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Derivative Instruments (Tables)
 9 Months Ended
Sep. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Summary of location and gross amounts of derivative fair values
The following table summarizes information on the location and gross amounts of derivative fair values contained in the consolidated balance sheet at September 30, 2013 and December 31, 2012:
 
September 30, 2013
 
December 31, 2012
(U.S. dollars in thousands)
Asset
Derivative
Notional
Amount
 
Asset
Derivative
Fair Value
(1)
 
Liability
Derivative
Notional
Amount
 
Liability
Derivative
Fair Value
(1)
 
Asset
Derivative
Notional
Amount
 
Asset
Derivative
Fair Value
(1)
 
Liability
Derivative
Notional
Amount
 
Liability
Derivative
Fair Value
(1)
Derivatives designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts
$
915,109

 
$
27,024

 
$
2,766,826

 
$
162,666

 
$
670,751

 
$
12,511

 
$
2,382,507

 
$
23,715

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Investment Related Derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate exposure
$
12,715

 
$
178

 
$
14,934

 
$
—

 
$
45,604

 
$
2,060

 
$
26,139

 
$
253

Foreign exchange exposure
69,204

 
2,421

 
13,507

 
471

 
33,007

 
226

 
54,449

 
1,790

Credit exposure
932

 
16

 
374,088

 
14,855

 
25,000

 
486

 
436,959

 
15,472

Financial market exposure
33,838

 
940

 
55,627

 
—

 
72,597

 
9,559

 
16,910

 
—

Financial Operations Derivatives: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit exposure
—

 
—

 
43,482

 
4,190

 
—

 
—

 
46,903

 
—

Other Non-Investment Derivatives:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Guaranteed minimum income benefit contract
—

 
—

 
58,179

 
19,219

 
—

 
—

 
69,051

 
25,396

Modified coinsurance funds withheld contract
68,226

 
—

 
—

 
—

 
76,975

 
—

 
—

 
—

Total derivatives not designated as hedging instruments
$
184,915

 
$
3,555

 
$
559,817

 
$
38,735

 
$
253,183

 
$
12,331

 
$
650,411

 
$
42,911

____________
(1)
Derivative instruments in an asset or liability position are included within Other assets or Other liabilities, respectively, in the balance sheet on a net basis where the Company has both a legal right of offset and the intentions to settle the contracts on a net basis.
(2)
Financial operations derivatives represent interests in variable interest entities as described in Note 10, “Variable Interest Entities".
Summary of gross and net amounts of derivative fair values and associated collateral received or paid
The following table summarizes information on the gross and net amounts of derivative fair values and associated collateral received related to derivative assets or paid relating to derivative liabilities contained in the consolidated balance sheet at September 30, 2013 and December 31, 2012:
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
September 30, 2013
(U.S. dollars in thousands)
Gross Amounts Recognized in Balance Sheet
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts in the Balance Sheet
 
Financial Instruments
 
Cash Collateral
 
Net Amounts
Derivative Assets
$
30,579

 
$
2,600

 
$
27,979

 
$
—

 
$
—

 
$
27,979

Derivative Liabilities
$
201,401

 
$
2,600

 
$
198,801

 
$
—

 
$
113,426

 
$
85,375

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
(U.S. dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
$
24,842

 
$
1,327

 
$
23,515

 
$
—

 
$
—

 
$
23,515

Derivative Liabilities
$
66,626

 
$
1,327

 
$
65,299

 
$
—

 
$
12,130

 
$
53,169
Gain (loss) recognized in income attributable to risk of hedged items
The following table provides the total impact on earnings relating to derivative instruments formally designated as fair value hedges along with the impacts of the related hedged items for the three and nine months ended September 30, 2013 and 2012:
 
 
Hedged Items - Amount of Gain/(Loss) Recognized in Income Attributable to Risk
 
Derivatives Designated as Fair Value Hedges:
Three Months Ended September 30, 2013
(U.S. dollars in thousands)
Gain/(Loss)
Recognized
in Income on
Derivative
 
Deposit
Liabilities
 
Fixed Maturity
Investments
 
Ineffective
Portion of
Hedging
Relationship -
Gain/(Loss)
Interest rate exposure
$
—

 
 

 
 

 
 

Foreign exchange exposure
(29,523
)
 
 

 
 

 
 

Total
$
(29,523
)
 
$
—

 
$
29,263

 
$
(260
)
 
 

 
 

 
 

 
 

Three Months Ended September 30, 2012
 

 
 

 
 

 
 

(U.S. dollars in thousands)
 

 
 

 
 

 
 

Interest rate exposure
$
—

 
 

 
 

 
 

Foreign exchange exposure
(22,323
)
 
 

 
 

 
 

Total
$
(22,323
)
 
$
—

 
$
22,126

 
$
(197
)
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 

 
 

 
 

 
 

(U.S. dollars in thousands)
 

 
 

 
 

 
 

Interest rate exposure
$
—

 
 

 
 

 
 

Foreign exchange exposure
(4,280
)
 
 

 
 

 
 

Total
$
(4,280
)
 
