Derivative Financial Instruments

Derivative transactions are generally entered into pursuant to International Swaps and Derivatives Association (“ISDA”) Master Agreements or Master Securities Forward Transaction Agreements (“MSFTA”) with approved counterparties that provide for a single net payment to be made by one party to the other on a daily basis, periodic payment dates, or at the due date, expiration, or termination of the agreement.

The ISDA Master Agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold. The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty. The aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $101,896 and $141,653 as of September 30, 2015, and December 31, 2014, respectively. The Company had pledged collateral related to these derivatives of $66,769 and $106,110 as of September 30, 2015, and December 31, 2014, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on September 30, 2015, the fair value of assets that could be required to settle the derivatives in a net liability position was $35,127.

At September 30, 2015, and December 31, 2014, the Company had pledged $66,769 and $106,110 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $15,168 and $791 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

At September 30, 2015, the Company estimated $9,614 of net derivative gains related to cash flow hedges included in AOCI will be reclassified into net income within the next twelve months. Gains and losses included in AOCI are reclassified into net income when the hedged item affects earnings.

Types of derivative instruments and derivative strategies

Interest rate contracts

Cash flow hedges

Interest rate swap agreements are used to convert the interest rate on certain debt securities from a floating rate to a fixed rate. Interest rate futures are used to manage the interest rate risks of forecasted acquisitions of fixed rate maturity investments and are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

Fair value hedges

Interest rate swap agreements are used to convert the interest rate on certain debt securities from a fixed rate to a floating rate to manage the interest rate risk of the change in the fair value of certain fixed rate maturity investments.

Not designated as hedging instruments

The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is not elected. These derivative instruments include: exchange-traded interest rate swap futures, over-the-counter (“OTC”) interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures, and treasury interest rate futures. Certain of the Company’s OTC derivatives are cleared and settled through a central clearing counterparty while others are bilateral contracts between the Company and a counterparty.

The derivative instruments mentioned above are economic hedges and used to manage risk. These transactions are used to offset changes in liabilities including those in variable annuity products, hedge the economic effect of a large increase in interest rates, manage the potential variability in future interest payments due to a change in credited interest rates and the related change in cash flows due to increased surrenders, and manage interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing.

Cross-currency contracts

Cross-currency swaps are used to manage the foreign currency exchange rate risk associated with investments denominated in other than U.S. dollars. The Company uses cross-currency swaps to convert interest and principal payments on foreign denominated debt instruments into U.S. dollars. Cross-currency swaps may be designated as cash flow hedges; however, hedge accounting is not always elected.

Equity contracts

Futures on equity indices are used to reduce the Company’s exposure to equity market risks; however, hedge accounting is not elected. The Company is hedging the risk of declining equity market values having an adverse effect on fee income collected on equity funds. The Company also uses futures on equity indices to offset changes in guaranteed lifetime withdrawal benefit liabilities.

Other forward contracts

The Company uses forward settling to be announced (“TBA”) securities to gain exposure to the investment risk and return of agency mortgage-backed securities (pass-throughs). These transactions enhance the return on the Company’s investment portfolio and provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual agency mortgage-backed pools. As the Company does not regularly accept delivery of such securities, they are accounted for as derivatives but hedge accounting is not elected.

The following tables summarize the notional amount and fair value of derivative financial instruments, excluding embedded derivatives:



	September 30, 2015
			Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value ⁽¹⁾		Fair value ⁽¹⁾
Hedge designation/derivative type:
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	175,800	$	13,960		$	13,960	$	—
Cross-currency swaps	342,834		16,392			17,375		983
Total cash flow hedges	518,634		30,352			31,335		983

Fair value hedges:
Interest rate swaps	8,750		18			18		—
Total fair value hedges	8,750		18			18		—

Total derivatives designated as hedges	527,384		30,370			31,353		983

Derivatives not designated as hedges:
Interest rate swaps	276,600		4,905			10,057		5,152
Futures on equity indices	34,778		—			—		—
Interest rate futures	120,000		—			—		—
Interest rate swaptions	142,704		193			193		—
Other forward contracts	5,137,500		14,778			23,519		8,741
Cross-currency swaps	662,935		(78,460		)	13,900		92,360
Total derivatives not designated as hedges	6,374,517		(58,584		)	47,669		106,253
Total derivative financial instruments	$	6,901,901	$	(28,214	)	$	79,022	$	107,236

⁽¹⁾ The estimated fair value excludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.



	December 31, 2014
			Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value ⁽¹⁾		Fair value ⁽¹⁾
Hedge designation/derivative type:
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	184,200	$	17,746		$	17,746	$	—
Cross-currency swaps	174,245		2,322			5,143		2,821
Total cash flow hedges	358,445		20,068			22,889		2,821

Fair value hedges:
Interest rate swaps	78,000		1,506			1,637		131
Total fair value hedges	78,000		1,506			1,637		131

Total derivatives designated as hedges	436,445		21,574			24,526		2,952

Derivatives not designated as hedges:
Interest rate swaps	128,100		4,402			6,246		1,844
Futures on equity indices	5,505		—			—		—
Interest rate futures	17,958		—			—		—
Interest rate swaptions	293,964		271			271		—
Cross-currency swaps	662,935		(127,230		)	4,561		131,791
Total derivatives not designated as hedges	1,108,462		(122,557		)	11,078		133,635
Total derivative financial instruments	$	1,544,907	$	(100,983	)	$	35,604	$	136,587

⁽¹⁾The estimated fair value excludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.

The increase of $5,137,500 notional in other forward contracts since December 31, 2014 was due to the Company’s positions being closed at year end.

Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the nine months ended September 30, 2015, was $439,045, $909,195, $101,382, $230,628, and $5,761,678 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2014, was $340,262, $732,581, $21,702, $407,552, and $4,217,408 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively.

The following tables present the effect of derivative instruments in the condensed consolidated statements of income reported by cash flow hedges, fair value hedges, and economic hedges, excluding embedded derivatives:



	Gain (loss) recognized in OCI on derivatives (Effective portion)					Gain (loss) reclassified from OCI into net income (Effective portion)
	Three Months Ended September 30,					Three Months Ended September 30,
	2015			2014		2015			2014
Cash flow hedges:
Interest rate swaps	$	(937	)	$	184	$	1,490		$	1,876		(A)
Cross-currency swaps	15,741			7,224		630			900			(A)
Cross-currency swaps	—			—		—			(154		)	(B)
Interest rate futures	—			—		(21		)	17			(A)
Total cash flow hedges	$	14,804		$	7,408	$	2,099		$	2,639

(A) Net investment income.