Fair Value Hierarchy

Fair value is defined as the price to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. 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 hierarchy is broken down into three levels as follows:


•	Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.


•	Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.


•	Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own judgments about assumptions that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead us to change the selection of our valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy.

We used the following valuation techniques including significant inputs and assumptions in estimating the fair value of our financial instruments as well as the general classification of such financial instruments pursuant to the above fair value hierarchy.

Fixed Maturities

At each valuation date, we use the market approach valuation technique to estimate the fair value of our fixed maturities portfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services is sourced from multiple vendors, when available, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, we obtain non-binding quotes from broker-dealers who are active in the corresponding markets.

The valuation techniques including significant inputs generally used to determine the fair value of our fixed maturities by asset class as well as the classification in the fair value hierarchy are described in detail below.

U.S. government and agency

U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. As the fair values of U.S. Treasury securities are based on unadjusted market prices in active markets, these securities are classified within Level 1. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.

Non-U.S. government

Non-U.S. government securities comprise bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair values of these securities are based on prices obtained from international indices or a valuation model which uses inputs including interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs are observable market inputs, the fair value of non-U.S. government securities are classified within Level 2.

Corporate debt

Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of corporate debt securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3.

Agency RMBS

Agency RMBS securities consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of these securities are priced using a mortgage pool specific model which uses daily inputs from the active to be announced market and the spread associated with each mortgage pool based on vintage. As the significant inputs are observable market inputs, the fair values of Agency RMBS securities are classified within Level 2.

CMBS

CMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using a pricing model which uses dealer quotes and other available trade information along with security level characteristics to determine deal specific spreads. As the significant inputs are observable market inputs, the fair values of CMBS securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3.

Non-Agency RMBS

Non-Agency RMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using an option adjusted spread model or other relevant models, which use inputs including available trade information or broker quotes, prepayment and default projections based on historical statistics of the underlying collateral and current market data. As the significant inputs are observable market inputs, the fair values of Non-Agency RMBS securities are classified within Level 2.

ABS

ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO Debt originated by a variety of financial institutions. The fair values of ABS are priced using a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3.

Municipals

Municipals comprise revenue and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair values of these securities are determined using spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2.

Equity Securities

Equity securities include common stocks, exchange-traded funds and bond mutual funds. As the fair values of common stocks and exchange-traded funds are based on unadjusted quoted market prices in active markets, these securities are classified within Level 1.

As bond mutual funds have daily liquidity with redemption based on the NAV of the funds, the fair values of these securities are classified within Level 2.

Other Investments

At September 30, 2016, our investments in CLO - Equities were classified within Level 3 as we estimated the fair value for these securities using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in the secondary markets.

Other privately held securities include convertible preferred shares, convertible notes and notes payable. In the reporting period of investment, the cost of these investments approximates fair value. In subsequent measurement periods, a discounted cash flow model is used to determine the fair value of these securities. These securities are classified within Level 3.

Short-Term Investments

Short-term investments primarily comprise highly liquid securities with maturities greater than three months but less than one year from the date of purchase. These securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value.

Derivative Instruments

Our foreign currency forward contracts, interest rate swaps and commodity contracts are customized to our economic hedging strategies and trade in the over-the-counter derivative market. We use the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly, we classified these derivatives within Level 2.

We also participate in non-exchange traded derivative-based risk management products addressing weather risks. We use observable market inputs and unobservable inputs in combination with industry or internally-developed valuation and forecasting techniques to determine fair value. We classify these instruments within Level 3.

Insurance-linked Securities

Insurance-linked securities comprise an investment in a catastrophe bond. We obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3.

Cash Settled Awards

Cash settled awards comprise restricted stock units that form part of our compensation program. Although the fair value of these awards is determined using observable quoted market prices in active markets, the stock units themselves are not actively traded. Accordingly, we have classified these liabilities within Level 2.

The tables below present the financial instruments measured at fair value on a recurring basis for the periods indicated:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair value based on NAV practical expedient		Total Fair Value

