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 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 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; catastrophe bonds; mortality bonds; asset-backed securities; mortgage-backed securities; certain equities traded on foreign exchanges; certain fixed income mutual funds; foreign exchange forward contracts; over-the-counter derivatives such as foreign currency option contracts, non-exchange traded futures, credit default swaps, total return swaps, interest rate swaps and to-be-announced mortgage-backed securities (TBAs).

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; privately issued corporate securities; special purpose financing asset-backed bonds; unlisted equities; real estate and certain other mutual fund investments; credit-linked notes; inactively traded weather derivatives; notes, annuities, residuals and loans receivable and longevity and other 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 March 31, 2012 and December 31, 2011, 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):

			Quoted prices in				Significant
			active markets for		Significant other		unobservable
			identical assets		observable inputs		inputs
March 31, 2012			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and government sponsored enterprises		$	—	$	1,088,812	$	—	$	1,088,812
	U.S. states, territories and municipalities			—		14,439		115,580		130,019
	Non-U.S. sovereign government,
		supranational and government related		—		3,070,440		—		3,070,440
	Corporate			—		5,954,953		111,951		6,066,904
	Asset-backed securities			—		374,252		264,456		638,708
	Residential mortgage-backed securities			—		3,342,525		—		3,342,525
	Other mortgage-backed securities			—		74,256		—		74,256
Fixed maturities			$	—	$	13,919,677	$	491,987	$	14,411,664
Short-term investments			$	—	$	38,838	$	—	$	38,838
Equities
	Consumer noncyclical		$	99,933	$	120	$	—	$	100,053
	Finance			69,896		283		12,730		82,909
	Technology			68,296		—		—		68,296
	Energy			67,609		23		—		67,632
	Insurance			57,743		—		—		57,743
	Communications			53,219		—		—		53,219
	Industrials			48,430		332		—		48,762
	Consumer cyclical			45,916		98		—		46,014
	Other			60,660		206		—		60,866
	Mutual funds and exchange traded funds			95,503		255,812		6,649		357,964
Equities			$	667,205	$	256,874	$	19,379	$	943,458
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	—	$	5,608	$	—	$	5,608
		Foreign currency option contracts		—		3,338		—		3,338
		Futures contracts		17,393		—		—		17,393
		Credit default swaps (protection purchased)		—		17		—		17
		Credit default swaps (assumed risks)		—		356		—		356
		Total return swaps		—		412		6,531		6,943
	Other assets			—		—		86,535		86,535
	Derivative liabilities
		Foreign exchange forward contracts		—		(2,132)		—		(2,132)
		Futures contracts		(381)		(1,614)		—		(1,995)
		Credit default swaps (protection purchased)		—		(1,464)		—		(1,464)
		Credit default swaps (assumed risks)		—		(102)		—		(102)
		Insurance-linked securities		—		—		(3,528)		(3,528)
		Total return swaps		—		—		(418)		(418)
		Interest rate swaps		—		(7,029)		—		(7,029)
		TBAs		—		(206)		—		(206)
Other invested assets			$	17,012	$	(2,816)	$	89,120	$	103,316
Funds held – directly managed
	U.S. government and government sponsored enterprises		$	—	$	374,744	$	—	$	374,744
	U.S. states, territories and municipalities			—		—		329		329
	Non-U.S. sovereign government,
		supranational and government related		—		290,265		—		290,265
	Corporate			—		460,100		—		460,100
	Short-term investments			—		1,576		—		1,576
	Other invested assets			—		—		17,683		17,683
Funds held – directly managed			$	—	$	1,126,685	$	18,012	$	1,144,697
Total			$	684,217	$	15,339,258	$	618,498	$	16,641,973

