments			$	—	$	(1,069)	$	3,992	$	—	$	—	$	2,923	$	(1,069)
Equities
	Finance		$	2,486	$	239	$	—	$	(2,562)	$	—	$	163	$	13
	Mutual funds and exchange
		traded funds		40,927		1,242		—		(35,627)		—		6,542		(382)
Equities			$	43,413	$	1,481	$	—	$	(38,189)	$	—	$	6,705	$	(369)
Other invested assets
	Derivatives, net		$	(7,954)	$	(8,803)	$	(4,778)	$	—	$	—	$	(21,535)	$	(8,893)
	Other			86,278		(3,207)		6,548		(15,601)		—		74,018		(2,497)
Other invested assets			$	78,324	$	(12,010)	$	1,770	$	(15,601)	$	—	$	52,483	$	(11,390)
Funds held – directly managed
	U.S. government and agencies		$	368	$	(13)	$	—	$	—	$	—	$	355	$	(13)
	Mortgage/asset-backed securities			12,118		(150)		—		(11,968)		—		—		—
	Other invested assets			20,528		1,192		—		—		—		21,720		1,192
Funds held – directly managed			$	33,014	$	1,029	$	—	$	(11,968)	$	—	$	22,075	$	1,179
Total			$	500,286	$	(34,172)	$	182,968	$	(140,022)	$	40,180	$	549,240	$	(3,603)

					Realized and								Change in
						unrealized								unrealized
						investment		Net		Net				investment gains
				Balance at		gains (losses)		purchases,		transfers		Balance		(losses) relating
For the six months ended			beginning		included in		sales and		(out of)/into		at end of		to assets held
June 30, 2010			of period		net income		settlements		Level 3 ^(a)		period		at end of period
Fixed maturities
	U.S. government and agencies		$	4,286	$	272	$	9,727	$	(4,286)	$	9,999	$	272
	Corporate			15,041		423		10,900		(10,927)		15,437		423
	Asset-backed securities			99,952		4,601		124,305		(2,900)		225,958		4,576
	Residential mortgage-backed securities			77,440		191		(77,631)		—		—		—
	Other mortgage-backed securities			874		153		(173)		—		854		153
Fixed maturities			$	197,593	$	5,640	$	67,128	$	(18,113)	$	252,248	$	5,424
Equities
	Finance		$	2,488	$	(1,068)	$	695	$	—	$	2,115	$	(1,068)
	Industrials			805		(84)		(721)		—		—		—
	Mutual funds and exchange traded funds			34,810		(198)		5,000		—		39,612		(198)
Equities			$	38,103	$	(1,350)	$	4,974	$	—	$	41,727	$	(1,266)
Other invested assets
	Derivatives, net		$	(9,361)	$	4,315	$	(17,699)	$	8,166	$	(14,579)	$	2,490
	Other			25,815		(169)		24,643		—		50,289		(169)
Other invested assets			$	16,454	$	4,146	$	6,944	$	8,166	$	35,710	$	2,321
Funds held – directly managed
	U.S. government and agencies		$	375	$	(18)	$	—	$	—	$	357	$	(18)
	Non-U.S. sovereign government,
		supranational and government related		3,417		(13)		(3,404)		—		—		—
	Mortgage/asset-backed securities			142		(4,431)		—		16,866		12,577		(4,426)
	Other invested assets			35,685		(8,860)		—		—		26,825		(8,860)
Funds held – directly managed			$	39,619	$	(13,322)	$	(3,404)	$	16,866	$	39,759	$	(13,304)
Total			$	291,769	$	(4,886)	$	75,642	$	6,919	$	369,444	$	(6,825)

During the six months ended June 30, 2011, a catastrophe bond (included within corporate fixed maturities) with a fair value of $40.2 million was transferred from Level 2 into Level 3. The transfer into Level 3 was due to the lack of observable market inputs at March 31, 2011, leading the Company to apply inputs that were not directly observable. The catastrophe bond matured during the three months ended June 30, 2011.

