FAIR VALUE MEASUREMENTS

The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within the Company's financial statements. Fair value is defined under accounting guidance currently applicable to the Company to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. The Company recognizes the change in unrealized gains and losses arising from changes in fair value in its consolidated statements of operations, with the exception of changes in unrealized gains and losses on its fixed maturity investments available for sale, which are recognized as a component of accumulated other comprehensive income in shareholders' equity.

FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:


•	Fair values determined by Level 1 inputs utilize unadjusted quoted prices obtained from active markets for identical assets or liabilities for which the Company has access. The fair value is determined by multiplying the quoted price by the quantity held by the Company;

•

Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals, broker quotes and certain pricing indices; and


•	Level 3 inputs are based on unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management's best estimate of the assumptions used by other market participants in determining the fair value of the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability.

In order to determine if a market is active or inactive for a security, the Company considers a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity.

There have been no material changes in the Company's valuation techniques, nor have there been any transfers between Level 1 and Level 2, or Level 2 and Level 3, respectively, during the period represented by these consolidated financial statements.

Below is a summary of the assets and liabilities that are measured at fair value on a recurring basis and also represents the carrying amount on the Company’s consolidated balance sheet:




At June 30, 2012	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed maturity investments
U.S. treasuries	$	1,126,759	$	1,126,759		$	—	$	—
Agencies	436,691		—			436,691		—
Non-U.S. government (Sovereign debt)	177,231		—			177,231		—
FDIC guaranteed corporate	29,386		—			29,386		—
Non-U.S. government-backed corporate	393,875		—			393,875		—
Corporate	1,664,722		—			1,636,947		27,775
Agency mortgage-backed	592,355		—			592,355		—
Non-agency mortgage-backed	153,674		—			153,674		—
Commercial mortgage-backed	470,167		—			470,167		—
Asset-backed	12,197		—			12,197		—
Total fixed maturity investments	5,057,057		1,126,759			3,902,523		27,775
Short term investments	654,912		—			654,912		—
Equity investments trading	55,381		55,381			—		—
Other investments
Private equity partnerships	360,268		—			—		360,268
Senior secured bank loan funds	269,317		—			246,593		22,724
Catastrophe bonds	106,470		—			106,470		—
Hedge funds	6,243		—			—		6,243
Miscellaneous other investments	1,270		—			—		1,270
Total other investments	743,568		—			353,063		390,505
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts	9,689		—			—		9,689
Derivatives (1)	14,752		2,011			3,660		9,081
Other	10,811		(4,604		)	—		15,415
Total other assets and (liabilities)	35,252		(2,593		)	3,660		34,185
	$	6,546,170	$	1,179,547		$	4,914,158	$	452,465

(1) See "Note 12. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.




At December 31, 2011	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fixed maturity investments
U.S. treasuries	$	885,152	$	885,152		$	—		$	—
Agencies	158,561		—			158,561			—
Non-U.S. government (Sovereign debt)	227,912		—			227,912			—
FDIC guaranteed corporate	423,630		—			423,630			—
Non-U.S. government-backed corporate	641,082		—			641,082			—
Corporate	1,206,904		—			1,179,143			27,761
Agency mortgage-backed	441,749		—			441,749			—
Non-agency mortgage-backed	104,771		—			104,771			—
Commercial mortgage-backed	325,729		—			325,729			—
Asset-backed	18,027		—			18,027			—
Total fixed maturity investments	4,433,517		885,152			3,520,604			27,761
Short term investments	905,477		—			905,477			—
Equity investments trading	50,560		50,560			—			—
Other investments
Private equity partnerships	367,909		—			—			367,909
Senior secured bank loan funds	257,870		—			237,815			20,055
Catastrophe bonds	70,999		—			70,999			—
Non-U.S. fixed income funds	28,862		—			28,862			—
Hedge funds	21,344		—			14,782			6,562
Miscellaneous other investments	2,000		—			—			2,000
Total other investments	748,984		—			352,458			396,526
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts	2,115		—			—			2,115
Derivatives (1)	3,312		707			(6,293		)	8,898
Other	10,644		(6,869		)	—			17,513
Total other assets and (liabilities)	16,071		(6,162		)	(6,293		)	28,526
	$	6,154,609	$	929,550		$	4,772,246		$	452,813

(1) See "Note 12. Derivative Instruments" for additional information related to the fair value by type of contract, of derivatives entered into by the Company.

