Derivative Financial Instruments

12 Months Ended

Dec. 31, 2012

Derivative Financial Instruments

Derivative Financial Instruments

5.             Derivative Financial Instruments

Derivative transactions are primarily entered into pursuant to master agreements and other contracts 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 aggregate fair value of derivative instruments with credit-risk-related contingent features where the Company is in a net liability position was $55,875 and zero as of December 31, 2012 and 2011, respectively.

At December 31, 2012 and 2011, the Company had pledged $54,400 and zero of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged zero and $11,985 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

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. Cross-currency swaps are used to manage the foreign currency exchange rate risk associated with investments denominated in other than U.S. dollars.  Interest rate futures are used to manage the interest rate risks of forecasted acquisitions of fixed rate maturity investments.  These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.  The Company’s derivatives treated as cash flow hedges are eligible for hedge accounting.

At December 31, 2012, the Company estimated that $7,916 of net derivative gains included in AOCI will be reclassified into net income within the next twelve months.

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.  Interest rate futures are used to manage the interest rate risk of the change in the fair value of certain fixed rate maturity investments.  The Company’s derivatives treated as fair value hedges are eligible for hedge accounting.

Derivatives 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, exchange-traded equity index futures on certain indices, OTC interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures and interest rate futures.

The derivative instruments mentioned above are economic hedges and used to manage risk.  These transactions are used to offset changes in liabilities, 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, manage interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing, and hedge equity-based fee income.

The following tables summarize derivative financial instruments at December 31, 2012 and 2011:

	December 31, 2012
			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	$	26,113		$	26,113	$	—
Cross-currency swaps	424,248		(81,109		)	4,643		85,752
Total cash flow hedges	608,448		(54,996		)	30,756		85,752
Fair value hedges:
Interest rate swaps	183,776		(1,391		)	258		1,649
Total fair value hedges	183,776		(1,391		)	258		1,649
Total derivatives designated as hedges	792,224		(56,387		)	31,014		87,401
Derivatives not designated as hedges:
Interest rate swaps	29,264		305			1,062		757
Futures on equity indices	3,133		—			—		—
Interest rate futures	80,550		—			—		—
Interest rate swaptions	688,674		342			342		—
Total derivatives not designated as hedges	801,621		647			1,404		757
Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	1,593,845	$	(55,740	)	$	32,418	$	88,158

(1) 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 consolidated balance sheets.

	December 31, 2011
			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	$	20,894		$	20,894	$	—
Cross-currency swaps	69,030		6,241			6,241		—
Total cash flow hedges	253,230		27,135			27,135		—
Fair value hedges:
Interest rate swaps	35,800		(1,011		)	—		1,011
Total fair value hedges	35,800		(1,011		)	—		1,011
Total derivatives designated as hedges	289,030		26,124			27,135		1,011
Derivatives not designated as hedges:
Interest rate swaps	392,235		(8,316		)	4,687		13,003
Futures on equity indices	2,680		—			—		—
Interest rate futures	59,090		—			—		—
Interest rate swaptions	890,400		944			944		—
Total derivatives not designated as hedges	1,344,405		(7,372		)	5,631		13,003
Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	1,633,435	$	18,752		$	32,766	$	14,014

(1) 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 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 Company had 75 and 143 swap transactions with an average notional amount of $8,685 and $16,361 during the years ended December 31, 2012 and 2011, respectively.  During the years ended December 31, 2012 and 2011, the Company had 23 and one cross-currency swap transaction(s) with an average notional amount of $12,710 and $39,030, respectively.  The Company had 931 and 1,678 futures transactions with an average number of contracts per transaction of 11 and 18 during the years ended December 31, 2012 and 2011, respectively.  The Company had 46 and 44 swaption transactions with an average notional amount of $5,528 and $5,986 during the years ended December 31, 2012 and 2011, respectively.

Significant changes in the derivative notional amount during the year ended December 31, 2012 were primarily due to the following:

· The net decrease of $394,808 in interest rate swaps, interest rate swaptions and futures was primarily due to a change in the Company’s interest rate risk hedging strategy.

· The increase of $355,218 in cross-currency swaps was due to additional swaps opened to hedge newly purchased assets denominated in British pounds and Euros.

The Company recognized total derivative gains (losses) in net investment income of $12,567, ($15,428) and $1,366 for the years ended December 31, 2012, 2011 and 2010, respectively.  The Company recognized net investment gains (losses) on closed derivative positions of ($10,221), ($38,794) and ($17,076) for the years ended December 31, 2012, 2011 and 2010, respectively.  The preceding amounts are shown net of any gains (losses) on the hedged assets in a fair value hedge that has been recorded in net investment income.

The following tables present the effect of derivative instruments in the consolidated statement of income for the years ended December 31, 2012, 2011 and 2010 reported by cash flow hedges, fair value hedges and economic hedges:

	Gain (loss) recognized in OCI on derivatives (Effective portion)								Gain (loss) reclassified from OCI into net income (Effective portion)							Gain (loss) recognized in net income on derivatives (Ineffective portion and amount excluded from effectiveness testing)
	Year ended December 31,								Year ended December 31,							Year ended December 31,
	2012			2011			2010		2012		2011		2010			2012		2011			2010
Cash flow hedges:
Interest rate swaps	$	5,220		$	21,322		$	13,896	$	2,856	$	2,820	$	1,582	(A)	$	—	$	9		$	—	(A)
Cross-currency swaps	(24,101		)	1,123			3,065		—		—		—			—		—
Interest rate futures	—			—			—		63		43		110		(A)	—		(92		)	92		(A)
Interest rate futures	—			(1,431		)	332		—		—		—			—		6			545		(B)
Total cash flow hedges	$	(18,881	)	$	21,014		$	17,293	$	2,919	$	2,863	$	1,691		$	—	$	(77	)	$	637

(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
	Year ended December 31,									Year ended December 31,
	2012			2011			2010			2012		2011			2010
Fair value hedges:
Interest rate swaps	$	(380	)	$	(1,011	)	$	—	(A)	$	—	$	—		$	—
Interest rate futures	—			(285		)	(1,027		)(A)	—		—			—
Interest rate futures	—			(8,311		)	(1,088		)(B)	—		—			—
Items hedged in interest rate swaps	—			—			—			380		1,011			—		(A)
Items hedged in interest rate futures	—			—			—			—		(2,002		)	3,632		(A)
Items hedged in interest rate futures	—			—			—			—		8,470			—		(B)
Total fair value hedges (1)	$	(380	)	$	(9,607	)	$	(2,115	)	$	380	$	7,479		$	3,632

(1) Hedge ineffectiveness of zero, ($2,128) and $1,517 was recognized during the years ended December 31, 2012, 2011 and 2010, respectively.

(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
	Year ended December 31,
	2012			2011			2010
Derivatives not designated as hedging instruments:
Futures on equity indices	2		(A)	(32		)(A)	(9		)(A)
Futures on equity indices	(774		)(B)	373		(B)	(363		)(B)
Interest rate swaps	8,620		(A)	(12,351		)(A)	4,036		(A)
Interest rate swaps	(4,979		)(B)	(38,377		)(B)	(4,476		)(B)
Interest rate futures	164		(A)	260		(A)	(3,600		)(A)
Interest rate futures	(2,641		)(B)	(251		)(B)	(11,640		)(B)
Interest rate swaptions	862		(A)	(3,798		)(A)	(3,450		)(A)
Interest rate swaptions	(1,827		)(B)	(704		)(B)	(54		)(B)
Total derivatives not designated as hedging instruments	$	(573	)	$	(54,880	)	$	(19,556	)

(A) Net investment income.

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