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Derivative Financial Instruments and Hedging | 9 Months Ended
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Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging | Derivative Financial Instruments and Hedging The Company utilizes derivative financial instruments as part of its overall investment and hedging activities. Derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk and interest rate risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms. The derivative financial instruments are located within trading assets at fair value and are reported in Other Assets. Trading liabilities are reported within Other liabilities and accrued expenses. Derivatives, at fair value Credit Derivatives Credit derivatives are generally defined as over‑the‑counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity. Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. The Company is required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side, subject to increase based on additional maintenance margin as a result of decreases in value. As of September 30, 2016, the total margin was $6,750. Foreign Currency Forward Contracts Foreign currency forward contracts are used as a foreign currency hedge where the Company has an obligation to either make or take a foreign currency payment at a future date. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched, the Company has in effect “locked in” the exchange rate payment amount. The Company, through its subsidiary Siena, has entered into a foreign exchange forward contract hedge on its foreign loans receivable. Interest Rate Lock Commitments The Company enters into interest rate lock commitments (IRLCs) in connection with its mortgage banking activities to fund residential mortgage loans with certain terms at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be classified as held-for-sale are considered derivative instruments under applicable accounting guidance. As such, these IRLCs are recorded at fair value with changes in fair value typically resulting in recognition of a gain when the Company enters into IRLCs. In estimating the fair value of an IRLC, the Company assigns a probability that the loan commitment will be exercised and the loan will be funded (“pull through”). The fair value of the commitments is derived from the fair value of related mortgage loans, net of estimated costs to complete. Outstanding IRLCs expose the Company to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan. To manage this risk, the Company utilizes forward delivery contracts and TBA mortgage backed securities to economically hedge the risk of potential changes in the value of the loans that would result from the commitments. Forward Delivery Contracts The Company enters into forward delivery contracts with investors to manage the interest rate risk associated with IRLCs and loans held for sale. TBA Mortgage Backed Securities The Company enters into to be announced (TBA) mortgage backed securities which facilitate hedging and funding by allowing the Company to prearrange prices for mortgages that are in the process of originating. The Company utilizes these hedging instruments for Agency (Fannie Mae and Freddie Mac) and FHA/VA (Ginnie Mae) eligible IRLCs and typically commit them to investors at prices higher than otherwise available. Interest Rate Swaps The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps (IRS) to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included in other assets in the Consolidated Balance Sheet. The Company is party to interest rate swaps in order to economically hedge interest rate risk associated with the financing of its real estate portfolio. All of these swaps have the same counterparty as the lender. T he following table summarizes the gross notional and fair value amounts of derivatives (on a gross basis) categorized by underlying risk:
| As of September 30, 2016 |  | As of December 31, 2015
| Notional Values |  | Asset Derivatives |  | Liability Derivatives |  | Notional Values |  | Asset Derivatives |  | Liability Derivatives
Credit risk: |  |  |  |  |  |  |  |  |  |  |
Credit derivatives sold protection | $ | 297,612 |  |  | $ | 31,948 |  |  | $ | — |  |  | $ | 297,612 |  |  | $ | 41,126 |  |  | $ | — |
Credit derivatives bought protection | 298,173 |  |  | — |  |  | 18,210 |  |  | 300,529 |  |  | 106 |  |  | 27,655 |
Sub-total | 595,785 |  |  | 31,948 |  |  | 18,210 |  |  | 598,141 |  |  | 41,232 |  |  | 27,655 |
Foreign currency risk: |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts | 992 |  |  | — |  |  | — |  |  | 683 |  |  | — |  |  | 5 |
Interest rate risk: |  |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments | 225,374 |  |  | 5,560 |  |  | — |  |  | 156,309 |  |  | 3,384 |  |  | — |
Forward delivery contracts | 82,696 |  |  | — |  |  | 16 |  |  | 52,054 |  |  | 11 |  |  | 8 |
TBA mortgage backed securities | 270,750 |  |  | 153 |  |  | 839 |  |  | 136,750 |  |  | 179 |  |  | 150 |
Interest rate swaps | 127,588 |  |  | — |  |  | 3,116 |  |  | 78,988 |  |  | — |  |  | 2,310 |
Sub-total | 706,408 |  |  | 5,713 |  |  | 3,971 |  |  | 424,101 |  |  | 3,574 |  |  | 2,468 |
Total | $ | 1,303,185 |  |  | $ | 37,661 |  |  | $ | 22,181 |  |  | $ | 1,022,925 |  |  | $ | 44,806 |  |  | $ | 30,128 |
The Company nets the credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting arrangements with the same party. The following table presents derivative instruments that are subject to offset by a master netting agreement:
| As of
| September 30, 2016 |  | December 31, 2015
Derivatives subject to netting arrangements: |  |  |
Credit default swap indices sold protection | $ | 31,948 |  |  | $ | 41,126 |
Credit default swap indices bought protection | (18,210 | ) |  | (27,549 | )
Gross assets recognized | 13,738 |  |  | 13,577 |
Collateral payable | (1,632 | ) |  | (1,632 | )
Net assets recognized (included in other assets) | $ | 12,106 |  |  | $ | 11,945 |
Derivatives designated as cash flow hedging instruments Fortegra has one IRS with a counterparty, pursuant to which Fortegra swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. This IRS is designated as a cash flow hedge and expires in June 2017. As of the December 4, 2014 acquisition date, the IRS was considered a new hedging relationship, and was redesignated as a hedge. Care has eight IRS with the same counterparty as the lender, pursuant to which Care swapped the floating rate portion of its outstanding debt to a fixed rate. These IRS are designated as cash flow hedges and expire between November 30, 2017 and January 31, 2023. As of September 30, 2016, these IRS were designated as cash flow hedges. The following table presents the fair value and the related outstanding notional amounts of the Company's cash flow hedging derivative instruments and indicates where the Company records each amount within its Consolidated Balance Sheets:
|  |  | As of
| Balance Sheet Location |  | September 30, 2016 |  | December 31, 2015
Derivatives designated as cash flow hedging instruments: |  |  |  |  |
Notional value |  |  | $ | 127,588 |  |  | $ | 35,000 |
Fair value of interest rate swaps | Other liabilities and accrued expenses |  | $ | 3,116 |  |  | $ | 1,283 |
Unrealized gain (loss), net of tax, on the fair value of interest rate swaps | AOCI |  | $ | (272 | ) |  | $ | 111 |
Range of variable rates on interest rate swaps |  |  | 0.52% to 0.85% |  | 0.51 | %
Range of fixed rates on interest rate swaps |  |  | 1.31% to 4.99% |  | 3.47 | %
The following table presents the pretax impact of the cash flow hedging derivative instruments on the Consolidated Financial Statements for the following periods:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
Gain (loss) recognized in AOCI on the derivative-effective portion | 156 |  |  | (167 | ) |  | (515 | ) |  | (456 | )
(Gain) loss reclassified from AOCI into income-effective portion | 172 |  |  | 284 |  |  | (56 | ) |  | 848 |
Gain (loss) recognized in income on the derivative-ineffective portion | 48 |  |  | — |  |  | (3 | ) |  | — |
The following table presents the estimated amount to be reclassified to earnings from AOCI during the next 12 months. These net losses reclassified into earnings are primarily expected to increase net interest expense related to the respective hedged item.
| At
| September 30, 2016
Estimated (gains) losses to be reclassified to earnings from AOCI during the next 12 months | $ | 345 |

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