Derivative Instruments

12 Months Ended

Dec. 31, 2022

Summary of Derivative Instruments [Abstract]

Derivative Instruments

DERIVATIVE INSTRUMENTS

From time to time, the Company may enter 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 to assume risk. The Company’s derivative instruments can be exchange traded or over-the-counter, with over-the-counter derivatives 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 a 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 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 December 31, 2022.

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

	Derivative Assets
At December 31, 2022	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
Derivative Instruments Not Designated as Hedges
Interest rate futures	$	387	$	—	$	387	Other assets	$	—	$	387
Foreign currency forward contracts (1)	31,755		—		31,755		Other assets	—		31,755
Foreign currency forward contracts (2)	11,866		—		11,866		Other assets	—		11,866
Credit default swaps	413		—		413		Other assets	—		413
Total derivative instruments not designated as hedges	44,421		—		44,421			—		44,421
Total	$	44,421	$	—	$	44,421		$	—	$	44,421
	Derivative Liabilities
At December 31, 2022	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
Derivative Instruments Not Designated as Hedges
Interest rate futures	$	1,685	$	—	$	1,685	Other liabilities	$	209	$	1,476
Foreign currency forward contracts (1)	1,160		—		1,160		Other liabilities	—		1,160
Foreign currency forward contracts (2)	2,165		—		2,165		Other liabilities	—		2,165
Credit default swaps	1,055		—		1,055		Other assets	100		955
Equity futures	323		—		323		Other liabilities	—		323
Total derivative instruments not designated as hedges	6,388		—		6,388			309		6,079
Derivative Instruments Designated as Hedges
Foreign currency forward contracts (3)	1,193		—		1,193		Other liabilities	—		1,193
Total	$	7,581	$	—	$	7,581		$	309	$	7,272

(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.

(3)Contracts designated as hedges of net investments in a foreign operation.

	Derivative Assets
At December 31, 2021	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
Derivative Instruments Not Designated as Hedges
Interest rate futures	$	1,068	$	—	$	1,068	Other assets	$	—	$	1,068
Foreign currency forward contracts (1)	13,730		—		13,730		Other assets	—		13,730
Foreign currency forward contracts (2)	1,247		—		1,247		Other assets	—		1,247
Credit default swaps	478		—		478		Other assets	—		478
Total derivative instruments not designated as hedges	16,523		—		16,523			—		16,523
Derivative Instruments Designated as Hedges
Foreign currency forward contracts (3)	1,366		—		1,366		Other assets	—		1,366
Total	$	17,889	$	—	$	17,889		$	—	$	17,889
	Derivative Liabilities
At December 31, 2021	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
Derivative Instruments Not Designated as Hedges
Interest rate futures	$	1,426	$	—	$	1,426	Other liabilities	$	1,426	$	—
Foreign currency forward contracts (1)	7,880		—		7,880		Other liabilities	—		7,880
Foreign currency forward contracts (2)	3,412		—		3,412		Other liabilities	—		3,412
Equity futures	173		—		173		Other liabilities	173		—
Total derivative instruments not designated as hedges	12,891		—		12,891			1,599		11,292
Derivative Instruments Designated as Hedges
Foreign currency forward contracts (3)	4,063		—		4,063		Other liabilities	—		4,063
Total	$	16,954	$	—	$	16,954		$	1,599	$	15,355

(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.

(3)Contracts designated as hedges of net investments in foreign operations.

Refer to “Note 4. 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
Year ended December 31,		2022		2021		2020
Derivative Instruments Not Designated as Hedges
Interest rate futures (4)	Net realized and unrealized gains (losses) on investments	$	(86,863)	$	(15,846)	$	103,102
Interest rate swaps (4)	Net realized and unrealized gains (losses) on investments	—		(1,184)		2,334
Foreign currency forward contracts (1)	Net foreign exchange gains (losses)	(51,401)		(19,151)		24,309
Foreign currency forward contracts (2)	Net foreign exchange gains (losses)	21,689		(1,521)		(4,450)
Credit default swaps (4)	Net realized and unrealized gains (losses) on investments	(9,084)		3,479		(1,304)
Total return swaps (4)	Net realized and unrealized gains (losses) on investments	(6)		1,314		(5,479)
Equity futures (5)	Net realized and unrealized gains (losses) on investments	(69,972)		—		(30,045)
Warrants	Net realized and unrealized losses on investments	632		—		—
Total derivative instruments not designated as hedges		(195,005)		(32,909)		88,467
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	Accumulated other comprehensive income (loss)	6,466		(4,535)		11,685
Total derivative instruments designated as hedges		6,466		(4,535)		11,685
Total		$	(188,539)	$	(37,444)	$	100,152

(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.

(3)Contracts designated as hedges of net investments in foreign operations.

(4)Fixed income related derivatives included in net realized and unrealized gains (losses) on investment-related derivatives. See “Note 4. Investments” for additional information.

(5)Equity related derivatives included in net realized and unrealized gains (losses) on investment-related derivatives. See “Note 4. Investments” for additional information.