			Quoted prices in				Significant
			active markets for		Significant other		unobservable
			identical assets		observable inputs		inputs
December 31, 2011			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and government sponsored enterprises		$	—	$	1,115,777	$	—	$	1,115,777
	U.S. states, territories and municipalities			—		12,269		111,415		123,684
	Non-U.S. sovereign government,
		supranational and government related		—		2,964,091		—		2,964,091
	Corporate			—		5,635,297		111,700		5,746,997
	Asset-backed securities			—		376,384		257,415		633,799
	Residential mortgage-backed securities			—		3,282,901		—		3,282,901
	Other mortgage-backed securities			—		74,580		—		74,580
Fixed maturities			$	—	$	13,461,299	$	480,530	$	13,941,829
Short-term investments			$	—	$	42,571	$	—	$	42,571
Equities
	Consumer noncyclical		$	124,697	$	154	$	—	$	124,851
	Energy			83,403		858		—		84,261
	Finance			69,722		191		9,670		79,583
	Technology			74,729		—		—		74,729
	Communications			64,036		44		—		64,080
	Industrials			58,254		—		—		58,254
	Insurance			58,017		—		—		58,017
	Consumer cyclical			52,305		108		—		52,413
	Other			69,457		239		—		69,696
	Mutual funds and exchange traded funds			35,285		237,027		6,495		278,807
Equities			$	689,905	$	238,621	$	16,165	$	944,691
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	—	$	7,865	$	—	$	7,865
		Foreign currency option contracts		—		1,074		—		1,074
		Futures contracts		13,524		48		—		13,572
		Credit default swaps (protection purchased)		—		92		—		92
		Credit default swaps (assumed risks)		—		246		—		246
		Total return swaps		—		443		7,230		7,673
		TBAs		—		747		—		747
	Other assets			—		—		91,405		91,405
	Derivative liabilities
		Foreign exchange forward contracts		—		(5,816)		—		(5,816)
		Foreign currency option contracts		—		(321)		—		(321)
		Futures contracts		(12,905)		(1,268)		—		(14,173)
		Credit default swaps (protection purchased)		—		(1,285)		—		(1,285)
		Credit default swaps (assumed risks)		—		(772)		—		(772)
		Insurance-linked securities		—		—		(968)		(968)
		Total return swaps		—		—		(640)		(640)
		Interest rate swaps		—		(7,992)		—		(7,992)
		TBAs		—		(58)		—		(58)
	Other liabilities			—		(137)		—		(137)
Other invested assets			$	619	$	(7,134)	$	97,027	$	90,512
Funds held – directly managed
	U.S. government and government sponsored enterprises		$	—	$	268,539	$	—	$	268,539
	U.S. states, territories and municipalities			—		—		334		334
	Non-U.S. sovereign government,
		supranational and government related		—		274,665		—		274,665
	Corporate			—		480,485		—		480,485
	Short-term investments			—		18,097		—		18,097
	Other invested assets			—		—		15,433		15,433
Funds held – directly managed			$	—	$	1,041,786	$	15,767	$	1,057,553
Total			$	690,524	$	14,777,143	$	609,489	$	16,077,156

At March 31, 2012 and December 31, 2011, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $257.6 million and $267.6 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 $1,144.7 million and $1,057.6 million at March 31, 2012 and December 31, 2011, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $46.6 million and $176.3 million, respectively, and accrued investment income of $14.6 million and $13.7 million, respectively. At March 31, 2012 and December 31, 2011, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $58.5 million and $20.4 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/A for the year ended December 31, 2011).

At March 31, 2012 and December 31, 2011, 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 ended March 31, 2012, there were no transfers between Level 1 and Level 2. During the three months ended March 31, 2011, there were no significant 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, 2012 and December 31, 2011, 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 March 31, 2012 and 2011 (in thousands of U.S. dollars):

															Change in
						Realized and										unrealized
						unrealized										investment
						investment						Net				(losses) gains
				Balance at		(losses) gains		Purchases		Sales		transfers		Balance		relating to
For the three months ended			beginning		included in		and		and		into		at end		assets held at
March 31, 2012			of period		net income		issuances ⁽¹⁾		settlements		Level 3 ⁽²⁾		of period		end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	111,415	$	(462)	$	4,700	$	(73)	$	—	$	115,580	$	(462)
	Corporate			111,700		327		48		(124)		—		111,951		327
	Asset-backed securities			257,415		(1,319)		50,120		(41,760)		—		264,456		(1,264)
Fixed maturities			$	480,530	$	(1,454)	$	54,868	$	(41,957)	$	—	$	491,987	$	(1,399)
Equities
	Finance		$	9,670	$	3,060	$	—	$	—	$	—	$	12,730	$	3,060
	Mutual funds and exchange
		traded funds		6,495		154		—		—		—		6,649		154
Equities			$	16,165	$	3,214	$	—	$	—	$	—	$	19,379	$	3,214
Other invested assets
	Derivatives, net		$	5,622	$	263	$	(3,300)	$	—	$	—	$	2,585	$	263
	Other assets			91,405		3,829		29,729		(38,428)		—		86,535		5,724
Other invested assets			$	97,027	$	4,092	$	26,429	$	(38,428)	$	—	$	89,120	$	5,987
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	334	$	(5)	$	—	$	—	$	—	$	329	$	(5)
	Other invested assets			15,433		2,250		—		—		—		17,683		2,250
Funds held – directly managed			$	15,767	$	2,245	$	—	$	—	$	—	$	18,012	$	2,245
Total			$	609,489	$	8,097	$	81,297	$	(80,385)	$	—	$	618,498	$	10,047

