12. Derivative Instruments

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Note 12 - Derivative Instruments

Derivative instruments

We use derivative financial instruments, including options, futures and swaps as a means of hedging exposure to interest rate, equity price change, equity volatility and foreign currency risk. This includes our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact. We also use derivative instruments to economically hedge our exposure on living benefits offered on certain of our variable annuity products as well as index credits on our fixed indexed annuity products.

The Company seeks to enter into over-the-counter (“OTC”) derivative transactions pursuant to master agreements that provide for a netting of payments and receipts by counterparty. As of September 30, 2012 and December 31, 2011, $9.3 million and $8.0 million, respectively, of cash and cash equivalents were held as collateral by a third party related to our derivative transactions.

Our derivatives do not qualify for hedge accounting. We do not designate the purchased derivatives related to variable annuity living benefits or fixed indexed annuity index credits as hedges for accounting purposes.

Derivative Instruments:				Fair Value as of
($ in millions)		Notional		September 30, 2012
	Maturity	Amount		Assets		Liabilities(1)
Interest rate swaps	2016-2027	$	180.0	$	16.8	$	8.2
Variance swaps	2015-2017		0.9		—		3.1
Swaptions	2024		25.0		—		—
Put options	2015-2022		406.0		80.9		—
Call options(2)	2013-2017		1,261.7		77.4		48.7
Cross currency swaps	2016		10.0		0.2		—
Equity futures	2013		184.2		19.8		—
Total derivative instruments		$	2,067.8	$	195.1	$	60.0

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(1)	Derivative liabilities are included in other liabilities on the consolidated balance sheets.
(2)	Includes a contingent receivable of $3.5 million.

Derivative Instruments:				Fair Value as of
($ in millions)				December 31, 2011
		Notional		As restated and amended
	Maturity	Amount		Assets		Liabilities(1)
Interest rate swaps	2017-2026	$	131.0	$	13.7	$	5.2
Variance swaps	2015-2017		0.9		2.8		—
Swaptions	2024		25.0		0.2		—
Put options	2015-2022		406.0		95.4		—
Call options(2)	2012-2016		700.4		31.4		19.0
Cross currency swaps	2012-2016		15.0		0.2		—
Equity futures	2012		70.0		18.5		—
Total derivative instruments		$	1,348.3	$	162.2	$	24.2

———————

(1)	Derivative liabilities are included in other liabilities on the consolidated balance sheets.
(2)	Includes a contingent receivable of $3.4 million.

Derivative Instrument Gains (Losses) Recognized in	Three Months Ended						Nine Months Ended
Realized Investment Gains (Losses):	September 30,						September 30,
($ in millions)	2012			2011			2012			2011
				As restated and amended						As restated and amended
Interest rate swaps	$	(0.4	)	$	9.0		$	0.5		$	10.5
Variance swaps		(1.8	)		5.1			(6.4	)		3.5
Swaptions		—			(0.4	)		(0.2	)		(1.3	)
Put options		(8.4	)		32.9			(14.6	)		24.3
Call options		7.4			(11.0	)		7.6			(11.0	)
Equity futures		(11.1	)		15.6			(20.5	)		9.9
Cross currency swaps		0.1			1.1			0.2			(0.2	)
Embedded derivatives		7.1			(50.5	)		6.9			(42.9	)
Total derivative instrument losses recognized in realized investment gains (losses)	$	(7.1	)	$	1.8		$	(26.5	)	$	(7.2	)

Contingent features

In certain derivative counterparty agreements, our financial strength ratings are below the specified threshold levels. However, the Company held no derivative instruments as of September 30, 2012 in a net aggregate liability position payable to any counterparty (i.e., such derivative instruments have fair values in a net asset position payable to the Company if such holdings were liquidated).