DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2011

DERIVATIVE INSTRUMENTS [ABSTRACT]

DERIVATIVE INSTRUMENTS

6.       DERIVATIVE INSTRUMENTS

The following table summarizes the balance sheet classification of derivatives recorded at fair values. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of our derivative activities. Notional amounts are not reflective of credit risk.

		September 30, 2011						December 31, 2010
			Derivative Notional Amount		Asset Derivative Fair Value(1)		Liability Derivative Fair Value(1)		Derivative Notional Amount		Asset Derivative Fair Value(1)		Liability Derivative Fair Value(1)
	Fair value hedges
	Foreign exchange contracts	$	522,480	$	8,512	$	-	$	612,845	$	-	$	13,748
	Derivatives not designated as hedges
	Relating to investment portfolio:
	Foreign exchange contracts		279,910		10,590		338		154,990		2,182		746
	Relating to underwriting portfolio:
	Currency collar options		15,312		351		-		-		-		-
	Foreign exchange contracts	$	858,271		20,710		11,109	$	110,564		4,459		492
	Total derivatives			$	40,163	$	11,447			$	6,641	$	14,986
(1) Asset and liability derivatives are classified within other assets and other liabilities on the Consolidated Balance Sheets.

Fair Value Hedges

We entered into foreign exchange contracts to hedge the foreign currency exposure of two available for sale fixed maturity portfolios denominated in Euros. The hedges were designated and qualified as fair value hedges, resulting in the net impact of the hedges recognized in net realized investment gains (losses).

The following table provides the total impact on earnings relating to foreign exchange contracts designated as fair value hedges along with the impact of the related hedged investment portfolio for the periods indicated:

	Three months ended				Nine months ended
	September 30,				September 30,
		2011		2010		2011		2010
Foreign exchange contracts	$	39,179	$	(66,760)	$	(5,997)	$	25,463
Hedged investment portfolio		(43,920)		63,845		1,467		(20,861)
Hedge ineffectiveness recognized in earnings	$	(4,741)	$	(2,915)	$	(4,530)	$	4,602

Derivative Instruments not Designated as Hedges

a) Relating to Investment Portfolio

Within our investment portfolio we are exposed to foreign currency risk. Accordingly, the fair values for our investment portfolio are partially influenced by the change in foreign exchange rates. We may enter into foreign exchange contracts to manage the effect of this currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.

In addition, our external equity investment managers have the discretion to hold foreign currency exposures as part of their total return strategy.

The increase in the notional amount of investment-related derivatives since December 31, 2010 was consistent with an increase in the carrying value of Canadian, Sterling and Euro-denominated fixed maturities being hedged.

b) Relating to Underwriting Portfolio

Our insurance and reinsurance subsidiaries and branches operate in various foreign countries and consequently our underwriting portfolio is exposed to significant foreign currency risk. We manage foreign currency risk by seeking to match our liabilities under insurance and reinsurance policies that are payable in foreign currencies with cash and investments that are denominated in such currencies. When necessary, we may also use derivatives to economically hedge un-matched foreign currency exposures, specifically foreign currency forward contracts and options. In addition, we may utilize foreign currency swaps for cash management purposes.

The significant increase in the notional amount of underwriting related derivatives since December 31, 2010, was primarily due to hedging our foreign denominated liability exposure relating to the significant catastrophe losses incurred from the New Zealand and Japanese earthquakes.

The total unrealized and realized gains (losses) recognized in earnings for derivatives not designated as hedges were as follows:
				Three months ended				Nine months ended
		Location of Gain (Loss) Recognized		September 30,				September 30,
		in Income on Derivative		2011		2010		2011		2010
	Derivatives not designated as hedges
	Relating to investment portfolio:
	Foreign exchange contracts	Net realized investment gains (losses)	$	18,825	$	(6,333)	$	5,364	$	(3,503)
	Relating to underwriting portfolio:
	Currency collar options	Foreign exchange gains (losses)		(2,975)		-		352		-
	Foreign exchange contracts	Foreign exchange gains (losses)		(2,759)		(2,711)		18,842		4,705
	Total		$	13,091	$	(9,044)	$	24,558	$	1,202