(2) 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				investment gains
				Balance at		gains (losses)		Purchases				transfers		Balance		(losses) relating
For the three months ended			beginning		included in		and		Sales and		into		at end of		to assets held
March 31, 2011			of period		net loss		issuances		settlements		Level 3 ⁽²⁾		period		at end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	55,124	$	805	$	—	$	—	$	—	$	55,929	$	805
	Corporate			76,982		(39,115)		40,794		(3,734)		40,180		115,107		(33,873)
	Asset-backed securities			213,139		2,971		54,514		(8,216)		—		262,408		(1,837)
	Residential mortgage-backed
		securities		—		539		4,212		(450)		—		4,301		541
	Other mortgage-backed securities			290		(33)		408		(89)		—		576		(33)
Fixed maturities			$	345,535	$	(34,833)	$	99,928	$	(12,489)	$	40,180	$	438,321	$	(34,397)
Short-term investments			$	—	$	(339)	$	1,543	$	—	$	—	$	1,204	$	(339)
Equities
	Finance		$	2,486	$	237	$	—	$	(2,562)	$	—	$	161	$	10
	Mutual funds and exchange
		traded funds		40,927		648		—		(124)		—		41,451		692
Equities			$	43,413	$	885	$	—	$	(2,686)	$	—	$	41,612	$	702
Other invested assets
	Derivatives, net		$	(7,954)	$	(9,125)	$	37	$	—	$	—	$	(17,042)	$	(9,125)
	Other assets			86,278		(1,904)		2,980		(2,692)		—		84,662		(1,480)
Other invested assets			$	78,324	$	(11,029)	$	3,017	$	(2,692)	$	—	$	67,620	$	(10,605)
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	368	$	(2)	$	—	$	—	$	—	$	366	$	(2)
	Mortgage/asset-backed securities			12,118		(150)		—		(11,968)		—		—		—
	Other invested assets			20,528		1,928		—		—		—		22,456		1,928
Funds held – directly managed			$	33,014	$	1,776	$	—	$	(11,968)	$	—	$	22,822	$	1,926
Total			$	500,286	$	(43,540)	$	104,488	$	(29,835)	$	40,180	$	571,579	$	(42,713)

During the three months ended March 31, 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 following table shows the significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs for the three months ended March 31, 2012 (in thousands of U.S. dollars):

						Range
March 31, 2012			Fair Value	Valuation Techniques	Unobservable Inputs	(Weighted average)
Fixed maturities
	U.S. states, territories and municipalities	$	115,580	Discounted cash flow	Credit spreads	3.1% - 4.6% (3.6%)

	Corporate		9,877	Discounted cash flow	Discount rate	9.0% - 14.5% (12.6%)

	Asset-backed securities – interest only		11,919	Discounted cash flow	Credit spreads	7.2% - 12.1% (9.1%)
					Prepayment speed	20.0% - 33.3% (24.2%)

	Asset-backed securities – other		252,537	Discounted cash flow	Credit spreads	3.9% - 12.5% (6.6%)

Equities
	Finance		12,730	Market comparable companies	Comparable return	32.0% (32.0%)

Other invested assets
	Total return swaps		6,113	Discounted cash flow	Credit spreads	0.4% - 4.6% (2.4%)

	Notes and loan receivables		58,126	Discounted cash flow	Credit spreads	13.5% - 19.5% (16.5%)
					Gross revenue/fair value	1.4 - 2.8 (2.1)

	Annuities and residuals		28,409	Discounted cash flow	Credit spreads	5.1% - 18.2% (10.8%)
					Prepayment speed	0.0% - 5.0% (3.0%)
					Constant default rate	2.3% - 40.0% (18.3%)

Funds held – directly managed
	Other invested assets		17,683	Lag reported market value	Net asset value, as reported	100.0% (100.0%)
					Market adjustments	-64.1% - 0.0% (-14.4%)

The table above does 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 mortality bonds (included within corporate fixed maturities), certain mutual fund investments (included within equities) and certain insurance-linked securities (included within other invested assets).

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 all 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 ended March 31, 2012 and 2011, 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 government sponsored enterprises—U.S. government and government sponsored enterprises 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 the Private Export Funding Corporation. 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. 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 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. The significant unobservable input used in the fair value measurement of corporate securities classified as Level 3 is discount rates. A significant increase (decrease) in discount rates in isolation could result in a significantly lower (higher) fair value measurement.

• Asset-backed securities—Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are 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 inputs used in the fair value measurement of these asset-backed securities classified as Level 3 are prepayment speeds and credit spreads. Significant increases (decreases) in these prepayment speeds and 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. 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.

• 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 been 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 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 are valued in a manner similar to the Company's fixed maturity investments and are generally classified in Level 2.

Equity securities include U.S. and foreign common and preferred stocks, mutual funds and exchange traded 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 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 input used in the fair value measurement of inactively traded common stocks classified as Level 3 is market return information from comparable publicly traded companies in the same industry, in a similar region and of a similar size. Significant increases (decreases) in the market return information could result in a significantly higher (lower) 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.

The Company's exchange traded derivatives, such as futures and certain weather derivatives, 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, non-exchange traded futures, credit default swaps, total return 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 credit-linked notes, certain inactively traded weather derivatives, notes, annuities, residuals and loans receivable and longevity and other 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. 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 and gross revenue to fair value ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) 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 highly 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.

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. Significant increases (decreases) 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.

At March 31, 2012 and December 31, 2011, 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 following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument liability recorded in the Unaudited Condensed Consolidated Balance Sheets for which the Company does not measure that instrument at fair value:

• 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, 2012 and December 31, 2011; 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 from PartnerRe Finance II Inc. of $63 million at March 31, 2012 and December 31, 2011.

The carrying values and fair values of the Senior Notes and CENts at March 31, 2012 and December 31, 2011 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 March 31, 2012 and December 31, 2011.

(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 March 31, 2012 and December 31, 2011.

At March 31, 2012, 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.