v2.4.0.8
DERIVATIVE INSTRUMENTS
 6 Months Ended
Jun. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS [Text Block]
The following table summarizes the balance sheet classification of derivatives recorded at fair values. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of our derivative activities. Notional amounts are not reflective of credit risk.
 
  
June 30, 2013
 
December 31, 2012
 
 
  
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 not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
Relating to investment portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
376,870

 
$
6,735

 
$
25

 
$
287,819

 
$
1,067

 
$
2,733

 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
524,971

 
1,057

 
9,697

 
476,191

 
4,771

 
1,004

 
 
Total derivatives
 
 
$
7,792

 
$
9,722

 
 
 
$
5,838

 
$
3,737

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Asset and liability derivatives are classified within other assets and other liabilities on the Consolidated Balance Sheets.

Offsetting Assets and Liabilities

Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. In the event of a bankruptcy or other stipulated event, master netting agreements provide that individual positions be replaced with a new amount, usually referred to as the termination amount, determined by taking into account market prices and converting into a single currency. Effectively, this contractual close-out netting reduces credit exposure from gross to net exposure. The table below presents a reconciliation of our gross derivative assets and liabilities to the net amounts presented in our Consolidated Balance Sheets, with the difference being attributable to the impact of master netting agreements.
 
 
June 30, 2013
 
December 31, 2012
 
 
 
Gross Amounts
Gross Amounts Offset
Net
Amounts(1)
 
Gross Amounts
Gross Amounts Offset
Net
Amounts(1)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
10,256

$
(2,464
)
$
7,792

 
$
6,476

$
(639
)
$
5,838

 
 
Derivative liabilities
12,186

(2,464
)
9,722

 
4,376

(639
)
3,737

 
 
 
 
 
 
 
 
 
 
 
(1)
Net asset and liability derivatives are classified within other assets and other liabilities on the Consolidated Balance Sheets.

Refer to Note 3 - Investments for information on reverse repurchase agreements.

Fair Value Hedges

During the third quarter of 2012, we sold all available for sale fixed maturities in the portfolios that qualified for hedge accounting and settled all of the associated foreign exchange forward contracts. 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 forward contracts designated as fair value hedges along with the impact of the related hedged investment portfolio for the periods indicated:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
—

 
$
16,131

 
$
—

 
$
5,563

 
 
Hedged investment portfolio
—

 
(10,572
)
 
—

 
1,943

 
 
Hedge ineffectiveness recognized in earnings
$
—

 
$
5,559

 
$
—

 
$
7,506

 
 
 
 
 
 
 
 
 
 
 


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 may enter into foreign exchange forward contracts to manage the effect of this currency risk. These foreign currency hedging activities are not 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 increase in the notional amount of investment-related derivatives since December 31, 2012 was consistent with an increase in the carrying value of Sterling-denominated fixed maturities being hedged.

b) Relating to Underwriting Portfolio

Our (re)insurance subsidiaries and branches operate in various foreign countries. Consequently, some of our business is written in currencies other than the U.S. dollar and, therefore, our underwriting portfolio is exposed to significant foreign currency risk. We manage foreign currency risk by seeking to match our foreign-denominated net liabilities under (re)insurance contracts with cash and investments that are denominated in such currencies. We may also use derivative instruments, specifically forward contracts and currency options, to economically hedge foreign currency exposures.

The increase in the notional amount of underwriting related derivatives since December 31, 2012, was primarily due to the increase in euro-denominated forward contracts necessary to economically hedge our increased euro currency exposure, driven by the key January 1st renewal date.

The total unrealized and realized gains (losses) recognized in earnings for derivatives not designated as hedges were as follows:  
 
  
Location of Gain (Loss) Recognized in Income on Derivative
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Relating to investment portfolio:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Net realized investment gains (losses)
$
10,128

 
$
6,697

 
$
17,292

 
$
815

 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Foreign exchange gains (losses)
(4,685
)
 
201

 
(2,197
)
 
13,655

 
 
Total
 
$
5,443

 
$
6,898

 
$
15,095

 
$
14,470