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Derivative Instruments
 9 Months Ended
Sep. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
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, 2013 and December 31, 2012, $8.5 million and $8.5 million, respectively, of cash and cash equivalents were held as collateral by a third party related to our derivative transactions.

Our derivatives are not designated as hedges for accounting purposes.

Derivative Instruments:
 Maturity
 
 Notional Amount
 
Fair Value as of
($ in millions)
 
 
September 30, 2013
 
 
 
Assets
 
Liabilities [1]
 
 
 
 
 
 
 
 
  Interest rate swaps
2016 - 2027
 
$
160.0

 
$
6.8

 
$
7.2

Variance swaps
2015 - 2017
 
0.9

 
—

 
7.3

Swaptions
2024 - 2025
 
1,402.0

 
22.2

 
—

Put options
2015 - 2022
 
391.0

 
41.0

 
—

Call options
2013 - 2018
 
1,623.9

 
105.4

 
68.2

Equity futures
2013
 
155.8

 
15.3

 
—

Total derivative instruments
 
 
$
3,733.6

 
$
190.7

 
$
82.7

———————
[1]
Derivative liabilities are included in other liabilities on the balance sheets.

Derivative Instruments:
 
 
 
 
Fair Value as of
($ in millions)
 Maturity
 
 Notional Amount
 
December 31, 2012
 
 
 
Assets
 
Liabilities [1]
 
 
 
 
 
 
 
 
Interest rate swaps
2016-2027
 
$
180.0

 
$
15.5

 
$
7.7

Variance swaps
2015-2017
 
0.9

 
—

 
4.4

Swaptions
2024
 
25.0

 
—

 
—

Put options
2015-2022
 
391.0

 
69.5

 
—

Call options
2013-2017
 
1,328.4

 
50.6

 
33.6

Equity futures
2013
 
182.9

 
13.8

 
—

Total derivative instruments
 
 
$
2,108.2

 
$
149.4

 
$
45.7

———————
[1]
Derivative liabilities are included in other liabilities on the balance sheets.

Derivative Instrument Gains (Losses) Recognized in
Three Months Ended
 
Nine Months Ended
Realized Investment Gains (Losses):
September 30,
 
September 30,
($ in millions)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Derivative instruments by type
 
 
 
 
 
 
 
Interest rate swaps
$
(2.9
)
 
$
(1.1
)
 
$
(8.9
)
 
$
(0.3
)
Variance swaps
(1.2
)
 
(1.8
)
 
(3.0
)
 
(6.4
)
Swaptions
(4.7
)
 
—

 
8.9

 
(0.2
)
Put options
(8.5
)
 
(11.8
)
 
(29.1
)
 
(13.7
)
Call options
10.9

 
7.5

 
30.6

 
7.5

Equity futures
(7.6
)
 
(10.8
)
 
(28.6
)
 
(20.4
)
Embedded derivatives
8.4

 
6.6

 
13.7

 
6.1

Related party reinsurance derivatives
—

 
(4.2
)
 
—

 
(3.5
)
Total derivative instrument gains (losses) recognized in
  realized investment gains (losses)
$
(5.6
)
 
$
(15.6
)
 
$
(16.4
)
 
$
(30.9
)


Interest Rate Swaps

We maintain an overall interest rate risk management strategy that primarily incorporates the use of interest rate swaps as hedges of our exposure to changes in interest rates. Our exposure to changes in interest rates primarily results from our commitments to fund interest-sensitive insurance liabilities, as well as from our significant holdings of fixed rate financial instruments. We use interest rate swaps that effectively convert variable rate cash flows to fixed cash flows in order to hedge the interest rate risks associated with guaranteed minimum living benefit (GMAB/GMWB) rider liabilities.

Interest Rate Options

We use interest rate options, such as swaptions, to hedge against market risks to assets or liabilities from substantial changes in interest rates. An interest rate swaption gives us the right but not the obligation to enter into an underlying swap. Swaptions are options on interest rate swaps. All of our swaption contracts are receiver swaptions, which give us the right to enter into a swap where we will receive the agreed-upon fixed rate and pay the floating rate. If the market conditions are favorable and the swap is needed to continue hedging our in force liability business, we will exercise the swaption and enter into a fixed rate swap. If a swaption contract is not exercised by its option maturity date, it expires with no value.

Exchange Traded Future Contracts

We use equity index futures to hedge the market risks from changes in the value of equity indices, such as S&P 500, associated with guaranteed minimum living benefit (GMAB/GMWB) rider liabilities. Positions are short-dated, exchange-traded futures with maturities of three months.

Equity Index Options

We use equity indexed options to hedge against market risks from changes in equity markets, volatility and interest rates.

An equity index option affords us the right to make or receive payments based on a specified future level of an equity market index. We may use exchange-trade or OTC options.

Generally, we have used a combination of equity index futures, interest rate swaps, variance swaps and long-dated put options to hedge our GMAB and GMWB liabilities and equity index call options to hedge our indexed annuity option liabilities.

Offsetting of Derivative Assets/Liabilities

The Company may enter into netting agreements with counterparties that permit the Company to offset receivables and payables with such counterparties. The following tables present the gross fair value amounts, the amounts offset and net position of derivative instruments eligible for offset in the Company’s balance sheets that are subject to an enforceable master netting arrangement upon certain termination events, irrespective of whether they are offset in the balance sheet.

 
September 30, 2013
Offsetting of
 
 
Gross
 
 
 
Gross amounts not offset
 
 
Derivative Assets/Liabilities:
Gross
 
amounts
 
Net amounts
 
in the balance sheet
 
 
($ in millions)
amounts
 
offset in the
 
presented in the
 
Financial
 
Cash collateral
 
 
 
recognized [1]
 
balance sheet
 
balance sheet
 
instruments
 
pledged [2]
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
$
190.7

 
$
—

 
$
190.7

 
$
(82.7
)
 
$
—

 
$
108.0

Total derivative liabilities
$
(82.7
)
 
$
—

 
$
(82.7
)
 
$
82.7

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
Offsetting of
 
 
Gross
 
 
 
Gross amounts not offset
 
 
Derivative Assets/Liabilities:
Gross
 
amounts
 
Net amounts
 
in the balance sheet
 
 
($ in millions)
amounts
 
offset in the
 
presented in the
 
Financial
 
Cash collateral
 
 
 
recognized [1]
 
balance sheet
 
balance sheet
 
instruments
 
pledged [2]
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
$
149.4

 
$
—

 
$
149.4

 
$
(45.7
)
 
$
—

 
$
103.7

Total derivative liabilities
$
(45.7
)
 
$
—

 
$
(45.7
)
 
$
45.7

 
$
—

 
$
—

———————
[1]
Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.
[2]
Cash collateral pledged with derivative counterparties is recorded within other assets on the balance sheets. The Company pledges cash collateral to offset certain individual derivative liability positions with certain counterparties. Cash collateral of $8.5 million and $8.5 million as of September 30, 2013 and December 31, 2012, respectively, that exceeds the net liability resulting from the aggregate derivative positions with a corresponding counterparty is excluded.

Contingent features

Derivative counterparty agreements may contain certain provisions that require our insurance companies’ financial strength rating to be above a certain threshold. If our financial strength ratings were to fall below a specified rating threshold, certain derivative counterparties could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions, or trigger a termination of existing derivatives and/or future derivative transactions.

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, 2013 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).