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 consolidated 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 valuation techniques that use at least one significant input that is unobservable (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 all or in part on significant 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.

Other than the transaction noted below, 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 3 during the period represented by these consolidated financial statements. As discussed in greater detail below, the Company transferred its investment in the common shares of Trupanion, Inc. (“Trupanion”), a company that provides insurance for a variety of veterinarian costs, from Level 3 to Level 1, effective July 18, 2014, the date on which Trupanion became a publicly traded company on the New York Stock Exchange (the “NYSE”). The fair value transferred from Level 3 to Level 1 was $24.6 million.

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 sheets:




At September 30, 2014	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	$	1,636,326		$	1,636,326	$	—		$	—
Agencies	120,025			—		120,025			—
Non-U.S. government (Sovereign debt)	282,326			—		282,326			—
Non-U.S. government-backed corporate	141,159			—		141,159			—
Corporate	1,572,168			—		1,556,232			15,936
Agency mortgage-backed	325,138			—		325,138			—
Non-agency mortgage-backed	264,455			—		264,455			—
Commercial mortgage-backed	405,635			—		405,635			—
Asset-backed	31,603			—		31,603			—
Total fixed maturity investments	4,778,835			1,636,326		3,126,573			15,936
Short term investments	1,031,143			—		1,031,143			—
Equity investments trading	301,714			301,714		—			—
Other investments
Private equity partnerships	300,800			—		—			300,800
Catastrophe bonds	179,246			—		179,246			—
Senior secured bank loan fund	18,723			—		—			18,723
Hedge funds	2,718			—		—			2,718
Total other investments	501,487			—		179,246			322,241
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts	(7,281		)	—		—			(7,281		)
Derivatives (1)	(1,468		)	479		(1,957		)	10
Other	(8,523		)	—		(8,523		)	—
Total other assets and (liabilities)	(17,272		)	479		(10,480		)	(7,271		)
	$	6,595,907		$	1,938,519	$	4,326,482		$	330,906

(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.




December 31, 2013	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	$	1,352,413		$	1,352,413	$	—		$	—
Agencies	186,050			—		186,050			—
Non-U.S. government (Sovereign debt)	334,580			—		334,580			—
Non-U.S. government-backed corporate	237,479			—		237,479			—
Corporate	1,803,415			—		1,775,835			27,580
Agency mortgage-backed	341,908			—		341,908			—
Non-agency mortgage-backed	257,938			—		257,938			—
Commercial mortgage-backed	314,236			—		314,236			—
Asset-backed	15,258			—		15,258			—
Total fixed maturity investments	4,843,277			1,352,413		3,463,284			27,580
Short term investments	1,044,779			—		1,044,779			—
Equity investments trading	254,776			254,776		—			—
Other investments
Private equity partnerships	322,391			—		—			322,391
Catastrophe bonds	229,016			—		229,016			—
Senior secured bank loan funds	18,048			—		—			18,048
Hedge funds	3,809			—		—			3,809
Total other investments	573,264			—		229,016			344,248
Other assets and (liabilities)
Derivatives (1)	4,758			823		6,425			(2,490		)
Other	(12,991		)	—		(12,991		)	—
Total other assets and (liabilities)	(8,233		)	823		(6,566		)	(2,490		)
	$	6,707,863		$	1,608,012	$	4,730,513		$	369,338

(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, non-U.S. government-backed corporate, corporate, agency mortgage-backed, non-agency mortgage-backed, commercial mortgage-backed and asset-backed.

The Company’s fixed maturity investments 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 the Company’s fixed maturity investments are detailed below by asset class.

U.S. treasuries

Level 1 - At September 30, 2014, the Company’s U.S. treasuries fixed maturity investments are primarily priced by pricing services and had a weighted average effective yield of 1.0% and a weighted average credit quality of AA (December 31, 2013 - 0.8% 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 September 30, 2014, the Company’s agency fixed maturity investments had a weighted average effective yield of 1.5% and a weighted average credit quality of AA (December 31, 2013 - 1.3% 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 integrate 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 September 30, 2014 had a weighted average effective yield of 1.2% and a weighted average credit quality of AA (December 31, 2013 - 1.3% 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.