At September 30, 2016
Assets
Fixed maturities
U.S. government and agency	$	1,522,246	$	40,631	$	—	$	—	$	1,562,877
Non-U.S. government	—		582,056		—		—		582,056
Corporate debt	—		4,499,408		69,092		—		4,568,500
Agency RMBS	—		2,522,731		—		—		2,522,731
CMBS	—		885,355		8,920		—		894,275
Non-Agency RMBS	—		71,830		—		—		71,830
ABS	—		1,235,596		—		—		1,235,596
Municipals	—		128,995		—		—		128,995
	1,522,246		9,966,602		78,012		—		11,566,860
Equity securities
Common stocks	69		—		—		—		69
Exchange-traded funds	504,206		—		—		—		504,206
Bond mutual funds	—		140,069		—		—		140,069
	504,275		140,069		—		—		644,344
Other investments
Hedge funds	—		—		—		514,625		514,625
Direct lending funds	—		—		—		125,002		125,002
Private equity funds	—		—		—		89,170		89,170
Real estate funds	—		—		—		11,782		11,782
Other privately held investments	—		—		42,900		—		42,900
CLO - Equities	—		—		63,783		—		63,783
	—		—		106,683		740,579		847,262
Short-term investments	—		39,877		—		—		39,877
Other assets
Derivative instruments (see Note 5)	—		4,469		2,488		—		6,957
Insurance-linked securities	—		—		25,283		—		25,283
Total Assets	$	2,026,521	$	10,151,017	$	212,466	$	740,579	$	13,130,583
Liabilities
Derivative instruments (see Note 5)	$	—	$	4,411	$	8,184	$	—	$	12,595
Cash settled awards (see Note 7)	—		34,288		—		—		34,288
Total Liabilities	$	—	$	38,699	$	8,184	$	—	$	46,883



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair value based on NAV practical expedient		Total Fair Value

At December 31, 2015
Assets
Fixed maturities
U.S. government and agency	$	1,632,355	$	19,594	$	—	$	—	$	1,651,949
Non-U.S. government	—		739,005		—		—		739,005
Corporate debt	—		4,324,251		38,518		—		4,362,769
Agency RMBS	—		2,249,236		—		—		2,249,236
CMBS	—		1,072,376		10,922		—		1,083,298
Non-Agency RMBS	—		101,008		—		—		101,008
ABS	—		1,371,270		—		—		1,371,270
Municipals	—		161,214		—		—		161,214
	1,632,355		10,037,954		49,440		—		11,719,749
Equity securities
Common stocks	—		—		—		—		—
Exchange-traded funds	473,973		—		—		—		473,973
Bond mutual funds	—		124,025		—		—		124,025
	473,973		124,025		—		—		597,998
Other investments
Hedge funds	—		—		—		656,773		656,773
Direct lending funds	—		—		—		90,120		90,120
Private equity funds	—		—		—		—		—
Real estate funds	—		—		—		4,929		4,929
Other privately held investments	—		—		—		—		—
CLO - Equities	—		—		27,257		37,677		64,934
	—		—		27,257		789,499		816,756
Short-term investments	—		34,406		—		—		34,406
Other assets
Derivative instruments (see Note 5)	—		2,072		4,395		—		6,467
Insurance-linked securities	—		—		24,925		—		24,925
Total Assets	$	2,106,328	$	10,198,457	$	106,017	$	789,499	$	13,200,301
Liabilities
Derivative instruments (see Note 5)	$	—	$	7,692	$	10,937	$	—	$	18,629
Cash settled awards (see Note 7)	—		33,215		—		—		33,215
Total Liabilities	$	—	$	40,907	$	10,937	$	—	$	51,844

During 2016 and 2015, there were no transfers between Levels 1 and 2.

Except certain fixed maturities and insurance-linked securities priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs we have used in estimating fair value at September 30, 2016 for our investments classified as Level 3 in the fair value hierarchy.



	Fair Value			Valuation Technique	Unobservable Input	Range	Weighted Average

Other investments - CLO - Equities	$	35,594		Discounted cash flow	Default rates	4.0%	4.0%
					Loss severity rate	35.0% - 53.5%	35.4%
					Collateral spreads	3.6% - 4.0%	4.0%
					Estimated maturity dates	2 - 6 years	6 years

	28,189			Liquidation value	Fair value of collateral	100%	100%
					Discount margin	0.1% - 19.1%	2.4%

Other investments - Other privately held investments	42,900			Discounted cash flow	Discount rate	5.0% - 8.0%	7.2%

Derivatives - Weather derivatives, net	$	(5,696	)	Simulation model	Weather curve	1 - 2294⁽¹⁾	n/a⁽²⁾
					Weather standard deviation	1 - 1029⁽¹⁾	n/a⁽²⁾

(1) Measured in Heating Degree Days ("HDD") which is the number of degrees the daily temperature is below a reference temperature. The cumulative HDD for the duration of the derivatives contract is compared to the strike value to determine the necessary settlement.


(2)	Due to the diversity of the portfolio, the range of unobservable inputs can be widespread; therefore, presentation of a weighted average is not useful. Weather parameters may include various temperature and/or precipitation measures that will naturally vary by geographic location of each counterparty's operations.