Level 1 and Level 2 Assets and Liabilities Measured at Fair Value

Fixed Maturity Investments

Fixed maturity investments included in Level 1 consist of the Company's investments in U.S. treasuries. Fixed maturity investments included in Level 2 are agencies, non-U.S. government, Federal Deposit Insurance Company ("FDIC") guaranteed corporate, non-U.S. government-backed corporate, corporate, agency mortgage-backed, non-agency mortgage-backed, commercial mortgage-backed and asset-backed fixed maturity investments.

The Company’s fixed maturity investments portfolios are primarily priced using pricing services, such as index providers and pricing vendors, as well as broker quotations. In general, the pricing vendors provide pricing for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, bids, offers, reference data and industry and economic events. Index pricing generally relies on market traders as the primary source for pricing, however models are also utilized to provide prices for all index eligible securities. The models use a variety of observable inputs such as benchmark yields, transactional data, dealer runs, broker-dealer quotes and corporate actions. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.

In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.

The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of our fixed maturity investments are detailed below by asset class.

U.S. treasuries

Level 1 - At June 30, 2012, the Company’s U.S. treasuries fixed maturity investments are primarily priced by pricing services and had a weighted average effective yield of 0.5% and a weighted average credit quality of AA (December 31, 2011 - 0.6% and AA, respectively). When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers. Certain data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue and maturity date.

Agencies

Level 2 - At June 30, 2012, the Company’s agency fixed maturity investments had a weighted average effective yield of 0.7% and a weighted average credit quality of AA (December 31, 2011 - 0.5% and AA, respectively). The issuers of the Company’s agency fixed maturity investments primarily consist of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Fixed maturity investments included in agencies are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrates other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.

Non-U.S. government (Sovereign debt)

Level 2 - Non-U.S. government fixed maturity investments held by the Company at June 30, 2012, had a weighted average effective yield of 2.2% and a weighted average credit quality of AA (December 31, 2011 - 2.3% and AA, respectively). The issuers of securities in this sector are non-U.S. governments and their respective agencies as well as supranational organizations. Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

FDIC guaranteed corporate

Level 2 - The Company’s FDIC guaranteed corporate fixed maturity investments had a weighted average effective yield of 0.3% and a weighted average credit quality of AA at June 30, 2012 (December 31, 2011 - 0.3% and AA, respectively). The issuers consist of well known corporate issuers who participate in the FDIC program. The Company’s FDIC guaranteed corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve.

Non-U.S. government-backed corporate

Level 2 - Non-U.S. government-backed corporate fixed maturity investments had a weighted average effective yield of 1.2% and a weighted average credit quality of AAA at June 30, 2012 (December 31, 2011 - 1.4% and AAA, respectively). Non-U.S. government-backed fixed maturity investments are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread to the respective curve for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.

Corporate

Level 2 - At June 30, 2012, the Company’s corporate fixed maturity investments principally consist of U.S. and international corporations and had a weighted average effective yield of 3.1% and a weighted average credit quality of A (December 31, 2011 - 4.2% and A, respectively). The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.

Agency mortgage-backed

Level 2 - At June 30, 2012, the Company’s agency mortgage-backed fixed maturity investments included agency residential mortgage-backed securities with a weighted average effective yield of 1.5%, a weighted average credit quality of AA and a weighted average life of 2.8 years (December 31, 2011 - 1.5%, AA and 2.6 years, respectively). The Company’s agency mortgage-backed fixed maturity investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active and the to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.

