Derivative Instruments

9 Months Ended

Sep. 30, 2016

Summary of Derivative Instruments [Abstract]

Derivative Instruments

DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments such as futures, options, swaps, forward contracts and other derivative contracts primarily to manage its foreign currency exposure, obtain exposure to a particular financial market, for yield enhancement, or for trading and speculation. The Company’s derivative instruments are generally traded under International Swaps and Derivatives Association master agreements, which establish the terms of the transactions entered into with the Company’s derivative counterparties. In the event one party becomes insolvent or otherwise defaults on its obligations, a master agreement generally permits the non-defaulting party to accelerate and terminate all outstanding transactions and net the transactions’ marked-to-market values so that a single sum in a single currency will be owed by, or owed to, the non-defaulting party. Effectively, this contractual close-out netting reduces credit exposure from gross to net exposure. Where the Company has entered into master netting agreements with counterparties, or the Company has the legal and contractual right to offset positions, the derivative positions are generally netted by counterparty and are reported accordingly in other assets and other liabilities.

The tables below show the gross and net amounts of recognized derivative assets and liabilities, including the location on the consolidated balance sheets and fair value of the Company’s principal derivative instruments:

	Derivative Assets
At September 30, 2016	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets Presented in the Balance Sheet		Balance Sheet Location	Collateral		Net Amount
Interest rate futures	$	2,781	1,645		$	1,136	Other assets	$	—	$	1,136
Foreign currency forward contracts (1)	4,677		508		4,169		Other assets	—		4,169
Foreign currency forward contracts (2)	244		168		76		Other assets	—		76
Credit default swaps	1,107		106		1,001		Other assets	420		581
Total	$	8,809	$	2,427	$	6,382		$	420	$	5,962
	Derivative Liabilities
At September 30, 2016	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities Presented in the Balance Sheet		Balance Sheet Location	Collateral Pledged		Net Amount
Interest rate futures	$	1,865	1,645		$	220	Other liabilities	$	220	$	—
Foreign currency forward contracts (1)	1,129		—		1,129		Other liabilities	—		1,129
Foreign currency forward contracts (2)	200		168		32		Other liabilities	—		32
Credit default swaps	425		106		319		Other liabilities	199		120
Total	$	3,619	$	1,919	$	1,700		$	419	$	1,281

(1) Contracts used to manage foreign currency risks in underwriting and non-investment operations.

(2) Contracts used to manage foreign currency risks in investment operations.

	Derivative Assets
At December 31, 2015	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets Presented in the Balance Sheet		Balance Sheet Location	Collateral		Net Amount
Interest rate futures	$	1,059	937		$	122	Other assets	$	—	$	122
Foreign currency forward contracts (1)	4,645		82		4,563		Other assets	—		4,563
Foreign currency forward contracts (2)	1,007		599		408		Other assets	—		408
Credit default swaps	257		44		213		Other assets	—		213
Total	$	6,968	$	1,662	$	5,306		$	—	$	5,306
	Derivative Liabilities
At December 31, 2015	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities Presented in the Balance Sheet		Balance Sheet Location	Collateral Pledged		Net Amount
Interest rate futures	$	2,293	937		$	1,356	Other liabilities	$	1,356	$	—
Foreign currency forward contracts (1)	1,891		81		1,810		Other liabilities	—		1,810
Foreign currency forward contracts (2)	806		599		207		Other liabilities	—		207
Credit default swaps	491		44		447		Other liabilities	447		—
Total	$	5,481	$	1,661	$	3,820		$	1,803	$	2,017

(1) Contracts used to manage foreign currency risks in underwriting and non-investment operations.

(2) Contracts used to manage foreign currency risks in investment operations.

Refer to “Note 3. Investments” for information on reverse repurchase agreements.

