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; 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, credit default 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; 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 classified as trading securities, certain other invested assets and the segregated investment portfolio underlying the funds held – directly managed account. At September 30, 2013 and December 31, 2012, 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
September 30, 2013			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and government sponsored enterprises		$	0	$	1,495,749	$	0	$	1,495,749
	U.S. states, territories and municipalities			0		16,659		289,135		305,794
	Non-U.S. sovereign government, supranational
		and government related		0		2,343,751		0		2,343,751
	Corporate			0		5,942,359		99,627		6,041,986
	Asset-backed securities			0		704,174		453,753		1,157,927
	Residential mortgage-backed securities			0		2,293,874		0		2,293,874
	Other mortgage-backed securities			0		41,757		0		41,757
Fixed maturities			$	0	$	12,838,323	$	842,515	$	13,680,838
Short-term investments			$	0	$	36,781	$	0	$	36,781
Equities
	Real estate investment trusts		$	168,985	$	0	$	0	$	168,985
	Energy			156,254		0		0		156,254
	Finance			105,025		10,057		14,285		129,367
	Consumer noncyclical			119,194		0		0		119,194
	Communications			64,026		0		2,143		66,169
	Technology			51,535		0		9,150		60,685
	Industrials			45,181		0		0		45,181
	Consumer cyclical			44,566		0		0		44,566
	Utilities			38,481		0		0		38,481
	Insurance			36,481		0		0		36,481
	Other			20,559		0		0		20,559
	Mutual funds and exchange traded funds			48,126		180,362		7,674		236,162
Equities			$	898,413	$	190,419	$	33,252	$	1,122,084
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	0	$	4,188	$	0	$	4,188
		Credit default swaps (assumed risks)		0		49		0		49
		Insurance-linked securities		0		0		175		175
		Interest rate swaps		0		150		0		150
		TBAs		0		7,256		0		7,256
	Other
		Notes and loan receivables and notes securitization		0		0		47,781		47,781
		Annuities and residuals		0		0		26,939		26,939
		Private equities		0		0		21,878		21,878
	Derivative liabilities
		Foreign exchange forward contracts		0		(5,470)		0		(5,470)
		Foreign currency option contracts		0		(821)		0		(821)
		Futures contracts		(61,909)		0		0		(61,909)
		Credit default swaps (protection purchased)		0		(231)		0		(231)
		Insurance-linked securities		0		0		(390)		(390)
		Total return swaps		0		0		(732)		(732)
		Interest rate swaps		0		(4,614)		0		(4,614)
Other invested assets			$	(61,909)	$	507	$	95,651	$	34,249
Funds held – directly managed
	U.S. government and government sponsored enterprises		$	0	$	167,808	$	0	$	167,808
	U.S. states, territories and municipalities			0		0		298		298
	Non-U.S. sovereign government, supranational
		and government related		0		192,823		0		192,823
	Corporate			0		258,946		0		258,946
	Short-term investments			0		2,389		0		2,389
	Other invested assets			0		0		15,566		15,566
Funds held – directly managed			$	0	$	621,966	$	15,864	$	637,830
Total			$	836,504	$	13,687,996	$	987,282	$	15,511,782

