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Derivative Instruments | 9 Months Ended
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Sep. 30, 2011
Derivative Instruments |
Derivative Instruments |
NOTE 11. | 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 accounts for its derivatives in accordance with FASB ASC Topic Derivatives and Hedging, which requires all derivatives to be recorded at fair value on the Company's balance sheet as either assets or liabilities, depending on the rights or obligations of the derivatives, with changes in fair value reflected in current earnings. The Company does not currently apply hedge accounting in respect of any positions reflected in its consolidated financial statements. 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 table below shows the location on the consolidated balance sheets and fair value of the Company's principal derivative instruments:
|  | Other liabilities |  |  | Other liabilities |  |  | Other liabilities |  |  | Other liabilities |
|  | Derivative Assets |
|  | September 30, 2011 |  |  | December 31, 2010 |
(in thousands of U.S. dollars) |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value |
Interest rate futures |  | Other assets |  | $ | 246 |  |  | Other assets |  | $ | 2,459 |
Foreign currency forward contracts (1) |  | Other assets |  |  | — |  |  | Other assets |  |  | 6,341 |
Foreign currency forward contracts (2) |  | Other assets |  |  | 9,820 |  |  | Other assets |  |  | — |
Foreign currency forward contracts (3) |  | Other assets |  |  | 948 |  |  | Other assets |  |  | — |
Credit default swaps |  | Other assets |  |  | — |  |  | Other assets |  |  | 3,064 |
Energy and weather contracts (4) |  | Other assets |  |  | 23,855 |  |  | Other assets |  |  | 17,925 |
Platinum warrant |  | Other assets |  |  | — |  |  | Other assets |  |  | 44,925 |
Total |  |  |  | $ | 34,869 |  |  |  |  | $ | 74,714 |
|  | Other liabilities |  |  | Other liabilities |  |  | Other liabilities |  |  | Other liabilities |
|  | Derivative Liabilities |
|  | September 30, 2011 |  |  | December 31, 2010 |
(in thousands of U.S. dollars) |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value |
Interest rate futures |  | Other liabilities |  | $ | 1,019 |  |  | Other liabilities |  | $ | 719 |
Foreign currency forward contracts (1) |  | Other liabilities |  |  | 9,281 |  |  | Other liabilities |  |  | — |
Foreign currency forward contracts (2) |  | Other liabilities |  |  | — |  |  | Other liabilities |  |  | 3,141 |
Foreign currency forward contracts (3) |  | Other liabilities |  |  | — |  |  | Other liabilities |  |  | 44 |
Credit default swaps |  | Other liabilities |  |  | 537 |  |  | Other liabilities |  |  | — |
Energy and weather contracts (4) |  | Other liabilities |  |  | 21,312 |  |  | Other liabilities |  |  | 15,013 |
Total |  |  |  | $ | 32,149 |  |  |  |  | $ | 18,917 |
(1) | Contracts used to manage foreign currency risks in underwriting operations.
(2) | Contracts used to manage foreign currency risks in investment operations.
(3) | Contracts used to manage foreign currency risks in energy and risk operations.
(4) | Included in other assets is $28.0 million of derivative assets and $4.2 million of derivative liabilities at September 30, 2011 (December 31, 2010 - $21.7 million and $3.7 million, respectively). Included in other liabilities is $10.8 million of derivative assets and $32.1 million of derivative liabilities at September 30, 2011 (December 31, 2010 - $9.9 million and $24.9 million, respectively).
The location and amount of the gain (loss) recognized in the Company's consolidated statements of operations related to its derivative instruments is shown in the following table:
|  | Location of gain (loss) recognized on derivatives |  | Amount of gain (loss) recognized on derivatives |
Three months ended September 30, |  |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |  |  |
Interest rate futures |  | Net investment (loss) income |  | $ | (15,235 | ) |  | $ | 5,806 |
Foreign currency forward contracts (1) |  | Net foreign exchange losses |  |  | (15,927 | ) |  |  | (1,160 | )
Foreign currency forward contracts (2) |  | Net foreign exchange losses |  |  | 14,586 |  |  |  | (25,528 | )
Foreign currency forward contracts (3) |  | Net foreign exchange losses |  |  | 775 |  |  |  | (790 | )
Credit default swaps |  | Other (loss) income |  |  | (4,290 | ) |  |  | 310 |
Energy and weather contracts |  | Other (loss) income |  |  | 2,272 |  |  |  | (11 | )
Platinum warrant |  | Other (loss) income |  |  | — |  |  |  | 14,352 |
Total |  |  |  | $ | (17,819 | ) |  | $ | (7,021 | )
(1) | Contracts used to manage foreign currency risks in underwriting operations.
(2) | Contracts used to manage foreign currency risks in investment operations.