$
—

 
$
4,989

 
$
709

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
 

 
 

 
 

 
 

(U.S. dollars in thousands)
 

 
 

 
 

 
 

Interest rate exposure
$
1,813

 
 

 
 

 
 

Foreign exchange exposure
(30,126
)
 
 

 
 

 
 

Total
$
(28,313
)
 
$
(6,182
)
 
$
29,665

 
$
(4,830
)
Summary of fair value hedges that have been settled and their impact on results
A summary of the fair value hedges that have been settled and their impact on results during the three and nine months ended September 30, 2013 and 2012 is shown below:
Settlement of Fair Value Hedges - Summary
Fair Value Hedges - Notes
Payable and Debt
September 30,
 
Fair Value Hedges - Deposit
Liabilities
September 30,
(U.S. dollars in thousands, except years)
2013
 
2012
 
2013
 
2012
Cumulative reduction to interest expense
$
17,879

 
$
13,973

 
$
33,379

 
$
17,060

Remaining balance
$
3,744

 
$
7,651

 
$
199,816

 
$
216,135

Weighted average years remaining to maturity
1.0

 
2.0

 
23.9

 
25.9
Summary of hedges of net investment in foreign operation
The following table provides the weighted average U.S. dollar equivalent of foreign denominated net assets that were hedged and the resultant gain (loss) that was recorded in the cumulative translation adjustment account within AOCI for the three and nine months ended September 30, 2013 and 2012:
Derivative Instruments Designated as Hedges of the
Net Investment in a Foreign Operation - Summary
Three months ended September 30,
 
Nine months ended September 30,
(U.S. dollars in thousands)
2013
 
2012
 
2013
 
2012
Weighted average of U.S. dollar equivalent of foreign denominated net assets
$
2,758,577

 
$
1,920,421

 
$
2,623,594

 
$
1,895,409

Derivative gains (losses) (1)
$
(58,852
)
 
$
(40,784
)
 
$
(4,373
)
 
$
(21,879
)
____________
(1)
Derivative gains (losses) from derivative instruments designated as hedges of the net investment in a foreign operation are recorded in the cumulative translation adjustment account within AOCI for each period.
Summary of net realized and unrealized gains (losses) on derivative instruments
The following table provides the total impact on earnings relating to derivative instruments not formally designated as hedging instruments under authoritative accounting guidance and from the ineffective portion of fair value hedges. The impacts are all recorded through Net realized and unrealized gains (losses) on derivatives in the income statement for the three and nine months ended September 30, 2013 and 2012:
Net Realized and Unrealized Gains (Losses) on Derivative Instruments
Three months ended September 30,
 
Nine months ended September 30,
(U.S. dollars in thousands)
2013
 
2012
 
2013
 
2012
Investment Related Derivatives:
 

 
 

 
 

 
 

Interest rate exposure
$
4,334

 
$
243

 
$
4,822

 
$
860

Foreign exchange exposure
3,710

 
1,218

 
(578
)
 
1,547

Credit exposure
(956
)
 
(2,281
)
 
(2,950
)
 
343

Financial market exposure
1,553

 
2,337

 
4,170

 
312

Financial Operations Derivatives:
 

 
 
 
 

 
 
Credit exposure
(3,980
)
 
—

 
(2,651
)
 
143

Other Non-Investment Derivatives:
 

 
 
 
 

 
 
Guaranteed minimum income benefit contract
175

 
885

 
6,178

 
1,971

Modified coinsurance funds withheld contract
(3,696
)
 
4,049

 
(6,040
)
 
2,310

Total gain (loss) recognized in income from derivatives not designated as hedging instruments
$
1,140

 
$
6,451

 
$
2,951

 
$
7,486

Amount of gain (loss) recognized in income from ineffective
portion of fair value hedges
(260
)
 
(197
)
 
709

 
(4,830
)
Net realized and unrealized gains (losses) on derivative
instruments
$
880

 
$
6,254

 
$
3,660

 
$
2,656
Summary of credit derivative exposures
An aggregate summary of the credit derivative exposure at September 30, 2013 and December 31, 2012 is as follows:
Financial Operations Derivatives - Credit Exposure Summary:
(U.S. dollars in thousands)
September 30, 2013
 
December 31, 2012
Principal outstanding
$
41,364

 
$
44,281

Interest outstanding
2,118

 
2,622

Aggregate outstanding exposure
$
43,482

 
$
46,903

Total liability recorded
$
4,190

 
$
—

Weighted average contractual term to maturity
4.0 years

 
4.7 years

Underlying obligations credit rating
CC

 
BB
Summary of contingent credit features
The aggregate fair value of all derivative agreements containing such rating downgrade provisions that were in a liability position and the collateral posted under any of these agreements as of September 30, 2013 and December 31, 2012 were as follows:
Contingent Credit Features - Summary:
(U.S. dollars in thousands)
September 30, 2013
 
December 31, 2012
Aggregate fair value of derivative agreements with downgrade provisions in a net liability position
$
114,502

 
$
20,366

Collateral posted to counterparty
$
84,935

 
$
5,490