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Derivative Instruments
3 Months Ended
Mar. 31, 2020
Summary of Derivative Instruments [Abstract]  
Derivative Instruments DERIVATIVE INSTRUMENTS
From time to time, the Company may enter into derivative instruments such as futures, options, swaps, forward contracts and other derivative contracts primarily to manage its foreign currency exposure, obtain exposure to a particular financial market, for yield enhancement, or for trading and to assume risk. The Company’s derivative instruments can be exchange traded or over-the-counter, with over-the-counter derivatives generally traded under International Swaps and Derivatives Association master agreements, which establish the terms of the transactions entered into with the Company’s derivative counterparties. In the event a party becomes insolvent or otherwise defaults on its obligations, a master agreement generally permits the non-defaulting party to accelerate and terminate all outstanding transactions and net the transactions’ marked-to-market values so that a single sum in a single currency will be owed by, or owed to, the non-defaulting party. Effectively, this contractual close-out netting reduces credit exposure from gross to net exposure. Where the Company has entered into master netting agreements with counterparties, or the Company has the legal and contractual right to offset positions, the derivative positions are generally netted by counterparty and are reported accordingly in other assets and other liabilities. Commencing in the second quarter of 2019, the Company elected to adopt hedge accounting for certain of its derivative instruments used as hedges of a net investment in a foreign operation.
The tables below show the gross and net amounts of recognized derivative assets and liabilities at fair value, including the location on the consolidated balance sheets of the Company’s principal derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
At March 31, 2020
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Balance Sheet
 
 Net Amounts of Assets Presented in the Balance Sheet
 
Balance Sheet Location
 
Collateral
 
Net Amount
 
 
Derivative instruments not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate futures
$
139

 
$
(789
)
 
$
928

 
Other assets
 
$

 
$
928

 
 
Foreign currency forward contracts (1)
17,824

 
2,416

 
15,408

 
Other assets
 

 
15,408

 
 
Foreign currency forward contracts (2)
6,645

 
439

 
6,206

 
Other assets
 

 
6,206

 
 
Credit default swaps
30

 

 
30

 
Other assets
 

 
30

 
 
Total derivative instruments not designated as hedges
24,638

 
2,066

 
22,572

 
 
 

 
22,572

 
 
Derivative instruments designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (3)
4,154

 

 
4,154

 
Other assets
 

 
4,154

 
 
Total
$
28,792

 
$
2,066

 
$
26,726

 
 
 
$

 
$
26,726

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
At March 31, 2020
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Balance Sheet
 
 Net Amounts of Liabilities Presented in the Balance Sheet
 
Balance Sheet Location
 
Collateral Pledged
 
Net Amount
 
 
Derivative instruments not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate futures
$
1,654

 
$
(789
)
 
$
2,443

 
Other liabilities
 
$
2,443

 
$

 
 
Interest rate swaps
114

 

 
114

 
Other assets
 
114

 

 
 
Foreign currency forward contracts (1)
9,700

 
4,810

 
4,890

 
Other liabilities
 

 
4,890

 
 
Foreign currency forward contracts (2)
440

 
439

 
1

 
Other liabilities
 

 
1

 
 
Credit default swaps
332

 

 
332

 
Other assets
 
332

 

 
 
Total return swaps
17,767

 

 
17,767

 
Other assets
 
17,767

 

 
 
Equity futures
813

 

 
813

 
Other liabilities
 
813

 

 
 
Total derivative instruments not designated as hedges
30,820

 
4,460

 
26,360

 
 
 
21,469

 
4,891

 
 
Derivative instruments designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (3)

 
1,489

 
(1,489
)
 
Other liabilities
 

 
(1,489
)
 
 
Total
$
30,820

 
$
5,949

 
$
24,871

 
 
 
$
21,469

 
$
3,402

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Contracts used to manage foreign currency risks in underwriting and non-investment operations.
(2)
Contracts used to manage foreign currency risks in investment operations.
(3)
Contracts designated as hedges of a net investment in a foreign operation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
At December 31, 2019
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Balance Sheet
 
 Net Amounts of Assets Presented in the Balance Sheet
 
Balance Sheet Location
 
Collateral
 
Net Amount
 
 
Derivative instruments not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate futures
$
234

 
$
122

 
$
112

 
Other assets
 
$

 
$
112

 
 
Foreign currency forward contracts (1)
22,702

 
2,418

 
20,284

 
Other assets
 

 
20,284

 
 
Foreign currency forward contracts (2)
1,082

 
622

 
460

 
Other assets
 

 
460

 
 
Credit default swaps
37

 

 
37

 
Other assets
 

 
37

 
 
Total return swaps
3,744

 

 
3,744

 
Other assets
 
3,601

 
143

 
 
Equity futures
291

 

 
291

 
Other assets
 

 
291

 
 
Total derivative instruments not designated as hedges
28,090

 
3,162

 
24,928

 
 
 
3,601

 
21,327

 
 
