XML 31 R17.htm IDEA: XBRL DOCUMENT v3.6.0.2
DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
Types of Derivative Instruments and Derivative Strategies
The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through the Company's analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into the Company's risk management program.
Derivative instruments expose the Company to credit and market risk and could result in material changes from period to period. The Company attempts to minimize its credit risk by entering into transactions with highly rated counterparties. The Company manages the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. The Company monitors its use of derivatives in connection with its overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by our risk management department.
Derivatives Related to Interest Rate Risk Management
Derivative instruments that are used as part of the Company's interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps, and interest rate swaptions.
Derivatives Related to Risk Mitigation of Certain Annuity Contracts
The Company may use the following types of derivative contracts to mitigate its exposure to certain guaranteed benefits related to VA contracts and fixed indexed annuities:
•
Foreign Currency Futures
•
Variance Swaps
•
Interest Rate Futures
•
Equity Options
•
Equity Futures
•
Interest Rate Swaps
•
Interest Rate Swaptions
•
Volatility Futures
•
Volatility Options
•
Funds Withheld Agreement
•
Total Return Swaps
Other Derivatives
The Company and certain of its subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, YRT premium support agreements, and portfolio maintenance agreements with PLC.
The Company has a funds withheld account that consists of various derivative instruments held by us that is used to hedge the GLWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.
Accounting for Derivative Instruments
The Company records its derivative financial instruments in the consolidated balance sheet in "other long-term investments" and "other liabilities" in accordance with GAAP, which requires that all derivative instruments be recognized in the balance sheet at fair value. The change in the fair value of derivative financial instruments is reported either in the statement of income or in other comprehensive income (loss), depending upon whether it qualified for and also has been properly identified as being part of a hedging relationship, and also on the type of hedging relationship that exists.
For a derivative financial instrument to be accounted for as an accounting hedge, it must be identified and documented as such on the date of designation. For cash flow hedges, the effective portion of their realized gain or loss is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged item impacts earnings. Any remaining gain or loss, the ineffective portion, is recognized in current earnings. For fair value hedge derivatives, their gain or loss as well as the offsetting loss or gain attributable to the hedged risk of the hedged item is recognized in current earnings. Effectiveness of the Company's hedge relationships is assessed on a quarterly basis.
The Company reports changes in fair values of derivatives that are not part of a qualifying hedge relationship through earnings in the period of change. Changes in the fair value of derivatives that are recognized in current earnings are reported in "Realized investment gains (losses)—Derivative financial instruments".
Derivative Instruments Designated and Qualifying as Hedging Instruments
Cash-Flow Hedges
•
To hedge certain inflation-adjusted funding agreements, the Company entered into swaps to essentially convert the floating CPI-linked interest rate on the agreements to a fixed rate. The Company paid a fixed rate on the swap and received a floating rate primarily determined by the period's change in the CPI. The amounts received on the swaps almost equal to the amounts that were paid on the agreements. None of these positions were held as of December 31, 2016 (Successor Company), as these funding agreements and correlating swaps matured in June 2015.
•
To hedge a fixed rate note denominated in a foreign currency, the Company entered into a fixed-to-fixed foreign currency swap in order to hedge the foreign currency exchange risk associated with the note. The cash flows received on the swap are identical to the cash flow paid on the note.
Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments
The Company uses various other derivative instruments for risk management purposes that do not qualify for hedge accounting treatment. Changes in the fair value of these derivatives are recognized in earnings during the period of change.
Derivatives Related to Variable Annuity Contracts
•
The Company uses equity, interest rate, currency, and volatility futures to mitigate the risk related to certain guaranteed minimum benefits, including GLWB, within its VA products. In general, the cost of such benefits varies with the level of equity and interest rate markets, foreign currency levels, and overall volatility.
•
The Company uses equity options, variance swaps, and volatility options to mitigate the risk related to certain guaranteed minimum benefits, including GLWB, within its VA products. In general, the cost of such benefits varies with the level of equity markets and overall volatility.
•
The Company uses interest rate swaps and interest rate swaptions to mitigate the risk related to certain guaranteed minimum benefits, including GLWB, within its VA products.
•
The Company markets certain VA products with a GLWB rider. The GLWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
•
The Company has a funds withheld account that consists of various derivative instruments held by the Company that are used to hedge the GLWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.
Derivatives Related to Fixed Annuity Contracts
•
The Company uses equity futures and options to mitigate the risk within its fixed indexed annuity products. In general, the cost of such benefits varies with the level of equity and overall volatility.
•
The Company markets certain fixed indexed annuity products. The FIA component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
Derivatives Related to Indexed Universal Life Contracts
•
The Company uses equity futures and options to mitigate the risk within its indexed universal life products. In general, the cost of such benefits varies with the level of equity markets.
•
The Company markets certain IUL products. The IUL component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
Other Derivatives
•
The Company and certain of its subsidiaries have an interest support agreement, YRT premium support agreements, and portfolio maintenance agreements with PLC.
•
The Company uses various swaps and other types of derivatives to manage risk related to other exposures.
•
The Company is involved in various modified coinsurance arrangements which contain embedded derivatives. Changes in their fair value are recorded in current period earnings. The investment portfolios that support the related modified coinsurance reserves had fair value changes which substantially offset the gains or losses on these embedded derivatives. 
The following table sets forth realized investments gains and losses for the periods shown:
Realized investment gains (losses) - derivative financial instruments
 
