XML 93 R20.htm IDEA: XBRL DOCUMENT v3.2.0.727
Derivative Instruments
6 Months Ended
Jun. 30, 2015
Summary of Derivative Instruments [Abstract]  
Derivative Instruments
DERIVATIVE INSTRUMENTS
The Company enters 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 speculation. The Company accounts for its derivatives in accordance with FASB ASC Topic Derivatives and Hedging, which requires all derivatives to be recorded at fair value on the Company’s balance sheet as either assets or liabilities, depending on the rights or obligations of the derivatives, with changes in fair value reflected in current earnings. The Company does not currently apply hedge accounting in respect of any positions reflected in its consolidated financial statements. The Company’s derivative instruments are 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 one 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.
The tables below show the gross and net amounts of recognized derivative assets and liabilities, including the location on the consolidated balance sheets and fair value of the Company’s principal derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
At June 30, 2015
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
 
 
Interest rate futures
$
849

 
743

 
$
106

 
Other assets
 
$

 
$
106

 
 
Foreign currency forward contracts (1)
1,153

 
133

 
1,020

 
Other assets
 

 
1,020

 
 
Foreign currency forward contracts (2)
803

 
157

 
646

 
Other assets
 

 
646

 
 
Credit default swaps
274

 
135

 
139

 
Other assets
 
60

 
79

 
 
Total
$
3,079

 
$
1,168

 
$
1,911

 
 
 
$
60

 
$
1,851

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
At June 30, 2015
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
 
 
Interest rate futures
$
872

 
743

 
$
129

 
Other liabilities
 
$
129

 
$

 
 
Foreign currency forward contracts (1)
6,589

 
1,017

 
5,572

 
Other liabilities
 

 
5,572

 
 
Foreign currency forward contracts (2)
320

 
157

 
163

 
Other liabilities
 

 
163

 
 
Credit default swaps
250

 
135

 
115

 
Other liabilities
 

 
115

 
 
Weather contract
14

 

 
14

 
Other liabilities
 
14

 

 
 
Total
$
8,045

 
$
2,052

 
$
5,993

 
 
 
$
143

 
$
5,850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
At December 31, 2014
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
 
 
Interest rate futures
$
468

 
468

 
$

 
Other assets
 
$

 
$

 
 
Foreign currency forward contracts (1)
5,740

 
1,737

 
4,003

 
Other assets
 

 
4,003

 
 
Foreign currency forward contracts (2)
3,959

 
648

 
3,311

 
Other assets
 

 
3,311

 
 
Credit default swaps
468

 
88

 
380

 
Other assets
 
310

 
70

 
 
Total
$
10,635

 
$
2,941

 
$
7,694

 
 
 
$
310

 
$
7,384

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
At December 31, 2014
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
 
 
Interest rate futures
$
1,037

 
468

 
$
569

 
Other liabilities
 
$
569

 
$

 
 
Foreign currency forward contracts (1)
1,319

 
967

 
352

 
Other liabilities
 

 
352

 
 
Foreign currency forward contracts (2)
724

 
649

 
75

 
Other liabilities
 

 
75

 
 
Credit default swaps
251

 
88

 
163

 
Other liabilities
 

 
163

 
 
Weather contract
190

 

 
190

 
Other liabilities
 
190

 

 
 
Total
$
3,521

 
$
2,172

 
$
1,349

 
 
 
$
759

 
$
590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.
Refer to “Note 4. 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 June 30,
 
 
2015
 
2014
 
 
Interest rate futures
Net realized and unrealized (losses) gains on investments
 
$
19,784

 
$
(7,362
)
 
 
Foreign currency forward contracts (1)
Net foreign exchange (losses) gains
 
(10,210
)
 
(1,990
)
 
 
Foreign currency forward contracts (2)
Net foreign exchange (losses) gains
 
(3,417
)
 
58

 
 
Credit default swaps
Net realized and unrealized (losses) gains on investments
 
22

 
299

 
 
