Derivative Financial Instruments

3 Months Ended

Sep. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

8.       DERIVATIVE FINANCIAL INSTRUMENTS

The Company sells indexed annuities, which permit the holder to elect a fixed interest rate return or an indexed return, where interest credited to the contracts is based on the performance of the S&P 500 Index, subject to an upper limit or cap and minimum guarantees. Policyholders may elect to rebalance between interest crediting options at renewal dates annually. At each renewal date, the Company has the opportunity to re-price the indexed component by changing the cap, subject to minimum guarantees. The Company estimates the fair value of the index-based interest guarantees for the current period and for all future reset periods until contract maturity. Changes in the fair value of the index-based interest guarantees are recorded as interest credited. The liability represents an estimate of the cost of the options to be purchased in the future to manage the risk related to the index-based interest guarantees. The liability for index-based interest guarantees is the present value of future cash flows attributable to the projected index growth that is in excess of cash flows attributable to fixed interest rates guarantees. The excess cash flows are discounted back to the date of the balance sheet using current market indicators for future interest rates and option costs. Cash flows depend on actuarial estimates for policyholder lapse behavior and management's discretion in setting renewal index-based interest guarantees.

The Company purchases S&P 500 Index options for its interest crediting strategy used in its indexed annuity product. The S&P 500 Index options are purchased from investment banks and are selected in a manner that supports the amount of interest that is expected to be credited in the current year to annuity policyholder accounts that are dependent on the performance of the S&P 500 Index. The purchase of S&P 500 Index options is a pivotal part of the Company's risk management strategy for indexed annuity products. The S&P 500 Index options are exclusively used for risk management. While valuations of the S&P 500 Index options are sensitive to a number of variables, valuations for S&P 500 Index options purchased are most sensitive to changes in the S&P 500 Index value and the implied volatilities of this index. The Company generally purchases one S&P 500 Index option contract per month, which has an expiry date of one year from the date of purchase.

The notional amount of the Company's S&P 500 index options at September 30,2012and December 31, 2011 was $313.2million and $303.1million, respectively. Option premiums paid for the Company's index option contracts were $2.1 million and $2.2million for the third quarters of2012and 2011, respectively, and were $6.9 million for the first nine months of2012 and 2011. The Company received $3.6 million and $3.8million for options exercised for the third quarters of2012 and 2011, respectively, and$7.6 million and $12.8millionfor the first nine months of2012 and 2011, respectively.

The Company recognizes all derivative instruments as assets or liabilities on the balance sheet at fair value. The Companydoes not designate its derivatives as hedging instruments and thus does not use hedge accounting. As such, any change in the fair value of the derivative assets and derivative liabilities is recognized as income or loss in the period of change. See “Note 6—Fair Value” for additional information regarding the fair value of the Company's derivative assets and liabilities.

The following table sets forth the fair value of the Company's derivative assets and liabilities:

			September 30,		December 31,
Derivatives Not Designated as Hedging Instruments			2012		2011
			(In millions)
Assets:
	Fixed maturity securities:
		S&P 500 Index options	$	13.8	$	7.2
Liabilities:
	Other policyholder funds:
		Index-based interest guarantees	$	58.6	$	49.5

The following table sets forth the amount of gain or loss recognized in earnings from the change in fair value of the Company's derivative assets and liabilities:

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
Derivatives Not Designated as Hedging Instruments			2012		2011		2012		2011
			(In millions)
Net investment income:
	S&P 500 Index options		$	2.9	$	(6.8)	$	7.3	$	(3.0)
Interest credited:
	Index-based interest guarantees			(2.5)		3.8		(7.2)		1.7
		Net gain (loss)	$	0.4	$	(3.0)	$	0.1	$	(1.3)

Changes in the fair value of the S&P 500 Index options and index-based interest guarantees are primarily the result of fluctuations in the S&P 500 Index and are recorded to net investment income and interest credited, respectively.As a result of the Company's annual update of the key assumptions used to value index-based interest guarantees, a process known as “unlocking”,interest creditedincreased $1.1 million and $0.2 million for the third quarters of2012 and 2011, respectively, and $2.2 million and $1.7 million for the first nine months of2012 and 2011, respectively.

The Company does not bear derivative-related risk that would require it to post collateral with another institution, and its index option contracts do not contain counterparty credit-risk-related contingent features. The Company is exposed to the credit worthiness of the counterparties from which it purchases its S&P 500 Index options and these counterparties' continued abilities to perform according to the terms of the contracts. The current values for the credit exposure have been affected by fluctuations in the S&P 500 Index. The Company's maximum credit exposure would require an increase of approximately 8.1% in the value of the S&P 500 Index. The maximum credit risk is calculated using the cap strike price of the Company's S&P 500 Index options less the floor price, multiplied by the notional amount of the S&P 500 Index options.

The following table sets forth the fair value of the Company's derivative assets and its maximum credit risk exposure related to its derivatives:

			September 30, 2012
			Assets at		Maximum
			Fair Value		Credit Risk
			(In millions)
Counterparty:
	The Bank of New York Mellon		$	12.9	$	17.8
	Goldman Sachs			0.9		1.5
		Total	$	13.8	$	19.3