Successor Company
 
Predecessor Company
 
For The Year Ended December 31, 2016
 
February 1, 2015
to
December 31, 2015
 
January 1, 2015
to
January 31, 2015
 
For The Year Ended December 31, 2014
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Derivatives related to variable annuity contracts:
 

 
 
 
 

 
 

Interest rate futures - VA
$
(3,450
)
 
$
(14,818
)
 
$
1,413

 
$
27,801

Equity futures - VA
(106,431
)
 
(5,033
)
 
9,221

 
(26,104
)
Currency futures - VA
33,836

 
7,169

 
7,778

 
14,433

Variance swaps - VA
—

 
—

 
—

 
(744
)
Equity options - VA
(60,962
)
 
(27,733
)
 
3,047

 
(41,216
)
Interest rate swaptions - VA
(1,161
)
 
(13,354
)
 
9,268

 
(22,280
)
Interest rate swaps - VA
20,420

 
(85,942
)
 
122,710

 
214,164

Embedded derivative - GLWB
13,306

 
6,512

 
(68,503
)
 
(119,844
)
Funds withheld derivative
115,540

 
30,117

 
(9,073
)
 
47,792

Total derivatives related to VA contracts
11,098

 
(103,082
)
 
75,861

 
94,002

Derivatives related to FIA contracts:
 

 
 

 
 

 
 

Embedded derivative - FIA
(16,494
)
 
(738
)
 
1,769

 
(16,932
)
Equity futures - FIA
4,248

 
(355
)
 
(184
)
 
870

Volatility futures - FIA
—

 
5

 
—

 
20

Equity options - FIA
8,149

 
1,211

 
(2,617
)
 
9,906

Total derivatives related to FIA contracts
(4,097
)
 
123

 
(1,032
)
 
(6,136
)
Derivatives related to IUL contracts:
 

 
 

 
 

 
 

Embedded derivative - IUL
9,529

 
(614
)
 
(486
)
 
(8
)
Equity futures - IUL
129

 
144

 
3

 
15

Equity options - IUL
3,477

 
(540
)
 
(115
)
 
150

Total derivatives related to IUL contracts
13,135

 
(1,010
)
 
(598
)
 
157

Embedded derivative - Modco reinsurance treaties
390

 
166,092

 
(68,026
)
 
(105,276
)
Interest rate swaps
—

 
—

 
—

 
—

Derivatives with PLC(1)
29,289

 
(3,778
)
 
15,863

 
4,085

Other derivatives
(25
)
 
91

 
(37
)
 
(324
)
Total realized gains (losses) - derivatives
$
49,790

 
$
58,436

 
$
22,031

 
$
(13,492
)
(1)
These derivatives include an interest support, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.
The following table sets forth realized investments gains and losses for the Modco trading portfolio that is included in realized investment gains (losses) — all other investments:
Realized investment gains (losses) - all other investments
 
Successor Company
 
Predecessor Company
 
For The Year Ended December 31, 2016
 
February 1, 2015
to
December 31, 2015
 
January 1, 2015
to
January 31, 2015
 
For The Year Ended December 31, 2014
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Modco trading portfolio(1)
$
67,583

 
$
(167,359
)
 
