Derivative Financial Instruments

3 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments and Hedging

The Company utilizes derivative financial instruments as part of its overall investment activities. Investments in derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk, and interest rate risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms.

Derivatives, at fair value

Credit Derivatives

Credit derivatives are generally defined as over‑the‑counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity.

Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfoliosof single name credit default swaps. The Company held four CDX contracts as of March 31, 2015, with a notional amount of $597,078 ($298,344 of sold protection and $298,734 of bought protection). The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. The Company is required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side, subject to increase based on additional maintenance margin as a result of decreases in value. As of March 31, 2015, the total margin was $6,750.

Credit Default Swaps (CDS) are generally defined as over-the-counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity. The Company is party to one CDS contract with a notional amount of $2,626 at March 31, 2015 and $2,652 as of December 31, 2014.

Credit derivatives are included as a component of trading assets, at fair value, and are shown net of any right to reclaim cash collateral or obligation to return cash collateral.

Interest Rate Lock Commitments

The Company is exposed to certain risks in connection with its mortgage banking operations at Luxury. The Company is exposed to interest rate risk for certain interest rate lock commitments (IRLCs) until a purchaser for the related underlying loans is identified. The fair value of IRLCs is subject to change primarily due to changes in market interest rates. The notional amount of the Company’s IRLCs that were matched with best efforts lock commitments with investors was $123,690 and the notional amount of the Company’s IRLCs that were matched with mandatory forward sales contracts was $13,497 as of March 31, 2015, with a combined associated fair value of $1,167. The Company hedges the mandatory forward sales contracts with TBA Mortgage Backed Security instruments. The notional amount of these open hedge instruments was $11,000 and the notional amount of the closed not yet settled hedge instruments was $6,000 as of March 31, 2015, with a combined associated fair value of $24. As of March 31, 2015, the IRLCs were included as a component of trading assets, at fair value, on the Company’s consolidated balance sheet.

Interest Rate Swaps

The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included as a component of other assets in the consolidated balance sheet.

The Company is a party to six interest rate swaps with a combined notional amount of $43,988 in order to hedge interest rate risk associated with its real estate portfolio. All of these swaps have the same counterparty. These swaps are included as a component of trading liabilities at fair value on the Company’s consolidated balance sheet as of March 31, 2015 and December 31, 2014. The fair value of these interest rate swaps at March 31, 2015 and December 31, 2014 were $(1,318) and $(833), respectively.

The following tables identify the fair value amounts of the Company’s stand-alone derivative instruments, categorized by primary underlying risk:

	As of March 31, 2015
	Asset Derivatives
	Credit risk		Interest rate risk		Total
Credit derivatives	$	10,763	$	—	$	10,763
Interest rate lock commitments	—		1,167		1,167
Total	$	10,763	$	1,167	$	11,930
	Liability Derivatives
	Credit risk		Interest rate risk		Total
Interest rate swaps	$	—	$	1,318	$	1,318
TBA mortgage backed securities	—		24		24
Total	$	—	$	1,342	$	1,342
	As of December 31, 2014
	Asset Derivatives
	Credit risk		Interest rate risk		Total
Credit derivatives	$	10,833	$	—	$	10,833
Interest rate lock commitments	—		793		793
Total	$	10,833	$	793	$	11,626
	Liability Derivatives
	Credit risk		Interest rate risk		Total
Interest rate swaps	$	—	$	833	$	833
Total	$	—	$	833	$	833

The following tables identify the unrealized gain/(loss) amounts, categorized by primary underlying risk, for the following periods:

Change in unrealized (depreciation)/appreciation - derivatives
	Three months ended March 31, 2015
	Credit risk			Interest rate risk			Total			Location in consolidated statements of operations
Credit derivatives	$	(70	)	$	—		$	(70	)	net credit derivative loss
Interest rate lock commitments	—			351			351			net realized and unrealized gains on investments
Interest rate swaps	—			(485		)	(485		)	net realized and unrealized gains on investments
Total	$	(70	)	$	(134	)	$	(204	)
Change in unrealized (depreciation)/appreciation - derivatives
	Three months ended March 31, 2014
	Credit risk			Interest rate risk			Total			Location in consolidated statements of operations
Credit derivatives	$	8		$	—		$	8		net credit derivative loss
Interest rate lock commitments	—			85			85			net realized and unrealized gains on investments
Interest rate swaps	—			(309		)	(309		)	net realized and unrealized gains on investments
Total	$	8		$	(224	)	$	(216	)

The Company nets the credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting arrangements with the same party. There are no derivative instruments subject to a netting agreement for which we are not currently netting. The following table present derivative instruments that are subject to offset by a master netting agreement:

	March 31, 2015			December 31, 2014
Derivatives subject to netting arrangements:
Credit default swap indices sold protection	$	49,612		$	52,513
Credit default swap indices bought protection	(37,316		)	(40,147		)
Gross assets recognized	12,296			12,366
Collateral payable	(1,632		)	(1,632		)
Net assets recognized	$	10,664		$	10,734

Net Credit Derivative Revenue/(Loss)

Below is a table identifying the components of the net credit derivative revenue/(loss) as shown on the Company’s consolidated statements of operations for following periods:

	Three Months Ended March 31,
	2015			2014
Unrealized (loss)/gain	(70		)	8
Premium income	3,728			—
Premium (expense)	(3,748		)	(272		)
Net credit derivative (loss)	$	(90	)	$	(264	)

Derivatives designated as cash flow hedging instruments

Fortegra has an interest rate swap with a counterparty pursuant to which Fortegra swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. This swap is designated as a cash flow hedge and expires in June 2017.

As of March 31, 2015, the notional amount of this instrument was $35,000, with a fair value of $(2,034), an unrealized loss net of tax of $1,322, a variable rate of interest of 0.27% and a fixed rate of 3.47%.

As of March 31, 2015, the loss recognized in accumulated other comprehensive income (AOCI) on the derivative-effective portion was $234, with a loss reclassified from AOCI into income-effective portion of $281. The amount estimated to be reclassified to earnings from AOCI during the next 12 months is $1,071. These net losses reclassified into earnings are primarily expected to increase net interest expense related to the respective hedged item.