Derivative Financial Instruments
We primarily invest in the following types of derivative financial instruments: interest rate swaps, futures, forward contracts, put and call options, swaptions, embedded derivatives and warrants. We also enter into master netting agreements which reduce credit risk by permitting net settlement of transactions. At September 30, 2016, we had posted collateral of $67.0 and received collateral of $46.6 related to our derivative financial instruments. In addition to collateral posted for derivative transactions, from time to time, we may have cash on deposit to meet certain regulatory requirements, which are included in Cash and cash equivalents on the balance sheet. At September 30, 2016 and December 31, 2015, we had cash on deposit of $663.6 and $79.9, respectively.
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at September 30, 2016 and December 31, 2015 is as follows:
|
| | | | | | | | | | | | | |
| Contractual/ Notional Amount | | Balance Sheet Location | | Estimated Fair Value |
| Asset | | (Liability) |
September 30, 2016 | | | | | | | |
Hedging instruments | | | | | | | |
Interest rate swaps - fixed to floating | $ | 1,385.0 |
| | Other assets/other liabilities | | $ | 16.4 |
| | $ | (0.9 | ) |
Interest rate swaps - forward starting pay fixed | 4,775.0 |
| | Other assets/other liabilities | | 20.3 |
| | (3.1 | ) |
Subtotal hedging | 6,160.0 |
| | Subtotal hedging | | 36.7 |
| | (4.0 | ) |
| | | | | | | |
Non-hedging instruments | | | | | | | |
Interest rate swaps | 269.6 |
| | Equity securities | | — |
| | (21.2 | ) |
Options | 13,776.8 |
| | Other assets/other liabilities | | 243.1 |
| | (244.5 | ) |
Futures | 101.8 |
| | Equity securities | | 0.4 |
| | (0.2 | ) |
Subtotal non-hedging | 14,148.2 |
| | Subtotal non-hedging | | 243.5 |
| | (265.9 | ) |
Total derivatives | $ | 20,308.2 |
| | Total derivatives | | 280.2 |
| | (269.9 | ) |
| | | Amounts netted | | (119.2 | ) | | 119.2 |
|
| | | Net derivatives | | $ | 161.0 |
| | $ | (150.7 | ) |
| | | | | | | |
December 31, 2015 | | | | | | | |
Hedging instruments | | | | | | | |
Interest rate swaps - fixed to floating | $ | 1,385.0 |
| | Other assets/other liabilities | | $ | 7.0 |
| | $ | (0.8 | ) |
Interest rate swaps - forward starting pay fixed | 4,650.0 |
| | Other assets/other liabilities | | 15.7 |
| | (90.9 | ) |
Subtotal hedging | 6,035.0 |
| | Subtotal hedging | | 22.7 |
| | (91.7 | ) |
| | | | | | | |
Non-hedging instruments | | | | | | | |
Interest rate swaps | 271.7 |
| | Equity securities | | 1.2 |
| | (6.0 | ) |
Options | 16,917.4 |
| | Other assets/other liabilities | | 305.7 |
| | (332.1 | ) |
Futures | 152.0 |
| | Equity securities | | 0.1 |
| | (0.2 | ) |
Subtotal non-hedging | 17,341.1 |
| | Subtotal non-hedging | | 307.0 |
| | (338.3 | ) |
Total derivatives | $ | 23,376.1 |
| | Total derivatives | | 329.7 |
| | (430.0 | ) |
| | | Amounts netted | | (170.6 | ) | | 170.6 |
|
| | | Net derivatives | | $ | 159.1 |
| | $ | (259.4 | ) |
Fair Value Hedges
We have entered into various interest rate swap contracts to convert a portion of our interest rate exposure on our long-term debt from fixed rates to floating rates. The floating rates payable on all of our fair value hedges are benchmarked to LIBOR. A summary of our outstanding fair value hedges at September 30, 2016 and December 31, 2015 is as follows:
|
| | | | | | | | | | | | | | | |
Type of Fair Value Hedges | | Year Entered Into | | Outstanding Notional Amount | | Interest Rate Received | | Expiration Date |
| September 30,
2016 | | December 31, 2015 | |
Interest rate swap | | 2015 | | $ | 200.0 |
| | $ | 200.0 |
| | 4.350 | % | | August 15, 2020 |
Interest rate swap | | 2014 | | 150.0 |
| | 150.0 |
| | 4.350 | | | August 15, 2020 |
Interest rate swap | | 2013 | | 10.0 |
| | 10.0 |
| | 4.350 | | | August 15, 2020 |
Interest rate swap | | 2012 | | 200.0 |
| | 200.0 |
| | 4.350 | | | August 15, 2020 |
Interest rate swap | | 2012 | | 625.0 |
| | 625.0 |
| | 1.875 | | | January 15, 2018 |
Interest rate swap | | 2012 | | 200.0 |
| | 200.0 |
| | 2.375 | | | February 15, 2017 |
Total notional amount outstanding | | | | $ | 1,385.0 |
| | $ | 1,385.0 |
| | | | | |
A summary of the effect of fair value hedges on our income statement for the three and nine months ended September 30, 2016 and 2015 is as follows:
|
| | | | | | | | | | | | | | |
Type of Fair Value Hedges | | Income Statement Location of Hedge Gain | | Hedge Gain Recognized | | Hedged Item | | Income Statement Location of Hedged Item Loss | | Hedged Item Loss Recognized |
Three months ended September 30, 2016 | | | | | | | | | | |
Interest rate swaps | | Interest expense | | $ | 2.0 |
| | Fixed rate debt | | Interest expense | | $ | (2.0 | ) |
Three months ended September 30, 2015 | | | | | | | | | | |
Interest rate swaps | | Interest expense | | $ | 3.2 |
| | Fixed rate debt | | Interest expense | | $ | (3.2 | ) |
Nine months ended September 30, 2016 | | | | | | | | | | |
Interest rate swaps | | Interest expense | | $ | 6.6 |
| | Fixed rate debt | | Interest expense | | $ | (6.6 | ) |
Nine months ended September 30, 2015 | | | | | | | | | | |
Interest rate swaps | | Interest expense | | $ | 9.0 |
