FINANCIAL INSTRUMENTS

In the normal course of its business, the Company purchases and sells various financial instruments, which include listed and unlisted equities, corporate and sovereign debt, commodities, futures, put and call options, currency forwards, other derivatives and similar instruments sold, not yet purchased.

The Company is exposed to credit risk in relation to counterparties that may default on their obligations to the Company. The amount of counterparty credit risk predominantly relates to the value of financial contracts receivable and assets held at counterparties. The Company mitigates its counterparty credit risk by using several counterparties, which decreases the likelihood of any significant concentration of credit risk with any one counterparty. The Company mitigates its exposure to counterparty risk by obtaining collateral from its counterparties based on the value of the financial contracts receivable. In addition, the Company is exposed to credit risk on corporate and sovereign debt instruments to the extent that the debtors may default on their debt obligations.

The Company is exposed to market risk including interest rate and foreign exchange fluctuations on financial instruments that are valued at market prices. Market movements can be volatile and difficult to predict. This may affect the ultimate gains or losses realized upon the sale of its holdings as well as the amount of net investment income reported in the consolidated statements of income. Management utilizes the services of the Company’s investment advisor to monitor the Company’s positions to reduce the risk of potential loss due to changes in market values. The investment advisor may be limited in its ability to trade certain investments on behalf of the Company.

Purchases and sales of investments are disclosed in the consolidated statements of cash flows. Net realized gains on the sale of investments, financial contracts, and investments sold, not yet purchased during 2017 were $87.6 million (2016: $113.8 million losses, 2015: $22.2 million gains). Gross realized gains during 2017 were $267.9 million (2016: $188.7 million, 2015: $350.5 million) and gross realized losses were $180.3 million (2016: $302.5 million, 2015: $328.3 million). For the year ended December 31, 2017, included in net investment income in the consolidated statements of income were $41.4 million of net losses (2016: $210.0 million of net gains, 2015: $265.4 million of net losses) relating to change in unrealized gains and losses on trading securities still held at the balance sheet date.

As of December 31, 2017, cash and investments with a fair value of $200.4 million (2016: $310.9 million) have been pledged as security against letters of credit issued, and $377.9 million (2016: $86.4 million) have been pledged as security relating to regulatory trusts.

As of December 31, 2017, the Company’s investments in General Motors, Brighthouse Financial Inc, gold and gold derivatives, Bayer AG and Mylan NV were in excess of 10% of the Company’s total shareholders’ equity, with fair values of $205.5 million, or 24.3%, $132.4 million or 15.7%, $121.5 million, or 14.4%, $103.6 million or 12.3% and $84.8 million or 10.0%, respectively, of total shareholders’ equity.

As of December 31, 2016, the Company’s investment in gold and gold derivatives and General Motors were the only investments in excess of 10% of the Company’s total shareholders’ equity, with fair values of $137.3 million, or 15.5%, and $92.9 million, or 10.5%, respectively, of total shareholders’ equity.

Fair Value Hierarchy

The Company’s financial instruments are carried at fair value, and the net unrealized gains or losses are included in net investment income (loss) in the consolidated statements of income.

The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of December 31, 2017:



	Fair value measurements as of December 31, 2017
Description	Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)		Total
	($ in thousands)
Assets:
Debt instruments	$	—		$	6,300		$	880	$	7,180
Listed equity securities	1,181,150			22,522			—		1,203,672
Commodities	121,502			—			—		121,502
Private and unlisted equity securities	—			—			6,108		6,108
	$	1,302,652		$	28,822		$	6,988	$	1,338,462
Unlisted equity funds measured at net asset value⁽¹⁾									24,522
Total investments									$	1,362,984
Financial contracts receivable	$	22		$	12,871		$	—	$	12,893

Liabilities:
Listed equity securities, sold not yet purchased	$	(812,652	)	$	—		—		$	(812,652	)
Debt instruments, sold not yet purchased	—			(100,145		)	—		(100,145		)
Total securities sold, not yet purchased	$	(812,652	)	$	(100,145	)	—		$	(912,797	)
Financial contracts payable	$	—		$	(22,222	)	—		$	(22,222	)

⁽¹⁾ Investments measured at fair value using the net asset value practical expedient have not been classified in the fair value hierarchy. The fair value amounts are presented in the above table to facilitate reconciliation to the consolidated balance sheets.

