XML 37 R12.htm IDEA: XBRL DOCUMENT v2.4.0.8
Derivatives
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Disclosure [Text Block]
5. Derivatives
The Company’s derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value recognized in either net foreign exchange gains and losses or net realized and unrealized investment gains and losses in the Condensed Consolidated Statements of Operations or accumulated other comprehensive income or loss in the Condensed Consolidated Balance Sheets, depending on the nature of the derivative instrument. The Company’s objectives for holding or issuing these derivatives are as follows:
Foreign Exchange Forward Contracts
The Company utilizes foreign exchange forward contracts as part of its overall currency risk management and investment strategies. From time to time, the Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and branches whose functional currency is other than the U.S. dollar.
Foreign Currency Option Contracts and Futures Contracts
The Company utilizes foreign currency option contracts to mitigate foreign currency risk. The Company uses exchange traded treasury note futures contracts to manage portfolio duration and equity futures to hedge certain investments.
Credit Default Swaps
The Company purchases protection through credit default swaps to mitigate the risk associated with its underwriting operations, most notably in the credit/surety line, and to manage market exposures.
The Company also assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. The counterparties on the Company’s assumed credit default swaps are all investment grade rated financial institutions, however, the Company would be required to perform in the event of a default by the underlying issuer.
Insurance-Linked Securities
The Company enters into various weather derivatives and longevity total return swaps for which the underlying risks reference parametric weather risks for the weather derivatives and longevity risk for the longevity total return swaps.
Total Return and Interest Rate Swaps and Interest Rate Derivatives
The Company enters into total return swaps referencing various project, investments and principal finance obligations. The Company enters into interest rate swaps to mitigate the interest rate risk on certain of the total return swaps and certain fixed maturity investments. The Company also uses other interest rate derivatives to mitigate exposure to interest rate volatility.
To-Be-Announced Mortgage-Backed Securities
The Company utilizes TBAs as part of its overall investment strategy and to enhance investment performance.
The net fair values and the related net notional values of derivatives included in the Company’s Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013 were as follows (in thousands of U.S. dollars):
 
 
Asset
derivatives
at fair value

Liability
derivatives
at fair value

Net derivatives
June 30, 2014
 
Net notional
exposure

Fair value
Foreign exchange forward contracts
 
$
2,410

 
$
(4,171
)
 
$
2,130,049

 
$
(1,761
)
Foreign currency option contracts
 
746

 
—

 
85,547

 
746

Futures contracts
 
2,706

 
(407
)
 
2,987,520

 
2,299

Insurance-linked securities (1)
 
—

 
(950
)
 
170,969

 
(950
)
Total return swaps
 
408

 
(310
)
 
42,605

 
98

Interest rate swaps (2)
 
—

 
(9,145
)
 
202,116

 
(9,145
)
TBAs
 
1,728

 
—

 
154,210

 
1,728

Total derivatives
 
$
7,998

 
$
(14,983
)
 
 
 
$
(6,985
)
 
 
 
Asset
derivatives
at fair value
 
Liability
derivatives
at fair value
 
Net derivatives
December 31, 2013
 
Net notional
exposure
 
Fair value
Foreign exchange forward contracts
 
$
1,249

 
$
(8,648
)
 
$
1,957,409

 
$
(7,399
)
Foreign currency option contracts
 
—

 
(535
)
 
87,620

 
(535
)
Futures contracts
 
41,031

 
—

 
3,266,004

 
41,031

Credit default swaps (protection purchased)
 
—

 
(71
)
 
14,000

 
(71
)
Insurance-linked securities (1)
 
—

 
(268
)
 
168,724

 
(268
)
Total return swaps
 
79

 
(599
)
 
31,740

 
(520
)
Interest rate swaps (2)
 
2,147

 
(2,558
)
 
202,859

 
(411
)
TBAs
 
2

 
(1,331
)
 
183,835

 
(1,329
)
Total derivatives
 
$
44,508

 
$
(14,010
)
 
 
 
$
30,498

 
 
(1)
At June 30, 2014 and December 31, 2013, insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional amount.
(2)
The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps and certain fixed maturities. Only the notional value of interest rate swaps on fixed maturities is presented separately in the table.
The fair value of all derivatives at June 30, 2014 and December 31, 2013 is recorded in Other invested assets in the Company’s Condensed Consolidated Balance Sheets. At June 30, 2014 and December 31, 2013, none of the Company’s derivatives were designated as hedges.
The gains and losses in the Condensed Consolidated Statements of Operations for derivatives for the three months and six months ended June 30, 2014 and 2013 were as follows (in thousands of U.S. dollars):


For the three months ended June 30, 2014

For the three months ended June 30, 2013

For the six months ended June 30, 2014

For the six months ended June 30, 2013
Foreign exchange forward contracts
$
637

 
$
(54,004
)
 
$
8,892

 
$
(36,474
)
Foreign currency option contracts
753

 
(3,275
)
 
1,148

 
(3,840
)
Total included in net foreign exchange gains and losses
$
1,390

 
$
(57,279
)
 
$
10,040

 
$
(40,314
)
Futures contracts
$
(34,428
)
 
$
91,679

 
$
(50,501
)
 
$
85,376

Credit default swaps (protection purchased)
—

 
(22
)
 
(3
)
 
(120
)
Credit default swaps (assumed risks)
—

 
8

 
—

 
115

Insurance-linked securities
13

 
2,469

 
256

 
(550
)
Total return swaps
400

 
(2,988
)
 
618

 
(3,659
)
Interest rate swaps
(3,348
)
 
2,399

 
(8,734
)
 
3,176

TBAs
4,367

 
(8,363
)
 
8,114

 
(9,697
)
Total included in net realized and unrealized investment gains and losses
$
(32,996
)
 
$
85,182

 
$
(50,250
)
 
$
74,641

Total derivatives
$
(31,606
)
 
$
27,903

 
$
(40,210
)
 
$
34,327


Offsetting of Derivatives
The gross and net fair values of derivatives that are subject to offsetting in the Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013 were as follows (in thousands of U.S. dollars):
 
 
 
 
Gross
amounts
offset in the
balance sheet
 
Net amounts of
assets/liabilities
presented in the
balance sheet
 
Gross amounts not offset
in the balance sheet
 
 
June 30, 2014
 
Gross
amounts
recognized (1)
 
Financial
instruments
 
Cash collateral
received/pledged
 
Net amount
Total derivative assets
 
$
7,998

 
$
—

 
$
7,998

 
$
(616
)
 
$
—

 
$
7,382

Total derivative liabilities
 
$
(14,983
)
 
$
—

 
$
(14,983
)
 
$
616

 
$
—

 
$
(14,367
)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
 
$
44,508

 
$
—

 
$
44,508

 
$
(2
)
 
$
—

 
$
44,506

Total derivative liabilities
 
$
(14,010
)
 
$
—

 
$
(14,010
)
 
$
2

 
$
4,341

 
$
(9,667
)
 
 
(1)
Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.