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. 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 December 31, 2014	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	$	468	468		$	—	Other assets	$	—	$	—
Foreign currency forward contracts (1)	5,740		1,737		4,003		Other assets	—		4,003
Foreign currency forward contracts (2)	3,959		648		3,311		Other assets	—		3,311
Credit default swaps	468		88		380		Other assets	310		70
Total	$	10,635	$	2,941	$	7,694		$	310	$	7,384

	Derivative Liabilities
At December 31, 2014	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	$	1,037	468		$	569	Other liabilities	$	569	$	—
Foreign currency forward contracts (1)	1,319		967		352		Other liabilities	—		352
Foreign currency forward contracts (2)	724		649		75		Other liabilities	—		75
Credit default swaps	251		88		163		Other liabilities	—		163
Weather contract	190		—		190		Other liabilities	190		—
Total	$	3,521	$	2,172	$	1,349		$	759	$	590


(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, 2013	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	$	897	62		$	835	Other assets	$	—	$	835
Foreign currency forward contracts (1)	9,612		1,179		8,433		Other assets	—		8,433
Foreign currency forward contracts (2)	1,013		338		675		Other assets	—		675
Credit default swaps	806		82		724		Other assets	310		414
Total	$	12,328	$	1,661	$	10,667		$	310	$	10,357

	Derivative Liabilities
At December 31, 2013	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	$	74	62		$	12	Other liabilities	$	12	$	—
Foreign currency forward contracts (1)	2,204		28		2,176		Other liabilities	—		2,176
Foreign currency forward contracts (2)	1,557		338		1,219		Other liabilities	—		1,219
Credit default swaps	94		82		12		Other liabilities	—		12
Weather contract	2,490		—		2,490		Other liabilities	2,490		—
Total	$	6,419	$	510	$	5,909		$	2,502	$	3,407


(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 5. 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,		2014			2013			2012
Interest rate futures	Net realized and unrealized gains on investments	$	(32,713	)	$	29,695		$	(1,746	)
Foreign currency forward contracts (1)	Net foreign exchange gains	4,457			889			13,804
Foreign currency forward contracts (2)	Net foreign exchange gains	12,623			(3,015		)	(3,445		)
Credit default swaps	Net realized and unrealized gains on investments	328			1,363			1,074
Weather contract	Net realized and unrealized gains on investments	1,454			(1,331		)	—
Total		$	(13,851	)	$	27,601		$	9,687


(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 December 31, 2014.

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 December 31, 2014, the Company had $587.0 million of notional long positions and $617.4 million of notional short positions of primarily Eurodollar, U.S. treasury and non-U.S. dollar futures contracts (2013 – $1,169.3 million and $356.6 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-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 December 31, 2014, the Company had outstanding underwriting related foreign currency contracts of $144.8 million in notional long positions and $121.6 million in notional short positions, denominated in U.S. dollars (2013 – $263.6 million and $139.8 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. 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, 2014, the Company had outstanding investment portfolio related foreign currency contracts of $35.8 million in notional long positions and $150.1 million in notional short positions, denominated in U.S. dollars (2013 – $39.6 million and $159.1 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 December 31, 2014, the Company had outstanding credit derivatives of $4.6 million in notional long positions and $19.4 million in notional short positions, denominated in U.S. dollars (2013 – $7.1 million and $18.4 million, respectively).

Weather Contract

The Company, from time to time, transacts in certain derivative-based risk management products that address weather-related risks. The fair value of these contracts is determined through the use of an internal valuation model with the inputs to the internal valuation model based on proprietary data as observable market inputs are not available. The most significant unobservable input is the potential payment that would become due to a counterparty following the occurrence of a triggering event as reported by an external agency. Generally, the Company’s portfolio of such derivatives is relatively small and such derivatives are frequently seasonal in nature. At December 31, 2014, the Company had an outstanding weather contract with an insurance company of $2.2 million in a notional short position (2013 - $6.4 million).