Derivative Instruments (Tables)

9 Months Ended

Sep. 30, 2016

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 sheets as of September 30, 2016 and December 31, 2015:

	September 30, 2016								December 31, 2015
(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	$	1,443,726	$	58,686	$	1,155,580	$	36,240	$	1,667,585	$	64,289	$	674,976	$	11,941
Total derivatives designated as hedging instruments	$	1,443,726	$	58,686	$	1,155,580	$	36,240	$	1,667,585	$	64,289	$	674,976	$	11,941
Derivatives not designated as hedging instruments:
Investment Related Derivatives:
Foreign exchange exposure	214,406		1,583		76,821		1,512		102,234		2,888		144,707		1,702
Credit exposure	5,000		411		87,500		6,605		8,433		652		71,614		12,067
Financial market exposure	5		5		30,117		3,990		37		77		26,500		417

	September 30, 2016										December 31, 2015
(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)
Other Non-Investment Derivatives:
Foreign exchange contracts	—		—			—		—			194,566		2,009			—		—
Credit exposure	31,531		42			—		—			29,874		31			—		—
Guaranteed minimum income benefit contract	44,112		18,640			44,112		18,640			46,032		19,368			46,032		19,368
Modified coinsurance funds withheld contracts (2)	60,812		—			4,567,500		—			60,667		—			4,620,879		—
Total derivatives not designated as hedging instruments	$	355,866	$	20,681		$	4,806,050	$	30,747		$	441,843	$	25,025		$	4,909,732	$	33,554
Total derivatives			$	79,367				$	66,987				$	89,314				$	45,495
Counterparty netting			(23,873		)			(23,873		)			(3,087		)			(3,087		)
Total derivatives net of counterparty netting (1)			55,494					43,114					86,227					42,408
Cash collateral held/paid (3)			(24,040		)			(8,260		)			(30,958		)			—
Total derivatives as recorded in the balance sheets			$	31,454				$	34,854				$	55,269				$	42,408

____________

(1) Derivative instruments in an asset or liability position are included within Other assets or Other liabilities, respectively, in the balance sheets on a net basis where the Company has both a legal right of offset and the intention to settle the contracts on a net basis. The Company often enters into different types of derivative contracts with a single counterparty and these contracts are covered under netting agreements.

(2) The fair value movements in derivative assets and liabilities relating to modified coinsurance funds withheld contracts are included within the associated asset or liability at each period end on the face of the balance sheets. Notional amounts associated with reinsurance agreements under which the Company assumes reinsurance risk are recorded as asset derivative notional amounts. Notional amounts associated with the GreyCastle Life Retro Arrangements under which the Company cedes reinsurance risk are recorded as liability derivative notional amounts. Included in the liability derivative notional amount as of September 30, 2016 is the cumulative net realized and unrealized loss on the life retrocession embedded derivative of $1.1 billion.

(3) As of September 30, 2016, the Company held cash collateral related to foreign currency derivative positions and certain other derivative positions of $24.0 million for derivatives in an asset position and paid cash collateral of $8.3 million for derivatives in a liability position. As of December 31, 2015, the Company held cash collateral related to a foreign currency derivative position and certain other derivative positions of $31.0 million for derivatives in an asset position and paid cash collateral of nil for derivatives in a liability position. The assets and liabilities related to the net collateral paid or held were recorded as Other assets and Other liabilities within the unaudited consolidated balance sheets as the collateral and derivative positions are not intended to be settled on a net basis.

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 indicated periods as well as the remaining balance of fair value hedges and average years remaining to maturity as of September 30, 2016 and 2015 are shown below:

Settlement of Fair Value Hedges - Summary	Fair Value Hedges - Deposit Liabilities September 30,
(U.S. dollars in thousands)	2016		2015
Cumulative reduction to interest expense	$	110,914	$	101,461
Remaining balance	122,282		131,734
Weighted average years remaining to maturity	20.4 years		22.0 years

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 resulting derivative gain (loss) that was recorded in the foreign currency translation adjustment, net of tax, account within AOCI for the three and nine months ended September 30, 2016 and 2015:

Derivative Instruments Designated as Hedges of a Net Investment in a Foreign Operation - Summary	Three months ended September 30,				Nine months ended September 30,
(U.S. dollars in thousands)	2016		2015		2016		2015
Weighted average of U.S. dollar equivalent of foreign denominated net assets	$	2,575,987	$	2,299,875	$	2,401,640	$	1,581,470
Derivative gains (losses) (1)	1,999		29,943		35,882		66,215

