Derivatives

9 Months Ended

Sep. 30, 2013

Disclosure - Derivatives [Abstract]

Derivatives

4. Derivatives

The Company's derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value mainly recognized in either net foreign exchange gains and losses or net realized and unrealized investment gains and losses in the Condensed Consolidated Statements of Operations or accumulated other comprehensive income or loss in the Condensed Consolidated Balance Sheets, depending on the nature of the derivative instrument. The Company's objectives for holding or issuing these derivatives are as follows:

Foreign Exchange Forward Contracts

The Company utilizes foreign exchange forward contracts as part of its overall currency risk management and investment strategies. From time to time, the Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and branches whose functional currency is other than the U.S. dollar.

Foreign Currency Option Contracts and Futures Contracts

The Company utilizes foreign currency option contracts to mitigate foreign currency risk. The Company uses exchange traded treasury note futures contracts to manage portfolio duration and commodity and equity futures to hedge certain investments. The Company also uses commodities futures to replicate the investment return on certain benchmarked commodities.

Credit Default Swaps

The Company purchases protection through credit default swaps to mitigate the risk associated with its underwriting operations, most notably in the credit/surety line, and to manage market exposures.

The Company also assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the underlying issuer, no issuer was in default at September 30, 2013. The counterparties on the Company's assumed credit default swaps are all investment grade rated financial institutions.

Insurance-Linked Securities

The Company enters into various weather derivatives and longevity total return swaps for which the underlying risks reference parametric weather risks for the weather derivatives and longevity risk for the longevity total return swaps.

Total Return and Interest Rate Swaps and Interest Rate Derivatives

The Company enters into total return swaps referencing various project, investments and principal finance obligations. The Company enters into interest rate swaps to mitigate the interest rate risk on certain of the total return swaps and certain fixed maturity investments. The Company also uses other interest rate derivatives to mitigate exposure to interest rate volatility.

To-Be-Announced Mortgage-Backed Securities

The Company utilizes TBAs as part of its overall investment strategy and to enhance investment performance.

The net fair values and the related net notional values of derivatives included in the Company's Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012 were as follows (in thousands of U.S. dollars):

	Asset		Liability		Net derivatives
	derivatives		derivatives		Net notional
September 30, 2013	at fair value		at fair value		exposure		Fair value
Foreign exchange forward contracts	$	4,188	$	(5,470)	$	2,069,416	$	(1,282)
Foreign currency option contracts		0		(821)		93,438		(821)
Futures contracts		0		(61,909)		4,527,222		(61,909)
Credit default swaps (protection purchased)		0		(231)		34,000		(231)
Credit default swaps (assumed risks)		49		0		5,000		49
Insurance-linked securities (1)		175		(390)		140,744		(215)
Total return swaps		0		(732)		7,657		(732)
Interest rate swaps (2)		150		(4,614)		60,080		(4,464)
TBAs		7,256		0		192,040		7,256
Total derivatives	$	11,818	$	(74,167)			$	(62,349)
	Asset		Liability		Net derivatives
	derivatives		derivatives		Net notional
December 31, 2012	at fair value		at fair value		exposure		Fair value
Foreign exchange forward contracts	$	7,889	$	(17,395)	$	2,170,914	$	(9,506)
Foreign currency option contracts		1,410		(186)		133,377		1,224
Futures contracts		1,956		(1,352)		3,981,107		604
Credit default swaps (protection purchased)		6		(807)		55,000		(801)
Credit default swaps (assumed risks)		512		0		17,500		512
Insurance-linked securities (1)		0		(2,173)		135,964		(2,173)
Total return swaps		6,630		(546)		68,730		6,084
Interest rate swaps (2)		0		(7,880)		0		(7,880)
TBAs		115		(163)		155,760		(48)
Total derivatives	$	18,518	$	(30,502)			$	(11,984)

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(1)At September 30, 2013 and December 31, 2012, insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional amount.

(2)The Company enters into interest rate swaps to mitigate notional exposures oncertain total return swaps and certain fixed maturities. Accordingly, the notional valueof interest rate swaps on certain total return swaps is not presented separately in the table.

The fair value of all derivatives at September 30, 2013 andDecember 31, 2012 is recorded in Other invested assets in the Company's Condensed Consolidated Balance Sheets. At September 30, 2013 and December 31, 2012, none of the Company's derivatives were designated as hedges.

The gains and losses in the Condensed Consolidated Statements of Operations for derivatives not designated as hedges for the three monthsand nine months ended September 30, 2013 and 2012 were as follows (in thousands of U.S. dollars):

		For the three		For the three		For the nine		For the nine
		months ended		months ended		months ended		months ended
		September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Foreign exchange forward contracts		$	17	$	21,976	$	(36,457)	$	41,686
Foreign currency option contracts			(799)		1,061		(4,639)		2,559
Total included in net foreign exchange gains and losses		$	(782)	$	23,037	$	(41,096)	$	44,245
Futures contracts		$	(30,233)	$	(14,979)	$	55,143	$	(34,758)
Credit default swaps (protection purchased)			(6)		(250)		(126)		(861)
Credit default swaps (assumed risks)			7		398		122		1,709
Insurance-linked securities			(110)		3,934		(660)		5,160
Total return swaps			(1,762)		(773)		(5,421)		(1,242)
Interest rate swaps			240		(200)		3,416		(402)
TBAs			3,858		2,568		(5,839)		7,446
Total included in net realized and unrealized
	investment gains and losses	$	(28,006)	$	(9,302)	$	46,635	$	(22,948)
Total derivatives		$	(28,788)	$	13,735	$	5,539	$	21,297

Offsetting of Derivatives

The gross and net fair values of derivatives that are subject to offsetting in theCondensed Consolidated Balance Sheetsat September 30, 2013 and December 31, 2012 were as follows (in thousands of U.S. dollars):

			Gross		Net amounts of		Gross amounts not offset
	Gross		amounts		assets/ liabilities		in the balance sheet
	amounts		offset in the		presented in the		Financial		Cash collateral
September 30, 2013	recognized (1)		balance sheet		balance sheet		instruments		received/pledged		Net amount
Total derivative assets	$	11,818	$	0	$	11,818	$	1,739	$	0	$	13,557
Total derivative liabilities	$	(74,167)	$	0	$	(74,167)	$	(1,739)	$	4,260	$	(71,646)
December 31, 2012
Total derivative assets	$	18,518	$	0	$	18,518	$	(12,051)	$	0	$	6,467
Total derivative liabilities	$	(30,502)	$	0	$	(30,502)	$	12,051	$	0	$	(18,451)

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(1)Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.

Generally, credit default swaps, total return swaps and interest rate swaps are subject to a master netting or similar agreementsas they are entered into using International Swaps and Derivatives Association agreements which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. Futures contracts and foreign exchange forward contracts are traded on a regulated exchange which permits netting.