XML 112 R10.htm IDEA: XBRL DOCUMENT v2.4.0.8
Note 3 - Derivative Instruments (Notes)
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
We provide a significant portion of our credit protection within our financial guaranty segment in the form of CDS, which are accounted for as derivatives. Derivative instruments are recorded at fair value and changes in fair value are recorded as such in the condensed consolidated statement of operations. All of our derivative instruments are recognized in our condensed consolidated balance sheets as either derivative assets or derivative liabilities. In many of our CDS transactions, primarily our corporate collateralized debt obligations (“CDOs”), we are required to make payments to our counterparty above a specified level of subordination, upon the occurrence of credit events related to the borrowings or bankruptcy of obligors contained within pools of corporate obligations or, in the case of pools of mortgage or other asset-backed obligations, upon the occurrence of credit events related to the specific obligations in the pool. When we provide a CDS as credit protection on a specific obligation, we generally guarantee the full and timely payment of principal and interest when due on such obligation. These derivatives have various maturity dates, but the majority of the net par outstanding of our remaining insured CDS transactions, including all of our corporate CDOs, mature within four years.
We record premiums and origination costs related to our CDS and certain other derivative contracts in change in fair value of derivative instruments and policy acquisition costs, respectively, on our condensed consolidated statements of operations. Our classification of these contracts is the same whether we are a direct insurer or we reinsure these contracts.
The following table sets forth our derivative assets and liabilities as of the dates indicated. Certain contracts are in an asset position because the net present value of the contractual premium we receive exceeds the net present value of our estimate of the expected future premiums that a financial guarantor of similar credit quality to us would charge to provide the same credit protection, assuming a transfer of our obligation to such financial guarantor as of the measurement date.
 
(In thousands)
June 30,
2014
 
December 31,
2013
Balance Sheets
 
 
 
Derivative assets:
 
 
 
Financial Guaranty credit derivative assets
$
6,438

 
$
6,323

Fixed-maturity derivative assets
15,595

 
10,319

Total derivative assets
22,033

 
16,642

Derivative liabilities:
 
 
 
Financial Guaranty credit derivative liabilities
148,041

 
238,728

Financial Guaranty VIE derivative liabilities
52,186

 
68,457

Total derivative liabilities
200,227

 
307,185

Total derivative liabilities, net
$
178,194

 
$
290,543


The notional value of our derivative contracts at June 30, 2014 and December 31, 2013 was $9.4 billion and $12.3 billion, respectively.
The components of the gains (losses) included in change in fair value of derivative instruments are as follows:
    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Statements of Operations
 
 
 
 
 
 
 
Net premiums earned—derivatives
$
3,346

 
$
4,857

 
$
6,791

 
$
9,849

Financial Guaranty credit derivatives
60,526

 
80,293

 
88,542

 
(95,431
)
Financial Guaranty VIE derivatives
(4,976
)
 
1,477

 
15,141

 
4,539

Other derivatives
(1,419
)
 
(92
)
 
(2,911
)
 
(92
)
Change in fair value of derivative instruments
$
57,477

 
$
86,535

 
$
107,563

 
$
(81,135
)

The valuation of derivative instruments may result in significant volatility from period to period in gains and losses as reported on our condensed consolidated statements of operations. Generally, these gains and losses result, in part, from changes in corporate credit or asset-backed spreads and changes in the market’s perception of the creditworthiness of any: (i) underlying corporate entities; (ii) assets underlying asset-backed securities (“ABS”); or (iii) primary obligors of obligations for which we provide second-to-pay credit protection. Additionally, when determining the fair value of our liabilities, we are required to incorporate into the fair value of those liabilities an adjustment that reflects our own non-performance risk, and consequently, changes in the market’s perception of our non-performance risk can also result in gains and losses on our derivative instruments. Any incurred gains or losses (which include any claim payments) on our financial guaranty contracts that are accounted for as derivatives are recognized as a change in fair value of derivative instruments. Because our fair value determinations for derivative and other financial instruments are based on assumptions and estimates that are inherently subject to risk and uncertainty, the fair value amounts could vary significantly from period to period. See Note 4 for information on the fair value of our financial instruments.
The following table shows selected information about our derivative contracts:

($ in thousands)
June 30, 2014
Number of
Contracts
 
Par/
Notional
Exposure
 
Total Net Asset
(Liability)
Product
 
 
 
 
 
Corporate CDOs
14

 
$
6,060,500

 
$
1,545

Non-Corporate CDOs and other derivative transactions:
 
 
 
 
 
Trust preferred securities (“TruPs”)
9

 
820,536

 
(22,240
)
CDOs of commercial mortgage-backed securities (“CMBS”)
1

 
430,000

 
(36,738
)
Other:
 
 
 
 
 
Structured finance
3

 
441,375

 
(44,223
)
Public finance
21

 
1,296,202

 
(29,390
)
Total Non-Corporate CDOs and other derivative transactions
34

 
2,988,113

 
(132,591
)
Assumed financial guaranty credit derivatives:
 
 
 
 
 
Structured finance
22

 
154,261

 
(10,171
)
Public finance
4

 
93,208

 
(386
)
Total Assumed
26

 
247,469

 
(10,557
)
Financial Guaranty VIE derivative liabilities (1)
1

 
79,020

 
(52,186
)
Other (2)
3

 
—

 
15,595

Grand Total
78

 
$
9,375,102

 
$
(178,194
)
________________
(1)
Represents the fair value of a CDS included in a VIE that we have consolidated.
(2)
Represents derivative assets related to other purchased derivatives for which we do not have loss exposure that exceeds our net asset amount.