The CLO - Equities market continues to be mostly inactive with only a small number of transactions being observed and fewer still involving transactions in our CLO - Equities. Accordingly, we use models to estimate the fair value of our investments in CLO - Equities. Given that all of our direct investments in CLO - Equities are past their reinvestment period, there is uncertainty over the remaining time to maturity. As such our direct investments in CLO - Equities are valued at the lower of the liquidation value and fair value based on an internally developed discounted cash flow model.

The liquidation valuation is based on the fair value of the net underlying collateral which is determined by applying market discount margins by credit quality bucket. An increase (decrease) in the market discount margin would result in a decrease (increase) in value of our CLO - Equities. Regarding the discounted cash flow model, the default and loss severity rates are the most judgmental unobservable market inputs to which the valuation of CLO - Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in lower (higher) fair value estimates for direct investments in our CLO - Equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs as they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (decrease) in either of these significant inputs in isolation would result in higher (lower) fair value estimates for direct investments in our CLO - Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.

On a quarterly basis, our valuation process for CLO - Equities includes a review of the underlying collateral along with related discount margins by credit quality bucket used in the liquidation valuation and a review of the underlying cash flows and key assumptions used in the discounted cash flow model. We review and update the above significant unobservable inputs based on information obtained from secondary markets, including information received from the managers of our CLO - Equities portfolio.

In order to assess the reasonableness of the inputs we use in our models, we maintain an understanding of current market conditions, historical results, as well as emerging trends that may impact future cash flows. In addition,we update the assumptions we use in our models through regular communication with industry participants and ongoing monitoring of the deals in which we participate (e.g. default and loss severity rate trends).

Other privately held securities are initially valued at cost which approximates fair value. In subsequent measurement periods, a discounted cash flow model is used to determine the fair value of these securities. These models include inputs specific to each investment. The inputs used in the fair value measurement include dividend or interest rates and a discount rate. The discount rate is judgmental and the most significant unobservable input used in the valuation of the other privately held securities. Significant increases (decreases) in this input in isolation could result in a significantly higher (lower) fair value measurement. In order to assess the reasonableness of the inputs we use in our models, we maintain an understanding of current market conditions, historical results, as well as investee specific information that may impact future cash flows.

Weather derivatives relate to non-exchange traded risk management products addressing weather risks. We use observable market inputs and unobservable inputs in combination with industry or internally-developed valuation and forecasting techniques to determine fair value. The models may reference market price information for similar instruments. The pricing models are internally reviewed by Risk Management personnel prior to implementation and are reviewed periodically thereafter.

Observable and unobservable inputs to these models vary by contract type but would typically include the following:


•	Observable inputs: market prices for similar instruments, notional price, option strike price, term to expiry, contractual limits;


•	Unobservable inputs: correlation; and


•	Both observable and unobservable inputs: weather curves, weather standard deviation.

In general, weather curves are the most significant contributing input to fair value determination. Changes in this variable can result in higher or lower fair value depending on the underlying position. In addition, changes in any or all of the unobservable inputs identified above may contribute positively or negatively to overall portfolio value. The correlation input will quantify the interrelationship, if any, amongst the other variables.

The following tables present changes in Level 3 for financial instruments measured at fair value on a recurring basis for the periods indicated:



	Opening Balance		Transfers into Level 3		Transfers out of Level 3			Included in earnings⁽¹⁾			Included in OCI⁽²⁾			Purchases		Sales			Settlements/ Distributions			Closing Balance		Change in unrealized investment gain/(loss)⁽³⁾

Three months ended September 30, 2016
Fixed maturities
Corporate debt	$	62,022	$	—	$	—		$	(9	)	$	100		$	7,563	$	—		$	(584	)	$	69,092	$	—
CMBS	10,210		—		—			—			(48		)	—		—			(1,242		)	8,920		—
ABS	—		—		—			—			—			—		—			—			—		—
	72,232		—		—			(9		)	52			7,563		—			(1,826		)	78,012		—
Other investments
Other privately held investments	41,755		—		—			(355		)	—			1,500		—			—			42,900		(355		)
CLO - Equities	65,883		—		—			8,419			—			—		—			(10,519		)	63,783		8,419
	107,638		—		—			8,064			—			1,500		—			(10,519		)	106,683		8,064
Other assets
Derivative instruments	5		—		—			665			—			1,818		—			—			2,488		665
Insurance-linked securities	25,025		—		—			258			—			—		—			—			25,283		258
	25,030		—		—			923			—			1,818		—			—			27,771		923
Total assets	$	204,900	$	—	$	—		$	8,978		$	52		$	10,881	$	—		$	(12,345	)	$	212,466	$	8,987