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 December 31, 2022.

Derivative Instruments Not Designated as Hedges

Interest Rate Derivatives

The Company uses interest rate futures and swaps within its portfolio of fixed maturity investments to manage its exposure to interest rate risk, which may result in increasing or decreasing its exposure to this risk.

Interest Rate Futures

The fair value of interest rate futures is determined using exchange traded prices. At December 31, 2022, the Company had $2.4 billion of notional long positions and $0.5 billion of notional short positions of primarily U.S. treasury futures contracts (2021 – $2.2 billion and $0.5 billion of primarily Eurodollar and U.S. treasury futures contracts, respectively).

Interest Rate Swaps

The fair value of interest rate swaps is determined using the relevant exchange traded price where available or a discounted cash flow model based on the terms of the contract and inputs, including, where applicable, observable yield curves. At December 31, 2022 and 2021, the Company held no interest rate swaps.

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. The impact of changes in exchange rates on the Company’s assets and liabilities denominated in currencies other than the U.S. dollar, excluding non-monetary assets and liabilities, are recognized in the Company’s consolidated statements of operations.

Underwriting and Non-investments Operations Related Foreign Currency Contracts

The Company’s foreign currency policy with regard to its underwriting operations is generally to enter into foreign currency forward and option contracts for notional values that approximate the foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable, net of any cash, investments and receivables held in the respective foreign currency. The Company’s use of foreign currency forward and option contracts is intended 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 Company may determine not to match a portion of its projected underwriting related assets or liabilities with underlying foreign currency exposure with investments in the same currencies, which would increase its exposure to foreign currency fluctuations and potentially increase the impact and volatility of foreign exchange gains and losses on its results of 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 December 31, 2022, the Company had outstanding underwriting related foreign currency contracts of $861.7 million in notional long positions and $172.4 million in notional short positions, denominated in U.S. dollars (2021 – $915.0 million and $329.3 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 December 31, 2022, the Company had outstanding investment portfolio related foreign currency contracts of $225.6 million in notional long positions and $86.3 million in notional short positions, denominated in U.S. dollars (2021 – $245.8 million and $131.0 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 may purchase credit derivatives to manage 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 manage its credit exposure.

Credit Default Swaps

The fair value of the Company credit default swaps is determined using industry valuation models, broker bid indications or internal pricing valuation techniques. The fair value of these credit default swaps 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 December 31, 2022, the Company had outstanding credit default swaps of $953.4 million in notional positions to hedge credit risk and $13.1 million in notional positions to assume credit risk, denominated in U.S. dollars (2021 – $Nil and $218.5 million, respectively).

Total Return Swaps

From time to time, the Company uses total return swaps as a means to manage spread duration and credit exposure in its investment portfolio. The fair value of the Company’s total return swaps is determined using broker-dealer bid quotations, market-based prices from pricing vendors or valuation models. At December 31, 2022 and December 31, 2021, the Company had no outstanding total return swaps, respectively.

Equity Derivatives

Equity Futures

From time to time, the Company uses equity derivatives in its investment portfolio to either assume equity risk or hedge its equity exposure. The fair value of the Company’s equity futures is determined using market-based prices from pricing vendors. At December 31, 2022, the Company had a $116.0 million notional long position of equity futures, denominated in U.S. dollars (2021 - $74.3 million).

Derivative Instruments Designated as Hedges of Net Investments in Foreign Operations

Foreign Currency Derivatives

Hedges of Net Investments in Foreign Operations

Certain of the Company’s subsidiaries currently use, or have used in the past, non-U.S. dollar functional currencies. The Company, from time to time, enters into foreign exchange forwards to hedge currencies, which, as of December 31, 2022, includes the Australian dollar net investment in a foreign operation (December 31, 2021 - Australian dollar and Euro net investment in foreign operations), on an after-tax basis, from changes in the exchange rate between the U.S. dollar and these currencies.

The Company utilizes foreign exchange forward contracts to hedge the fair value of its net investments in foreign operations. The Company has entered into foreign exchange forward contracts that were formally designated as hedges of its investment in subsidiaries with non-U.S. dollar functional currencies. There was no ineffectiveness in these transactions.

The table below provides a summary of derivative instruments designated as hedges of net investments in foreign operations, including the weighted average U.S. dollar equivalent of foreign denominated net (liabilities) assets that were hedged and the resulting derivative gain that are recorded in foreign currency translation adjustments, net of tax, within accumulated other comprehensive loss on the Company’s consolidated statements of changes in shareholders’ equity:

Year ended December 31,	2022		2021
Weighted average of U.S. dollar equivalent of foreign denominated net assets (liabilities)	$	73,472	$	(66,438)
Derivative gains (losses) (1)	$	6,466	$	(4,535)

(1)Derivative gains (losses) from derivative instruments designated as hedges of the net investment in foreign operations are recorded in foreign currency translation adjustments, net of tax, within accumulated other comprehensive income (loss) on the Company’s consolidated statements of changes in shareholders’ equity.