The following table presents the Company’s investments, categorized by the level of the fair value hierarchy as of December 31, 2016:



	Fair value measurements as of December 31, 2016
Description	Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)		Total
	($ in thousands)
Assets:
Debt instruments	$	—		$	21,819		$	654	$	22,473
Listed equity securities	823,421			20,580			—		844,001
Commodities	137,296			—			—		137,296
Private and unlisted equity securities	—			—			6,109		6,109
	$	960,717		$	42,399		$	6,763	$	1,009,879
Unlisted equity funds measured at net asset value ⁽¹⁾									12,658
Total investments									$	1,022,537
Financial contracts receivable	$	20		$	76,361		$	—	$	76,381

Liabilities:
Listed equity securities, sold not yet purchased	$	(770,267	)	$	—		$	—	$	(770,267	)
Debt instruments, sold not yet purchased	—			(89,635		)	—		(89,635		)
Total securities sold, not yet purchased	$	(770,267	)	$	(89,635	)	$	—	$	(859,902	)
Financial contracts payable	$	—		$	(2,237	)	$	—	$	(2,237	)

The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31, 2017:



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Year ended December 31, 2017
	Assets
	Debt instruments		Private and unlisted equity securities			Total
	($ in thousands)
Beginning balance	$	654	$	6,109		$	6,763
Purchases	—		1,750			1,750
Sales	—		—			—
Total realized and unrealized gains (losses) and amortization included in earnings, net	226		17			243
Transfers into Level 3	—		—			—
Transfers out of Level 3	—		(1,768		)	(1,768		)
Ending balance	$	880	$	6,108		$	6,988

During the year ended December 31, 2017, $1.8 million of the private equity securities were transferred from Level 3 to Level 1 as these securities commenced trading on a listed exchange during the year and the fair value was determined based on the last traded price on an active market. There were no other transfers between Level 1, Level 2 or Level 3 during the year ended December 31, 2017.

The following table presents the reconciliation of the balances for all investments measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31, 2016:



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Year ended December 31, 2016
	Assets
	Debt instruments		Private and unlisted equity securities			Total
	($ in thousands)
Beginning balance	$	505	$	8,452		$	8,957
Purchases	—		—			—
Sales	—		(2,539		)	(2,539		)
Total realized and unrealized gains (losses) and amortization included in earnings, net	149		196			345
Transfers into Level 3	—		—			—
Transfers out of Level 3	—		—			—
Ending balance	$	654	$	6,109		$	6,763

There were no transfers between Level 1, Level 2 or Level 3 during the year ended December 31, 2016.

As of December 31, 2017, the Company held investments in unlisted equity funds of $24.5 million (December 31, 2016: $12.7 million) with fair values measured using the unadjusted net asset values and performance estimates as reported by the managers of these funds as a practical expedient. Some of these net asset values were reported from periods prior to December 31, 2017. The unlisted equity funds have varying lock-up periods and, as of December 31, 2017, all of the funds had redemption restrictions. The redemption restrictions have been in place since inception of the investments. One of the unlisted equity funds may be redeemed after December 31, 2018 while the redemption restrictions for the other funds are not expected to lapse in the near future. As of December 31, 2017, the Company had $6.5 million (December 31, 2016: $9.2 million) of unfunded commitments relating to unlisted equity funds whose fair values are determined based on unadjusted net asset values reported by the managers of these funds. These commitments are included in the amounts presented in the schedule of commitments and contingencies in Note 14 of these consolidated financial statements.

For the year ended December 31, 2017, included in net investment income in the consolidated statements of income were net realized losses relating to Level 3 securities of nil (2016: net realized losses of $1.4 million).