Non-agency mortgage-backed

Level 2 - The Company’s non-agency mortgage-backed fixed maturity investments include non-agency prime residential mortgage-backed and non-agency Alt-A fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. At June 30, 2012, the Company’s non-agency prime residential mortgage-backed fixed maturity investments have a weighted average effective yield of 5.2%, a weighted average credit quality of BBB, and a weighted average life of 5.2 years (December 31, 2011 - 8.0%, BBB and 3.3 years, respectively). The Company’s non-agency Alt-A fixed maturity investments held at June 30, 2012 have a weighted average effective yield of 7.0%, a weighted average credit quality of BBB and a weighted average life of 5.5 years (December 31, 2011 - 9.1%, A and 3.8 years, respectively) . Securities held in these sectors are primarily priced by pricing services using an option adjusted spread (”OAS”) model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.

Commercial mortgage-backed

Level 2 - The Company’s commercial mortgage-backed fixed maturity investments held at June 30, 2012 have a weighted average effective yield of 2.5%, a weighted average credit quality of AA, and a weighted average life of 3.8 years (December 31, 2011 - 3.2%, AA and 4.2 years, respectively). Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bid and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services discount the expected cash flows for each security held in this sector using a spread adjusted benchmark yield based on the characteristics of the security.

Asset-backed

Level 2 - At June 30, 2012, the Company’s asset-backed fixed maturity investments had a weighted average effective yield of 2.5%, a weighted average credit quality of AAA and a weighted average life of 3.8 years (December 31, 2011 - 0.9%, AAA and 1.8 years, respectively). The underlying collateral for the Company’s asset-backed fixed maturity investments primarily consists of student loans, credit card receivables, auto loans and other receivables. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.

Short Term Investments

Level 2 - The fair value of the Company's portfolio of short term investments are generally determined using amortized cost which approximates fair value and, in certain cases, in a manner similar to the Company’s fixed maturity investments noted above.

Equity Investments, Classified as Trading

Level 1 - The fair value of the Company's portfolio of equity investments, classified as trading are primarily priced by pricing services, reflecting the closing price quoted for the final trading day of the period. When pricing these securities, the pricing services utilize daily data from many real time market sources, including active broker dealers and applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source is used for each issue.

Other investments

Senior secured bank loan funds

Level 2 - At June 30, 2012, the Company’s investments in senior secured bank loan funds include funds that invest primarily in bank loans and other senior debt instruments. The fair value of the Company’s senior secured bank loan funds are determined using the net asset value per share of the funds. Investments of $246.6 million are redeemable, in part on a monthly basis, or in whole over a three month period.

Catastrophe bonds

Level 2 - The Company's other investments include investments in catastrophe bonds which are recorded at fair value. The fair value of the Company's investments in catastrophe bonds is based on broker or underwriter bid indications.

Non-U.S. fixed income funds

Level 2 - The Company’s non-U.S. fixed income funds invested primarily in non-U.S. convertible securities. The fair values of the investments in this category were estimated using the net asset value per share of the investments which were provided by third parties such as the relevant investment manager or administrator. During April 2012, the Company fully redeemed its remaining investment in non-U.S. fixed income funds at the then net asset value per share.

Hedge funds

Level 2 - The Company has investments in hedge funds that pursue multiple strategies. The fair values of the Company’s hedge funds are determined by adjusting the previous period's reported net asset value, which is generally one month in arrears, for an estimated periodic rate of return obtained from the respective investment manager.

For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the investment manager and the latest audited financial statements to attempt to ensure that the hedge fund investment is following fair value principles consistent with GAAP in determining the net asset value of each investor's interest.

During June 2012, the Company fully redeemed the portion of its investment in hedge funds which the Company had considered Level 2 in the fair value hierarchy, at the then net asset value per share.

Other assets and liabilities

Derivatives

Level 1 and Level 2 - Other assets and liabilities include certain other derivatives entered into by the Company. The fair value of these transactions include certain exchange traded foreign currency forward contracts which are considered Level 1, and certain credit derivatives, determined using standard industry valuation models and considered Level 2, as the inputs to the valuation model are based on observable market inputs, including credit spreads, credit ratings of the underlying referenced security, the risk free rate and the contract term.

