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Derivative Instruments | 3 Months Ended
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Mar. 31, 2021
Summary of Derivative Instruments [Abstract] |
Derivative Instruments | 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, 2021 | 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 | $ | 2,317 |  |  | $ | — |  |  | $ | 2,317 |  |  | Other assets |  | $ | — |  |  | $ | 2,317 |  |
| Interest rate swaps | 232 |  |  | — |  |  | 232 |  |  | Other assets |  | — |  |  | 232 |  |
| Foreign currency forward contracts (1) | 13,064 |  |  | — |  |  | 13,064 |  |  | Other assets |  | — |  |  | 13,064 |  |
| Foreign currency forward contracts (2) | 2,750 |  |  | 143 |  |  | 2,607 |  |  | Other assets |  | — |  |  | 2,607 |  |
| Credit default swaps | 211 |  |  | — |  |  | 211 |  |  | Other assets |  | — |  |  | 211 |  |
| Total derivative instruments not designated as hedges | 18,574 |  |  | 143 |  |  | 18,431 |  |  |  |  | — |  |  | 18,431 |  |
| Derivative instruments designated as hedges |  |  |  |  |  |  |  |  |  |  |  |
| Foreign currency forward contracts (3) | 2,018 |  |  | — |  |  | 2,018 |  |  | Other assets |  | — |  |  | 2,018 |  |
| Total | $ | 20,592 |  |  | $ | 143 |  |  | $ | 20,449 |  |  |  |  | $ | — |  |  | $ | 20,449 |  |
|  | Derivative Liabilities |
| At March 31, 2021 | 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 | $ | 2,494 |  |  | $ | — |  |  | $ | 2,494 |  |  | Other liabilities |  | $ | 2,494 |  |  | $ | — |  |
| Foreign currency forward contracts (1) | 17,573 |  |  | — |  |  | 17,573 |  |  | Other liabilities |  | — |  |  | 17,573 |  |
| Foreign currency forward contracts (2) | 4,175 |  |  | 143 |  |  | 4,032 |  |  | Other liabilities |  | — |  |  | 4,032 |  |
| Total derivative instruments not designated as hedges | 24,242 |  |  | 143 |  |  | 24,099 |  |  |  |  | 2,494 |  |  | 21,605 |  |
| Derivative instruments designated as hedges |  |  |  |  |  |  |  |  |  |  |  |
| Foreign currency forward contracts (3) | 2,365 |  |  | — |  |  | 2,365 |  |  | Other liabilities |  | — |  |  | 2,365 |  |
| Total | $ | 26,607 |  |  | $ | 143 |  |  | $ | 26,464 |  |  |  |  | $ | 2,494 |  |  | $ | 23,970 |  |
(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 net investments in foreign operations.
|  | Derivative Assets |
| At December 31, 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 | $ | 1,019 |  |  | $ | 863 |  |  | $ | 156 |  |  | Other assets |  | $ | — |  |  | $ | 156 |  |
| Interest rate swaps | 22 |  |  | — |  |  | 22 |  |  | Other assets |  | — |  |  | 22 |  |
| Foreign currency forward contracts (1) | 23,055 |  |  | 184 |  |  | 22,871 |  |  | Other assets |  | — |  |  | 22,871 |  |
| Foreign currency forward contracts (2) | 2,232 |  |  | 69 |  |  | 2,163 |  |  | Other assets |  | — |  |  | 2,163 |  |
| Credit default swaps | 68 |  |  | — |  |  | 68 |  |  | Other assets |  | — |  |  | 68 |  |
| Total derivative instruments not designated as hedges | 26,396 |  |  | 1,116 |  |  | 25,280 |  |  |  |  | — |  |  | 25,280 |  |
| Derivative instruments designated as hedges |  |  |  |  |  |  |  |  |  |  |  |
| Foreign currency forward contracts (3) | 19,953 |  |  | — |  |  | 19,953 |  |  | Other assets |  | — |  |  | 19,953 |  |
| Total | $ | 46,349 |  |  | $ | 1,116 |  |  | $ | 45,233 |  |  |  |  | $ | — |  |  | $ | 45,233 |  |
|  | Derivative Liabilities |
| At December 31, 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 | $ | 1,430 |  |  | $ | 863 |  |  | $ | 567 |  |  | Other liabilities |  | $ | 567 |  |  | $ | — |  |
| Foreign currency forward contracts (1) | 12,791 |  |  | — |  |  | 12,791 |  |  | Other liabilities |  | — |  |  | 12,791 |  |
| Foreign currency forward contracts (2) | 3,919 |  |  | 69 |  |  | 3,850 |  |  | Other liabilities |  | 1,053 |  |  | 2,797 |  |
| Total derivative instruments not designated as hedges | 18,140 |  |  | 932 |  |  | 17,208 |  |  |  |  | 1,620 |  |  | 15,588 |  |
| Derivative instruments designated as hedges |  |  |  |  |  |  |  |  |  |  |  |
| Foreign currency forward contracts (3) | 5,152 |  |  | — |  |  | 5,152 |  |  | Other liabilities |  | — |  |  | 5,152 |  |
| Total | $ | 23,292 |  |  | $ | 932 |  |  | $ | 22,360 |  |  |  |  | $ | 1,620 |  |  | $ | 20,740 |  |
(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 net investments in foreign operations. 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 |  | 2021 |  | 2020 |
| Derivative instruments not designated as hedges |  |  |  |  |
| Interest rate futures | Net realized and unrealized losses on investments | $ | 15,507 |  |  | $ | 88,006 |  |
| Interest rate swaps | Net realized and unrealized losses on investments | (901) |  |  | 2,107 |  |
| Foreign currency forward contracts (1) | Net foreign exchange losses | (3,641) |  |  | (330) |  |
| Foreign currency forward contracts (2) | Net foreign exchange losses | (5,061) |  |  | 6,400 |  |
| Credit default swaps | Net realized and unrealized losses on investments | 255 |  |  | (4,897) |  |
