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 March 31, 2014 and December 31, 2013, 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, 2014			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and government sponsored enterprises		$	0	$	1,866,135	$	0	$	1,866,135
	U.S. states, territories and municipalities			0		16,438		113,467		129,905
	Non-U.S. sovereign government, supranational
		and government related		0		2,332,066		0		2,332,066
	Corporate			0		5,989,320		0		5,989,320
	Asset-backed securities			0		703,750		447,701		1,151,451
	Residential mortgage-backed securities			0		2,384,629		0		2,384,629
	Other mortgage-backed securities			0		44,895		0		44,895
Fixed maturities			$	0	$	13,337,233	$	561,168	$	13,898,401
Short-term investments			$	0	$	28,821	$	0	$	28,821
Equities
	Real estate investment trusts		$	196,661	$	0	$	0	$	196,661
	Energy			160,093		0		0		160,093
	Insurance			136,040		0		0		136,040
	Finance			97,863		9,569		22,706		130,138
	Consumer noncyclical			112,721		0		0		112,721
	Communications			83,724		0		2,111		85,835
	Technology			55,263		0		7,400		62,663
	Industrials			47,622		0		0		47,622
	Consumer cyclical			45,709		0		0		45,709
	Utilities			38,605		0		0		38,605
	Other			20,929		0		0		20,929
	Mutual funds and exchange traded funds			25,170		179,505		8,053		212,728
Equities			$	1,020,400	$	189,074	$	40,270	$	1,249,744
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	0	$	4,404	$	0	$	4,404
		Foreign currency option contracts		0		398		0		398
		Futures contracts		18,814		0		0		18,814
		Total return swaps		0		0		181		181
	Other
		Notes and loan receivables and notes securitization		0		0		42,243		42,243
		Annuities and residuals		0		0		18,945		18,945
		Private equities		0		0		42,655		42,655
	Derivative liabilities
		Foreign exchange forward contracts		0		(5,888)		0		(5,888)
		Futures contracts		(5)		0		0		(5)
		Insurance-linked securities		0		0		(740)		(740)
		Total return swaps		0		0		(483)		(483)
		Interest rate swaps		0		(5,797)		0		(5,797)
		TBAs		0		(1,388)		0		(1,388)
Other invested assets			$	18,809	$	(8,271)	$	102,801	$	113,339
Funds held – directly managed
	U.S. government and government sponsored enterprises		$	0	$	153,426	$	0	$	153,426
	U.S. states, territories and municipalities			0		0		301		301
	Non-U.S. sovereign government, supranational
		and government related		0		178,839		0		178,839
	Corporate			0		245,067		0		245,067
	Short-term investments			0		3,477		0		3,477
	Other invested assets			0		0		15,223		15,223
Funds held – directly managed			$	0	$	580,809	$	15,524	$	596,333
Total			$	1,039,209	$	14,127,666	$	719,763	$	15,886,638

			Quoted prices in				Significant
			active markets for		Significant other		unobservable
			identical assets		observable inputs		inputs
December 31, 2013			(Level 1)		(Level 2)		(Level 3)		Total
Fixed maturities
	U.S. government and government sponsored enterprises		$	0	$	1,623,859	$	0	$	1,623,859
	U.S. states, territories and municipalities			0		16,207		108,380		124,587
	Non-U.S. sovereign government, supranational
		and government related		0		2,353,699		0		2,353,699
	Corporate			0		6,048,663		0		6,048,663
	Asset-backed securities			0		691,654		446,577		1,138,231
	Residential mortgage-backed securities			0		2,268,517		0		2,268,517
	Other mortgage-backed securities			0		35,747		0		35,747
Fixed maturities			$	0	$	13,038,346	$	554,957	$	13,593,303
Short-term investments			$	0	$	13,546	$	0	$	13,546
Equities
	Real estate investment trusts		$	175,796	$	0	$	0	$	175,796
	Energy			159,509		0		0		159,509
	Insurance			144,020		0		0		144,020
	Finance			108,944		9,556		20,207		138,707
	Consumer noncyclical			108,663		0		0		108,663
	Communications			70,792		0		2,199		72,991
	Technology			53,768		0		7,752		61,520
	Industrials			47,677		0		0		47,677
	Consumer cyclical			45,915		0		0		45,915
	Utilities			37,151		0		0		37,151
	Other			19,993		0		0		19,993
	Mutual funds and exchange traded funds			61,902		139,322		7,887		209,111
Equities			$	1,034,130	$	148,878	$	38,045	$	1,221,053
Other invested assets
	Derivative assets
		Foreign exchange forward contracts	$	0	$	1,249	$	0	$	1,249
		Futures contracts		41,031		0		0		41,031
		Total return swaps		0		0		79		79
		Interest rate swaps		0		2,147		0		2,147
		TBAs		0		2		0		2
	Other
		Notes and loan receivables and notes securitization		0		0		41,446		41,446
		Annuities and residuals		0		0		24,064		24,064
		Private equities		0		0		39,131		39,131
	Derivative liabilities
		Foreign exchange forward contracts		0		(8,648)		0		(8,648)
		Foreign currency option contracts		0		(535)		0		(535)
		Credit default swaps (protection purchased)		0		(71)		0		(71)
		Insurance-linked securities		0		0		(268)		(268)
		Total return swaps		0		0		(599)		(599)
		Interest rate swaps		0		(2,558)		0		(2,558)
		TBAs		0		(1,331)		0		(1,331)
Other invested assets			$	41,031	$	(9,745)	$	103,853	$	135,139
Funds held – directly managed
	U.S. government and government sponsored enterprises		$	0	$	157,296	$	0	$	157,296
	U.S. states, territories and municipalities			0		0		286		286
	Non-U.S. sovereign government, supranational
		and government related		0		137,186		0		137,186
	Corporate			0		248,947		0		248,947
	Short-term investments			0		2,426		0		2,426
	Other invested assets			0		0		15,165		15,165
Funds held – directly managed			$	0	$	545,855	$	15,451	$	561,306
Total			$	1,075,161	$	13,736,880	$	712,306	$	15,524,347