$
73,062

 
$
142,016

(1)
The Company elected to include the use of alternate disclosures for trading activities.
The following tables present the components of the gain or loss on derivatives that qualify as a cash flow hedging relationship:
Gain (Loss) on Derivatives in Cash Flow Relationship
 
Amount of Gains (Losses) Deferred in Accumulated Other Comprehensive Income (Loss) on Derivatives
 
Amount and Location of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss)
 
Amount and Location of (Losses) Recognized in Income (Loss) on Derivatives
 
 
(Effective Portion)
 
(Ineffective Portion)
 
 
Benefits and settlement
 expenses
 
Realized investment
gains (losses)
 
(Effective Portion)
 
 
 
(Dollars In Thousands)
Successor Company
 
 
 
 
 
For The Year Ended December 31, 2016
 
 
 
 
 
Foreign Currency Swaps
$
1,058

 
$
(60
)
 
$
—

Total
$
1,058

 
$
(60
)
 
$
—

 
 
 
 
 
 
Successor Company
 
 
 
 
 
February 1, 2015 to December 31, 2015
 

 
 

 
 

Inflation
$
(131
)
 
$
(131
)
 
$
73

Total
$
(131
)
 
$
(131
)
 
$
73

 
 
 
 
 
 
 
 
 
 
 
 
Predecessor Company
 
 
 
 
 
January 1, 2015 to January 31, 2015
 

 
 

 
 

Inflation
$
13

 
$
(36
)
 
$
(7
)
Total
$
13

 
$
(36
)
 
$
(7
)
 
 
 
 
 
 
Predecessor Company
 
 
 
 
 
For The Year Ended December 31, 2014
 

 
 

 
 

Inflation
$
(4
)
 
$
(1,777
)
 
$
(223
)
Total
$
(4
)
 
$
(1,777
)
 
$
(223
)

Based on expected cash flows of the underlying hedged items, the Company expects to reclassify $0.8 million out of accumulated other comprehensive income into earnings during the next twelve months.
The table below presents information about the nature and accounting treatment of the Company’s primary derivative financial instruments and the location in and effect on the consolidated financial statements for the periods presented below:
 
Successor Company
 
As of December 31,
 
2016
 
2015
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Other long-term investments
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Foreign currency swaps
$
117,178

 
$
132

 
$
—

 
$
—

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

Interest rate swaps
1,135,000

 
71,644

 
1,435,000

 
66,408

Derivatives with PLC(1)
2,808,807

 
48,878

 
1,619,200

 
18,161

Embedded derivative - Modco reinsurance treaties
64,123

 
2,573

 
64,593

 
1,215

Embedded derivative - GLWB
2,045,529

 
64,064

 
1,723,081

 
49,007

Interest rate futures
102,587

 
894

 
282,373

 
1,537

Equity futures
654,113

 
5,805

 
262,485

 
1,275

Currency futures
340,058

 
7,883

 
226,936

 
2,499

Equity options
3,944,444

 
328,908

 
2,198,340

 
179,458

Interest rate swaptions
225,000

 
2,503

 
225,000

 
3,663

Other
212

 
149

 
242

 
347

 
$
11,437,051

 
$
533,433

 
$
8,037,250

 
$
323,570

Other liabilities
 

 
 

 
 

 
 

Cash flow hedges:
 

 
 

 
 

 
 

Inflation
$
—

 
$
—

 
$
—

 
$
—

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

Interest rate swaps
575,000

 
10,208

 
475,000

 
16,579

Embedded derivative - Modco reinsurance treaties
2,450,692

 
141,301

 
2,473,427

 
178,362

Funds withheld derivative
1,557,237

 
91,267

 
1,149,664

 
102,378

Embedded derivative - GLWB
1,849,400

 
71,082

 
1,834,308

 
67,528

Embedded derivative - FIA
1,496,346

 
147,368

 
1,110,790

 
100,329

Embedded derivative - IUL
103,838

 
46,051

 
57,760

 
29,629

Interest rate futures
993,842

 
6,611

 
793,763

 
1,539

Equity futures
102,667

 
2,907

 
233,412

 
2,599

Currency futures
—

 
—

 
46,692

 
1,115

Equity options
2,590,160

 
157,253

 
1,205,204

 
22,167

 
$
11,719,182

 
$
674,048

 
$
9,380,020

 
$
522,225

(1)
These derivatives include an interest support, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.