v2.4.0.8
DERIVATIVE INSTRUMENTS
 12 Months Ended
Dec. 31, 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 value. 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
At December 31, 2013
 
At 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
$
254,023

 
1,214

 
1,032

 
$
287,819

 
1,067

 
2,733

 
 
Interest rate swaps
281,250

 
873

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
390,663

 
4,737

 
120

 
476,191

 
4,771

 
1,004

 
 
Weather-related contracts
24,451

 
984

 
815

 
—

 
—

 
—

 
 
Total derivatives
 
 
$
7,808

 
$
1,967

 
 
 
$
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.
 
 
December 31, 2013
 
December 31, 2012
 
 
 
Gross Amounts
Gross Amounts Offset
Net
Amounts(1)
 
Gross Amounts
Gross Amounts Offset
Net
Amounts(1)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
9,796

$
(1,988
)
$
7,808

 
$
6,476

$
(639
)
$
5,838

 
 
Derivative liabilities
3,955

(1,988
)
1,967

 
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 5 - Investments for information on reverse repurchase agreements.
Fair Value Hedges
During 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 of applying hedge accounting for 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,
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
—

 
$
10,853

 
$
11,682

 
 
Hedged investment portfolio
—

 
(3,099
)
 
(16,085
)
 
 
Hedge ineffectiveness recognized in earnings
$
—

 
$
7,754

 
$
(4,403
)
 
 
 
 
 
 
 
 
 

 
Derivative Instruments not Designated as Hedging Instruments
a) Relating to Investment Portfolio
Foreign Currency Risk
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 currency forward contracts to manage the effect of this foreign 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.
Interest Rate Risk
Our investment portfolio contains a large percentage of fixed maturities which exposes us to significant interest rate risk. As part of our overall management of this risk, we may use interest rate swaps. The interest rate swaps held at December 31, 2013 convert part of our overall fixed rate exposure to a variable rate exposure which effectively reduces the duration of our overall portfolio.
b) Relating to Underwriting Portfolio
Foreign Currency Risk
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.
Weather Risk

During 2013, we began to write derivative-based risk management products designed to address weather risks with the objective of generating profits on a portfolio basis. The majority of this business consists of receiving a payment at contract inception in exchange for bearing the risk of variations in a quantifiable weather-related phenomenon, such as temperature. Where a client wishes to minimize the upfront payment, these transactions may be structured as swaps or collars. In general, our portfolio of such derivative contracts is of short duration, with contracts being predominantly seasonal in nature. In order to economically hedge a portion of this portfolio, we may also purchase weather derivatives.
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
Amount of Gain (Loss) Recognized  in
Income on Derivative
 
 
 
 
 
  
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Relating to investment portfolio:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Net realized investment gains
$
10,843

 
$
(9,170
)
 
$
4,431

 
 
        Interest rate swaps
Net realized investment gains
(3,112
)
 
—

 
—

 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Foreign exchange gains (losses)
1,690

 
26,612

 
33,893

 
 
Currency collar options
Foreign exchange gains (losses)
—

 
—

 
267

 
 
Weather-related contracts
Other insurance related income
1,987

 
—

 
—

 
 
Total
 
$
11,408

 
$
17,442

 
$
38,591