			Quoted prices in				Significant
			active markets for		Significant other		unobservable
			identical assets		observable inputs		inputs
December 31, 2012			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and government sponsored enterprises		$	0	$	1,130,924	$	0	$	1,130,924
	U.S. states, territories and municipalities			0		10,151		233,235		243,386
	Non-U.S. sovereign government, supranational
		and government related		0		2,375,673		0		2,375,673
	Corporate			0		6,554,934		100,904		6,655,838
	Asset-backed securities			0		400,336		323,134		723,470
	Residential mortgage-backed securities			0		3,199,924		0		3,199,924
	Other mortgage-backed securities			0		66,100		0		66,100
Fixed maturities			$	0	$	13,738,042	$	657,273	$	14,395,315
Short-term investments			$	0	$	150,552	$	0	$	150,552
Equities
	Consumer noncyclical		$	130,526	$	0	$	0	$	130,526
	Energy			118,213		0		0		118,213
	Finance			79,456		7,472		13,477		100,405
	Technology			71,927		0		6,987		78,914
	Real estate investment trusts			66,846		0		0		66,846
	Communications			65,722		0		0		65,722
	Consumer cyclical			62,526		0		0		62,526
	Industrials			59,242		0		0		59,242
	Insurance			39,132		0		0		39,132
	Other			60,913		0		0		60,913
	Mutual funds and exchange traded funds			34,053		270,246		7,264		311,563
Equities			$	788,556	$	277,718	$	27,728	$	1,094,002
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	0	$	7,889	$	0	$	7,889
		Foreign currency option contracts		0		1,410		0		1,410
		Futures contracts		1,956		0		0		1,956
		Credit default swaps (protection purchased)		0		6		0		6
		Credit default swaps (assumed risks)		0		512		0		512
		Total return swaps		0		0		6,630		6,630
		TBAs		0		115		0		115
	Other
		Notes and loan receivables and notes securitization		0		0		34,902		34,902
		Annuities and residuals		0		0		46,882		46,882
		Private equities		0		0		1,404		1,404
	Derivative liabilities
		Foreign exchange forward contracts		0		(17,395)		0		(17,395)
		Foreign currency option contracts		0		(186)		0		(186)
		Futures contracts		(1,352)		0		0		(1,352)
		Credit default swaps (protection purchased)		0		(807)		0		(807)
		Insurance-linked securities		0		0		(2,173)		(2,173)
		Total return swaps		0		0		(546)		(546)
		Interest rate swaps		0		(7,880)		0		(7,880)
		TBAs		0		(163)		0		(163)
Other invested assets			$	604	$	(16,499)	$	87,099	$	71,204
Funds held – directly managed
	U.S. government and government sponsored enterprises		$	0	$	218,696	$	0	$	218,696
	U.S. states, territories and municipalities			0		0		345		345
	Non-U.S. sovereign government, supranational
		and government related		0		233,987		0		233,987
	Corporate			0		362,243		0		362,243
	Other invested assets			0		0		17,976		17,976
Funds held – directly managed			$	0	$	814,926	$	18,321	$	833,247
Total			$	789,160	$	14,964,739	$	790,421	$	16,544,320

At September 30, 2013 and December 31, 2012, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $233.9 million and $262.2 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 $637.8 million and $833.2 million at September 30, 2013 and December 31, 2012, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $33.9 million and $53.7 million, respectively, and accrued investment income of $8.9 million and $10.2 million, respectively. At September 30, 2013 and December 31, 2012, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $132.9 million and $33.6 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, 2012).

At September 30, 2013 and December 31, 2012, substantially all of the accrued investment income in the 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 nine months ended September 30, 2013 and the three months ended September 30, 2012, there were no transfers between Level 1 and Level 2. During the nine months ended September 30, 2012, certain equities traded on foreign exchanges with a fair value of $1.1 million were transferred from Level 2 to Level 1 given they were trading in an active market at September 30, 2012.

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 September 30, 2013 and December 31, 2012, the fair values of financial instrument assets recorded in the 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 September 30, 2013 and 2012 (in thousands of U.S. dollars):

															Change in
						Realized and										unrealized
						unrealized										investment
						investment						Net				gains (losses)
				Balance at		gains (losses)		Purchases		Settlements		transfers		Balance		relating to
For the three months ended			beginning		included in		and		and		into/ (out of)		at end		assets held at
September 30, 2013			of period		net income		issuances		sales ⁽¹⁾		Level 3		of period		end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	219,163	$	8,431	$	61,706	$	(165)	$	0	$	289,135	$	8,431
	Corporate			99,896		(269)		0		0		0		99,627		(269)
	Asset-backed securities			426,288		4,800		86,442		(63,777)		0		453,753		(3,043)
Fixed maturities			$	745,347	$	12,962	$	148,148	$	(63,942)	$	0	$	842,515	$	5,119
Equities
	Finance		$	13,000	$	1,285	$	0	$	0	$	0	$	14,285	$	1,285
	Communications			2,040		103		0		0		0		2,143		103
	Technology			8,012		1,138		0		0		0		9,150		1,138
	Mutual funds and exchange
		traded funds		7,549		125		0		0		0		7,674		125
Equities			$	30,601	$	2,651	$	0	$	0	$	0	$	33,252	$	2,651
Other invested assets
	Derivatives, net		$	2,333	$	(1,885)	$	0	$	(1,395)	$	0	$	(947)	$	(140)
	Notes and loan receivables and
		notes securitization		44,224		3,250		1,248		(941)		0		47,781		3,250
	Annuities and residuals			30,555		413		0		(4,029)		0		26,939		166
	Private equities			21,100		(299)		1,077		0		0		21,878		(299)
Other invested assets			$	98,212	$	1,479	$	2,325	$	(6,365)	$	0	$	95,651	$	2,977
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	337	$	(39)	$	0	$	0	$	0	$	298	$	(39)
	Other invested assets			15,207		1,045		0		(686)		0		15,566		1,045
Funds held – directly managed			$	15,544	$	1,006	$	0	$	(686)	$	0	$	15,864	$	1,006
Total			$	889,704	$	18,098	$	150,473	$	(70,993)	$	0	$	987,282	$	11,753