Other

Level 1 - The liabilities measured at fair value and included in Level 1 at June 30, 2012 of $4.6 million are principally cash settled restricted stock units (“CSRSU”) that form part of the Company's compensation program. The fair value of the Company's CSRSUs is determined using observable exchange traded prices for the Company's common shares.

Level 3 Assets and Liabilities Measured at Fair Value

Below is a summary of quantitative information regarding the significant observable and unobservable inputs (Level 3) used in determining the fair value of assets and liabilities measured at fair value on a recurring basis:




At June 30, 2012	Fair Value (Level 3)		Valuation Technique	Unobservable (U) and Observable (O) Inputs	Low			High			Weighted Average or Actual
Fixed maturity investments
Corporate	$	17,521	Discounted cash flow ("DCF")	Credit spread (U)	n/a			n/a			4.6	%
				Illiquidity premium (U)	n/a			n/a			1.0	%
				Risk-free rate (O)	n/a			n/a			0.2	%
				Dividend rate (O)	n/a			n/a			5.9	%
	10,254		Internal valuation model	Private transaction (U)	n/a			n/a			See below
Total fixed maturity investments	27,775
Other investments
Private equity partnerships	360,268		Net asset valuation	Estimated performance (U)	(19.7		)%	12.6		%	(1.4	)%
Senior secured bank loan funds	22,724		Net asset valuation	Estimated performance (U)	n/a			n/a			0.4	%
Hedge funds	6,243		Net asset valuation	Estimated performance (U)	(0.4		)%	3.0		%	1.9	%
Miscellaneous other investments	1,270		DCF	Illiquidity premium (U)	n/a			n/a			1.0	%
				Risk-free rate (O)	n/a			n/a			0.5	%
				Credit spread (U)	n/a			n/a			7.4	%
Total other investments	390,505
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts	9,689		Internal valuation model	Net premiums written (O)	—			$12.3 million			See below
				Contract period (O)	183 days			365 days			See below
				Net reserve for claims and claim expenses (U)	—			—			See below
Weather and energy related derivatives	9,081		Spread option; Quanto; Black Scholes; Simulation	Correlation (U)	0			1			See below
				Volatility (U)	9.4		%	525.0		%	See below
				Commodity curve (U)	$	2.62		$	200.00		See below
				Weather curve (U)	19			5,000			See below
				Counterparty default risk (U)	0.0		%	22.5		%	See below
Other	14,165		Net asset valuation	Estimated performance (U)	n/a			n/a			See below
	1,250		Internal valuation model	Private transaction (U)	n/a			n/a			See below
Total other assets and (liabilities)	34,185
	$	452,465

Fixed Maturity Investments

Corporate

Level 3 - Included in the Company's corporate fixed maturity investments is an investment with a fair value of $17.5 million in the preferred equity of a property and casualty insurance group organized to market residential property insurance in North America. The Company measures the fair value of this investment using a DCF model and seeks to incorporate all relevant information reasonably available to it. The Company considers the contractual agreement which stipulates the methodology for calculating a dividend rate to be paid upon liquidation, conversion or redemption. At June 30, 2012, the dividend rate was 5.9%. In addition, the Company has estimated an illiquidity premium of 1.0% and a risk-free rate of 0.2%. To ensure the estimate for fair value determined using the DCF model is reasonable, the Company reviews private market comparables of similar investments, if available, and in particular, credit ratings of other private market comparables for similar investments to determine the appropriateness of its estimate of fair value using a DCF model. The fair value of the Company's investment in corporate fixed maturity investments determined by a DCF model is positively correlated to the dividend rate, and inversely correlated to the credit spread, illiquidity premium and the risk-free rate.

