Derivatives

3 Months Ended

Mar. 31, 2012

Disclosure - Derivatives [Abstract]

Derivatives

4. Derivatives

The Company's derivative instruments are recorded in the Unaudited Condensed Consolidated Balance Sheets at fair value, with changes in fair value mainly recognized in either net foreign exchange gains and losses or net realized and unrealized investment gains and losses in the Unaudited Condensed Consolidated Statements of Operations or accumulated other comprehensive income or loss in the Unaudited 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 commodity and equity futures to hedge certain investments. The Company also uses commodities futures to replicate the investment return on certain benchmarked commodities.

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. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the underlying issuer, no issuer was in default at March 31, 2012. The counterparties on the Company's assumed credit default swaps are all highly rated financial institutions.

Insurance-Linked Securities

The Company has entered into various weather derivatives, weather futures and longevity total return swaps for which the underlying risks reference parametric weather risks for the weather derivatives and weather futures, and longevity risk for the longevity total return swaps.

Total Return and Interest Rate Swaps and Interest Rate Derivatives

The Company has entered into total return swaps referencing various project, investments and principal finance obligations. The Company has also entered into interest rate swaps to mitigate the interest rate risk on certain of the total return swaps. 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 fair values and the related notional values of derivatives included in the Company's Unaudited Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011 were as follows (in thousands of U.S. dollars):

	Asset		Liability		Net derivatives
	derivatives		derivatives		Net notional
March 31, 2012	at fair value		at fair value		exposure		Fair value
Foreign exchange forward contracts	$	5,608	$	(2,132)	$	2,955,928	$	3,476
Foreign currency option contracts		3,338		—		116,147		3,338
Futures contracts		17,393		(1,995)		2,526,540		15,398
Credit default swaps (protection purchased)		17		(1,464)		95,301		(1,447)
Credit default swaps (assumed risks)		356		(102)		17,500		254
Insurance-linked securities (1)		—		(3,528)		160,964		(3,528)
Total return swaps		6,943		(418)		113,328		6,525
Interest rate swaps (2)		—		(7,029)		—		(7,029)
TBAs		—		(206)		132,620		(206)
Total derivatives	$	33,655	$	(16,874)			$	16,781
	Asset		Liability		Net derivatives
	derivatives		derivatives		Net notional
December 31, 2011	at fair value		at fair value		exposure		Fair value
Foreign exchange forward contracts	$	7,865	$	(5,816)	$	2,555,230	$	2,049
Foreign currency option contracts		1,074		(321)		110,079		753
Futures contracts		13,572		(14,173)		2,534,995		(601)
Credit default swaps (protection purchased)		92		(1,285)		94,961		(1,193)
Credit default swaps (assumed risks)		246		(772)		17,500		(526)
Insurance-linked securities (1)		—		(968)		136,375		(968)
Total return swaps		7,673		(640)		122,230		7,033
Interest rate swaps (2)		—		(7,992)		—		(7,992)
TBAs		747		(58)		104,315		689
Total derivatives	$	31,269	$	(32,025)			$	(756)

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(1)       At March 31, 2012 and December 31, 2011, 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 oncertain total return swaps. Accordingly, the notional valueof interest rate swaps is not presented separately in the table.

The fair value of all derivatives at March 31, 2012 andDecember 31, 2011 is recorded in Other invested assets in the Company's Unaudited Condensed Consolidated Balance Sheets. At March 31, 2012 and December 31, 2011, none of the Company's derivatives were designated as hedges.

The gains and losses in the Unaudited Condensed Consolidated Statements of Operations for derivatives not designated as hedges for the three monthsended March 31, 2012 and 2011 were as follows (in thousands of U.S. dollars):

	For the three		For the three
	months ended		months ended
	March 31, 2012		March 31, 2011
Foreign exchange forward contracts	$	3,881	$	(17,016)
Foreign currency option contracts		3,327		(77)
Total included in net foreign exchange gains and losses	$	7,208	$	(17,093)
Futures contracts	$	21,845	$	(20,283)
Credit default swaps (protection purchased)		(597)		(244)
Credit default swaps (assumed risks)		1,076		836
Insurance-linked securities		(3,459)		(7,073)
Total return swaps		77		799
Interest rate swaps		963		823
TBAs		1,070		1,303
Total included in net realized and unrealized investment gains and losses	$	20,975	$	(23,839)
Total derivatives	$	28,183	$	(40,932)