Derivative Instruments

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivative Instruments

We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. The fair value of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts, presented in the consolidated balance sheets are as follows:

	December 31,
	2012		2011
	(Dollars in thousands)
Assets
Derivative instruments
Call options	$	415,258	$	273,314
Other assets
2015 notes hedges	43,105		45,593
Interest rate caps	3,247		—
	$	461,610	$	318,907
Liabilities
Policy benefit reserves—annuity products
Fixed index annuities—embedded derivatives	$	3,337,556	$	2,530,496
Other liabilities
2015 notes embedded derivative	43,105		45,593
Interest rate swaps	4,261		—
	$	3,384,922	$	2,576,089

The change in fair value of derivatives included in the consolidated statements of operations are as follows:

	Year Ended December 31,
	2012			2011			2010
	(Dollars in thousands)
Change in fair value of derivatives:
Call options	$	228,610		$	(93,582	)	$	141,803
2015 notes hedges (see note 9)	(2,488		)	(21,002		)	29,595
Interest rate swaps	(4,261		)	(144		)	(2,536		)
Interest rate caps	(723		)	—			—
	$	221,138		$	(114,728	)	$	168,862
Change in fair value of embedded derivatives:
2015 notes embedded derivative (see note 9)	$	(2,488	)	$	(21,002	)	$	29,595
Fixed index annuities—embedded derivatives	289,387			(84,192		)	101,355
	$	286,899		$	(105,194	)	$	130,950

We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or upon early termination and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and we purchase new one-year call options to fund the next annual index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications.

Our strategy attempts to mitigate any potential risk of loss under these agreements through a regular monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.

The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:

			December 31,
			2012				2011
Counterparty	Credit Rating (S&P)	Credit Rating (Moody's)	Notional Amount		Fair Value		Notional Amount		Fair Value
			(Dollars in thousands)
Bank of America	A	A3	$	568,786	$	16,533	$	2,340,213	$	43,481
Barclays	A+	A2	3,463,777		103,929		2,419,339		60,903
BNP Paribas	A+	A2	2,207,097		60,301		2,533,301		48,293
Citibank, N.A.	A	A3	2,878,588		67,592		—		—
Credit Suisse	A+	A1	936,625		21,518		1,423,802		27,464
Deutsche Bank	A+	A2	886,688		20,787		384,420		7,697
HSBC	AA-	Aa3	295,520		6,539		348,674		4,557
J.P. Morgan	A+	Aa3	735,016		21,940		2,109,019		27,961
Morgan Stanley	A	Baa1	1,590,505		40,113		244,180		7,375
UBS	A	A2	—		—		39,147		240
Wells Fargo (Wachovia)	AA-	Aa3	$	2,060,903	$	56,006	$	2,227,235	$	45,343
			$	15,623,505	$	415,258	$	14,069,330	$	273,314

As of December 31, 2012 and 2011, we held $328.7 million and $165.4 million, respectively, of cash and cash equivalents and other securities received from counterparties for derivative collateral, which is included in other liabilities on our consolidated balance sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts to $93.7 million and $109.3 million at December 31, 2012 and 2011, respectively.

The future annual index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value.

We entered into an interest rate swap and caps to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures. See note 10 for more information on our subordinated debentures. The terms of the interest rate swap provide that we pay a fixed rate of interest and receive a floating rate of interest. The terms of the interest rate caps limit the three month London Interbank Offered Rate to 2.50%. The interest rate swap and caps are not effective hedges under accounting guidance for derivative instruments and hedging activities. Therefore, we record the interest rate swap and caps at fair value and any net cash payments received or paid are included in the change in fair value of derivatives in the consolidated statements of operations.

Details regarding the interest rate swap are as follows:

							December 31,
							2012			2011
Maturity Date	Notional Amount		Receive Rate	Pay Rate		Counterparty	Fair Value			Fair Value
							(Dollars in thousands)
March 15, 2021	$	85,500	*LIBOR	2.415	%	SunTrust	$	(4,261	)	$	—

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* - three month London Interbank Offered Rate

Details regarding the interest rate caps are as follows:

							December 31,
							2012		2011
Maturity Date	Notional Amount		Floating Rate	Cap Rate		Counterparty	Fair Value		Fair Value
							(Dollars in thousands)
July 7, 2021	$	40,000	*LIBOR	2.50	%	SunTrust	$	1,634	$	—
July 8, 2021	12,000		*LIBOR	2.50	%	SunTrust	490		—
July 29, 2021	27,000		*LIBOR	2.50	%	SunTrust	1,123		—
	$	79,000					$	3,247	$	—

___________________________________

* - three month London Interbank Offered Rate

The interest rate swap has a forward starting date beginning in March 2014 and converts floating rates to fixed rates for seven years. The interest rate caps have a forward starting date beginning in July 2014 and cap our interest rates for seven years. As of December 31, 2012 we provided $1.2 million of cash and cash equivalents to the counterparty for derivative collateral related to the swap and caps, which is included in other assets on our consolidated balance sheets.