Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is equity price risk. Equity contracts (options sold) on various equity securities are intended to manage the price risk associated with forecasted purchases or sales of such securities.

From time to time, 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 formed by and consolidated into the Company, entered into a total return swap agreement with Citibank. The agreement had an initial term of one year, subject to periodic renewal. In July 2018, the agreement was renewed through January 24, 2020. During the fourth quarter of 2019, the underlying obligations were liquidated and the total return swap agreement between FFL and Citibank was terminated. Under the agreement, FFL received the income equivalent on underlying obligations due to Citibank and paid to Citibank interest on the outstanding notional amount of the underlying obligations. The Company paid interest at the rate of LIBOR plus 128 basis points prior to the renewal of the agreement in January 2018, LIBOR plus 120 basis points subsequent to the January 2018 renewal through July 2018, and LIBOR plus 105 basis points subsequent to the July 2018 renewal until December 2019, on approximately $100 million of underlying obligations as of December 31, 2018.

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


	Liability Derivatives
	June 30, 2020		December 31, 2019

	(Amount in thousands)
Options sold - Other liabilities	$	1,977	$	77
Total derivatives	$	1,977	$	77


	Gains (Losses) Recognized in Net Income (Loss)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

	(Amounts in thousands)
Total return swap - Net realized investment gains (losses)	$	—	$	515	$	—	$	2,281
Options sold - Net realized investment gains (losses)	8,944		2,472		10,656		3,344
Total	$	8,944	$	2,987	$	10,656	$	5,625

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. See Note 5. Fair Value Measurements for additional disclosures regarding options sold.