Financial Derivatives

Gains and losses on the Company's derivative contracts for the years ended December 31, 2013, 2012, and 2011 are summarized in the tables below:

December 31, 2013:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Year Ended December 31, 2013			Change in Net Unrealized Gain/(Loss) for the Year Ended December 31, 2013
(In thousands)
Financial derivatives–assets
Credit default swaps on asset-backed securities	Credit	$	(2,826	)	$	1,070
Credit default swaps on asset-backed indices	Credit	(5,954		)	1,082
Credit default swaps on corporate bond indices	Credit	626			1,026
Total return swaps	Equity Market	2,992			4
Interest rate swaps	Interest Rates	(2,829		)	23,548
Other	Credit/ Interest Rates	115			(244		)
		(7,876		)	26,486
Financial derivatives–liabilities
Credit default swaps on asset-backed securities	Credit	(78		)	(349		)
Credit default swaps on asset-backed indices	Credit	1,870			2,869
Credit default swaps on corporate bond indices	Credit	(9,573		)	(9,157		)
Total return swaps	Equity Market	(5,260		)	(3		)
Interest rate swaps	Interest Rates	319			(3,940		)
Futures	Interest Rates	(795		)	(2,302		)
Forwards	Currency	—			(38		)
Other	Interest Rates/Equity Market	(86		)	(84		)
		(13,603		)	(13,004		)
Total		$	(21,479	)	$	13,482

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		)
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
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		)
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		)
Futures	Interest Rates	(1,094		)	890
		3,490			(14,092		)
		$	16,307		$	(21,878	)

From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of December 31, 2013 and 2012, all of the Company's open written credit derivatives were credit default swaps on either mortgage/asset-backed indices (ABX and CMBX indices) or on corporate bond indices (CDX), collectively referred to as credit indices, for which the Company receives periodic payments at fixed rates from credit protection buyers, and is obligated to make payments to the credit 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, 2013 and 2012, are summarized below:



Credit Default Swaps on Credit Indices	Amount at December 31, 2013			Amount at December 31, 2012
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	1,421		$	(11,986	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	57		$	(717	)
Notional Amount of Written Credit Derivatives ⁽²⁾	$	(120,497	)	$	(40,216	)
Notional Amount of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	249		$	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 credit protection 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 credit derivative contracts with an International Swaps and Derivatives Association, or "ISDA," counterparty may be offset against amounts due or owed on other credit derivative contracts with the same ISDA counterparty. As a result, the notional amount of written credit derivatives involving a particular underlying reference asset or index has been reduced (but not below zero) by the notional amount of any contracts where the Company has purchased credit protection on the same reference asset or index with the same ISDA counterparty.

Unless terminated by mutual agreement by both the buyer and seller, a credit default swap on a credit index typically terminates at the date that all of the reference assets underlying the index are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of such contracts and are reflective of the cost of buying/selling credit protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make payment) under the 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 credit risk. Credit protection sellers entering the market would expect to be paid points up front corresponding to the approximate fair value of the contract. For the Company's written credit derivatives that were outstanding at December 31, 2013, periodic payment rates ranged between 25 and 500 basis points. For the Company's written credit derivatives that were outstanding at December 31, 2012, periodic payment rates ranged between 35 and 458 basis points. Total net up-front payments received relating to written credit derivatives outstanding at December 31, 2013 and 2012 were $2.5 million and $12.6 million, respectively.