For Level 3 securities still held as of the reporting date, the change in net unrealized gains for the year ended December 31, 2017 of $0.2 million (2016: net unrealized gains $0.3 million), were included in net investment income (loss) in the consolidated statements of income.

Investments

Debt instruments, trading

At December 31, 2017, the following investments were included in debt instruments:



	Cost/ amortized cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Corporate debt – U.S.	$	8,508	$	—	$	(7,186	)	$	1,322
Corporate debt – Non U.S.	2,109		—		(2,057		)	52
Sovereign debt – Non U.S.	5,831		—		(25		)	5,806
Total debt instruments	$	16,448	$	—	$	(9,268	)	$	7,180

At December 31, 2016, the following investments were included in debt instruments:



	Cost/ amortized cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Corporate debt – U.S.	$	21,294	$	6,509	$	(5,331	)	$	22,472
Corporate debt – Non U.S.	2,109		—		(2,108		)	1
Total debt instruments	$	23,403	$	6,509	$	(7,439	)	$	22,473

The maturity distribution for debt instruments held at December 31, 2017 and 2016, was as follows:



	2017				2016
	Cost/ amortized cost		Fair value		Cost/ amortized cost		Fair value
	($ in thousands)
Within one year	$	7,557	$	441	$	—	$	—
From one to five years	—		—		17,803		19,492
From five to ten years	2,109		52		4,649		2,327
More than ten years	6,782		6,687		951		654
	$	16,448	$	7,180	$	23,403	$	22,473

Equity securities, trading

At December 31, 2017, the following long positions were included in equity securities, trading:



	Cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	1,014,426	$	208,350	$	(19,104	)	$	1,203,672
Total equity securities	$	1,014,426	$	208,350	$	(19,104	)	$	1,203,672

At December 31, 2016, the following long positions were included in equity securities, trading:



	Cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	753,813	$	115,379	$	(40,706	)	$	828,486
Exchange traded funds	15,056		459		—			15,515
Total equity securities	$	768,869	$	115,838	$	(40,706	)	$	844,001

Other Investments

“Other investments” include commodities and private securities and unlisted funds. As of December 31, 2017 and 2016, all commodities were comprised of gold bullion.

At December 31, 2017, the following securities were included in other investments:



	Cost		Unrealized gains		Unrealized losses		Fair value
	($ in thousands)
Commodities	$	101,184	$	20,318	$	—	$	121,502
Private and unlisted equity funds	25,316		5,314		—		30,630
	$	126,500	$	25,632	$	—	$	152,132

At December 31, 2016, the following securities were included in other investments:



	Cost		Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Commodities	$	130,671	$	6,625	$	—		$	137,296
Private and unlisted equity funds	14,418		4,375		(26		)	18,767
	$	145,089	$	11,000	$	(26	)	$	156,063

Investments in Securities Sold, Not Yet Purchased

Securities sold, not yet purchased are securities that the Company has sold, but does not own, in anticipation of a decline in the market value of the security. The Company’s risk is that the value of the security will increase rather than decline. Consequently, the settlement amount of the liability for securities sold, not yet purchased may exceed the amount recorded in the consolidated balance sheet as the Company is obligated to purchase the securities sold, not yet purchased in the market at prevailing prices to settle its obligations. To establish a position in a security sold, not yet purchased, the Company needs to borrow the security for delivery to the buyer. On each day the transaction is open, the liability for the obligation to replace the borrowed security is marked-to-market and an unrealized gain or loss is recorded. At the time the transaction is closed, the Company realizes a gain or loss equal to the difference between the price at which the security was sold and the cost of replacing the borrowed security. While the transaction is open, the Company will also incur an expense for any dividends or interest which will be paid to the lender of the securities.

