Financial Derivatives

Gains and losses on the Company’s derivative contracts for the years ended December 31, 2012, 2011, and 2010 are summarized in the tables below:

December 31, 2012:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Year Ended December 31, 2012			Change in Net Unrealized Gain/(Loss) for the Year Ended December 31, 2012
(In thousands)
Financial derivatives - assets
Credit default swaps on asset-backed securities	Credit	$	(1,164	)	$	3,218
Credit default swaps on asset-backed indices	Credit	(14,870		)	(5,887		)
Credit default swaps on corporate bond indices	Credit	(1,548		)	570
Interest rate swaps	Interest Rates	169			(91		)
Eurodollar futures	Interest Rates	(51		)	(11		)
		(17,464		)	(2,201		)
Financial derivatives - liabilities
Credit default swaps on asset-backed securities	Credit	(79		)	(1		)
Credit default swaps on asset-backed indices	Credit	9,665			(491		)
Credit default swaps on corporate bond indices	Credit	(579		)	(122		)
Total return swaps	Equity Market	(3,563		)	209
Interest rate swaps	Interest Rates	(22,777		)	16,094
Eurodollar futures	Interest Rates	—			(71		)
		(17,333		)	15,618
Total		$	(34,797	)	$	13,417

December 31, 2011:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Year Ended December 31, 2011			Change in Net Unrealized Gain/(Loss) for the Year Ended December 31, 2011
(In thousands)
Financial derivatives - assets
Credit default swaps on asset-backed securities	Credit	$	9,969		$	(5,721	)
Credit default swaps on asset-backed indices	Credit	3,751			192
Credit default swaps on corporate bond indices	Credit	(709		)	(570		)
Interest rate swaps	Interest Rates	(195		)	(1,699		)
Eurodollar futures	Interest Rates	1			12
		12,817			(7,786		)
Financial derivatives - liabilities
Credit default swaps on asset-backed indices	Credit	14,319			474
Credit default swaps on corporate bond indices	Credit	(297		)	359
Total return swaps	Equity Market	(1,599		)	(274		)
Interest rate swaps	Interest Rates	(7,839		)	(15,541		)
Eurodollar futures	Interest Rates	(1,094		)	890
		3,490			(14,092		)
Total		$	16,307		$	(21,878	)

December 31, 2010:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Year Ended December 31, 2010			Change in Net Unrealized Gain/(Loss) for the Year Ended December 31, 2010
(In thousands)
Financial derivatives - assets
Credit default swaps on asset-backed securities	Credit	$	11,415		$	(20,085	)
Credit default swaps on asset-backed indices	Credit	(7,904		)	3,613
Credit default swaps on corporate bonds	Credit	(2,281		)	(2,650		)
Other swaps	Interest Rates	335			(257		)
Interest rate swaps	Interest Rates	1			1,686
		1,566			(17,693		)
Financial derivatives - liabilities
Credit default swaps on asset-backed securities	Credit	(1,657		)	3,881
Credit default swaps on asset-backed indices	Credit	9,324			(572		)
Credit default swaps on corporate bond indices	Credit	(1,101		)	787
Total return swaps	Equity Market	(854		)	88
Interest rate swaps	Interest Rates	(1,517		)	(1,677		)
Eurodollar futures	Interest Rates	(3,689		)	182
		506			2,689
Total		$	2,072		$	(15,004	)

As of December 31, 2012 and December 31, 2011, the Company was a party to credit derivatives contracts in the form of credit default swaps on mortgage/asset-backed indices (ABX and CMBX indices or “ABS indices”). As a seller of credit protection via ABS indices, the Company receives periodic payments at fixed rates from protection buyers, and is obligated to make payments to the protection buyer upon the occurrence of a “credit event” with respect to underlying reference assets. Written credit derivatives held by the Company at December 31, 2012 and December 31, 2011, respectively, are summarized below:



Credit Default Swaps on Asset Backed Indices	Amount at December 31, 2012			Amount at December 31, 2011
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	(11,986	)	$	(9,548	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	(717	)	$	—
Notional Amount of Written Credit Derivatives ⁽²⁾	$	(40,216	)	$	(22,615	)
Notional Amount of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	7,792		$	—


(1)	Offsetting transactions with third parties include purchased credit derivatives which have the same reference obligation.

(2)

The notional value is the maximum amount that a seller of ABS indices would be obligated to pay, and a buyer of credit protection would receive upon occurrence of a “credit event.” Movements in the value of credit default swap transactions may require the Company or the counterparty to post or receive collateral. Amounts due or owed under an ABS index contract may be offset against amounts due or owed on another ABS index contract with the same ISDA counterparty.

Unless terminated by mutual agreement by both the buyer and seller, ABS index contracts typically terminate at the date that all of the underlying reference assets are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of swap contracts and are reflective of the cost of buying/selling protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make payment) under the swap contract. In situations where the credit quality of the underlying reference assets have deteriorated, the percentage of notional values paid up front (“points up front”) is frequently used as an indication of ABS index risk. ABS index credit protection sellers entering the market would expect to be paid points up front corresponding to the approximate fair value of the contract in order to write protection on the reference assets underlying the Company’s ABS index contracts. Periodic payment rates at December 31, 2012 on ABS index contracts where the Company wrote protection range between 35 and 458 basis points on contracts that were outstanding at this date. Periodic payment rates at December 31, 2011 on ABS index contracts where the Company wrote protection range between 350 and 442 basis points on contracts that were outstanding at this date. Total net up-front payments received relating to ABS index contracts outstanding at December 31, 2012 and December 31, 2011 were $12.6 million and $9.6 million, respectively.