Derivative instruments designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (3)
64

 
667

 
(603
)
 
Other assets
 

 
(603
)
 
 
Total
$
28,154

 
$
3,829

 
$
24,325

 
 
 
$
3,601

 
$
20,724

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
At December 31, 2019
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Balance Sheet
 
 Net Amounts of Liabilities Presented in the Balance Sheet
 
Balance Sheet Location
 
Collateral Pledged
 
Net Amount
 
 
Derivative instruments not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate futures
$
1,545

 
$
122

 
$
1,423

 
Other liabilities
 
$
1,423

 
$

 
 
Interest rate swaps
50

 

 
50

 
Other liabilities
 
50

 

 
 
Foreign currency forward contracts (1)
3,808

 
28

 
3,780

 
Other liabilities
 

 
3,780

 
 
Foreign currency forward contracts (2)
939

 
622

 
317

 
Other liabilities
 

 
317

 
 
Total derivative instruments not designated as hedges
6,342

 
772

 
5,570

 
 
 
1,473

 
4,097

 
 
Derivative instruments designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (3)
1,818

 

 
1,818

 
Other liabilities
 

 
1,818

 
 
Total
$
8,160

 
$
772

 
$
7,388

 
 
 
$
1,473

 
$
5,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Contracts used to manage foreign currency risks in underwriting and non-investment operations.
(2)
Contracts used to manage foreign currency risks in investment operations.
(3)
Contracts designated as hedges of a net investment in a foreign operation.
See “Note 3. Investments” for information on reverse repurchase agreements.
The location and amount of the gain (loss) recognized in the Company’s consolidated statements of operations related to its principal derivative instruments are shown in the following table:
 
 
 
 
 
 
 
 
 
Location of gain (loss)
recognized on derivatives
Amount of gain (loss) recognized on
derivatives
 
 
Three months ended March 31,
 
2020
 
2019
 
 
Derivative instruments not designated as hedges
 
 
 
 
 
 
Interest rate futures
Net realized and unrealized (losses) gains on investments
$
88,006

 
$
6,056

 
 
Interest rate swaps
Net realized and unrealized (losses) gains on investments
2,107

 
349

 
 
Foreign currency forward contracts (1)
Net foreign exchange losses
(330
)
 
4,442

 
 
Foreign currency forward contracts (2)
Net foreign exchange losses
6,400

 
1,145

 
 
Credit default swaps
Net realized and unrealized (losses) gains on investments
(4,897
)
 
4,410

 
 
Total return swaps
Net realized and unrealized (losses) gains on investments
(21,137
)
 
534

 
 
Equity futures
Net realized and unrealized (losses) gains on investments
(30,898
)
 
2,447

 
 
Total derivative instruments not designated as hedges
 
39,251

 
19,383

 
 
Derivative instruments designated as hedges
 
 
 
 
 
 
Foreign currency forward contracts (3)
Accumulated other comprehensive loss
10,844

 

 
 
Total
 
$
50,095

 
$
19,383

 
 
 
 
 
 
 
 