In addition, the Company's corporate fixed maturity investments include an investment with a fair value of $10.3 million at June 30, 2012 in the preferred equity of a company that provides insurance for a variety of veterinarian costs, including surgeries, medication and diagnostic testing. When utilizing an internal valuation model to determine the fair value of this investment, the Company uses a combination of quantitative and qualitative factors, which may include, but are not limited to, discounted cash flow analysis, financial statement analysis, budgets and forecasts, capital transactions and third party valuations. In circumstances where a private market transaction has recently occurred, the Company will evaluate the comparableness of that transaction and incorporate into its internal valuation model accordingly. Recent private market transactions of investments similar to that held by the Company have been used to determine the fair value of $10.3 million at June 30, 2012, as the Company believes it represents the price that would be received upon the sale of its investment in an orderly transaction among market participants. Consequently, should future relevant private market transactions occur, the Company will re-evaluate the information available used to determine fair value of this investment and record any adjustments to fair value in its consolidated statements of operations.

Other investments

Private equity partnerships

Level 3 - Included in the Company’s $360.3 million of investments in private equity partnerships at June 30, 2012 are alternative asset limited partnerships (or similar corporate structures) that invest in certain private equity asset classes including U.S. and global leveraged buyouts; mezzanine investments; distressed securities; real estate; and oil, gas and power. The fair value of private equity partnership investments is based on current estimated net asset values established in accordance with the governing documents of such investments and is obtained from the investment manager or general partner of the respective entity. The type of underlying investments held by the investee which form the basis of the net asset valuation include assets such as private business ventures, for which the Company does not have access to financial information. As a result, the Company is unable to corroborate the fair value measurement of the underlying investments of the private equity partnership and therefore requires significant management judgment to determine the fair value of the private equity partnership. In circumstances where there is a reporting lag between the current period end reporting date and the reporting date of the latest fund valuation, the Company estimates the fair value of these funds by starting with the prior month or quarter-end fund valuations, adjusting these valuations for actual capital calls, redemptions or distributions, as well as the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which the Company estimates the return for the current period, all relevant information reasonably available to the Company is utilized. This principally includes preliminary estimates reported to the Company by its fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to the Company with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which the Company has obtained reported results, or other valuation methods, where possible. The range of such current estimated periodic returns for the six months ended June 30, 2012 was negative 19.7% to positive 12.6% with a weighted average of negative 1.4%. The fair value of the Company's investment in private equity partnerships is positively correlated to the estimated periodic rate of return. The Company also considers factors such as recent financial information, the value of capital transactions with the partnership and management’s judgment regarding whether any adjustments should be made to the net asset value. For each respective private equity partnership, the Company obtains and reviews the valuation methodology used by the investment manager or general partner and the latest audited financial statements to ensure that the investment partnership is following fair value principles consistent with GAAP in determining the net asset value of each limited partner's interest.

Senior secured bank loan funds

Level 3 - The Company has a $22.7 million investment in a closed end fund which invests primarily in loans. The Company has no right to redeem its investment in this fund. The Company’s investment in this fund is valued using estimated monthly net asset valuations received from the investment manager. The lock up provisions in this fund result in a lack of current observable market transactions between the fund participants and the fund, and therefore, the Company considers the fair value of its investment in this fund to be determined using Level 3 inputs. The Company obtains and reviews the latest audited financial statements to attempt to ensure that the fund is following fair value principles consistent with GAAP in determining the net asset value.

Hedge funds

Level 3 - The Company has $6.2 million of hedge fund investments that are invested in so called "side pockets" or illiquid investments. In these instances, the Company generally does not have the right to redeem its interest, and as such, the Company classifies this portion of its investment as Level 3. The fair value of these illiquid investments are determined by adjusting the previous periods' reported net asset value (generally one month in arrears) for an estimated periodic rate of return obtained from the respective investment manager.

For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the investment manager and the latest audited financial statements to ensure that the hedge fund investment is following fair value principles consistent with GAAP in determining the net asset value.

