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DERIVATIVE INSTRUMENTS
 12 Months Ended
Dec. 31, 2011
DERIVATIVE INSTRUMENTS [Abstract]  
DERIVATIVE INSTRUMENTS [Text Block]

7.       DERIVATIVE INSTRUMENTS

 

The following table summarizes the balance sheet classification of derivatives recorded at fair value. The notional amounts represent the basis upon which payments or receipts are calculated and are presented in the table in order to quantify the magnitude of our derivative activities. Notional amounts are not reflective of credit risk.

   December 31, 2011 December 31, 2010 
     Derivative Notional Amount  Asset Derivative Fair Value(1)  Liability Derivative Fair Value(1)  Derivative Notional Amount  Asset Derivative Fair Value(1)  Liability Derivative Fair Value(1) 
                     
 Derivatives designated as hedging instruments                 
  Foreign exchange forward contracts$ 540,176 $ 16,519 $ - $ 612,845 $ - $ 13,748 
                     
 Derivatives not designated as hedging instruments                
  Relating to investment portfolio:                  
  Foreign exchange forward contracts  287,711   7,012   1,783   154,990   2,182   746 
                     
  Relating to underwriting portfolio:                  
  Foreign exchange forward contracts$ 955,728   14,644   252 $ 110,564   4,459   492 
                     
  Total derivatives    $ 38,175 $ 2,035    $ 6,641 $ 14,986 
                     
(1) Asset and liability derivatives are classified within other assets and other liabilities on the consolidated balance sheets.

Fair Value Hedges

 

We entered into foreign exchange forward contracts to hedge the foreign currency exposure of two available for sale fixed maturity portfolios denominated in Euros. The hedges were designated and qualified as fair value hedges, resulting in the net impact of the hedges recognized in net realized investment gains (losses).

 

The following table provides the total impact on earnings relating to foreign exchange contracts designated as fair value hedges along with the impact of the related hedged investment portfolio for the periods indicated:

             
       
 Year ended December 31,  2011  2010  2009 
            
  Foreign exchange forward contracts  $ 11,682 $ 35,886 $ (13,655) 
  Hedged investment portfolio    (16,085)   (30,063)   16,565 
 Hedge ineffectiveness recognized in earnings $ (4,403) $ 5,823 $ 2,910 
             

Derivative Instruments not Designated as Hedging Instruments

 

a) Relating to Investment Portfolio

 

Within our investment portfolio we are exposed to foreign currency risk. Accordingly, the fair values for our investment portfolio are partially influenced by the change in foreign exchange rates. We entered into foreign currency forward contracts to manage the effect of this foreign currency risk. These foreign currency hedging activities have not been designated as specific hedges for financial reporting purposes.

 

In addition, our external equity investment managers have the discretion to hold foreign currency exposures as part of their total return strategy.

 

The significant increase in the notional amount of investment related derivatives since December 31, 2010, was primarily due to hedging an increase in Canadian, Sterling, and Euro denominated fixed maturities whereby the portfolio managers hedge against foreign currency exposure in accordance with our investment guidelines.

 

b) Relating to Underwriting Portfolio

 

Longevity Risk

 

In September 2007, we issued a policy which indemnified a third party in the event of a non-payment of a $400 million asset-backed note. This security had a 10 year term with the full principal amount due at maturity and was collateralized by a portfolio of life settlement contracts and cash held by a special purpose entity. We concluded that the indemnity contract was a derivative instrument and accordingly we recorded it at its fair value. This contract was cancelled and settled during the fourth quarter of 2009.

 

Foreign Currency Risk

 

Our (re)insurance subsidiaries and branches operate in various foreign countries and consequently our underwriting portfolio is exposed to significant foreign currency risk. We manage foreign currency risk by seeking to match our liabilities under (re)insurance contracts that are payable in foreign currencies with cash and investments that are denominated in such currencies. When necessary, we may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts and currency options.

 

The significant increase in the notional amount of underwriting related derivatives since December 31, 2010, was primarily due to hedging our foreign denominated liability exposure relating to the significant catastrophe losses from the New Zealand and Japanese earthquakes.

The following table provides the total unrealized and realized gains (losses) on derivatives recorded in earnings:
            
    Amount of Gain (Loss) Recognized in Income on Derivative 
  Location of Gain (Loss) Recognized         
  in Income on Derivative 2011  2010  2009 
            
 Derivatives not designated as hedging instruments          
  Relating to investment portfolio:         
  Foreign exchange forward contractsNet realized investment gains (losses)$ 4,431 $ (3,641) $ (1,032) 
            
  Relating to underwriting portfolio:         
  Foreign exchange forward contractsForeign exchange gains (losses)  33,893   9,596   (10,429) 
  Currency collar optionsForeign exchange gains (losses)  267   -   2,428 
  Longevity risk derivativeOther insurance related income (loss)  -   -   (132,595) 
  Catastrophe-related riskOther insurance related income (loss)  -   -   45 
            
  Total $ 38,591 $ 5,955 $ (141,583)