XML 40 R18.htm IDEA: XBRL DOCUMENT v3.5.0.2
Derivative Instruments
6 Months Ended
Jun. 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 June 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
$
1,514

 
262

 
$
1,252

 
Other assets
 
$

 
$
1,252

 
 
Foreign currency forward contracts (1)
5,236

 
73

 
5,163

 
Other assets
 

 
5,163

 
 
Foreign currency forward contracts (2)
127

 
87

 
40

 
Other assets
 

 
40

 
 
Credit default swaps
726

 
99

 
627

 
Other assets
 
447

 
180

 
 
Total
$
7,603

 
$
521

 
$
7,082

 
 
 
$
447

 
$
6,635

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
At June 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
$
430

 
262

 
$
168

 
Other liabilities
 
$
151

 
$
17

 
 
Foreign currency forward contracts (1)
4,968

 
1,665

 
3,303

 
Other liabilities
 

 
3,303

 
 
Foreign currency forward contracts (2)
1,060

 
87

 
973

 
Other liabilities
 

 
973

 
 
Credit default swaps
369

 
99

 
270

 
Other liabilities
 
245

 
25

 
 
Total
$
6,827

 
$
2,113

 
$
4,714

 
 
 
$
396

 
$
4,318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 June 30,
 
 
2016
 
2015
 
 
Interest rate futures
Net realized and unrealized gains (losses) on investments
 
$
(9,456
)
 
$
19,784

 
 
Foreign currency forward contracts (1)
Net foreign exchange losses
 
(3,815
)
 
(10,210
)
 
 
Foreign currency forward contracts (2)
Net foreign exchange losses
 
2,641

 
(3,417
)
 
 
Credit default swaps
Net realized and unrealized gains (losses) on investments
 
305

 
22

 
 
Weather contract
Net realized and unrealized gains (losses) on investments
 

 
10

 
 
Total
 
 
$
(10,325
)
 
$
6,189

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Location of gain (loss)
recognized on derivatives
 
Amount of gain (loss) recognized on
derivatives
 
 
Six months ended June 30,
 
 
2016
 
2015
 
 
Interest rate futures
Net realized and unrealized gains (losses) on investments
 
$
(28,815
)
 
$
15,376

 
 
Foreign currency forward contracts (1)
Net foreign exchange losses
 
(5,189
)
 
(6,599
)
 
 
Foreign currency forward contracts (2)
Net foreign exchange losses
 
(3,217
)
 
5,793

 
 
Credit default swaps
Net realized and unrealized gains (losses) on investments
 
215

 
62

 
 
Weather contract
Net realized and unrealized gains (losses) on investments
 

 
170

 
 
Total
 
 
$
(37,006
)
 
$
14,802

 
 
 
 
 
 
 
 
 
(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 June 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 June 30, 2016, the Company had $953.6 million of notional long positions and $911.5 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 June 30, 2016, the Company had outstanding underwriting related foreign currency contracts of $168.7 million in notional long positions and $135.5 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 June 30, 2016, the Company had outstanding investment portfolio related foreign currency contracts of $13.6 million in notional long positions and $112.2 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 June 30, 2016, the Company had outstanding credit derivatives of $Nil in notional long positions and $28.4 million in notional short positions, denominated in U.S. dollars (December 31, 2015 - $Nil and $46.1 million, respectively).