Derivative Instruments

6 Months Ended

Jun. 30, 2020

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 June 30, 2020	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	$	492	$	(932)	$	1,424	Other assets	$	—	$	1,424

Foreign currency forward contracts (1)	16,104		3,366		12,738		Other assets	—		12,738
Foreign currency forward contracts (2)	209		76		133		Other assets	—		133
Credit default swaps	261		—		261		Other assets	—		261




Total derivative instruments not designated as hedges	17,066		2,510		14,556			—		14,556
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	—		3,953		(3,953)		Other assets	—		(3,953)

Total	$	17,066	$	6,463	$	10,603		$	—	$	10,603



	Derivative Liabilities
At June 30, 2020	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	$	196	$	(932)	$	1,128	Other liabilities	$	1,128	$	—
Interest rate swaps	37		—		37		Other assets	37		—
Foreign currency forward contracts (1)	2,102		967		1,135		Other liabilities	—		1,135
Foreign currency forward contracts (2)	2,919		76		2,843		Other liabilities	—		2,843
Credit default swaps	—		—		—		Other assets	—		—
Total return swaps	779		—		779		Other assets	779		—
Equity futures	606		—		606		Other liabilities	606		—






Total	$	6,639	$	111	$	6,528		$	2,550	$	3,978

(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, 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	$	234	$	122	$	112	Other assets	$	—	$	112

Foreign currency forward contracts (1)	22,702		2,418		20,284		Other assets	—		20,284
Foreign currency forward contracts (2)	1,082		622		460		Other assets	—		460
Credit default swaps	37		—		37		Other assets	—		37
Total return swaps	3,744		—		3,744		Other assets	3,601		143
Equity futures	291		—		291		Other assets	—		291


Total derivative instruments not designated as hedges	28,090		3,162		24,928			3,601		21,327
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	64		667		(603)		Other assets	—		(603)

Total	$	28,154	$	3,829	$	24,325		$	3,601	$	20,724



	Derivative Liabilities
At December 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
Derivative instruments not designated as hedges
Interest rate futures	$	1,545	$	122	$	1,423	Other liabilities	$	1,423	$	—
Interest rate swaps	50		—		50		Other liabilities	50		—
Foreign currency forward contracts (1)	3,808		28		3,780		Other liabilities	—		3,780
Foreign currency forward contracts (2)	939		622		317		Other liabilities	—		317



Total derivative instruments not designated as hedges	6,342		772		5,570			1,473		4,097
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	1,818		—		1,818		Other liabilities	—		1,818
Total	$	8,160	$	772	$	7,388		$	1,473	$	5,915

(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.

See “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,		2020		2019
Derivative instruments not designated as hedges
Interest rate futures	Net realized and unrealized gains on investments	$	2,557	$	22,253
Interest rate swaps	Net realized and unrealized gains on investments	502		835
Foreign currency forward contracts (1)	Net foreign exchange (losses) gains	6,908		(11,616)
Foreign currency forward contracts (2)	Net foreign exchange (losses) gains	(7,613)		590
Credit default swaps	Net realized and unrealized gains on investments	1,974		1,046
Total return swaps	Net realized and unrealized gains on investments	14,151		4,501
Equity futures	Net realized and unrealized gains on investments	5,188		8,538



Total derivative instruments not designated as hedges		23,667		26,147
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	Accumulated other comprehensive loss	(8,694)		844
Total derivative instruments designated as hedges		(8,694)		844
Total		$	14,973	$	26,991



	Location of gain (loss) recognized on derivatives	Amount of gain (loss) recognized on derivatives
Six months ended June 30,		2020		2019
Derivative instruments not designated as hedges
Interest rate futures	Net realized and unrealized gains on investments	$	90,563	$	28,307
Interest rate swaps	Net realized and unrealized gains on investments	2,609		1,184
Foreign currency forward contracts (1)	Net foreign exchange (losses) gains	6,578		(7,174)
Foreign currency forward contracts (2)	Net foreign exchange (losses) gains	(1,213)		(2,281)
Credit default swaps	Net realized and unrealized gains on investments	(2,923)		5,456
Total return swaps	Net realized and unrealized gains on investments	(6,986)		5,035
Equity futures	Net realized and unrealized gains on investments	(25,710)		10,987



Total derivative instruments not designated as hedges		62,918		41,514
Derivative instruments designated as hedges
Foreign currency forward contracts (3)	Accumulated other comprehensive loss	2,150		844
Total derivative instruments designated as hedges		2,150		844
Total		$	65,068	$	42,358

(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 June 30, 2020.

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 June 30, 2020, the Company had $2.1 billion of notional long positions and $913.4 million of notional short positions of primarily Eurodollar and U.S. treasury futures contracts (December 31, 2019 - $2.5 billion and $1.0 billion, 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 June 30, 2020, the Company had $Nil of notional positions paying a fixed rate and $23.5 million receiving a fixed rate denominated in U.S. dollar swap contracts (December 31, 2019 - $27.9 million and $25.5 million, respectively).

Foreign Currency Derivatives

The Company’s reporting currency is the U.S. dollar. In addition, the functional currency of the Company, and the majority of the Company’s subsidiaries, is the U.S. dollar. However, 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 enter into foreign currency forward and option contracts for notional values that approximate the foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable, net of any cash, investments and receivables held in the respective foreign currency. The Company’s use of foreign currency forward and option contracts is intended 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, 2020, the Company had outstanding underwriting related foreign currency contracts of $464.0 million in notional long positions and $514.0 million in notional short positions, denominated in U.S. dollars (December 31, 2019 - $722.6 million and $1.2 billion, 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, 2020, the Company had outstanding investment portfolio related foreign currency contracts of $219.9 million in notional long

positions and $64.2 million in notional short positions, denominated in U.S. dollars (December 31, 2019 - $195.6 million and $61.0 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 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 June 30, 2020, the Company had outstanding credit default swaps of $Nil in notional positions to hedge credit risk and $121.2 million in notional positions to assume credit risk, denominated in U.S. dollars (December 31, 2019 - $0.5 million and $143.4 million, respectively).

Total Return Swaps

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 June 30, 2020, the Company had $26.1 million of notional long positions (long credit) and $Nil of notional short positions (short credit), denominated in U.S. dollars (December 31, 2019 - $173.5 million and $Nil, respectively).

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 June 30, 2020, the Company had $Nil notional long position and $44.0 million notional short position of equity futures, denominated in U.S. dollars (December 31, 2019 - $122.0 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 TMR, 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 2020 and 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						Six months ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Weighted average of U.S. dollar equivalent of foreign denominated net assets	$	74,451	$	80,037	$	77,683	$	80,037
Derivative (losses) gains (1)	$	(8,694)	$	844	$	2,150	$	844

(1) Derivative (losses) 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.