At December 31, 2017, the following securities were included in investments in securities sold, not yet purchased:



	Proceeds			Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	(643,148	)	$	17,541	$	(187,045	)	$	(812,652	)
Sovereign debt – Non U.S.	(96,231		)	—		(3,914		)	(100,145		)
	$	(739,379	)	$	17,541	$	(190,959	)	$	(912,797	)

At December 31, 2016, the following securities were included in investments in securities sold, not yet purchased:



	Proceeds			Unrealized gains		Unrealized losses			Fair value
	($ in thousands)
Equities – listed	$	(690,270	)	$	30,768	$	(110,765	)	$	(770,267	)
Sovereign debt – Non U.S.	(96,230		)	6,595		—			(89,635		)
	$	(786,500	)	$	37,363	$	(110,765	)	$	(859,902	)

Financial Contracts

As of December 31, 2017 and 2016, the Company had entered into total return equity swaps, interest rate swaps, commodity swaps, options, warrants, rights, futures and forward contracts with various financial institutions to meet certain investment objectives. Under the terms of each of these financial contracts, the Company is either entitled to receive or is obligated to make payments, which are based on the product of a formula contained within each contract that includes the change in the fair value of the underlying or reference security.

At December 31, 2017, the fair values of financial contracts outstanding were as follows:



Financial Contracts	Listing currency⁽¹⁾	Notional amount of underlying instruments	Fair value of net assets (obligations) on financial contracts
		($ in thousands)
Financial contracts receivable
Call options	USD	2,656	$	91
Commodity Swaps	USD	17,833	2,142
Forwards	KRW	41,379	801
Futures	USD	5,874	12
Interest rate swaps	JPY	21,269	479
Put options ⁽²⁾	USD	155	1
Total return swaps – equities	EUR/GBP/USD	34,965	9,357
Warrants and rights on listed equities	EUR/USD	29	10
Total financial contracts receivable, at fair value			$	12,893
Financial contracts payable
Commodity Swaps	USD	26,795	$	(353	)
Put options	USD	130	(14		)
Total return swaps – equities	EUR/GBP/KRW/RON/USD	60,663	(21,855		)
Total financial contracts payable, at fair value			$	(22,222	)

⁽¹⁾USD = US Dollar; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.

⁽²⁾ Includes options on the Chinese Yuan, denominated in U.S. dollars.

At December 31, 2016, the fair values of financial contracts outstanding were as follows:



Financial Contracts	Listing currency ⁽¹⁾	Notional amount of underlying instruments	Fair value of net assets (obligations) on financial contracts
		($ in thousands)
Financial contracts receivable
Call options	USD	134,495	$	26,508
Commodity Swaps	USD	82,009	13,506
Interest rate swaps	JPY	20,490	218
Put options ⁽²⁾	USD	115,481	6,703
Total return swaps – equities	EUR/GBP/USD	100,199	29,413
Warrants and rights on listed equities	EUR/USD	67	33
Total financial contracts receivable, at fair value			$	76,381
Financial contracts payable
Forwards	KRW	6,880	(118		)
Put options	USD	815	(172		)
Total return swaps – equities	EUR/GBP/KRW/RON/USD	31,257	(1,947		)
Total financial contracts payable, at fair value			$	(2,237	)

⁽¹⁾ USD = US Dollar; EUR = Euro; GBP = British Pound; JPY = Japanese Yen; KRW = Korean Won; RON = Romanian New Leu.

⁽²⁾ Includes options on the Japanese Yen and the Chinese Yuan, denominated in U.S. dollars.

Options are derivative financial instruments that give the buyer, in exchange for a premium payment, the right, but not the obligation, to either purchase from (call option) or sell to (put option) the writer, a specified underlying security at a specified price on or before a specified date. The Company enters into option contracts to meet certain investment objectives. For exchange traded option contracts, the exchange acts as the counterparty to specific transactions and therefore bears the risk of delivery to and from counterparties of specific positions.

As of December 31, 2017, the Company held no OTC put options (long) (December 31, 2016: $6.7 million) and $0.1 million OTC call options (long) (December 31, 2016: $22.4 million).