					Realized and										Change in
						unrealized										unrealized
						investment						Net				investment gains
				Balance at		gains (losses)		Purchases		Settlements		transfers		Balance		(losses) relating
For the three months ended			beginning		included in		and		and		(out of)/ into		at end of		to assets held
September 30, 2012			of period		net income		issuances		sales		Level 3		period		at end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	117,235	$	1,618	$	90,050	$	(83)	$	0	$	208,820	$	1,618
	Corporate			111,070		681		56		(3,250)		0		108,557		582
	Asset-backed securities			290,371		699		59,724		(21,605)		0		329,189		739
Fixed maturities			$	518,676	$	2,998	$	149,830	$	(24,938)	$	0	$	646,566	$	2,939
Equities
	Finance		$	19,422	$	750	$	0	$	0	$	(6,800)	$	13,372	$	750
	Technology			7,192		(99)		0		0		0		7,093		(99)
	Mutual funds and exchange
		traded funds		6,760		311		0		0		0		7,071		311
Equities			$	33,374	$	962	$	0	$	0	$	(6,800)	$	27,536	$	962
Other invested assets
	Derivatives, net		$	1,207	$	3,152	$	0	$	0	$	0	$	4,359	$	4,168
	Notes and loan receivables and
		notes securitization		44,304		3,473		1,209		(19,958)		0		29,028		1,654
	Annuities and residuals			27,225		6,314		23,642		(14,899)		0		42,282		2,641
	Private equities			1,000		(141)		450		0		0		1,309		(141)
Other invested assets			$	73,736	$	12,798	$	25,301	$	(34,857)	$	0	$	76,978	$	8,322
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	321	$	8	$	0	$	0	$	0	$	329	$	8
	Other invested assets			15,076		2,460		0		0		0		17,536		2,460
Funds held – directly managed			$	15,397	$	2,468	$	0	$	0	$	0	$	17,865	$	2,468
Total			$	641,183	$	19,226	$	175,131	$	(59,795)	$	(6,800)	$	768,945	$	14,691

During the three months ended September 30, 2012, an equity traded on a foreign exchange with a fair value of $6.8 million was transferred from Level 3 into Level 2 given it was valued using observable inputs at September 30, 2012.

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 nine months ended September 30, 2013 and 2012 (in thousands of U.S. dollars):

															Change in
						Realized and										unrealized
						unrealized										investment
						investment						Net				(losses) gains
				Balance at		(losses) gains		Purchases		Settlements		transfers		Balance		relating to
For the nine months ended			beginning		included in		and		and		into/ (out of)		at end		assets held at
September 30, 2013			of period		net income		issuances ⁽¹⁾		sales ⁽²⁾		Level 3		of period		end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	233,235	$	(5,427)	$	61,706	$	(379)	$	0	$	289,135	$	(5,427)
	Corporate			100,904		(1,277)		0		0		0		99,627		(1,277)
	Asset-backed securities			323,134		478		241,607		(111,466)		0		453,753		(7,182)
Fixed maturities			$	657,273	$	(6,226)	$	303,313	$	(111,845)	$	0	$	842,515	$	(13,886)
Equities
	Finance		$	13,477	$	808	$	0	$	0	$	0	$	14,285	$	808
	Communications			0		103		2,040		0		0		2,143		103
	Technology			6,987		2,163		0		0		0		9,150		2,163
	Mutual funds and exchange
		traded funds		7,264		410		0		0		0		7,674		410
Equities			$	27,728	$	3,484	$	2,040	$	0	$	0	$	33,252	$	3,484
Other invested assets
	Derivatives, net		$	3,911	$	(6,084)	$	121	$	1,105	$	0	$	(947)	$	(349)
	Notes and loan receivables and
		notes securitization		34,902		1,867		14,598		(3,586)		0		47,781		1,867
	Annuities and residuals			46,882		506		0		(20,449)		0		26,939		481
	Private equities			1,404		(3,811)		24,285		0		0		21,878		(3,811)
Other invested assets			$	87,099	$	(7,522)	$	39,004	$	(22,930)	$	0	$	95,651	$	(1,812)
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	345	$	(47)	$	0	$	0	$	0	$	298	$	(47)
	Other invested assets			17,976		(1,653)		0		(757)		0		15,566		(589)
Funds held – directly managed			$	18,321	$	(1,700)	$	0	$	(757)	$	0	$	15,864	$	(636)
Total			$	790,421	$	(11,964)	$	344,357	$	(135,532)	$	0	$	987,282	$	(12,850)