Miscellaneous other investments

Level 3 - Included in miscellaneous other investments is a loan to a third party with a fair value of $1.3 million. The Company determines the fair value of this loan using a DCF model and endeavors to incorporate all relevant information reasonably available, including the outstanding principal amount, interest rate inherent in the loan as determined using the 3-month LIBOR, credit spread and an illiquidity premium. The fair value of this loan is inversely correlated to the 3-month LIBOR, credit spread and illiquidity premium.

Other assets and liabilities

Assumed and ceded (re)insurance contracts

Level 3 - The $9.7 million fair value of the Company's assumed and ceded (re)insurance contracts accounted for at fair value is obtained through the use of an internal valuation model with the inputs to the internal valuation model based on proprietary data as observable market inputs are not available. The most significant unobservable inputs are the reserve for claims and claim expenses and losses recoverable. Generally, an increase (decrease) in the reserve for claims and claim expenses, or a decrease (increase) in losses recoverable, would result in a decrease (increase) to the fair value of the Company's assumed and ceded (re)insurance contracts.

Derivatives

Level 3 - Derivatives measured at fair value include $9.1 million of proprietary, non-exchange traded derivative-based risk management products primarily to address weather and energy risks, and hedging and trading activities related to these risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena and in instances where market prices are not available, the Company uses industry or internally developed valuation techniques such as spread option, Black Scholes, quanto and simulation modeling to determine fair value and are considered Level 3. These models may reference prices for similar instruments.

Observable and unobservable inputs to these valuation techniques vary by contract requirements and commodity type, are validated using market-based or independently sourced parameters where applicable and would typically include the following, if applicable, dependent on contract requirements and commodity type:


•	observable inputs: contract price, notional, option strike, term to expiry, interest rate, contractual limits;


•	unobservable inputs: correlation; and


•	both observable and unobservable: spot and forward volatilities, forward commodity price, forward weather curve, counterparty credit risk.

The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the above table on quantitative information.

If a trade has one or more significant valuation inputs that are unobservable, such trades are initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the initial valuation, the Company updates market observable inputs to reflect observable market changes. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. The Company seeks to use broker quotes in less liquid markets.

Changes in any or all of the unobservable inputs listed above may contribute positively or negatively to the overall portfolio fair value depending upon the underlying position. In general, movements in weather curves are the largest contributing factor that impact fair value. However, trades valued using unobservable inputs represent a small percentage of the total number of transactions in the portfolio.

Pricing models are internally approved by the Company's Risk Committee prior to implementation and are reviewed periodically.

Other

Level 3 - The Company has an investment of $14.2 million at June 30, 2012 in the common equity of a mortgage insurance company which provides private capital to lenders and investors that supports financing for homeowner mortgages. The fair value of this investment is based on the unadjusted net asset value obtained from the management of the mortgage insurance company. The fair value of the Company's investment is positively correlated to the net asset valuation. The Company also considers factors such as recent financial information, the value of capital transactions with the mortgage insurance company and management's judgment regarding whether any adjustments should be made to the net asset value.

The Company also has an investment in the preferred equity of a company that develops online risk management products primarily focused on motor fuels risk, more specifically, structuring products, sourcing the risk and facilitating the settlement of capital. The fair value of this investment at June 30, 2012 of $1.3 million was determined using recent private market transactions. In instances where private market transactions are not available, the fair value is measured using a number of qualitative and quantitative factors, including but not limited to a net asset estimation of the company, projected earnings, private market transactions, and any other information that may be available to the Company. At June 30, 2012, the Company determined that the fair value of its investment was appropriate when compared to the net asset position of the company and recent private market transactions. Should the net asset position of the company increase, the fair value of the Company's investment would also increase.

Below is a reconciliation of the beginning and ending balances, for the periods shown, of assets and liabilities measured at fair value on a recurring basis using Level 3 inputs. Interest and dividend income are included in net investment income and are excluded from the reconciliation.