Weather contract
Net realized and unrealized (losses) gains on investments
 
10

 
179

 
 
Call rights
Other income (loss)
 

 
2,220

 
 
Total
 
 
$
6,189

 
$
(6,596
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Location of gain (loss)
recognized on derivatives
 
Amount of gain (loss) recognized on
derivatives
 
 
Six months ended June 30,
 
 
2015
 
2014
 
 
Interest rate futures
Net realized and unrealized (losses) gains on investments
 
$
15,376

 
$
(19,636
)
 
 
Foreign currency forward contracts (1)
Net foreign exchange (losses) gains
 
(6,599
)
 
2,109

 
 
Foreign currency forward contracts (2)
Net foreign exchange (losses) gains
 
5,793

 
(1,341
)
 
 
Credit default swaps
Net realized and unrealized (losses) gains on investments
 
62

 
458

 
 
Weather contract
Net realized and unrealized (losses) gains on investments
 
170

 
1,395

 
 
Call rights
Other income (loss)
 

 
2,220

 
 
Total
 
 
$
14,802

 
$
(14,795
)
 
 
 
 
 
 
 
 
 
(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.
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 June 30, 2015.
Interest Rate Futures
The Company uses interest rate futures within its portfolio of fixed maturity investments to manage its exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk. At June 30, 2015, the Company had $1,355.9 million of notional long positions and $1,414.0 million of notional short positions of primarily Eurodollar, U.S. treasury and non-U.S. dollar futures contracts (December 31, 2014 - $587.0 million and $617.4 million, respectively). The fair value of these derivatives is determined using exchange traded prices.
Foreign Currency Derivatives
The Company’s functional currency is the U.S. dollar. 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 currently in the Company’s consolidated statements of operations.
Underwriting Operations Related Foreign Currency Contracts
The Company’s foreign currency policy with regard to its underwriting operations is generally to hold foreign currency assets, including cash, investments and receivables that approximate the foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable. When necessary, the Company may use foreign currency forward and option contracts 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 June 30, 2015, the Company had outstanding underwriting related foreign currency contracts of $162.4 million in notional long positions and $126.2 million in notional short positions, denominated in U.S. dollars (December 31, 2014 - $144.8 million and $121.6 million, 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 June 30, 2015, the Company had outstanding investment portfolio related foreign currency contracts of $32.2 million in notional long positions and $127.3 million in notional short positions, denominated in U.S. dollars (December 31, 2014 - $35.8 million and $150.1 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 purchases 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. The fair value of the credit derivatives is determined using industry valuation models, broker bid indications or internal pricing valuation techniques.  The fair value of these credit derivatives 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 June 30, 2015, the Company had outstanding credit derivatives of $Nil in notional long positions and $32.7 million in notional short positions, denominated in U.S. dollars (December 31, 2014 - $4.6 million and $19.4 million, respectively).
Weather Contract
The Company, from time to time, transacts in certain derivative-based risk management products that address weather-related risks. The fair value of these contracts is determined through the use of an internal valuation model with the inputs to the internal valuation model based on proprietary data as observable market inputs are not available.  The most significant unobservable input is the potential payment that would become due to a counterparty following the occurrence of a triggering event as reported by an external agency.  Generally, the Company’s portfolio of such derivatives is relatively small and such derivatives are frequently seasonal in nature. At June 30, 2015, the Company had an outstanding weather contract with an insurance company of $2.1 million in a notional short position (December 31, 2014 - $2.2 million).
Call Rights
At June 30, 2014, the Company had an agreement with a counterparty that gave the counterparty the right to purchase shares the Company has in certain of its equity method investees at a price above the Company’s then carrying value for those investments. The agreement was considered a derivative for accounting purposes and the Company’s estimated fair value of the agreement was $2.2 million at June 30, 2014. The fair value was based on an internal valuation model which incorporated the estimated intrinsic value of the agreement, the time value of money, and the likelihood of the agreement being exercised and ultimately settled.