Derivative Financial Instruments

9 Months Ended

Sep. 30, 2015

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts on various equity securities are intended to manage the price risk associated with forecasted purchases or sales of such securities. Interest rate swaps are intended to manage the interest rate risk associated with the Company’s debts with fixed or floating rates.

The Company also enters into derivative contracts to enhance returns on its investment portfolio.

On February 13, 2014, Fannette Funding LLC (“FFL”), a special purpose investment vehicle, entered into a total return swap agreement with Citibank. Under the total return swap agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest equal to LIBOR plus 135 basis points on the outstanding notional amount of the underlying obligations, which was approximately $115 million as of September 30, 2015. The total return swap is secured by approximately $20 million of U.S. Treasuries and $10 million of cash as collateral, which are included in short-term investments and cash, respectively, on the consolidated balance sheets. The agreement had an initial term of one year, subject to annual renewal, and was renewed for an additional one-year term expiring February 13, 2016.

On August 9, 2013, Animas Funding LLC (“AFL”), a special purpose investment vehicle, entered into a three-year total return swap agreement with Citibank. Under the total return swap agreement, AFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest equal to LIBOR plus 120 basis points on the outstanding notional amount of the underlying obligations, which was approximately $128 million as of September 30, 2015. The total return swap is secured by approximately $40 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets.

Fair value amounts, and (losses) gains on derivative instruments

The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative (losses) gains in the consolidated statements of operations:

	Asset Derivatives				Liability Derivatives
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(Amount in thousands)
Total return swaps - Other liabilities	$	—	$	—	$	6,059	$	4,025
Options sold - Other liabilities	—		—		266		194
Total derivatives	$	—	$	—	$	6,325	$	4,219

	(Losses) Gains Recognized in Income
	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Amounts in thousands)
Total return swaps - Net realized investment losses	$	(4,422	)	$	(3,090	)	$	(710	)	$	(482	)
Options sold - Net realized investment gains	695			1,627			2,219			2,681
Total	$	(3,727	)	$	(1,463	)	$	1,509		$	2,199

Most options sold consist of covered calls. The Company writes covered calls on underlying equity positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under statutory regulations. The Company manages the risk associated with covered calls through strict capital limitations and asset diversification throughout various industries. For additional disclosures regarding options sold, see Note 5.