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments, trading			Other investments			Other assets and (liabilities)			Total
Balance – April 1, 2012	$	27,838		$	418,537		$	48,145		$	494,520
Total unrealized losses
Included in net investment income	(63		)	(13,013		)	—			(13,076		)
Included in other income	—			—			(15,576		)	(15,576		)
Total realized gains
Included in net investment income	—			—			—			—
Included in other income	—			—			22,076			22,076
Total foreign exchange (losses) gains	—			(1,394		)	371			(1,023		)
Purchases	—			5,956			40,878			46,834
Sales	—			—			(91,655		)	(91,655		)
Settlements	—			(19,581		)	29,946			10,365
Net transfers into Level 3	—			—			—			—
Balance – June 30, 2012	$	27,775		$	390,505		$	34,185		$	452,465
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income	$	(63	)	$	(13,013	)	$	—		$	(13,076	)
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)	$	—		$	—		$	8,019		$	8,019




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments, trading		Other investments			Other assets and (liabilities)			Total
Balance – January 1, 2012	$	27,761	$	396,526		$	28,526		$	452,813
Total unrealized gains (losses)
Included in net investment income	14		16,094			—			16,108
Included in other loss	—		—			2,987			2,987
Total realized gains
Included in net investment income	—		—			—			—
Included in other loss	—		—			(33,232		)	(33,232		)
Total foreign exchange losses	—		(664		)	(6		)	(670		)
Purchases	—		18,645			50,159			68,804
Sales	—		—			(105,086		)	(105,086		)
Settlements	—		(40,096		)	90,837			50,741
Net transfers into Level 3	—		—			—			—
Balance – June 30, 2012	$	27,775	$	390,505		$	34,185		$	452,465
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income	$	14	$	16,094		$	—		$	16,108
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)	$	—	$	—		$	9,678		$	9,678




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other investments			Other assets and (liabilities)			Total
Balance – April 1, 2011	$	21,826		$	381,815		$	68,380		$	472,021
Total unrealized (losses) gains
Included in net investment income	(562		)	6,135			—			5,573
Included in other loss	—			—			91			91
Total realized gains
Included in net investment income	—			—			—			—
Included in other loss	—			—			3,307			3,307
Total foreign exchange losses	—			553			(91		)	462
Purchases	—			11,219			8,984			20,203
Sales	—			—			(6,864		)	(6,864		)
Settlements	—			(18,599		)	(815		)	(19,414		)
Net transfers into Level 3	—			—			—			—
Balance – June 30, 2011	$	21,264		$	381,123		$	72,992		$	475,379
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income	$	(562	)	$	6,135		$	—		$	5,573
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)	$	—		$	—		$	4,195		$	4,195




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other investments			Other assets and (liabilities)			Total
Balance – January 1, 2011	$	21,785		$	362,102		$	16,499		$	400,386
Total unrealized (losses) gains
Included in net investment income	(521		)	29,892			—			29,371
Included in other income	—			—			41,599			41,599
Total realized gains
Included in net investment income	—			—			—			—
Included in other income	—			—			12,822			12,822
Total foreign exchange losses	—			1,922			(142		)	1,780
Purchases	—			28,684			10,615			39,299
Sales	—			—			(11,024		)	(11,024		)
Settlements	—			(41,477		)	2,623			(38,854		)
Net transfers into Level 3	—			—			—			—
Balance – June 30, 2011	$	21,264		$	381,123		$	72,992		$	475,379
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in net investment income	$	(521	)	$	29,892		$	—		$	29,371
Change in unrealized gains (losses) for the period included in earnings for assets held at the end of the period included in other income (loss)	$	—		$	—		$	48,598		$	48,598

Financial Instruments Disclosed, But Not Carried, at Fair Value

The Company uses various financial instruments in the normal course of its business. The Company's insurance contracts are excluded from fair value of financial instruments accounting guidance, unless the Company elects the fair value option, and therefore, are not included in the amounts discussed herein. The carrying values of cash, accrued interest, receivables for investments sold, certain other assets, payables for investments purchased, certain other liabilities, and other financial instruments not included herein approximated their fair values.