At March 31, 2014 and December 31, 2013, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $189.2 million and $185.8 million, respectively, which related to the Company's investments that are accounted for using the cost method of accounting or equity method of accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $596.3 million and $561.3 million at March 31, 2014 and December 31, 2013, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $37.1 million and $84.8 million, respectively, and accrued investment income of $7.5 million and $6.7 million, respectively. At March 31, 2014 and December 31, 2013, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $123.5 million and $133.0 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, 2013).

At March 31, 2014 and December 31, 2013, substantially all of the accrued investment income in the Condensed Consolidated Balance Sheets relate to the Company's investments and the investments underlying the funds held – directly managed account for which the fair value option was elected.

During the three months ended March 31, 2014 and 2013, there were no transfers between Level 1 and Level 2.

Disclosures about the fair value of financial instruments that the Company does not measure at fair value exclude insurance contracts and certain other financial instruments. At March 31, 2014 and December 31, 2013, the fair values of financial instrument assets recorded in the Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

The reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended March 31, 2014 and 2013, were as follows (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
March 31, 2014			of period		net income		issuances ⁽¹⁾		sales		Level 3		of period		end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	108,380	$	892	$	4,265	$	(70)	$	0	$	113,467	$	890
	Asset-backed securities			446,577		5,996		59,418		(64,290)		0		447,701		6,259
Fixed maturities			$	554,957	$	6,888	$	63,683	$	(64,360)	$	0	$	561,168	$	7,149
Equities
	Finance		$	20,207	$	2,499	$	0	$	0	$	0	$	22,706	$	2,499
	Communications			2,199		(88)		0		0		0		2,111		(88)
	Technology			7,752		(352)		0		0		0		7,400		(352)
	Mutual funds and exchange
		traded funds		7,887		166		0		0		0		8,053		166
Equities			$	38,045	$	2,225	$	0	$	0	$	0	$	40,270	$	2,225
Other invested assets
	Derivatives, net		$	(788)	$	466	$	(720)	$	0	$	0	$	(1,042)	$	466
	Notes and loan receivables and
		notes securitization		41,446		600		720		(523)		0		42,243		600
	Annuities and residuals			24,064		89		0		(5,208)		0		18,945		128
	Private equities			39,131		433		5,066		(1,975)		0		42,655		401
Other invested assets			$	103,853	$	1,588	$	5,066	$	(7,706)	$	0	$	102,801	$	1,595
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	286	$	15	$	0	$	0	$	0	$	301	$	15
	Other invested assets			15,165		(197)		255		0		0		15,223		(197)
Funds held – directly managed			$	15,451	$	(182)	$	255	$	0	$	0	$	15,524	$	(182)
Total			$	712,306	$	10,519	$	69,004	$	(72,066)	$	0	$	719,763	$	10,787