The location and amount of the gain (loss) recognized in the Company’s consolidated statements of operations related to its principal derivative instruments are shown in the following table:

	Location of gain (loss) recognized on derivatives	Amount of gain (loss) recognized on derivatives
Three months ended September 30,		2016			2015
Interest rate futures	Net realized and unrealized gains (losses) on investments	$	1,040		$	(16,817	)
Foreign currency forward contracts (1)	Net foreign exchange (losses) gains	5,097			817
Foreign currency forward contracts (2)	Net foreign exchange (losses) gains	(489		)	2,185
Credit default swaps	Net realized and unrealized gains (losses) on investments	687			195
Weather contract	Net realized and unrealized gains (losses) on investments	—			10
Total		$	6,335		$	(13,610	)

	Location of gain (loss) recognized on derivatives	Amount of gain (loss) recognized on derivatives
Nine months ended September 30,		2016			2015
Interest rate futures	Net realized and unrealized gains (losses) on investments	$	(27,775	)	$	(1,441	)
Foreign currency forward contracts (1)	Net foreign exchange (losses) gains	(92		)	(5,782		)
Foreign currency forward contracts (2)	Net foreign exchange (losses) gains	(3,706		)	7,978
Credit default swaps	Net realized and unrealized gains (losses) on investments	902			257
Weather contract	Net realized and unrealized gains (losses) on investments	—			180
Total		$	(30,671	)	$	1,192

(1) Contracts used to manage foreign currency risks in underwriting and non-investment operations.

(2) Contracts used to manage foreign currency risks in investment operations.

The Company is not aware of the existence of any credit-risk related contingent features that it believes would be triggered in its derivative instruments that are in a net liability position at September 30, 2016.

Interest Rate Futures

The Company uses interest rate futures within its portfolio of fixed maturity investments to manage its exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk. At September 30, 2016, the Company had $952.3 million of notional long positions and $772.5 million of notional short positions of primarily Eurodollar, U.S. treasury and non-U.S. dollar futures contracts (December 31, 2015 - $1.0 billion and $1.1 billion, respectively). The fair value of these derivatives is determined using exchange traded prices.

Foreign Currency Derivatives

The Company’s functional currency is the U.S. dollar. The Company writes a portion of its business in currencies other than U.S. dollars and may, from time to time, experience foreign exchange gains and losses in the Company’s consolidated financial statements. All changes in exchange rates, with the exception of non-monetary assets and liabilities, are recognized currently in the Company’s consolidated statements of operations.

Underwriting Operations Related Foreign Currency Contracts

The Company’s foreign currency policy with regard to its underwriting operations is generally to hold foreign currency assets, including cash, investments and receivables that approximate the foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable. When necessary, the Company may use foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar denominated assets and liabilities associated with its underwriting operations. The fair value of the Company’s underwriting operations related foreign currency contracts is determined using indicative pricing obtained from counterparties or broker quotes. At September 30, 2016, the Company had outstanding underwriting related foreign currency contracts of $205.1 million in notional long positions and $150.7 million in notional short positions, denominated in U.S. dollars (December 31, 2015 - $172.4 million and $101.5 million, respectively).

Investment Portfolio Related Foreign Currency Forward Contracts

The Company’s investment operations are exposed to currency fluctuations through its investments in non-U.S. dollar fixed maturity investments, short term investments and other investments. From time to time, the Company may employ foreign currency forward contracts in its investment portfolio to either assume foreign currency risk or to economically hedge its exposure to currency fluctuations from these investments. The fair value of the Company’s investment portfolio related foreign currency forward contracts is determined using an interpolated rate based on closing forward market rates. At September 30, 2016, the Company had outstanding investment portfolio related foreign currency contracts of $30.1 million in notional long positions and $62.0 million in notional short positions, denominated in U.S. dollars (December 31, 2015 - $31.3 million and $143.4 million, respectively).

Credit Derivatives

The Company’s exposure to credit risk is primarily due to its fixed maturity investments, short term investments, premiums receivable and reinsurance recoverable.  From time to time, the Company purchases credit derivatives to hedge its exposures in the insurance industry, and to assist in managing the credit risk associated with ceded reinsurance.  The Company also employs credit derivatives in its investment portfolio to either assume credit risk or hedge its credit exposure. The fair value of the credit derivatives is determined using industry valuation models, broker bid indications or internal pricing valuation techniques.  The fair value of these credit derivatives can change based on a variety of factors including changes in credit spreads, default rates and recovery rates, the correlation of credit risk between the referenced credit and the counterparty, and market rate inputs such as interest rates. At September 30, 2016, the Company had outstanding credit derivatives of $Nil in notional long positions and $45.7 million in notional short positions, denominated in U.S. dollars (December 31, 2015 - $Nil and $46.1 million, respectively).