Note 13. Derivatives

Interest Rate Cap

Sirius Group entered into an interest rate swap (“Interest Rate Cap”) with two financial institutions where it paid an upfront premium and in return receives a series of quarterly payments based on the 3-month London Interbank Offered Rate (“LIBOR”) at the time of payment. The Interest Rate Cap does not qualify for hedge accounting. Changes in fair value are recognized as unrealized gains or losses and are presented within Other revenue. The fair value of the interest rate cap has been estimated using a non-binding single broker quote and, accordingly, has been classified as a Level 3 measurement as of December 31, 2018 and 2017. Collateral held is recorded within short-term investments with an equal amount recognized as a liability to return collateral. Sirius Group’s liability to return that collateral is based on the amounts provided by the counterparties and investment earnings thereon. The following table summarizes the Interest Rate Cap collateral balances held by Sirius Group and ratings by counterparty:


	2018
(Millions)	Collateral Balances Held		S&P Rating(1)
Barclays Bank Plc	$	0.2	A
Nordea Bank Finland Abp		0.1	AA-
Total	$	0.3

(1)

Standard & Poor’s ratings as detailed above are: “AA -" (Very Strong, which is the fourth highest of twenty-three creditworthiness ratings) and “A” (Strong, which is the sixth highest of twenty-three credit worthiness ratings).

Foreign Currency Swaps

Sirius Group executes foreign currency swaps to manage foreign currency exposure. The foreign currency swaps have not been designated or accounted for under hedge accounting. Changes in fair value are recognized as unrealized gains or losses and are presented within Net foreign exchange gains (losses). The fair value of the foreign currency swaps has been estimated using a non-binding single broker quote and accordingly, has been classified as a Level 3 measurement as of December 31, 2018 and 2017. Sirius Group does not provide or hold any collateral associated with the swaps.

Foreign Currency Forward

During 2016, Sirius Group executed a foreign currency forward to manage currency exposure against a foreign currency investment. During 2017, the foreign currency forward expired and was not renewed. The foreign currency forward was not designated or accounted for under hedge accounting. Changes in fair value are presented within Net foreign exchange gains (losses). The fair value of the foreign currency forward was estimated using a non-binding single broker quote and, accordingly, was classified as a Level 3 measurement. Sirius Group did not provide or hold any collateral associated with the forwards.

Weather Derivatives

Sirius Group holds assets and assumes liabilities related to weather and weather contingent risk management products. Weather and weather contingent derivative contracts are entered into with the objective of generating profits in normal climatic conditions. Accordingly, Sirius Group’s weather and weather contingent derivatives are not designed to meet the criteria for hedge accounting under GAAP. Sirius Group receives payment of premium at the contract inception in exchange for bearing the risk of variations in a quantifiable weather index. Changes in fair value are recognized as unrealized gains or losses and are presented within Other revenue. Management uses available market data and internal pricing models based upon consistent statistical methodologies to estimate the fair value. Because of the significance of the unobservable inputs used to estimate the fair value of Sirius Group’s weather risk contracts, the fair value measurements of the contracts are deemed to be Level 3 measurements in the fair value hierarchy as at December 31, 2018 and 2017. Sirius Group does not provide or hold any collateral associated with the weather derivatives.

Equity Futures Contracts

During 2018, Sirius Group executed trades in equity futures contracts to hedge against a long position in Common equities. During 2018, the equity futures contracts were exited and were not renewed. The equity futures contracts were not designated or accounted for under hedge accounting. Changes in fair value are presented within Net realized investment gains (losses). The fair value of the equity put options is widely available and have quoted prices in active markets and accordingly, were classified as a Level 1 measurement.

Equity Put Options

During 2018, Sirius Group sold equity put options to hedge against a long position in Common equities. The equity put options were not designated or accounted for under hedge accounting. Changes in fair value are presented within Net unrealized investment (losses) gains. The fair value of the equity put options is widely available and have quoted prices in active markets and accordingly, were classified as a Level 1 measurement.

The following tables summarize information on the classification and amount of the fair value of derivatives not designated as hedging instruments within the Company’s Consolidated Balance Sheets as at December 31, 2018 and 2017:


(Millions)	2018						2017
					Liability						Liability
Derivatives not					derivative at						derivative at
designated as hedging			Asset derivative		fair				Asset derivative		fair
instruments	Notional value		at fair value(1)		value(2)		Notional value		at fair value(1)		value(2)

Interest rate cap	$	250.0	$	0.2	$	—	$	250.0	$	0.3	$	—
Foreign currency swaps	$	45.0	$	—	$	4.6	$	45.0	$	—	$	10.6
Weather derivatives	$	150.5	$	3.9	$	—	$	113.3	$	4.2	$	—
Equity put options	$	6.2	$	—	$	0.5	$	—	$	—	$	—

(1)

Asset derivatives are classified within Other assets within the Company’s Consolidated Balance Sheets at December 31, 2018 and 2017.

(2)

Liability derivatives are classified within Other liabilities within the Company’s Consolidated Balance Sheets at December 31, 2018 and 2017.

The following table summarizes information on the classification and net impact on earnings, recognized in the Company’s Consolidated Statements of (Loss) Income relating to derivatives during the years ended December 31, 2018, 2017 and 2016:


(Millions)
Derivatives not designated as
hedging
instruments	Classification of gains (losses) recognized in earnings	2018		2017		2016
Interest rate cap	Other revenues	$	0.1	$	(1.5)	$	(0.2)
Foreign currency swaps	Net foreign exchange gains (losses)	$	6.9	$	(11.3)	$	6.6
Foreign currency forwards(1)	Net foreign exchange gains (losses)	$	—	$	(0.3)	$	—
Weather derivatives	Other revenues	$	5.2	$	(1.5)	$	5.2
Equity futures contracts(2)	Net realized investment gains (losses)	$	1.7	$	—	$	—

(1)

There were no Foreign currency forwards at December 31, 2017 and an insignificant amount at December 31, 2016 on the Consolidated Balance Sheets.

(2)

There were no Equity futures contracts at December 31, 2018.