During the six months ended June 30, 2010, certain fixed maturities with a fair value of $18.1 million were transferred from Level 3 into Level 2. The reclassifications to Level 2 consisted of municipal (included within U.S. government and agencies), corporate and student loans (included within asset-backed securities) fixed maturities. The transfers into Level 2 were due to the availability of quoted prices for similar assets in active markets used for valuation as of June 30, 2010, resulting from the continued recovery of the financial markets. In addition, during the six months ended June 30, 2010, certain derivatives with a fair value in a net liability position of $8.2 million were transferred out of Level 3 into Level 2 due to the availability of observable inputs.

During the six months ended June 30, 2010, certain fixed maturities within the investments underlying the funds held – directly managed account with a fair value of $16.9 million were transferred from Level 2 into Level 3. The reclassification into Level 3 consisted of asset-backed securities and residential and commercial mortgage-backed securities. The transfers into Level 3 were the result of the lack of observable market inputs, leading the Company to apply inputs that were not directly observable.

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, 2011 and 2010, respectively, were as follows (in thousands of U.S. dollars):

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

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

• U.S. government and agencies — U.S. government and agencies securities consist primarily of bonds issued by the U.S. Treasury, corporate debt securities issued by the Federal National Mortgage Association, the Federal Home Loan Bank and other U.S. agencies as well as bonds issued by U.S. domiciled state and municipal entities. 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. Certain of the U.S. domiciled states and municipal investments issued by municipal housing authorities are not actively traded and are priced based on internal models using unobservable inputs. Accordingly, the Company classifies these securities in Level 3.

• 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 agencies above. The Company generally classifies these securities in Level 2.

• Corporate — Corporate securities consist primarily of U.S. and foreign corporations covering a variety of industries. 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 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, including cash flow assumptions and credit spreads. The Company generally classifies these securities in Level 3.

• 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. With the exception of 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 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. Bonds issued by private, non-agency issuers are generally inactively traded and are priced based on valuation models using unobservable inputs, including cash flow assumptions and credit spreads. The Company generally classifies these securities in Level 3.

• 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. When a commercial mortgage-backed security is inactively traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3.

In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not actively traded 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 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 categorize that security as Level 3. 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 are valued in a manner similar to the Company's fixed maturity investments and are generally classified in Level 2. Special purpose financing securities purchased with less than 12 months to maturity are generally inactively traded and are priced based on valuation models using unobservable inputs, including cash flow assumptions and credit spreads. The Company generally classifies these securities in Level 3.

Equity securities include U.S. and foreign common and preferred stocks, exchange traded funds and mutual funds. Equities 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 categorized 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 categorized 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.

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.

The Company's exchange traded derivatives, such as futures and certain weather derivatives, are generally categorized as Level 1 as their fair values are quoted prices in active markets. The Company's foreign exchange forward contracts, foreign currency option contracts, equity put and call options, interest rate swaps, non-exchange traded futures and credit default swaps are generally categorized as Level 2 within the fair value hierarchy and are priced by independent pricing services.

Included in the Company's Level 3 categorization, in general, are unlisted equities, credit linked notes, certain inactively traded weather derivatives, notes and loans receivable and total return swaps. For Level 3 instruments, the Company will generally either (i) receive a price based on a manager's or trustee's valuation for the asset; or (ii) develop an internal discounted cash flow model to measure fair value. 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. 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 highly rated institutions and the failure of any one counterparty would not have a significant impact on the Company's 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. In addition, the fair value measurements of all Level 3 investments are presented to, and peer reviewed by, an internal valuation committee that the Company has established.

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 categorized 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 categorized 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.

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

Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments. At June 30, 2011 and December 31, 2010, the fair values of financial instrument liabilities recorded in the Unaudited 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 the Senior Notes and CENts did not change from December 31, 2010.

The carrying values and fair values of the Senior Notes and CENts as of June 30, 2011 and December 31, 2010 were as follows (in thousands of U.S. dollars):

(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 Unaudited Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010.

(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 Unaudited Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010.