| | Fixed rate debt | | Interest expense | | $ | (9.0 | ) |
Cash Flow Hedges
We have entered into a series of forward starting pay fixed interest rate swaps with the objective of eliminating the variability of cash flows in the interest payments on anticipated future financings beginning in 2017. During the three months ended September 30, 2016, swaps in the notional amount of $5,400.0 expired. We paid an aggregate of $831.6 to the swap counter parties upon expiration. We performed a final effectiveness test upon the expiration of each swap. The ineffective portion of the hedge loss of $7.7 was recorded as a net realized loss on financial instruments. The effective portion of the hedge loss of $823.9 was recorded in accumulated other comprehensive loss. Following the expiration of these swaps, we entered into a new series of forward starting pay fixed interest rate swaps to replace the expired swaps. As of September 30, 2016, we recognized a hedge gain of $17.1 on the new swaps, which was recorded in accumulated other comprehensive loss. We had $4,775.0 and $4,650.0 in notional amount outstanding under these swaps at September 30, 2016 and December 31, 2015, respectively. The unrecognized loss for all outstanding, expired and terminated cash flow hedges included in accumulated other comprehensive loss, net of tax, was $553.8 and $81.1 at September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the total amount of amortization over the next twelve months for all cash flow hedges is estimated to increase interest expense by approximately $19.2.
A summary of the effect of cash flow hedges on our financial statements for the three and nine months ended September 30, 2016 and 2015 is as follows:
|
| | | | | | | | | | | | | | | | |
| | Effective Portion | | |
| | Pretax Hedge Loss
Recognized
in Other
Comprehensive
Income (Loss) | | Income Statement
Location of
Loss
Reclassification
from Accumulated
Other
Comprehensive
Loss | | Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Loss | | Ineffective Portion |
Type of Cash Flow Hedge | | | | | Income Statement Location of Loss Recognized | | Hedge Loss Recognized |
Three months ended September 30, 2016 | | | | | | | | | | |
Forward starting pay fixed swaps | | $ | (27.9 | ) | | Interest expense | | $ | (1.4 | ) | | Net realized gains (losses) on financial instruments | | $ | (7.7 | ) |
Three months ended September 30, 2015 | | | | | | | | | | |
Forward starting pay fixed swaps | | $ | (119.1 | ) | | Interest expense | | $ | (1.4 | ) | | None | | $ | — |
|
Nine months ended September 30, 2016 | | | | | | | | | | |
Forward starting pay fixed swaps | | $ | (731.6 | ) | | Interest expense | | $ | (4.3 | ) | | Net realized gains (losses) on financial instruments | | $ | (7.7 | ) |
Nine months ended September 30, 2015 | | | | | | | | | | |
Forward starting pay fixed swaps | | $ | (119.1 | ) | | Interest expense | | $ | (4.1 | ) | | None | | $ | — |
|
We test for cash flow hedge effectiveness at hedge inception and re-assess at the end of each reporting period. No amounts were excluded from the assessment of hedge effectiveness, except for the amounts described above related to the expired interest rate swaps.
Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our income statement for the three and nine months ended September 30, 2016 and 2015 is as follows:
|
| | | | | | |
Type of Non-hedging Derivatives | | Income Statement Location of Gain (Loss) Recognized | | Derivative Gain (Loss) Recognized |
Three months ended September 30, 2016 | | | | |
Interest rate swaps | | Net realized gains (losses) on financial instruments | | $ | 2.8 |
|
Options | | Net realized gains (losses) on financial instruments | | (7.7 | ) |
Futures | | Net realized gains (losses) on financial instruments | | 1.0 |
|
Total | | | | $ | (3.9 | ) |
Three months ended September 30, 2015 | | | | |
Derivatives embedded in convertible fixed maturity securities | | Net realized gains (losses) on financial instruments | | $ | 0.8 |
|
Interest rate swaps | | Net realized gains (losses) on financial instruments | | (8.8 | ) |
Options | | Net realized gains (losses) on financial instruments | | 18.0 |
|
Futures | | Net realized gains (losses) on financial instruments | | (3.0 | ) |
Total | | | | $ | 7.0 |
|
Nine months ended September 30, 2016 | | | | |
Interest rate swaps | | Net realized gains (losses) on financial instruments | | $ | (23.5 | ) |
Options | | Net realized gains (losses) on financial instruments | | (197.8 | ) |
Futures | | Net realized gains (losses) on financial instruments | | (1.3 | ) |
Total | | | | $ | (222.6 | ) |
Nine months ended September 30, 2015 | | | | |
Derivatives embedded in convertible fixed maturity securities | | Net realized gains (losses) on financial instruments | | $ | (21.5 | ) |
Interest rate swaps | | Net realized gains (losses) on financial instruments | | (5.7 | ) |
Options | | Net realized gains (losses) on financial instruments | | 34.4 |
|
Futures | | Net realized gains (losses) on financial instruments | | (0.1 | ) |
Total | | | | $ | 7.1 |
|
During the three months ended September 30, 2016, certain options classified as non-hedging derivatives expired and we paid the counter parties $164.4.