(2) Settlements and sales of asset-backed securities, derivatives and annuities and residuals include sales of $13.7 million, $1.4 million and $6.3 million, respectively.

															Change in
						Realized and										unrealized
						unrealized										investment
						investment						Net				gains (losses)
				Balance at		gains (losses)		Purchases		Settlements		transfers		Balance		relating to
For the nine months ended			beginning		included in		and		and		(out of)/ into		at end		assets held at
September 30, 2012			of period		net income		issuances ⁽¹⁾		sales		Level 3		of period		end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	111,415	$	2,900	$	94,750	$	(245)	$	0	$	208,820	$	2,900
	Corporate			111,700		111		120		(3,374)		0		108,557		(2)
	Asset-backed securities			257,415		8,892		142,314		(79,432)		0		329,189		8,771
Fixed maturities			$	480,530	$	11,903	$	237,184	$	(83,051)	$	0	$	646,566	$	11,669
Equities
	Finance		$	9,670	$	3,702	$	6,800	$	0	$	(6,800)	$	13,372	$	3,702
	Technology			0		(99)		7,192		0		0		7,093		(99)
	Mutual funds and exchange
		traded funds		6,495		576		0		0		0		7,071		576
Equities			$	16,165	$	4,179	$	13,992	$	0	$	(6,800)	$	27,536	$	4,179
Other invested assets
	Derivatives, net		$	5,622	$	4,157	$	(5,420)	$	0	$	0	$	4,359	$	4,874
	Notes and loan receivables
		and notes securitization		63,565		9,944		36,834		(81,315)		0		29,028		2,402
	Annuities and residuals			27,840		8,661		25,065		(19,284)		0		42,282		3,543
	Private equities			0		(141)		1,450		0		0		1,309		(141)
Other invested assets			$	97,027	$	22,621	$	57,929	$	(100,599)	$	0	$	76,978	$	10,678
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	334	$	(5)	$	0	$	0	$	0	$	329	$	(5)
	Other invested assets			15,433		2,103		0		0		0		17,536		2,103
Funds held – directly managed			$	15,767	$	2,098	$	0	$	0	$	0	$	17,865	$	2,098
Total			$	609,489	$	40,801	$	309,105	$	(183,650)	$	(6,800)	$	768,945	$	28,624

During the nine months ended September 30, 2012, an equity traded on a foreign exchange with a fair value of $6.8 million was transferred from Level 3 into Level 2 given it was valued using observable inputs at September 30, 2012.

The following tables show the significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at September 30, 2013 and December 31, 2012 (in thousands of U.S. dollars):

Range

September 30, 2013

Fair value

Valuation techniques

Unobservable inputs

(Weighted average)

Fixed maturities

U.S. states, territories and municipalities

289,135

Discounted cash flow

Credit spreads

2.8% - 10.1% (3.7%)

Asset-backed securities – interest only

Discounted cash flow

Credit spreads

6.0% - 11.2% (9.0%)

Prepayment speed

20.0% (20.0%)

Asset-backed securities – other

453,728

Discounted cash flow

Credit spreads

4.0% - 12.2% (7.2%)

Equities

Finance

14,285

Weighted market

Net income multiple

14.6 (14.6)

comparables

Tangible book value multiple

1.1 (1.1)

Liquidity discount

25.0% (25.0%)