____________

(1) Derivative gains (losses) from derivative instruments designated as hedges of an 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. 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, 2016 and 2015:

Net Realized and Unrealized Gains (Losses) on Derivative Instruments	Three months ended September 30,						Nine months ended September 30,
(U.S. dollars in thousands)	2016			2015			2016			2015
Investment Related Derivatives:
Interest rate exposure	$	—		$	(5,120	)	$	781		$	(2,046	)
Foreign exchange exposure	74			(146		)	(592		)	(1,026		)
Credit exposure	(812		)	1,684			(959		)	1,380
Financial market exposure	(45		)	(4,309		)	(2,866		)	(2,913		)
Other Non-Investment Derivatives:
Foreign exchange contracts	(347		)	4,063			(1,345		)	61,494
Credit exposure	4,477			(327		)	4,424			1,151
Modified coinsurance funds withheld contract	2,143			(3,748		)	3,331			(913		)
Net realized and unrealized gains (losses) on derivative instruments	$	5,490		$	(7,903	)	$	2,774		$	57,127
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets	$	(225,610	)	$	(126,140	)	$	(691,432	)	$	(116,333	)

Summary of impact of Life Retro Arrangements

The impact of the GreyCastle Life Retro Arrangements on the Company's results was as follows:

Impact of GreyCastle Life Retro Arrangements	Three months ended September 30,						Nine months ended September 30,
(U.S. dollars in thousands)	2016			2015			2016			2015
Underwriting profit (loss) (1)	$	—		$	—		$	—		$	603
Net investment income - Life Funds Withheld Assets	38,937			46,586			119,643			143,869
Net realized gains (losses) on investments sold - Life Funds Withheld Assets	44,011			53,780			108,541			174,555
Net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets	41,270			(149		)	165,653			(18,932		)
OTTI on investments - Life Funds Withheld Assets	—			(2,023		)	(2,598		)	(10,110		)
Exchange gains (losses)	1,535			8,754			5,899			(5,932		)
Other income and expenses	—			(121		)	(170		)	2,354
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets	(225,610		)	(126,140		)	(691,432		)	(116,333		)
Net income (loss)	$	(99,857	)	$	(19,313	)	$	(294,464	)	$	170,074
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax	77,242			(33,569		)	206,480			(317,500		)
Change in adjustments related to future policy benefit reserves, net of tax	2,058			40,681			27,820			127,365
Change in cumulative translation adjustment - Life Funds Withheld Assets, net of tax	20,557			12,201			60,164			20,664
Total changes to other comprehensive income as a result of GreyCastle Life Retro Arrangements	$	99,857		$	19,313		$	294,464		$	(169,471	)
Comprehensive income (loss)	$	—		$	—		$	—		$	603

____________

(1) The underwriting profit of $0.6 million relates to a premium adjustment during the nine months ended September 30, 2015 relating to the GreyCastle Life Retro Arrangements transaction. Excluding this transaction, the impact to comprehensive income relating to the GreyCastle Life Retro Arrangements was nil for the nine months ended September 30, 2015.

Components of life retrocession embedded derivatives

The change in the value of the life retrocession embedded derivative includes the interest income, realized and unrealized gains and losses on Life Funds Withheld Assets and certain related expenses as follows:

Components of Life Retrocession Embedded Derivative and Derivative Instruments - Life Funds Withheld Assets:	Three months ended September 30,						Nine months ended September 30,
(U.S. dollars in thousands)	2016			2015			2016			2015
Interest income - Life Funds Withheld Assets	$	(40,065	)	(48,809		)	$	(124,630	)	$	(147,679	)
Realized and unrealized gains (losses) - Life Funds Withheld Assets	(181,952		)	(38,161		)	(533,752		)	130,047
Other	—			121			171			276
Net realized and unrealized gains (losses) on life retrocession embedded derivative	$	(222,017	)	$	(86,849	)	$	(658,211	)	$	(17,356	)
Net adjustments related to future policy benefit reserves, net of tax	(5,309		)	(40,668		)	(33,312		)	(88,551		)
Net realized and unrealized gains (losses) on derivative instruments - Life Funds Withheld Assets	1,716			1,377			91			(10,426		)
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets	$	(225,610	)	$	(126,140	)	$	(691,432	)	$	(116,333	)

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 any collateral posted under these agreements as of September 30, 2016 and December 31, 2015 were as follows:

Contingent Credit Features - Summary: (U.S. dollars in thousands)	September 30, 2016		December 31, 2015
Aggregate fair value of derivative agreements with downgrade provisions in a net liability position	$	6,186	$	5,827