					Realized and										Change in
						unrealized										unrealized
						investment						Net				investment (losses)
				Balance at		(losses) gains		Purchases		Settlements		transfers		Balance		gains relating
For the three months ended			beginning		included in		and		and		into/ (out of)		at end of		to assets held
March 31, 2013			of period		net income		issuances		sales ⁽¹⁾		Level 3		period		at end of period
Fixed maturities
	U.S. states, territories
		and municipalities	$	233,235	$	(849)	$	0	$	(94)	$	0	$	232,292	$	(849)
	Corporate			100,904		(188)		0		0		0		100,716		(188)
	Asset-backed securities			323,134		1,741		27,156		(26,372)		0		325,659		1,781
Fixed maturities			$	657,273	$	704	$	27,156	$	(26,466)	$	0	$	658,667	$	744
Equities
	Finance		$	13,477	$	(924)	$	0	$	0	$	0	$	12,553	$	(924)
	Technology			6,987		660		0		0		0		7,647		660
	Mutual funds and exchange
		traded funds		7,264		178		0		0		0		7,442		178
Equities			$	27,728	$	(86)	$	0	$	0	$	0	$	27,642	$	(86)
Other invested assets
	Derivatives, net		$	3,911	$	(3,679)	$	0	$	2,500	$	0	$	2,732	$	(3,679)
	Notes and loan receivables and
		notes securitization		34,902		(61)		1,360		(2,143)		0		34,058		(61)
	Annuities and residuals			46,882		336		0		(11,562)		0		35,656		826
	Private equities			1,404		(3,065)		19,425		0		0		17,764		(3,065)
Other invested assets			$	87,099	$	(6,469)	$	20,785	$	(11,205)	$	0	$	90,210	$	(5,979)
Funds held – directly managed
	U.S. states, territories
		and municipalities	$	345	$	(4)	$	0	$	0	$	0	$	341	$	(4)
	Other invested assets			17,976		(2,437)		0		(71)		0		15,468		(1,373)
Funds held – directly managed			$	18,321	$	(2,441)	$	0	$	(71)	$	0	$	15,809	$	(1,377)
Total			$	790,421	$	(8,292)	$	47,941	$	(37,742)	$	0	$	792,328	$	(6,698)

The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at March 31, 2014 and December 31, 2013 were as follows (fair value in thousands of U.S. dollars):

Range

March 31, 2014

Fair value

Valuation techniques

Unobservable inputs

(Weighted average)

Fixed maturities

U.S. states, territories and municipalities

113,467

Discounted cash flow

Credit spreads

2.7% - 10.1% (5.4%)

Asset-backed securities – interest only

Discounted cash flow

Credit spreads

5.2% - 10.3% (8.5%)

Asset-backed securities – other

447,681

Discounted cash flow

Credit spreads

3.9% - 12.1% (6.9%)

Equities

Finance

17,316

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

12.0% (12.0%)

Finance

5,390

Profitability analysis

Projected return on equity

14.0% (14.0%)

Communications

2,111

Weighted market

Adjusted earnings multiple

9.4 (9.4)

comparables

Comparable return

-4.0% (-4.0%)

Technology

7,400

Weighted market

Revenue multiple

1.5 (1.5)

comparables

Adjusted earnings multiple

8.4 (8.4)

Other invested assets

Total return swaps

(302)

Discounted cash flow

Credit spreads

3.5% - 18.3% (14.3%)

Notes and loan receivables

22,038

Discounted cash flow

Credit spreads

17.5% (17.5%)

Gross revenue/fair value

1.3 - 1.5 (1.5)

Notes securitization

20,205

Discounted cash flow

Credit spreads

6.1% (6.1%)

Annuities and residuals

18,945

Discounted cash flow

Credit spreads

4.0% - 7.5% (5.8%)

Prepayment speed

0% - 15.0% (6.1%)

Constant default rate

0.3% - 23.0% (8.8%)

Private equity - direct

12,040

Discounted cash flow and

Net income multiple

9.1 (9.1)

weighted market

Tangible book value multiple

1.7 (1.7)

comparables

Recoverability of intangible assets

0% (0%)

Private equity funds

12,653

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

-1.9% - 2.2% (1.2%)

Private equity - other

17,962

Discounted cash flow

Effective yield

5.8% (5.8%)

Funds held – directly managed

Other invested assets

15,223

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

-15.7% - 0% (-13.6%)

Range

December 31, 2013

Fair value

Valuation techniques

Unobservable inputs

(Weighted average)

Fixed maturities

U.S. states, territories and municipalities

108,380

Discounted cash flow

Credit spreads

2.9% - 9.9% (5.3%)

Asset-backed securities – interest only

Discounted cash flow

Credit spreads

5.5% - 10.7% (8.8%)

Asset-backed securities – other

446,556

Discounted cash flow

Credit spreads

4.0% - 12.2% (7.1%)

Equities

Finance

15,483

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

8.5% (8.5%)

Finance

4,724

Profitability analysis

Projected return on equity

14.0% (14.0%)

Communications

2,199

Weighted market

Adjusted earnings multiple

9.4 (9.4)

comparables

Comparable return

0% (0%)

Technology

7,752

Weighted market

Revenue multiple

0.9 (0.9)

comparables

Adjusted earnings multiple

4.4 (4.4)

Other invested assets

Total return swaps

(520)

Discounted cash flow

Credit spreads

2.8% - 18.9% (17.0%)