Comparable return

10.0% (10.0%)

Technology

9,150

Weighted market

Revenue multiple

2.0 (2.0)

comparables

Adjusted earnings multiple

12.9 (12.9)

Liquidity discount

25.0% (25.0%)

Comparable return

14.2% (14.2%)

Communications

2,143

Weighted market

Adjusted earnings multiple

10.2 (10.2)

comparables

Comparable return

5% (5%)

Other invested assets

Total return swaps

(732)

Discounted cash flow

Credit spreads

20.2% (20.2%)

Notes and loan receivables

27,674

Discounted cash flow

Credit spreads

17.5% (17.5%)

Gross revenue/fair value

1.2 - 1.6 (1.5)

Notes securitization

20,107

Discounted cash flow

Credit spreads

6.4% (6.4%)

Annuities and residuals

26,939

Discounted cash flow

Credit spreads

4.6% - 9.0% (6.4%)

Prepayment speed

0% - 15.0% (7.0%)

Constant default rate

0.3% - 35.0% (13.0%)

Private equity

15,259

Liquidation analysis

Net assets, as reported

100.0% (100.0%)

Recoverability of intangible assets

0% (0%)

Private equity fund

6,619

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

2.4% - 9.7% (4.6%)

Funds held – directly managed

Other invested assets

15,566

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

-12.9% - 0% (-11.4%)

Range

December 31, 2012

Fair value

Valuation techniques

Unobservable inputs

(Weighted average)

Fixed maturities

U.S. states, territories and municipalities

233,235

Discounted cash flow

Credit spreads

2.8% - 4.5% (3.7%)

Asset-backed securities – interest only

12,625

Discounted cash flow

Credit spreads

6.8% - 11.7% (9.1%)

Prepayment speed

20.0% (20.0%)

Asset-backed securities – other

310,509

Discounted cash flow

Credit spreads

4.0% - 12.2% (7.6%)

Equities

Finance

13,477

Weighted market

comparables

Comparable return

0.8% (0.8%)

Technology

6,987

Weighted market

comparables

Comparable return

-1.5% (-1.5%)

Other invested assets

Total return swaps

6,084

Discounted cash flow

Credit spreads

2.6% - 4.6% (3.2%)

Notes and loan receivables

24,902

Discounted cash flow

Credit spreads

17.5% (17.5%)

Gross revenue/fair value

1.7 - 2.1 (1.8)

Notes securitization

10,000

Discounted cash flow

Credit spreads

6.5% (6.5%)

Annuities and residuals

46,882

Discounted cash flow

Credit spreads

4.7% - 9.9% (7.2%)

Prepayment speed

0% - 15.0% (7.6%)

Constant default rate

2.3% - 35.0% (13.2%)

Private equity fund

1,404

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

7.3% (7.3%)

Funds held – directly managed

Other invested assets

17,976

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

-38.1% - 0% (-12.1%)

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 mortality bonds (included within corporate fixed maturities), 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 and nine months ended September 30, 2013 and 2012 were as follows (in thousands of U.S. dollars):

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 (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 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 Mortgage Corporation, 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.

• 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 or the Company will employ proprietary models with observable inputs including other trade information, prepayment speeds, yield curves and credit spreads. The Company generally classifies these securities in Level 2.

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

In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not been actively traded 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 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, revenue multiples and adjusted earnings multiples. 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.

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

Included in the Company's Level 3 classification, in general, are certain inactively traded weather derivatives; notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps. For Level 3 instruments, the Company will generally (i) receive a price based on a manager's or trustee's valuation for the asset; (ii) perform a liquidation analysis using investee company financial statements, that are generally audited on an annual basis, adjusted if necessary for the recoverability of intangible assets; (iii) develop an internal discounted cash flow model to measure fair value; or (iv) 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 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. 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 increase (decrease) 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.

The segregated investment portfolio underlying the funds held – directly managed account is comprised of fixed maturities 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 September 30, 2013 and December 31, 2012, 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 following methods and assumptions were 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:

• 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 September 30, 2013 and December 31, 2012; 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 September 30, 2013 and December 31, 2012.

The carrying values and fair values of the Senior Notes and CENts at September 30, 2013 and December 31, 2012 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 Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012.

(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 September 30, 2013 and December 31, 2012.

At September 30, 2013, 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.