Financial Derivatives

Gains and losses on the Company's derivative contracts for the three and six month periods ended June 30, 2014 and 2013 are summarized in the tables below:

June 30, 2014:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended June 30, 2014			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended June 30, 2014			Net Realized Gain/(Loss) for the Six Month Period Ended June 30, 2014			Change in Net Unrealized Gain/(Loss) for the Six Month Period Ended June 30, 2014
(In thousands)
Financial derivatives–assets
Credit default swaps on asset-backed securities	Credit	$	(467	)	$	586		$	724		$	(625	)
Credit default swaps on asset-backed indices	Credit	(814		)	(106		)	(2,116		)	39
Credit default swaps on corporate bond indices	Credit	1,460			(460		)	2,112			(775		)
Total return swaps	Equity Market	1,842			10			7,767			20
Interest rate swaps	Interest Rates	(1,520		)	1,949			(48		)	(4,131		)
Futures	Interest Rates	926			138			966			2,573
Forwards	Currency	494			(115		)	505			52
Other	Credit/ Interest Rates	55			313			108			601
		1,976			2,315			10,018			(2,246		)
Financial derivatives–liabilities
Credit default swaps on asset-backed securities	Credit	(20		)	—			(39		)	—
Credit default swaps on asset-backed indices	Credit	(161		)	361			2,442			(1,125		)
Credit default swaps on corporate bond indices	Credit	(1,956		)	(656		)	(5,760		)	3,915
Credit default swaps on corporate bonds	Credit	140			(225		)	140			(225		)
Total return swaps	Equity Market	442			(12		)	(975		)	24
Interest rate swaps	Interest Rates	(92		)	(7,244		)	(3,856		)	(7,713		)
Futures	Interest Rates	(153		)	(197		)	(26		)	(335		)
Forwards	Currency	(437		)	(272		)	(929		)	(276		)
Other	Credit/ Interest Rates	(556		)	159			(613		)	(230		)
		(2,793		)	(8,086		)	(9,616		)	(5,965		)
Total		$	(817	)	$	(5,771	)	$	402		$	(8,211	)

June 30, 2013:



Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss) for the Three Month Period Ended June 30, 2013			Change in Net Unrealized Gain/(Loss) for the Three Month Period Ended June 30, 2013			Net Realized Gain/(Loss) for the Six Month Period Ended June 30, 2013			Change in Net Unrealized Gain/(Loss) for the Six Month Period Ended June 30, 2013
(In thousands)
Financial derivatives–assets
Credit default swaps on asset-backed securities	Credit	$	(542	)	$	1,107		$	2,709		$	(4,492	)
Credit default swaps on asset-backed indices	Credit	(2,634		)	3,489			(4,121		)	3,514
Credit default swaps on corporate bond indices	Credit	82			(44		)	82			(44		)
Total return swaps	Equity Market	42			66			4			127
Interest rate swaps	Interest Rates	500			15,583			283			15,962
Futures	Interest Rates	(153		)	5			(153		)	5
		(2,705		)	20,206			(1,196		)	15,072
Financial derivatives–liabilities
Credit default swaps on asset-backed securities	Credit	(29		)	(540		)	(57		)	(540		)
Credit default swaps on asset-backed indices	Credit	22			455			200			814
Credit default swaps on corporate bond indices	Credit	(905		)	378			(4,532		)	200
Total return swaps	Equity Market	(363		)	(90		)	(395		)	(53		)
Interest rate swaps	Interest Rates	(325		)	1,462			292			1,101
Futures	Interest Rates	(622		)	(34		)	(644		)	(12		)
		(2,222		)	1,631			(5,136		)	1,510
Total		$	(4,927	)	$	21,837		$	(6,332	)	$	16,582

The Company uses period end notional values as a percentage of average monthly notional values outstanding by instrument type as an indicator of the volume of activity with respect to financial derivatives. For forwards, options, futures, credit default swaps, interest rate swaps, and total return swaps, notional values reflected on the Consolidated Condensed Schedule of Investments represent approximately 160%, 123%, 111%, 102%, 98%, and 92%, respectively, of average monthly notional values of each such category outstanding during the six month period ended June 30, 2014. For options, total return swaps, interest rate swaps, futures, and credit default swaps, notional values reflected on the Consolidated Condensed Schedule of Investments represent approximately 387%, 210%, 187%, 179%, and 174%, respectively, of average monthly notional values of each such category outstanding during the year ended December 31, 2013. The Company started trading foreign currency forward contracts in December 2013; foreign currency contracts outstanding at December 31, 2013 represented the entire foreign currency forward activity for the year ended December 31, 2013.

From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of June 30, 2014 and December 31, 2013, all of the Company's open written credit derivatives were credit default swaps on either mortgage/asset-backed indices (ABX and CMBX indices), corporate bond indices (CDX), collectively referred to as credit indices, or on individual corporate bonds, 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 June 30, 2014 and December 31, 2013, are summarized below:



Credit Derivatives	Amount at June 30, 2014			Amount at December 31, 2013
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	14,115		$	1,421
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	507		$	57
Notional Amount of Written Credit Derivatives ⁽²⁾	$	(138,192	)	$	(120,497	)
Notional Amount of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	1,590		$	249


(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.

A credit default swap on a credit index or a corporate bond typically terminates at the stated maturity date in the case of corporate indices or bonds, or, in the case of ABX and CMBX indices, 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 has 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. Total net up-front payments received relating to written credit derivatives outstanding at June 30, 2014 and December 31, 2013 were $12.0 million and $2.5 million, respectively.