7. Derivative Financial Instruments

Derivative transactions are entered generally into pursuant to master agreements and other contracts 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.

Certain derivative 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 aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $111,491(1) and $55,875 as of June 30, 2013 and December 31, 2012, respectively. The Company had pledged collateral related to these derivatives of $83,160 and $43,360 as of June 30, 2013 and December 31, 2012, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on June 30, 2013 the fair value of assets that could be required to settle the derivatives in a net liability position was $28,331.

(1) Due to a previous misstatement, the $80,605 as previously presented was restated to $111,491 as a result of improperly netting assets in the calculation of net liabilities. In conjunction with this change, additional disclosures of the Company’s pledged collateral have been included herein.

At June 30, 2013 and December 31, 2012, the Company had pledged $83,160 and $54,400, respectively, of unrestricted cash collateral to counterparties in the normal course of business.

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 June 30, 2013, the Company estimated $7,761 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, over-the-counter (“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 Company uses TBA forward contracts 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. These transactions are disclosed as Other forward contracts in the following tables.

The following tables summarize derivative financial instruments at June 30, 2013 and December 31, 2012:

	June 30, 2013
			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	$	193,700	$	17,671		$	17,671	$	—
Cross-currency swaps	634,717		(103,581		)	6,010		109,591
Total cash flow hedges	828,417		(85,910		)	23,681		109,591

Fair value hedges:
Interest rate swaps	121,776		5,689			5,830		141
Total fair value hedges	121,776		5,689			5,830		141

Total derivatives designated as hedges	950,193		(80,221		)	29,511		109,732

Derivatives not designated as hedges:
Interest rate swaps	37,100		(1,010		)	749		1,759
Futures on equity indices	4,836		—			—		—
Interest rate futures	17,000		—			—		—
Interest rate swaptions	593,874		849			849		—
Other forward contracts	3,162,100		(31,060		)	4,687		35,747

Total derivatives not designated as hedges	3,814,910		(31,221		)	6,285		37,506

Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	4,765,103	$	(111,442	)	$	35,796	$	147,238

(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 condensed consolidated balance sheets.

	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

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 32 and 75 interest rate swap transactions with an average notional amount of $2,821 and $8,685 during the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. During the six months ended June 30, 2013 and the year ended December 31, 2012, the Company had 15 and 23 cross-currency swap transactions with an average notional amount of $11,601 and $12,710, respectively. The Company had 379 and 931 futures transactions with an average number of contracts per transaction of 11 and 11 during the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. The Company had 26 and 46 swaption transactions with an average notional amount of $5,123 and $5,528 during the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. The Company had 527 and 737 TBA forward transactions with an average notional amount of $47,875 and $33,237 during the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.

Significant changes in the derivative notional amount during the six months ended June 30, 2013 were primarily due to the following:

· The net decrease of $201,311 in interest rate swaps, interest rate swaptions and futures was primarily due to (i) a change in the Company’s interest rate risk hedging strategy and (ii) the closing of fair value hedges associated with the concurrent sale of certain fixed rate maturity investments.

· The increase of $210,469 in cross-currency swaps was due to additional swaps opened to hedge newly purchased assets denominated in British pounds and Euros.

· The increase of $3,162,100 in other forward contracts since December 31, 2012 was due to the Company’s positions being closed at year end.

The Company recognized total derivative gains (losses) in net investment income of ($31,332) and $5,081 for the three-month periods ended June 30, 2013 and 2012, respectively. The Company recognized total derivative gains (losses) in net investment income of ($26,255) and $13,144 for the six-month periods ended June 30, 2013 and 2012, respectively. The Company recognized net investment gains (losses) on closed derivative positions of ($27,122) and $13,470 for the three-month periods ended June 30, 2013 and 2012, respectively. The Company recognized net investment gains (losses) on closed derivative positions of ($36,323) and $11,680 for the six-month periods ended June 30, 2013 and 2012, 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 condensed consolidated statements of income for the three and six-month periods ended June 30, 2013 and 2012 reported by cash flow hedges, fair value hedges and economic hedges:

	Gain (loss) recognized
	in OCI on derivatives					Gain (loss) reclassified from OCI
	(Effective portion)					into net income (Effective portion)
	Three months ended June 30,					Three months ended June 30,
	2013			2012		2013		2012
Cash flow hedges:
Interest rate swaps	$	(7,108	)	$	5,698	$	3,225	$	699	(A)
Cross-currency swaps	68			5,887		—		—
Interest rate futures	—			—		16		16		(A)
Total cash flow hedges	$	(7,040	)	$	11,585	$	3,241	$	715

(A) Net investment income.

	Gain (loss) recognized
	in OCI on derivatives					Gain (loss) reclassified from OCI
	(Effective portion)					into net income (Effective portion)
	Six months ended June 30,					Six months ended June 30,
	2013			2012		2013		2012
Cash flow hedges:
Interest rate swaps	$	(9,801	)	$	6,206	$	3,916	$	1,442	(A)
Cross-currency swaps	26,709			833		—		—
Interest rate futures	—			—		32		32		(A)
Total cash flow hedges	$	16,908		$	7,039	$	3,948	$	1,474

(A) Net investment income.

	Gain (loss) on derivatives						Gain (loss) on hedged assets
	recognized in net income						recognized in net income
	Three months ended June 30,						Three months ended June 30,
	2013			2012			2013			2012
Fair value hedges:
Interest rate swaps	$	5,188		$	(1,832	)(A)	$	—		$	—
Interest rate swaps	(569		)	—		(B)	—			—
Items hedged in interest rate swaps	—			—			(4,166		)	1,832		(A)
Items hedged in interest rate swaps	—			—			(453		)	—		(B)
Total fair value hedges	$	4,619		$	(1,832	)	$	(4,619	)	$	1,832

(A) Net investment income.

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

	Gain (loss) on derivatives						Gain (loss) on hedged assets
	recognized in net income						recognized in net income
	Six months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Fair value hedges:
Interest rate swaps	$	7,080		$	(693	)(A)	$	—		$	—
Interest rate swaps	(185		)	—		(B)	—			—
Items hedged in interest rate swaps	—			—			(6,058		)	693		(A)
Items hedged in interest rate swaps	—			—			(837		)	—		(B)
Total fair value hedges	$	6,895		$	(693	)	$	(6,895	)	$	693

(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 June 30,
	2013			2012
Derivatives not designated as hedging instruments:
Futures on equity indices	$	62	(A)	$	106	(A)
Futures on equity indices	(878		)(B)	50		(B)
Interest rate swaps	(800		)(A)	1,003		(A)
Interest rate swaps	(473		)(B)	(136		)(B)
Interest rate futures	860		(A)	146		(A)
Interest rate futures	(982		)(B)	(360		)(B)
Interest rate swaptions	894		(A)	225		(A)
Interest rate swaptions	(683		)(B)	(423		)(B)
Other forward contracts	(36,611		)(A)	2,886		(A)
Other forward contracts	(23,084		)(B)	14,339		(B)

Total derivatives not designated as hedging instruments	$	(61,695	)	$	17,836

(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
	Six months ended June 30,
	2013			2012
Derivatives not designated as hedging instruments:
Futures on equity indices	$	86	(A)	$	79	(A)
Futures on equity indices	(1,112		)(B)	(224		)(B)
Interest rate swaps	(1,315		)(A)	8,879		(A)
Interest rate swaps	(636		)(B)	(4,432		)(B)
Interest rate futures	(520		)(A)	(284		)(A)
Interest rate futures	490		(B)	(1,537		)(B)
Interest rate swaptions	1,584		(A)	234		(A)
Interest rate swaptions	(1,308		)(B)	(770		)(B)
Other forward contracts	(31,060		)(A)	2,762		(A)
Other forward contracts	(32,735		)(B)	18,643		(B)

Total derivatives not designated as hedging instruments	$	(66,526	)	$	23,350

(A) Net investment income.

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