(3) | Contracts used to manage foreign currency risks in energy and risk operations.
|  | Location of gain (loss) recognized on derivatives |  | Amount of gain (loss) recognized on derivatives |
Nine months ended September 30, |  |  | 2011 |  |  | 2010 |
(in thousands of U.S. dollars) |  |  |  |  |  |  |  |
Interest rate futures |  | Net investment (loss) income |  | $ | (23,582 | ) |  | $ | 5,341 |
Foreign currency forward contracts (1) |  | Net foreign exchange losses |  |  | 1,080 |  |  |  | (686 | )
Foreign currency forward contracts (2) |  | Net foreign exchange losses |  |  | (6,566 | ) |  |  | 13,281 |
Foreign currency forward contracts (3) |  | Net foreign exchange losses |  |  | 127 |  |  |  | 126 |
Credit default swaps |  | Other (loss) income |  |  | (3,148 | ) |  |  | 223 |
Energy and weather contracts |  | Other (loss) income |  |  | 12,201 |  |  |  | 7,174 |
Platinum warrant |  | Other (loss) income |  |  | 2,975 |  |  |  | 8,987 |
Total |  |  |  | $ | (16,913 | ) |  | $ | 34,446 |
(1) | Contracts used to manage foreign currency risks in underwriting operations.
(2) | Contracts used to manage foreign currency risks in investment operations.
(3) | Contracts used to manage foreign currency risks in energy and risk 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, 2011. 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, 2011, the Company had $4.5 billion of notional long positions and $298.0 million of notional short positions of primarily Eurodollar and U.S. Treasury and non-U.S. dollar futures contracts (December 31, 2010 - $2.2 billion and $209.1 million, 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-U.S. dollar denominated investments classified as available for sale and 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, 2011, the Company had outstanding underwriting related foreign currency contracts of $123.7 million in notional long positions and $694.2 million in notional short positions, denominated in U.S. dollars (December 31, 2010 - $42.0 million and $188.1 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. To economically hedge its exposure to currency fluctuations from these investments, the Company has entered into foreign currency forward contracts. Foreign exchange gains (losses) associated with the Company's hedging of these non-U.S. dollar investments are recorded in net foreign exchange losses in its consolidated statements of operations. 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, 2011, the Company had outstanding investment portfolio related foreign currency contracts of $166.4 million in notional long positions and $350.2 million in notional short positions, denominated in U.S. dollars (December 31, 2010 - $69.2 million and $281.0 million, respectively). Energy and Risk Operations Related Foreign Currency Contracts The Company's energy and risk operations are exposed to currency fluctuations through certain derivative transactions it enters into that are denominated in non-U.S. dollars. The Company may, from time to time, 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 these operations. The fair value of the Company's energy and risk operations related foreign currency contracts is based on exchange traded prices. At September 30, 2011, the Company's energy and risk management operations had outstanding foreign currency contracts of $75.0 million in notional long positions and $17.1 million in notional short positions, denominated in U.S. dollars (December 31, 2010 - $Nil and $10.0 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 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, 2011, the Company had outstanding credit derivatives of $15.0 million in notional long positions and $79.0 million in notional short positions, denominated in U.S. dollars (December 31, 2010 - $15.0 million and $118.0 million, respectively). Energy and Weather-Related Derivatives The Company regularly transacts in certain derivative-based risk management products primarily to address weather and energy risks and engages in hedging and trading activities related to these risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Currently, a significant percentage of the Company's derivative-based risk management products are transacted on a dual-trigger basis combining weather or other natural phenomenon, with prices for commodities or securities related to energy or agriculture. The fair value of these contracts is obtained through the use of quoted market prices, or in the absence of such quoted prices, industry or internal valuation models. Generally, the Company's current portfolio of such derivative contracts is of comparably short duration and such contracts are predominantly seasonal in nature. Over time, the Company currently expects that its participation in these markets, and the impact of these operations on its financial results, is likely to increase on both an absolute and relative basis. The Company had the following gross derivative contract positions outstanding relating to its energy and weather derivatives trading activities.
|  | Quantity (1) |  |  |
|  | September 30, 2011 |  |  | December 31, 2010 |  |  | Unit of measurement
Energy |  |  | 170,550,283 |  |  |  | 136,767,119 |  |  | One million British thermal units ("MMBTUs")
Temperature |  |  | 12,896,109 |  |  |  | 5,419,846 |  |  | $ per Degree Day Fahrenheit
Agriculture |  |  | 12,008,000 |  |  |  | 260,000 |  |  | Bushels
(1) | Represents the sum of gross long and gross short derivative contracts.
At September 30, 2011, RenaissanceRe had provided guarantees in the aggregate amount of $368.4 million to certain counterparties of the weather and energy risk operations of Renaissance Trading. In the future, RenaissanceRe may issue guarantees for other purposes or increase the amount of guarantees issued to counterparties of Renaissance Trading.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5580258-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5618551-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624163-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5708773-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41638-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624171-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41620-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41641-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6887037&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6887037&loc=d3e80784-113994 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5579240-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41635-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624258-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5579245-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 20: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 45 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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