Other liabilities
Derivative instruments	$	1,978	$	—	$	—		$	(169	)	$	—		$	6,384	$	—		$	(9	)	$	8,184	$	335
Total liabilities	$	1,978	$	—	$	—		$	(169	)	$	—		$	6,384	$	—		$	(9	)	$	8,184	$	335

Nine months ended September 30, 2016
Fixed maturities
Corporate debt	$	38,518	$	20,412	$	(1,955	)	$	(988	)	$	1,188		$	17,107	$	(4,015	)	$	(1,175	)	$	69,092	$	—
CMBS	10,922		—		—			—			(134		)	—		—			(1,868		)	8,920		—
ABS	—		—		—			—			—			—		—			—			—		—
	49,440		20,412		(1,955		)	(988		)	1,054			17,107		(4,015		)	(3,043		)	78,012		—
Other investments
Other privately held investments	—		—		—			(1,505		)	—			44,405		—			—			42,900		(1,505		)
CLO - Equities	27,257		36,378		—			17,431			—			—		—			(17,283		)	63,783		17,431
	27,257		36,378		—			15,926			—			44,405		—			(17,283		)	106,683		15,926
Other assets
Derivative instruments	4,395		—		—			3,255			—			3,623		—			(8,785		)	2,488		669
Insurance-linked securities	24,925		—		—			358			—			—		—			—			25,283		358
	29,320		—		—			3,613			—			3,623		—			(8,785		)	27,771		1,027
Total assets	$	106,017	$	56,790	$	(1,955	)	$	18,551		$	1,054		$	65,135	$	(4,015	)	$	(29,111	)	$	212,466	$	16,953

Other liabilities
Derivative instruments	$	10,937	$	—	$	—		$	2,445		$	—		$	7,189	$	—		$	(12,387	)	$	8,184	$	457
Total liabilities	$	10,937	$	—	$	—		$	2,445		$	—		$	7,189	$	—		$	(12,387	)	$	8,184	$	457



	Opening Balance		Transfers into Level 3		Transfers out of Level 3			Included in earnings⁽¹⁾			Included in OCI⁽²⁾			Purchases		Sales		Settlements/ Distributions			Closing Balance		Change in unrealized investment gain/(loss)⁽³⁾

Three months ended September 30, 2015
Fixed maturities
Corporate debt	$	43,008	$	—	$	—		$	(2	)	$	300		$	22,821	$	—	$	(4,403	)	$	61,724	$	—
CMBS	21,900		—		(9,902		)	—			(219		)	—		—		(461		)	11,318		—
ABS	110		—		—			—			—			—		—		(3		)	107		—
	65,018		—		(9,902		)	(2		)	81			22,821		—		(4,867		)	73,149		—
Other investments
Other privately held investments	—		—		—			—			—			—		—		—			—		—
CLO - Equities	36,921		—		—			1,192			—			—		—		(3,118		)	34,995		1,192
	36,921		—		—			1,192			—			—		—		(3,118		)	34,995		1,192
Other assets
Derivative instruments	240		—		—			35			—			—		—		(240		)	35		35
Insurance-linked securities	24,837		—		—			175			—			—		—		—			25,012		175
	25,077		—		—			210			—			—		—		(240		)	25,047		210
Total assets	$	127,016	$	—	$	(9,902	)	$	1,400		$	81		$	22,821	$	—	$	(8,225	)	$	133,191	$	1,402

Other liabilities
Derivative instruments	$	818	$	—	$	—		$	(331	)	$	—		$	6,475	$	—	$	—		$	6,962	$	(331	)
Total liabilities	$	818	$	—	$	—		$	(331	)	$	—		$	6,475	$	—	$	—		$	6,962	$	(331	)

Nine months ended September 30, 2015
Fixed maturities
Corporate debt	$	15,837	$	—	$	—		$	(2	)	$	724		$	54,445	$	—	$	(9,280	)	$	61,724	$	—
CMBS	17,763		5,072		(9,902		)	—			(543		)	—		—		(1,072		)	11,318		—
ABS	40,031		—		(39,851		)	—			105			—		—		(178		)	107		—
	73,631		5,072		(49,753		)	(2		)	286			54,445		—		(10,530		)	73,149		—
Other investments
Other privately held investments	—		—		—			—			—			—		—		—			—		—
CLO - Equities	37,046		—		—			7,930			—			—		—		(9,981		)	34,995		7,930
	37,046		—		—			7,930			—			—		—		(9,981		)	34,995		7,930
Other assets
Derivative instruments	111		—		—			(792		)	—			—		—		716			35		35
Insurance-linked securities	—		—		—			12			—			25,000		—		—			25,012		12
	111		—		—			(780		)	—			25,000		—		716			25,047		47
Total assets	$	110,788	$	5,072	$	(49,753	)	$	7,148		$	286		$	79,445	$	—	$	(19,795	)	$	133,191	$	7,977