(1)
Contracts used to manage foreign currency risks in underwriting and non-investment operations.
(2)
Contracts used to manage foreign currency risks in investment operations.
(3)
Contracts designated as hedges of a net investment in a foreign operation.
The Company is not aware of the existence of any credit-risk related contingent features that it believes would be triggered in its derivative instruments that are in a net liability position at March 31, 2020.
Derivative Instruments Not Designated as Hedges
Interest Rate Derivatives
The Company uses interest rate futures and swaps within its portfolio of fixed maturity investments to manage its exposure to interest rate risk, which may result in increasing or decreasing its exposure to this risk.
Interest Rate Futures
The fair value of interest rate futures is determined using exchange traded prices. At March 31, 2020, the Company had $2.2 billion of notional long positions and $935.7 million of notional short positions of primarily Eurodollar and U.S. treasury futures contracts (December 31, 2019 - $2.5 billion and $1.0 billion, respectively).
Interest Rate Swaps
The fair value of interest rate swaps is determined using the relevant exchange traded price where available or a discounted cash flow model based on the terms of the contract and inputs, including, where applicable, observable yield curves. At March 31, 2020, the Company had $2.0 million of notional positions paying a fixed rate and $25.5 million receiving a fixed rate denominated in U.S. dollar swap contracts (December 31, 2019 - $27.9 million and $25.5 million, respectively).
Foreign Currency Derivatives
The Company’s reporting currency is the U.S. dollar. In addition, the functional currency of the Company, and the majority of the Company’s subsidiaries, is the U.S. dollar. However, the Company writes a portion of its business in currencies other than U.S. dollars and may, from time to time, experience foreign exchange gains and losses in the Company’s consolidated financial statements. All changes in exchange rates, with the exception of non-monetary assets and liabilities, are recognized in the Company’s consolidated statements of operations.
Underwriting and Non-Investments Operations Related Foreign Currency Contracts
The Company’s foreign currency policy with regard to its underwriting operations is generally to enter into foreign currency forward and option contracts for notional values that approximate the foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable, net of any cash, investments and receivables held in the respective foreign currency. The Company’s use of foreign currency forward and option contracts is intended to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar denominated assets and liabilities associated with its underwriting operations. The fair value of the Company’s underwriting operations related foreign currency contracts is determined using indicative pricing obtained from counterparties or broker quotes. At March 31, 2020, the Company had outstanding underwriting related foreign currency contracts of $502.4 million in notional long positions and $651.5 million in notional short positions, denominated in U.S. dollars (December 31, 2019 - $722.6 million and $1.2 billion, respectively).
Investment Portfolio Related Foreign Currency Forward Contracts
The Company’s investment operations are exposed to currency fluctuations through its investments in non-U.S. dollar fixed maturity investments, short term investments and other investments. From time to time, the Company may employ foreign currency forward contracts in its investment portfolio to either assume foreign currency risk or to economically hedge its exposure to currency fluctuations from these investments. The fair value of the Company’s investment portfolio related foreign currency forward contracts is determined using an interpolated rate based on closing forward market rates. At March 31, 2020, the Company had outstanding investment portfolio related foreign currency contracts of $384.8 million in notional long positions and $255.5 million in notional short positions, denominated in U.S. dollars (December 31, 2019 - $195.6 million and $61.0 million, respectively).
Credit Derivatives
The Company’s exposure to credit risk is primarily due to its fixed maturity investments, short term investments, premiums receivable and reinsurance recoverable. From time to time, the Company may purchase credit derivatives to hedge its exposures in the insurance industry, and to assist in managing the credit risk associated with ceded reinsurance. The Company also employs credit derivatives in its investment portfolio to either assume credit risk or hedge its credit exposure.
Credit Default Swaps
The fair value of the Company’s credit default swaps is determined using industry valuation models, broker bid indications or internal pricing valuation techniques. The fair value of these credit default swaps can change based on a variety of factors including changes in credit spreads, default rates and recovery rates, the correlation of credit risk between the referenced credit and the counterparty, and market rate inputs such as interest rates. At March 31, 2020, the Company had outstanding credit default swaps of $0.5 million in notional positions to hedge credit risk and $117.1 million in notional positions to assume credit risk, denominated in U.S. dollars (December 31, 2019 - $0.5 million and $143.4 million, respectively).
Total Return Swaps
The Company uses total return swaps as a means to manage spread duration and credit exposure in its investment portfolio. The fair value of the Company’s total return swaps is determined using broker-dealer bid quotations, market-based prices from pricing vendors or valuation models. At March 31, 2020, the
Company had $173.5 million of notional long positions (long credit) and $Nil of notional short positions (short credit), denominated in U.S. dollars (December 31, 2019 - $173.5 million and $Nil, respectively).
Equity Derivatives
Equity Futures
The Company uses equity derivatives in its investment portfolio from time to time to either assume equity risk or hedge its equity exposure. The fair value of the Company’s equity futures is determined using market-based prices from pricing vendors. At March 31, 2020, the Company had $50.4 million notional long position and $Nil notional short position of equity futures, denominated in U.S. dollars (December 31, 2019 - $122.0 million and $Nil, respectively).
Derivative Instruments Designated as Hedges of a Net Investment in a Foreign Operation
Foreign Currency Derivatives
Hedges of a Net Investment in a Foreign Operation
In connection with the acquisition of TMR, the Company acquired certain entities with non-U.S. dollar functional currencies, including RenaissanceRe Europe, Australia Branch, which has an Australian dollar functional currency. The Company has entered into foreign exchange forwards to hedge the Australian dollar net investment in foreign operations, on an after-tax basis, from changes in the exchange rate between the U.S. dollar and the Australian dollar.
The Company utilizes foreign exchange forward contracts to hedge the fair value of its net investment in a foreign operation. During 2020 and 2019, the Company entered into foreign exchange forward contracts that were formally designated as hedges of its investment in RenaissanceRe Europe, Australia Branch. There was no ineffectiveness in these transactions.
The table below provides a summary of derivative instruments designated as hedges of a net investment in a foreign operation, including the weighted average U.S. dollar equivalent of foreign denominated net assets that were hedged and the resulting derivative gain that was recorded in foreign currency translation adjustments, net of tax, within accumulated other comprehensive loss on the Company’s consolidated statements of changes in shareholders’ equity:
 
 
 
 
 
 
 
 
Three months ended
 
 
 
March 31,
2020
 
March 31,
2019
 
 
Weighted average of U.S. dollar equivalent of foreign denominated net assets
$
76,804

 
$

 
 
Derivative gains (1)
$
10,844

 
$

 
 
 
 
 
 
 
(1)
Derivative gains from derivative instruments designated as hedges of the net investment in a foreign operation are recorded in foreign currency translation adjustments, net of tax, within accumulated other comprehensive loss on the Company’s consolidated statements of changes in shareholders’ equity.