Senior Notes

In January 2003, RenaissanceRe issued $100.0 million, which represents the carrying amount on the Company’s consolidated balance sheet, of 5.875% Senior Notes due February 15, 2013, with interest on the notes payable on February 15 and August 15 of each year. At June 30, 2012, the fair value of the 5.875% Senior Notes was $102.2 million (December 31, 2011 – $103.4 million).

In March 2010, RenRe North America Holdings Inc. (“RRNAH”) issued $250.0 million of 5.75% Senior Notes due March 15, 2020, with interest on the notes payable on March 15 and September 15 of each year. At June 30, 2012, the fair value of the 5.75% Senior Notes was $264.1 million (December 31, 2011 - $263.0 million).

The fair value of RenaissanceRe’s 5.875% Senior Notes and RRNAH’s 5.75% Senior Notes is determined using indicative market pricing obtained from third-party service providers, which the Company considers Level 2 in the fair value hierarchy. There have been no changes during the period in the Company's valuation technique used to determine the fair value of its Senior Notes.

The Fair Value Option for Financial Assets and Financial Liabilities

The Company has elected to account for certain assets and liabilities at fair value using the guidance under FASB ASC Topic Financial Instruments as the Company believes it represents the most meaningful measurement basis for these assets and liabilities. Below is a summary of the balances the Company has elected to account for at fair value:




	June 30, 2012		December 31, 2011
Other investments	$	743,568	$	748,984
Other assets	$	25,104	$	19,628

Included in net investment income for the three and six months ended June 30, 2012 was net unrealized (losses) gains of $(13.4) million and $21.9 million related to the changes in fair value of other investments (2011 – $5.7 million and $33.7 million, respectively). Net unrealized losses related to the changes in the fair value of other assets and liabilities recorded in other (loss) income was $0.4 million and $2.5 million for the three and six months ended June 30, 2012 (2011 – $(0.8) million and $43.3 million, respectively).

Measuring the Fair Value of Other Investments Using Net Asset Valuations

The table below shows the Company’s portfolio of other investments measured using net asset valuations:

At June 30, 2012

Fair Value

Unfunded
Commitments

Redemption Frequency

Redemption
Notice Period (Minimum Days)

Redemption
Notice Period (Maximum Days)

Private equity partnerships

360,268

99,125

See below

Senior secured bank loan funds

269,317

2,901

See below

Hedge funds

6,243

—

See below

Total other investments measured using net asset valuations

635,828

102,026

Private equity partnerships – Included in the Company’s investments in private equity partnerships are alternative asset limited partnerships (or similar corporate structures) that invest in certain private equity asset classes including U.S. and global leveraged buyouts; mezzanine investments; distressed securities; real estate; and oil, gas and power. The fair values of the investments in this category have been estimated using the net asset value of the investments, as discussed in detail above. The Company generally has no right to redeem its interest in any of these private equity partnerships in advance of dissolution of the applicable partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the liquidation of the underlying assets of the applicable limited partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 7 to 10 years from inception of the limited partnership.

Senior secured bank loan funds – The Company’s investment in senior secured bank loan funds includes funds that invest primarily in bank loans and other senior debt instruments. The fair values of the investments in this category have been determined using the net asset value per share of the funds or the estimated net asset per share where applicable, as discussed in detail above. Investments of $246.6 million are redeemable, in part on a monthly basis, or in whole over a three month period.

The Company also has a $22.7 million investment in a closed end fund which invests in loans. The Company has no right to redeem its investment in this fund.

Hedge funds – The Company invests in hedge funds that pursue multiple strategies. The fair values of the investments in this category are estimated using the net asset value per share of the funds, as discussed in detail above. The remaining portion of the Company's investments in hedge funds at June 30, 2012, are $6.2 million of so called “side pocket” investments which are not redeemable at the option of the shareholder. As noted above, the Company fully redeemed the remaining non-side pocket investments in hedge funds during June 2012. The Company has retained its interest in the side pocket investments until the underlying investments attributable to such side pockets are liquidated, realized or deemed realized at the discretion of the fund manager.