Non-U.S. government-backed corporate

Level 2 - Non-U.S. government-backed corporate fixed maturity investments had a weighted average effective yield of 1.4% and a weighted average credit quality of AA at September 30, 2014 (December 31, 2013 - 1.1% 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 September 30, 2014, the Company’s corporate fixed maturity investments principally consist of U.S. and international corporations and had a weighted average effective yield of 3.0% and a weighted average credit quality of BBB (December 31, 2013 - 2.7% and BBB, 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 September 30, 2014, the Company’s agency mortgage-backed fixed maturity investments included agency residential mortgage-backed securities with a weighted average effective yield of 2.6%, a weighted average credit quality of AA and a weighted average life of 6.2 years (December 31, 2013 - 2.9%, AA and 6.2 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 to be announced 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 September 30, 2014, the Company’s non-agency prime residential mortgage-backed fixed maturity investments have a weighted average effective yield of 3.2%, a weighted average credit quality of non-investment grade, and a weighted average life of 4.3 years (December 31, 2013 - 3.7%, BBB and 4.4 years, respectively). The Company’s non-agency Alt-A fixed maturity investments held at September 30, 2014 have a weighted average effective yield of 3.9%, a weighted average credit quality of BBB and a weighted average life of 5.0 years (December 31, 2013 - 4.7%, non-investment grade and 4.0 years, respectively). Securities held in these sectors are primarily priced by pricing services using an option adjusted spread 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 September 30, 2014 have a weighted average effective yield of 2.2%, a weighted average credit quality of AAA, and a weighted average life of 4.0 years (December 31, 2013 - 2.1%, AA and 3.3 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 September 30, 2014, the Company’s asset-backed fixed maturity investments had a weighted average effective yield of 1.6%, a weighted average credit quality of AAA and a weighted average life of 2.7 years (December 31, 2013 - 2.0%, AAA and 3.5 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 is 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 is 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 applicable securities exchanges. All data sources are regularly reviewed for accuracy to attempt to ensure the most reliable price source was used for each security.

At June 30, 2014, the Company had a corporate fixed maturity investment of $30.2 million in the convertible preferred equity of Trupanion, for which the Company measured the fair value using Level 3 inputs. On July 18, 2014, Trupanion common stock began publicly trading on the NYSE. Effective immediately prior to the closing of the IPO, the Company’s investment in the convertible preferred equity of Trupanion was converted into 2.5 million common shares of Trupanion. Trupanion common shares began publicly trading on the NYSE on July 18, 2014 at a share price of $10.00, resulting in a fair value of $24.6 million. Following the IPO, the Company transferred its investment in Trupanion from corporate fixed maturity investments to its portfolio of equity investments trading on its consolidated balance sheet and any realized and unrealized gains or losses related to Trupanion from the IPO price are included in net realized and unrealized gains (losses) on investments on the Company’s consolidated statements of operations. The Company has agreed, subject to certain exceptions, not to dispose of or hedge any of the common shares of Trupanion it holds prior to January 14, 2015. Included in equity investments trading at September 30, 2014 is $20.9 million related to the Company’s investment in Trupanion.

Other investments

Catastrophe bonds

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

Other assets and liabilities

Derivatives

Level 1 and Level 2 - Other assets and liabilities include certain derivatives entered into by the Company. The fair value of these transactions includes 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 2 - The liabilities measured at fair value and included in Level 2 at September 30, 2014 of $8.5 million are comprised of 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 September 30, 2014	Fair Value (Level 3)			Valuation Technique	Unobservable (U) and Observable (O) Inputs	Low			High			Weighted Average or Actual
Fixed maturity investments
Corporate	$	15,936		Discounted cash flow (“DCF”)	Credit spread (U)	n/a			n/a			0.0		%
					Liquidity discount (U)	n/a			n/a			1.0		%
					Risk-free rate (O)	n/a			n/a			0.4		%
					Dividend rate (O)	n/a			n/a			6.2		%
Total fixed maturity investments	15,936
Other investments
Private equity partnerships	300,800			Net asset valuation	Estimated performance (U)	(13.9		)%	8.3		%	(0.4		)%
Senior secured bank loan fund	18,723			Net asset valuation	Estimated performance (U)	n/a			n/a			0.5		%
Hedge funds	2,718			Net asset valuation	Estimated performance (U)	0.0		%	0.0		%	0.0		%
Total other investments	322,241
Other assets and (liabilities)
Assumed and ceded (re)insurance contracts	(7,281		)	Internal valuation model	Net undiscounted cash flows (U)	$	140		$	6,284		$	3,784
					Contract period (O)	824			1,100			857
					Discount rate (U)	n/a			n/a			0.8		%
Weather contract	(254		)	Internal valuation model	See below	n/a			n/a			See below
Call rights	264			Internal valuation model	See below	n/a			n/a			See below
Total other assets and (liabilities)	(7,271		)
	$	330,906