During the years ended December 31, 2017, 2016 and 2015, the Company reported gains and losses on derivatives as follows:



Derivatives not designated as hedging instruments	Location of gains and losses on derivatives recognized in income	Gain (loss) on derivatives recognized in income
		Year ended December 31
		2017			2016			2015
		($ in thousands)
Commodity swaps	Net investment income (loss)	$	(9,293	)	$	10,474		$	(12,061	)
Credit default swaps, purchased – corporate debt	Net investment income (loss)	—			—			(156		)
Credit default swaps, purchased – sovereign debt	Net investment income (loss)	—			—			(90		)
Forwards	Net investment income (loss)	2,507			(302		)	1,009
Futures	Net investment income (loss)	(399		)	376			(952		)
Interest rate swaps	Net investment income (loss)	136			218			(706		)
Options, warrants, and rights	Net investment income (loss)	(18,455		)	10,261			(13,955		)
Total return swaps – equities	Net investment income (loss)	2,281			28,612			(12,590		)
Weather derivative swap	Other income (expense), net	—			—			(2,340		)
Total		$	(23,223	)	$	49,639		$	(41,841	)

The Company generally does not enter into derivatives for risk management or hedging purposes. The volume of derivative activities varies from period to period depending on potential investment opportunities.

For the year ended December 31, 2017, the Company’s volume of derivative activities (based on notional amounts) was as follows:



	Year ended December 31, 2017
Derivatives not designated as hedging instruments (notional amounts)	Entered		Exited
	($ in thousands)
Commodity swaps	$	2,025	$	41,830
Forwards	34,652		1,739
Futures	38,207		32,537
Options, warrants and rights ⁽¹⁾	950,811		133,407
Total return swaps	258,874		355,446
Total	$	1,284,569	$	564,959

⁽¹⁾Exited amount excludes derivatives which expired or were exercised during the period.

For the year ended December 31, 2016, the Company’s volume of derivative activities (based on notional amounts) was as follows:



	Year ended December 31, 2016
Derivatives not designated as hedging instruments (notional amounts)	Entered		Exited
	($ in thousands)
Commodity swaps	$	141,534	$	100,045
Forwards	6,880		3,128
Futures	1,966,368		1,988,782
Interest rate swaps	20,490		—
Options, warrants and rights⁽¹⁾	462,429		366,285
Total return swaps	86,688		59,810
Total	$	2,684,389	$	2,518,050

⁽¹⁾ Exited amount excludes derivatives which expired or were exercised during the period.

The Company does not offset its derivative instruments and presents all amounts in the consolidated balance sheets on a gross basis. The Company has pledged cash collateral to derivative counterparties to support the current value of amounts due to the counterparties on its derivative instruments.

As of December 31, 2017, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:



December 31, 2017	(i)			(ii)		(iii) = (i) - (ii)			(iv) Gross amounts not offset in the balance sheet						(v) = (iii) + (iv)
Description	Gross amounts of recognized assets (liabilities)			Gross amounts offset in the balance sheet		Net amounts of assets (liabilities) presented in the balance sheet			Financial instruments available for offset			Cash collateral (received) pledged			Net amount of asset (liability)
	($ in thousands)
Financial contracts receivable	$	12,893		$	—	$	12,893		$	(5,128	)	$	(1,336	)	$	6,429
Financial contracts payable	(22,222		)	—		(22,222		)	5,128			17,094			—

As of December 31, 2016, the gross and net amounts of derivative instruments and the cash collateral applicable to derivative instruments were as follows:



December 31, 2016	(i)			(ii)		(iii) = (i) - (ii)			(iv) Gross amounts not offset in the balance sheet						(v) = (iii) + (iv)
Description	Gross amounts of recognized assets (liabilities)			Gross amounts offset in the balance sheet		Net amounts of assets (liabilities) presented in the balance sheet			Financial instruments available for offset			Cash collateral (received) pledged			Net amount of asset (liability)
	($ in thousands)
Financial contracts receivable	$	76,381		$	—	$	76,381		$	(938	)	$	(44,572	)	$	30,871
Financial contracts payable	(2,237		)	—		(2,237		)	938			1,299			—