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 $69,984 and $76,107 as of September 30, 2016, and December 31, 2015, respectively. The Company had pledged collateral related to these derivatives of $28,526 and $45,940 as of September 30, 2016, and December 31, 2015, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on September 30, 2016, the fair value of assets that could be required to settle the derivatives in a net liability position was $41,458.

At September 30, 2016, and December 31, 2015, the Company had pledged $28,526 and $50,924 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $80,630 and $19,060 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

At September 30, 2016, the Company estimated $7,972 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 security investments and debt obligations 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

The Company uses futures on equity indices to offset changes in guaranteed lifetime withdrawal benefit liabilities; however, hedge accounting is not elected.

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, 2016
			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	$	419,800	$	(13,852	)	$	13,490	$	27,342
Cross-currency swaps	561,467		46,194			51,284		5,090
Total cash flow hedges	981,267		32,342			64,774		32,432

Total derivatives designated as hedges	981,267		32,342			64,774		32,432

Derivatives not designated as hedges:
Interest rate swaps	480,100		22,921			32,982		10,061
Futures on equity indices	24,260		—			—		—
Interest rate futures	107,400		—			—		—
Interest rate swaptions	166,664		191			191		—
Other forward contracts	2,437,760		7,268			7,891		623
Cross-currency swaps	662,935		14,700			41,528		26,828
Total derivatives not designated as hedges	3,879,119		45,080			82,592		37,512
Total derivative financial instruments	$	4,860,386	$	77,422		$	147,366	$	69,944

⁽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, 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	$	143,800	$	11,843		$	11,843	$	—
Cross-currency swaps	380,873		28,714			28,736		22
Total cash flow hedges	524,673		40,557			40,579		22

Total derivatives designated as hedges	524,673		40,557			40,579		22

Derivatives not designated as hedges:
Interest rate swaps	303,600		3,240			8,295		5,055
Futures on equity indices	29,310		—			—		—
Interest rate futures	117,200		—			—		—
Interest rate swaptions	151,204		189			189		—
Cross-currency swaps	662,935		(51,759		)	19,537		71,296
Total derivatives not designated as hedges	1,264,249		(48,330		)	28,021		76,351
Total derivative financial instruments	$	1,788,922	$	(7,773	)	$	68,600	$	76,373

⁽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.

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, 2016, was $752,800, $1,110,757, $149,391, $153,961, and $2,645,834 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2015, was $443,589, $937,242, $111,801, $212,299, and $5,014,845 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,
	2016			2015			2016			2015
Cash flow hedges:
Interest rate swaps	$	(401	)	$	(937	)	$	1,335		$	1,490		(A)
Interest rate swaps	(4,284		)	—			(1,092		)	—			(B)
Cross-currency swaps	(3,120		)	15,741			1,576			630			(A)
Interest rate futures	—			—			—			(21		)	(A)
Total cash flow hedges	$	(7,805	)	$	14,804		$	1,819		$	2,099

(A) Net investment income.

(B) Interest expense.



	Gain (loss) recognized in OCI on derivatives (Effective portion)						Gain (loss) reclassified from OCI into net income (Effective portion)
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Cash flow hedges:
Interest rate swaps	$	4,098		$	(311	)	$	4,166		$	5,183		(A)
Interest rate swaps	(29,017		)	—			(1,675		)	—			(B)
Cross-currency swaps	21,612			15,637			3,777			1,329			(A)
Interest rate futures	—			—			—			(64		)	(A)
Total cash flow hedges	$	(3,307	)	$	15,326		$	6,268		$	6,448

(A) Net investment income.

(B) Interest expense.



	Gain (loss) on derivatives recognized in net income						Gain (loss) on hedged assets recognized in net income
	Three Months Ended September 30,						Three Months Ended September 30,
	2016		2015				2016		2015
Fair value hedges:
Interest rate swaps	$	—	$	(620	)	(A)	$	—	$	—
Interest rate swaps	—		323			(B)	—		—
Items hedged in interest rate swaps	—		—				—		623			(A)
Items hedged in interest rate swaps	—		—				—		(323		)	(B)
Total fair value hedges	$	—	$	(297	)		$	—	$	300

(A) Net investment income.

(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.



	Gain (loss) on derivatives recognized in net income						Gain (loss) on hedged assets recognized in net income
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2016		2015				2016		2015
Fair value hedges:
Interest rate swaps	$	—	$	(1,489	)	(A)	$	—	$	—
Interest rate swaps	—		765			(B)	—		—
Items hedged in interest rate swaps	—		—				—		1,493			(A)
Items hedged in interest rate swaps	—		—				—		(765		)	(B)
Total fair value hedges	$	—	$	(724	)		$	—	$	728

(A) Net investment income.

(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.



	Gain (loss) on derivatives recognized in net income
	Three Months Ended September 30,
	2016				2015
Derivatives not designated as hedging instruments:
Futures on equity indices	$	510		(A)	$	478		(A)
Futures on equity indices	(2,081		)	(B)	1,111			(B)
Interest rate swaps	418			(A)	6,480			(A)
Interest rate futures	134			(A)	(99		)	(A)
Interest rate futures	(183		)	(B)	(117		)	(B)
Interest rate swaptions	23			(A)	928			(A)
Interest rate swaptions	(39		)	(B)	—			(B)
Other forward contracts	(8,286		)	(A)	32,538			(A)
Other forward contracts	19,413			(B)	8,504			(B)
Cross-currency swaps	1,872			(A)	36,845			(A)
Total derivatives not designated as hedging instruments	$	11,781			$	86,668

(A) Net investment income.

(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.



	Gain (loss) on derivatives recognized in net income
	Nine Months Ended September 30,
	2016				2015
Derivatives not designated as hedging instruments:
Futures on equity indices	$	103		(A)	$	896		(A)
Futures on equity indices	(5,358		)	(B)	122			(B)
Interest rate swaps	19,727			(A)	553			(A)
Interest rate futures	(77		)	(A)	(214		)	(A)
Interest rate futures	(249		)	(B)	55			(B)
Interest rate swaptions	96			(A)	2,919			(A)
Interest rate swaptions	(256		)	(B)	(2,076		)	(B)
Other forward contracts	7,268			(A)	14,778			(A)
Other forward contracts	31,509			(B)	6,414			(B)
Cross-currency swaps	62,147			(A)	44,549			(A)
Total derivatives not designated as hedging instruments	$	114,910			$	67,996

(A) Net investment income.

(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.

Embedded derivative - Guaranteed Lifetime Withdrawal Benefit

The Company offers a guaranteed lifetime withdrawal benefit (“GLWB”) through a variable annuity or a contingent deferred annuity. The GLWB is deemed to be an embedded derivative. The GLWB is recorded at fair value within future policy benefits on the condensed consolidated balance sheets. Changes in fair value of the GLWB are recorded in net investment income in the condensed consolidated statements of income.

The estimated fair value of the GLWB was a liability position of $31,277 and $11,257 at September 30, 2016, and December 31, 2015, respectively. The changes in fair value of the GLWB were unrealized gains (losses) of $(590) and $(6,858) for the three months ended September 30, 2016, and 2015, respectively, and $(20,020) and $(3,370) for the nine months ended September 30, 2016, and 2015, respectively.