| Total return swaps | Net realized and unrealized losses on investments | — |  |  | (21,137) |  |
| Equity futures | Net realized and unrealized losses on investments | — |  |  | (30,898) |  |
| Total derivative instruments not designated as hedges |  | 6,159 |  |  | 39,251 |  |
| Derivative instruments designated as hedges |  |  |  |  |
| Foreign currency forward contracts (3) | Accumulated other comprehensive loss | (2,089) |  |  | 10,844 |  |
| Total derivative instruments designated as hedges |  | (2,089) |  |  | 10,844 |  |
| Total |  | $ | 4,070 |  |  | $ | 50,095 |  |
(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 net investments in foreign 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, 2021. 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 March 31, 2021, the Company had $1.8 billion of notional long positions and $0.9 billion of notional short positions of primarily Eurodollar and U.S. treasury futures contracts (December 31, 2020 - $2.0 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 March 31, 2021, the Company had $Nil of notional positions paying a fixed rate and $20.2 million receiving a fixed rate denominated in U.S. dollar swap contracts (December 31, 2020 - $Nil and $23.5 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 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 Company may determine not to match a portion of its projected underwriting related assets or liabilities with underlying foreign currency exposure with investments in the same currencies, which would increase its exposure to foreign currency fluctuations and potentially increase the impact and volatility of foreign exchange gains and losses on its results of 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, 2021, the Company had outstanding underwriting related foreign currency contracts of $843.3 million in notional long positions and $355.6 million in notional short positions, denominated in U.S. dollars (December 31, 2020 - $661.4 million and $504.2 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, 2021, the Company had outstanding investment portfolio related foreign currency contracts of $265.5 million in notional long positions and $139.3 million in notional short positions, denominated in U.S. dollars (December 31, 2020 - $269.5 million and $117.5 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, 2021, the Company had outstanding credit default swaps of $25.0 million in notional positions to hedge credit risk and $77.9 million in notional positions to assume credit risk, denominated in U.S. dollars (December 31, 2020 - $Nil and $96.8 million, respectively). Total Return Swaps From time to time, 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, 2021 and December 31, 2020, the Company had no outstanding total return swaps, respectively. Equity Derivatives Equity Futures From time to time, 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 March 31, 2021 and December 31, 2020, the Company had no outstanding equity futures, respectively. Derivative Instruments Designated as Hedges of Net Investments in Foreign Operations Foreign Currency Derivatives Hedges of Net Investments in Foreign Operations Certain of the Company’s subsidiaries use non-U.S. dollar functional currencies. The Company, from time to time, enters into foreign exchange forwards to hedge currencies, which currently includes the Australian dollar and Euro net investment in foreign operations, on an after-tax basis, from changes in the exchange rate between the U.S. dollar and these currencies. The Company utilizes foreign exchange forward contracts to hedge the fair value of its net investment in a foreign operation. The Company has entered into foreign exchange forward contracts that were formally designated as hedges of its investment in subsidiaries with non-U.S. dollar functional currencies. There was no ineffectiveness in these transactions. The table below provides a summary of derivative instruments designated as hedges of net investments in foreign operations, including the weighted average U.S. dollar equivalent of foreign denominated net (liabilities) assets that were hedged and the resulting derivative (losses) gains that are recorded in foreign currency translation adjustments, net of tax, within accumulated other comprehensive (loss) income on the Company’s consolidated statements of changes in shareholders’ equity:
|  |  |  | Three months ended |
|  |  |  |  |  | March 31, 2021 |  | March 31, 2020 |
| Weighted average of U.S. dollar equivalent of foreign denominated net (liabilities) assets |  |  |  |  | $ | (97,219) |  |  | $ | 76,804 |  |
| Derivative (losses) gains (1) |  |  |  |  | $ | (2,089) |  |  | $ | 10,844 |  |
(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) income on the Company’s consolidated statements of changes in shareholders’ equity.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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