Fixed Maturity Investments

Corporate

Level 3 - Included in the Company’s corporate fixed maturity investments is an investment in the preferred equity of an insurance holding company with a fair value of $15.9 million at September 30, 2014. The Company measures the fair value of this investment using a DCF model and seeks to incorporate all relevant information reasonably available. The Company considers the contractual agreement which stipulates the methodology for calculating a dividend rate to be paid upon liquidation, conversion or redemption. At September 30, 2014, the dividend rate was 6.2%. In addition, the Company has estimated a liquidity discount of 1.0%, a risk-free rate of 0.4% and a credit spread of 0.0%. 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 this corporate fixed maturity investment determined by a DCF model is positively correlated to the dividend rate, and inversely correlated to the credit spread, liquidity discount and the risk-free rate.

Other investments

Private equity partnerships

Level 3 - Included in the Company’s $300.8 million of investments in private equity partnerships at September 30, 2014 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 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 three months ended September 30, 2014 was negative 13.9% to positive 8.3% with a weighted average of negative 0.4%. 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 annual financial statements to attempt 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 fund

Level 3 - The Company has $18.7 million invested 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 the estimated monthly net asset valuation 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 annual financial statements to attempt to ensure that the fund is following fair value principles consistent with GAAP in determining the net asset value. The fair value of the Company’s investment in the senior secured bank loan fund is positively correlated to the estimated monthly net asset valuations received from the investment manager.

Hedge funds

Level 3 - The Company has $2.7 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 is 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 annual 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.

Other assets and liabilities

Assumed and ceded (re)insurance contracts

Level 3 - The Company has a $7.3 million liability related to assumed and ceded (re)insurance contracts accounted for at fair value, with the fair value obtained through the use of an internal valuation model. The inputs to the internal valuation model are principally based on proprietary data as observable market inputs are generally not available. The most significant unobservable inputs include the assumed and ceded expected net cash flows related to the contracts, including the expected premium, acquisition expenses and losses; and the relevant discount rate used to present value the net cash flows. The contract period is considered an observable input as it is defined in the contract. Generally, an increase in the net expected cash flows and expected term of the contract and a decrease in the discount rate, would result in an increase in the expected profit and ultimate fair value of the Company's assumed and ceded (re)insurance contracts.

Weather Contract

Level 3 - The Company has a $0.3 million liability related to a weather contract entered into with an insurance company, with the fair value determined through the use of an internal valuation model. Inputs to the internal valuation model are based on proprietary data as observable market inputs are not available. The most significant unobservable input is the potential payment that would become due to a counterparty following the occurrence of a triggering event as reported by an external agency. Generally, an increase (decrease) in the potential payment would result in an increase (decrease) to the fair value of the Company’s weather contract liability.

Call Rights

Level 3 - The Company has an agreement with a counterparty that gives the counterparty the right to purchase shares the Company has in certain of its equity method investees at a price above the Company’s current carrying value for those investments. The agreement is considered a derivative for accounting purposes and the Company’s estimated fair value of the agreement is $0.3 million. The fair value is based on an internal valuation model which incorporates the estimated intrinsic value of the agreement, the time value of money, and the likelihood of the agreement being exercised and ultimately settled. The fair value of the agreement is positively correlated to the tangible GAAP book value of the underlying equity method investees as well as the likelihood of the agreement being exercised and ultimately settled.

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 - July 1, 2014	$	46,176		$	334,149		$	1,071		$	381,396
Total unrealized gains (losses)
Included in net investment income	(5,596		)	(8,054		)	9			(13,641		)
Included in other (loss) income	—			—			(1,956		)	(1,956		)
Total realized losses
Included in other (loss) income	—			—			225			225
Total foreign exchange gains	—			(2,074		)	20			(2,054		)
Purchases	—			12,425			(6,640		)	5,785
Settlements	—			(14,205		)	—			(14,205		)
Net transfers out of Level 3	(24,644		)	—			—			(24,644		)
Balance - September 30, 2014	$	15,936		$	322,241		$	(7,271	)	$	330,906
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in net investment income	$	(2	)	$	(8,054	)	$	9		$	(8,047	)
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in other loss	$	—		$	—		$	(1,956	)	$	(1,956	)




