Derivative Instruments

3 Months Ended

Mar. 31, 2019

Summary of Derivative Instruments [Abstract]

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 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 March 31, 2019	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	$	1,263	1,206		$	57	Other assets	$	—	$	57
Interest rate swaps	6		—		6		Other assets	—		6
Foreign currency forward contracts (1)	10,490		152		10,338		Other assets	—		10,338
Foreign currency forward contracts (2)	743		64		679		Other assets	—		679
Credit default swaps	121		—		121		Other assets	—		121
Total return swaps	600		—		600		Other assets	—		600
Total	$	13,223	$	1,422	$	11,801		$	—	$	11,801

	Derivative Liabilities
At March 31, 2019	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	$	3,330	1,206		$	2,124	Other liabilities	$	2,113	$	11
Interest rate swaps	71		—		71		Other liabilities	71		—
Foreign currency forward contracts (1)	3,011		103		2,908		Other liabilities	—		2,908
Foreign currency forward contracts (2)	945		64		881		Other liabilities	—		881
Total	$	7,357	$	1,373	$	5,984		$	2,184	$	3,800


(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, 2018	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	$	2,361	1,660		$	701	Other assets	$	—	$	701
Interest rate swaps	860		—		860		Other assets	—		860
Foreign currency forward contracts (1)	16,459		2,260		14,199		Other assets	—		14,199
Foreign currency forward contracts (2)	3,194		71		3,123		Other assets	—		3,123
Total	$	22,874	$	3,991	$	18,883		$	—	$	18,883

	Derivative Liabilities
At December 31, 2018	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	$	1,887	1,670		$	217	Other liabilities	$	217	$	—
Interest rate swaps	506		—		506		Other liabilities	254		252
Foreign currency forward contracts (1)	4,154		—		4,154		Other liabilities	—		4,154
Foreign currency forward contracts (2)	72		71		1		Other liabilities	—		1
Credit default swaps	1,606		—		1,606		Other liabilities	1,605		1
Total	$	8,225	$	1,741	$	6,484		$	2,076	$	4,408


(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.

See “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
Three months ended March 31,		2019		2018
Interest rate futures	Net realized and unrealized gains (losses) on investments	$	8,503	$	(2,337	)
Interest rate swaps	Net realized and unrealized gains (losses) on investments	349		(106		)
Foreign currency forward contracts (1)	Net foreign exchange (losses) gains	4,442		6,743
Foreign currency forward contracts (2)	Net foreign exchange (losses) gains	1,145		(691		)
Credit default swaps	Net realized and unrealized gains (losses) on investments	4,410		(1,921		)
Total return swaps	Net realized and unrealized gains (losses) on investments	534		—
Total		$	19,383	$	1,688


(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 March 31, 2019.

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 March 31, 2019, the Company had $2.6 billion of notional long positions and $343.0 million of notional short positions of primarily Eurodollar, U.S. treasury and non-U.S. dollar futures contracts (December 31, 2018 - $1.9 billion and $545.8 million, 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 March 31, 2019, the Company had $26.2 million of notional positions paying a fixed rate and $26.3 million receiving a fixed rate denominated in U.S. dollar swap contracts (December 31, 2018 - $78.4 million and $32.1 million, respectively).

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 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 March 31, 2019, the Company had outstanding underwriting related foreign currency contracts of $681.9 million in notional long positions and $617.0 million in notional short positions, denominated in U.S. dollars (December 31, 2018 - $354.1 million and $601.2 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 March 31, 2019, the Company had outstanding investment portfolio related foreign currency contracts of $105.7 million in notional long positions and $38.9 million in notional short positions, denominated in U.S. dollars (December 31, 2018 - $121.3 million and $42.9 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 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.

Credit Default Swaps

The fair value of the Company’s 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 March 31, 2019, the Company had outstanding credit default swaps of $Nil in notional positions to hedge credit risk and $53.4 million in notional positions to assume credit risk, denominated in U.S. dollars (December 31, 2018 - $1.0 million and $126.2 million, respectively).

Total Return Swaps

During the three months ended March 31, 2019, the Company entered into certain total return swap contracts. 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 March 31, 2019, the Company had $100.0 million of notional long positions (long credit) and $Nil of notional short positions (short credit), denominated in U.S. dollars.