Derivative Instruments

9 Months Ended

Sep. 30, 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. Commencing in the second quarter of 2019, the Company elected to adopt hedge accounting for certain of its derivative instruments used as hedges of a net investment in a foreign operation.

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 September 30, 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
Derivative instruments not designated as hedges
Interest rate futures	$	175	$	145	$	30	Other assets	$	—	$	30
Interest rate swaps	5		—		5		Other assets	—		5
Foreign currency forward contracts (1)	21,822		—		21,822		Other assets	—		21,822
Foreign currency forward contracts (2)	1,105		368		737		Other assets	—		737
Credit default swaps	209		—		209		Other assets	—		209
Total return swaps	1,177		—		1,177		Other assets	—		1,177
Equity futures	555		—		555		Other assets	—		555
Total derivative instruments not designated as hedges	25,048		513		24,535			—		24,535
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	1,072		—		1,072		Other assets	—		1,072
Total derivative instruments designated as hedges	1,072		—		1,072			—		1,072
Total	$	26,120	$	513	$	25,607		$	—	$	25,607




	Derivative Liabilities
At September 30, 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
Derivative instruments not designated as hedges
Interest rate futures	$	518	$	145	$	373		Other liabilities	$	373	$	—
Interest rate swaps	16		—		16			Other liabilities	16		—
Foreign currency forward contracts (1)	6,676		497		6,179			Other liabilities	—		6,179
Foreign currency forward contracts (2)	1,078		368		710			Other liabilities	—		710
Total return swaps	180		—		180			Other liabilities	—		180
Total derivative instruments not designated as hedges	8,468		1,010		7,458				389		7,069
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	—		416		(416		)	Other liabilities	—		(416		)
Total	$	8,468	$	1,426	$	7,042			$	389	$	6,653


(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 a net investment in a foreign operation.




	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
Derivative instruments not designated as hedges
Interest rate futures	$	971	$	636	$	335	Other assets	$	—	$	335
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
Equity futures	1,390		977		413		Other assets	—		413
Total	$	22,874	$	3,944	$	18,930		$	—	$	18,930

	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
Derivative instruments not designated as hedges
Interest rate futures	$	910	$	636	$	273	Other liabilities	$	273	$	—
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
Equity futures	977		977		—		Other liabilities	—		—
Total	$	8,225	$	1,684	$	6,540		$	2,132	$	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 September 30,		2019			2018
Derivative instruments not designated as hedges
Interest rate futures	Net realized and unrealized gains (losses) on investments	$	7,199		$	2,731
Interest rate swaps	Net realized and unrealized gains (losses) on investments	887			(6		)
Foreign currency forward contracts (1)	Net foreign exchange losses	(5,912		)	(2,596		)
Foreign currency forward contracts (2)	Net foreign exchange losses	911			650
Credit default swaps	Net realized and unrealized gains (losses) on investments	65			(191		)
Total return swaps	Net realized and unrealized gains (losses) on investments	1,960			—
Equity futures	Net realized and unrealized gains (losses) on investments	1,023			29
Total derivative instruments not designated as hedges		6,133			617
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	Accumulated other comprehensive income (loss)	3,264			—
Total		$	9,397		$	617



	Location of gain (loss) recognized on derivatives	Amount of gain (loss) recognized on derivatives
Nine months ended September 30,		2019			2018
Derivative instruments not designated as hedges
Interest rate futures	Net realized and unrealized gains (losses) on investments	$	35,136		$	292
Interest rate swaps	Net realized and unrealized gains (losses) on investments	2,071			129
Foreign currency forward contracts (1)	Net foreign exchange losses	(13,086		)	(2,227		)
Foreign currency forward contracts (2)	Net foreign exchange losses	(1,370		)	1,302
Credit default swaps	Net realized and unrealized gains (losses) on investments	5,521			(1,228		)
Total return swaps	Net realized and unrealized gains (losses) on investments	6,995			—
Equity futures	Net realized and unrealized gains (losses) on investments	12,380			44
Total derivative instruments not designated as hedges		47,647			(1,688		)
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	Accumulated other comprehensive income (loss)	4,108			—
Total		$	51,755		$	(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.


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

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, 2019.

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 September 30, 2019, the Company had $2.2 billion of notional long positions and $456.9 million of notional short positions of primarily Eurodollar and U.S. treasury 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 September 30, 2019, the Company had $25.9 million of notional positions paying a fixed rate and $23.5 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 and Non-Investments 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, 2019, the Company had outstanding underwriting related foreign currency contracts of $536.1 million in notional long positions and $1.0 billion 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 September 30, 2019, the Company had outstanding investment portfolio related foreign currency contracts of $145.5 million in notional long positions and $42.9 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 September 30, 2019, the Company had outstanding credit default swaps of $0.5 million in notional positions to hedge credit risk and $146.4 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 nine months ended September 30, 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 September 30, 2019, the Company had $230.2 million of notional long positions (long credit) and $Nil of notional short positions (short credit), denominated in U.S. dollars.

Equity Derivatives

Equity Futures

The Company uses equity derivatives in its investment portfolio from time to time 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 September 30, 2019, the Company had $112.4 million notional long position and $Nil notional short position of equity futures, denominated in U.S. dollars (December 31, 2018 - $44.7 million and $Nil, respectively).

Derivative Instruments Designated as Hedges of a Net Investment in a Foreign Operation

Foreign Currency Derivatives

Hedges of a Net Investment in a Foreign Operation

In connection with the acquisition of the TMR Group Entities, the Company acquired certain entities with non-U.S. dollar functional currencies, including RenaissanceRe Europe, Australia Branch, which has an Australian dollar functional currency. The Company has entered into foreign exchange forwards to hedge the Australian dollar net investment in foreign operations, on an after-tax basis, from changes in the exchange rate between the U.S. dollar and the Australian dollar.

The Company utilizes foreign exchange forward contracts to hedge the fair value of its net investment in a foreign operation. During the three and nine months ended September 30, 2019, the Company entered into foreign exchange forward contracts that were formally designated as hedges of its investment in RenaissanceRe Europe, Australia Branch. There was no ineffectiveness in these transactions.

The table below provides a summary of derivative instruments designated as hedges of a net investment in a foreign operation, including the weighted average U.S. dollar equivalent of foreign denominated net assets that were hedged and the resulting derivative gain that was 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:




	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Weighted average of U.S. dollar equivalent of foreign denominated net assets	$	79,538	$	—	$	80,303	$	—
Derivative gains (1)	$	3,264	$	—	$	4,108	$	—

(1)

Derivative gains from derivative instruments designated as hedges of the net investment in a foreign operation 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.