Other liabilities
Derivative instruments	$	15,288	$	—	$	—		$	(12,053	)	$	—		$	8,698	$	—	$	(4,971	)	$	6,962	$	(318	)
Total liabilities	$	15,288	$	—	$	—		$	(12,053	)	$	—		$	8,698	$	—	$	(4,971	)	$	6,962	$	(318	)


(1)	Gains and losses included in earnings on fixed maturities are included in net realized investment gains (losses). Gains and (losses) included in earnings on other investments are included in net investment income. Gains (losses) on weather derivatives included in earnings are included in other insurance-related income.


(2)	Gains and losses included in other comprehensive income (“OCI”) on fixed maturities are included in unrealized gains (losses) arising during the period.


(3)	Change in unrealized investment gain (loss) relating to assets held at the reporting date.

The transfers into and out of fair value hierarchy levels reflect the fair value of the securities at the end of the reporting period.

Transfers into Level 3 from Level 2

There were no transfers to Level 3 from Level 2 made during the three months ended September 30, 2016 and 2015.

The transfers to Level 3 from Level 2 made during the nine months ended September 30, 2016 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities and as the result of a change in valuation methodology relating to our CLO equity fund. An income approach valuation technique (discounted cash flow model) is used to estimate fair value at September 30, 2016. As the NAV practical expedient is no longer used the CLO equity fund is now categorized within the fair value hierarchy.

The transfers to Level 3 from Level 2 made during the nine months ended September 30, 2015 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities.

Transfers out of Level 3 into Level 2

There were no transfers to Level 2 from Level 3 made during the three months ended September 30, 2016. The transfers to Level 2 from Level 3 made during the nine months ended September 30, 2016 were primarily due to the availability of observable market

inputs and quotes from pricing vendors on certain fixed maturities.

The transfers to Level 2 from Level 3 made during the three and nine months ended September 30, 2015 were primarily due to the availability of observable market inputs and quotes from pricing vendors on certain fixed maturities and CLO Debt securities.

Measuring the Fair Value of Other Investments Using Net Asset Valuations

As a practical expedient, we estimate fair values for hedge funds, direct lending funds, private equity funds and real estate funds using NAVs as advised by external fund managers or third party administrators. For each of these funds, the NAV is based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund's governing documents and in accordance with U.S. GAAP.

If there is a reporting lag between the current period end and reporting date of the latest available fund valuation for any hedge fund, we estimate the change in fair value by starting with the most recently available fund valuation and adjusting for return estimates as well as any subscriptions, redemptions and distributions that took place during the current period. Return estimates are obtained from the relevant fund managers. Accordingly, we do not typically have a reporting lag in our fair value measurements for these funds. Historically, our valuation estimates incorporating these return estimates have not significantly diverged from the subsequently received NAVs.

For private equity funds, direct lending funds and the real estate fund, valuation statements are typically released on a three month reporting lag therefore the Company estimates fair value of these funds by starting with the prior quarter-end fund valuations and adjusting for capital calls, redemptions, drawdowns and distributions. Return estimates are not available from the relevant fund managers for these funds. Accordingly, we typically have a reporting lag in our fair value measurements for these funds.

The Company often does not have access to financial information relating to the underlying securities held within the funds, therefore management is unable to corroborate the fair values placed on the securities underlying the asset valuations provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures to assess the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager, regular evaluation of fund performance against applicable benchmarks and the backtesting of our fair value estimates against subsequently received NAVs. Backtesting involves comparing our previously reported values for each individual fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values).

The fair value of our hedge funds, direct lending funds, private equity funds and real estate funds are measured using the NAV practical expedient and therefore have not been categorized with the fair value hierarchy.

Financial Instruments Not Carried at Fair Value

U.S. GAAP guidance over disclosures about the fair value of financial instruments are also applicable to financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts.

The carrying values of cash equivalents (including restricted amounts), accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated their fair values at September 30, 2016, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

The carrying value of mortgage loans held-for-investment approximated their fair value at September 30, 2016, as the loans are within their first two years of issue. The estimated fair value of mortgage loans is primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or is determined from pricing for similar loans. As mortgage loans are not actively traded, their respective fair values are classified within Level 3.

At September 30, 2016, our senior notes are recorded at amortized cost with a carrying value of $993 million (2015: $992 million) and have a fair value of $1,083 million (2015: $1,058 million). The fair values of these securities were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our senior notes are classified within Level 2.