Notes and loan receivables

21,280

Discounted cash flow

Credit spreads

17.5% (17.5%)

Gross revenue/fair value

1.5 (1.5)

Notes securitization

20,166

Discounted cash flow

Credit spreads

6.2% (6.2%)

Annuities and residuals

24,064

Discounted cash flow

Credit spreads

4.0% - 7.9% (5.8%)

Prepayment speed

0% - 15.0% (6.4%)

Constant default rate

0.3% - 35.0% (12.4%)

Private equity - direct

11,742

Discounted cash flow and

Net income multiple

8.3 (8.3)

weighted market

Tangible book value multiple

1.6 (1.6)

comparables

Recoverability of intangible assets

0% (0%)

Private equity funds

8,993

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

1.8% - 9.8% (8.3%)

Private equity - other

18,396

Discounted cash flow

Credit spreads

3.8% (3.8%)

Funds held – directly managed

Other invested assets

15,165

Lag reported market value

Net asset value, as reported

100.0% (100.0%)

Market adjustments

-22.9% - 0% (-15.5%)

The tables above do not include financial instruments that are measured using unobservable inputs (Level 3) where the unobservable inputs were obtained from external sources and used without adjustment. These financial instruments include mutual fund investments (included within equities) and certain 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 significant securities that are classified as Level 3. The Valuation Committee is comprised of members of the Company's senior management team and meets on a quarterly basis. The Company's invested asset valuation policy is monitored by the Company's Audit Committee of the Board of Directors (Board) and approved annually by the Company's Risk and Finance Committee of the Board.

Changes in the fair value of the Company's financial instruments subject to the fair value option during the three months ended March 31, 2014 and 2013 were as follows (in thousands of U.S. dollars):

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

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

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

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

• Asset-backed securities—Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are predominantly backed by student loans, automobile loans, credit card receivables, equipment leases, and special purpose financing. With the exception of special purpose financing, these asset-backed securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. Special purpose financing securities are generally inactively traded and are priced based on valuation models using unobservable inputs. The Company generally classifies these securities in Level 3. The significant unobservable 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. 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, real estate investment trusts, mutual funds and exchange traded funds. Equities, real estate investment trusts and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted prices in active markets. Equities classified as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on a daily basis, and common stocks traded in inactive markets. Equities classified as Level 3 are generally mutual funds invested in securities other than the common stock of publicly traded companies, where the net asset value is not provided on a daily basis, and inactively traded common stocks. The significant unobservable inputs used in the fair value measurement of inactively traded common stocks classified as Level 3 include market return information, weighted using management's judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size, including net income multiples, tangible book value multiples, comparable returns, revenue multiples, adjusted earnings multiples and projected return on equity ratios. Significant increases (decreases) in any of these inputs could result in a significantly higher (lower) fair value measurement. Significant unobservable inputs used in measuring the fair value measurement of inactively traded common stocks also include a liquidity discount. A significant increase (decrease) in the liquidity discount could result in a significantly lower (higher) fair value measurement.

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

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

Included in the Company's Level 3 classification, in general, are certain inactively traded weather derivatives, notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps. For Level 3 instruments, the Company will generally (i) receive a price based on a manager's or trustee's valuation for the asset; (ii) develop an internal discounted cash flow model to measure fair value; or (iii) use market return information, adjusted if necessary and weighted using management's judgment, from comparable selected publicly traded equity funds, in a similar region and of a similar size. Where the Company receives prices from the manager or trustee, these prices are based on the manager's or trustee's estimate of fair value for the assets and are generally audited on an annual basis. Where the Company develops its own discounted cash flow models, the inputs will be specific to the asset in question, based on appropriate historical information, adjusted as necessary, and using appropriate discount rates. The significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 include credit spreads, prepayment speeds, constant default rates, gross revenue to fair value ratios, net income multiples, effective yields, tangible book value multiples and other valuation ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) fair value measurement. Significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 also include an assessment of the recoverability of intangible assets and market return information, weighted using management's judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size. Significant 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 March 31, 2014 and December 31, 2013, the fair values of financial instrument liabilities recorded in the Condensed Consolidated Balance Sheets approximate their carrying values, with the exception of the debt related to senior notes (Senior Notes) and the debt related to capital efficient notes (CENts).

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

• the fair value of the Senior Notes was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $250 million from PartnerRe Finance A LLC and $500 million from PartnerRe Finance B LLC at March 31, 2014 and December 31, 2013; and

• the fair value of the CENts was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $63 million from PartnerRe Finance II Inc. at March 31, 2014 and December 31, 2013.

The carrying values and fair values of the Senior Notes and CENts at March 31, 2014 and December 31, 2013 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 March 31, 2014 and December 31, 2013.

(2) PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013.

At March 31, 2014 and December 31, 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.