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other investments			Other assets and (liabilities)			Total
Balance - January 1, 2014	$	27,580		$	344,248		$	(2,490	)	$	369,338
Total unrealized gains (losses)
Included in net investment income	13,000			1,401			1,404			15,805
Included in other (loss) income	—			—			264			264
Total realized losses
Included in other (loss) income	—			—			225			225
Total foreign exchange gains	—			(2,273		)	(34		)	(2,307		)
Purchases	—			37,817			(6,640		)	31,177
Settlements	—			(58,952		)	—			(58,952		)
Net transfers out of Level 3	(24,644		)	—			—			(24,644		)
Balance - September 30, 2014	$	15,936		$	322,241		$	(7,271	)	$	330,906
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in net investment income	$	210		$	1,401		$	1,404		$	3,015
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in other loss	$	—		$	—		$	264		$	264




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other investments			Other assets and (liabilities)			Total
Balance - July 1, 2013	$	25,681		$	393,704		$	625		$	420,010
Total unrealized gains (losses)
Included in net investment income	(311		)	20,480			—			20,169
Included in other (loss) income	—			—			(625		)	(625		)
Total realized losses
Included in other (loss) income	—			—			281			281
Total foreign exchange gains	—			1,218			—			1,218
Purchases	—			6,056			(563		)	5,493
Settlements	—			(22,829		)	—			(22,829		)
Balance - September 30, 2013	$	25,370		$	398,629		$	(282	)	$	423,717
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in net investment income	$	(311	)	$	20,480		$	—		$	20,169
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in other income (loss)	$	—		$	—		$	(625	)	$	(625	)




	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Fixed maturity investments trading			Other investments			Other assets and (liabilities)			Total
Balance - January 1, 2013	$	27,792		$	381,067		$	21,513		$	430,372
Total unrealized gains (losses)
Included in net investment income	78			31,123			—			31,201
Included in other income (loss)	—			—			(625		)	(625		)
Total realized losses
Included in other income (loss)	—			—			(2,365		)	(2,365		)
Total foreign exchange gains	—			801			—			801
Purchases	—			35,252			(563		)	34,689
Settlements	(2,500		)	(67,856		)	—			(70,356		)
Reclassified from other assets to other investments	—			18,242			(18,242		)	—
Balance - September 30, 2013	$	25,370		$	398,629		$	(282	)	$	423,717
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in net investment income	$	78		$	29,913		$	—		$	29,991
Change in unrealized gains for the period included in earnings for assets held at the end of the period included in other income (loss)	$	—		$	—		$	(625	)	$	(625	)

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 the 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 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 September 30, 2014, the fair value of the 5.75% Senior Notes was $271.0 million (December 31, 2013 – $273.9 million).

The fair value of 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 the Senior Notes.

The Fair Value Option for Financial Assets and Financial Liabilities

The Company has elected to account for certain financial assets and financial 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:




	September 30, 2014		December 31, 2013
Other investments	$	501,487	$	573,264
Other liabilities	$	7,281	$	—

Included in net investment income for the three and nine months ended September 30, 2014 was net unrealized losses of $6.0 million and gains of $2.9 million, respectively, related to the changes in fair value of other investments (2013 – gains of $22.9 million and gains of $32.6 million, respectively). Net unrealized gains related to the changes in the fair value of other assets and liabilities recorded in other (loss) income was $Nil and $Nil for the three and nine months ended September 30, 2014, respectively (2013 - $Nil and $Nil, 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 September 30, 2014

Fair Value

Unfunded
Commitments

Redemption Frequency

Redemption
Notice Period (Minimum Days)

Redemption
Notice Period (Maximum Days)

Private equity partnerships

300,800

77,563

See below

Senior secured bank loan fund

18,723

6,666

See below

Hedge funds

2,718

—

See below

Total other investments measured using net asset valuations

322,241

84,229

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 in respect of 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 private equity 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 respective private equity 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 respective limited partnership.

Senior secured bank loan fund – The Company has $18.7 million invested 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 investments in this fund is valued using the estimated monthly net asset valuation received from the investment manager, as discussed in detail above. It is estimated that the majority of the underlying assets in the closed end fund would liquidate over 4 to 5 years from inception of the 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 Company’s investments in hedge funds at September 30, 2014 are $2.7 million of so called “side pocket” investments which are not redeemable at the option of the shareholder. The Company will retain its interest in the side pocket investments referred to above, until the underlying investments attributable to such side pockets are liquidated, realized or deemed realized at the discretion of the fund manager.