15.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. The Company’s inflation risk management strategy involves the use of swaps that requires the Company to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index (“CPI”).

Derivatives Related to Risk Mitigation of Variable Annuity Contracts

The Company may use the following types of derivative contracts to mitigate its exposure to certain guaranteed benefits related to VA, fixed indexed annuity, and indexed universal life contracts:

Foreign Currency Futures

Variance Swaps

Interest Rate Futures

Equity Options

Equity Futures

Credit Derivatives

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, a YRT premium support agreement, 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 GMWB 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 condensed 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

In connection with the issuance of inflation-adjusted funding agreements, the Company has entered into swaps to essentially convert the floating CPI-linked interest rate on these agreements to a fixed rate. The Company pays a fixed rate on the swap and receives a floating rate primarily determined by the period’s change in the CPI. The amounts that are received on the swaps are almost equal to the amounts that are paid on the agreements.

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 GMWB, 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 GMWB, 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 GMWB, within its VA products.

The Company markets certain VA products with a GMWB rider. The GMWB 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 GMWB 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 used 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 uses equity options to mitigate the risk within its fixed indexed annuity products. In general, the cost of such benefits varies with the level of equity markets.

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 uses certain interest rate swaps to mitigate the price volatility of fixed maturities. None of these positions were held as of March 31, 2015 (Successor Company).

The Company and certain of its subsidiaries have an interest support agreement, YRT premium support agreement, and two portfolio maintenance agreements with PLC. The Company entered into two separate portfolio maintenance agreements in October 2012.

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 and funds withheld 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 and funds withheld arrangements 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			Predecessor
	Company			Company
	February 1, 2015			January 1, 2015			For The Three
	to			to			Months Ended
	March 31, 2015			January 31, 2015			March 31, 2014
	(Dollars In Thousands)			(Dollars In Thousands)
Derivatives related to variable annuity contracts:
Interest rate futures - VA	$	(48	)	$	1,413		$	4,250
Equity futures - VA	(32,469		)	9,221			(2,651		)
Currency futures - VA	6,137			7,778			(1,278		)
Variance swaps - VA	—			—			(1,850		)
Equity options - VA	(21,774		)	3,047			(12,341		)
Interest rate swaptions - VA	(11,328		)	9,268			(9,403		)
Interest rate swaps - VA	(54,791		)	122,710			57,368
Embedded derivative - GMWB	35,870			(68,503		)	(27,315		)
Funds withheld derivative	38,236			(9,073		)	10,699
Total derivatives related to variable annuity contracts	(40,167		)	75,861			17,479
Derivatives related to FIA contracts:
Embedded derivative - FIA	(2,583		)	1,769			1,733
Equity futures - FIA	184			(184		)	345
Volatility futures - FIA	4			—			—
Equity options - FIA	4,375			(2,617		)	994
Total derivatives related to FIA contracts	1,980			(1,032		)	3,072
Derivatives related to IUL contracts:
Embedded derivative - IUL	257			(486		)	—
Equity futures - IUL	14			3			—
Equity options - IUL	140			(115		)	—
Total derivatives related to IUL contracts	411			(598		)	—
Embedded derivative - Modco reinsurance treaties	32,191			(68,026		)	(60,169		)
Derivatives with PLC (1)	565			15,863			105
Other derivatives	72			(37		)	(61		)
Total realized gains (losses) - derivatives	$	(4,948	)	$	22,031		$	(39,574	)

(1)	These derivatives include the Interest, 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			Predecessor
	Company			Company
	February 1, 2015			January 1, 2015		For The Three
	to			to		Months Ended
	March 31, 2015			January 31, 2015		March 31, 2014
	(Dollars In Thousands)			(Dollars In Thousands)
Modco trading portfolio(1)	$	(33,160	)	$	73,062	$	66,303

(1)The Company elected to include the use of alternate disclosures for trading activities.

The following table presents the components of the gain or loss on derivatives that qualify as a cash flow hedging relationship:

Gain (Loss) on Derivatives in Cash Flow Hedging Relationship

				Amount and Location of
	Amount of Gains (Losses)			Gains (Losses)
	Deferred in			Reclassified from			Amount and Location of
	Accumulated Other			Accumulated Other			(Losses) Recognized in
	Comprehensive Income			Comprehensive Income			Income (Loss) on
	(Loss) on Derivatives			(Loss) into Income (Loss)			Derivatives
	(Effective Portion)			(Effective Portion)			(Ineffective Portion)
				Benefits and settlement			Realized investment
				expenses			gains (losses)
	(Dollars In Thousands)
Successor Company
February 1, 2015 to March 31, 2015
Inflation	$	(36	)	$	(90	)	$	(4	)
Total	$	(36	)	$	(90	)	$	(4	)

Predecessor Company
January 1, 2015 to January 31, 2015
Inflation	$	13	$	(36	)	$	(7	)
Total	$	13	$	(36	)	$	(7	)

Predecessor Company
For The Three Months Ended March 31, 2014
Inflation	$	903	$	(670	)	$	39
Total	$	903	$	(670	)	$	39

The tables below present 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				Predecessor
	Company				Company
	As of March 31, 2015				As of December 31, 2014
	Notional		Fair		Notional		Fair
	Amount		Value		Amount		Value
	(Dollars In Thousands)				(Dollars In Thousands)
Other long-term investments
Derivatives not designated as hedging instruments:
Interest rate swaps	$	1,725,000	$	99,230	$	1,550,000	$	50,743
Derivatives with PLC(1)	1,510,682		22,505		1,497,010		6,077
Embedded derivative - Modco reinsurance treaties	65,609		1,572		25,760		1,051
Embedded derivative - GMWB	1,799,940		55,145		1,302,895		37,497
Interest rate futures	410,966		4,731		27,977		938
Equity futures	26,607		102		26,483		427
Currency futures	112,106		524		197,648		2,384
Equity options	2,285,482		163,491		1,921,167		163,212
Interest rate swaptions	225,000		5,690		625,000		8,012
Other	849		451		242		360
	$	8,162,241	$	353,441	$	7,174,182	$	270,701
Other liabilities
Cash flow hedges:
Inflation	$	19,285	$	55	$	40,469	$	142
Derivatives not designated as hedging instruments:
Interest rate swaps	250,000		1,792		275,000		3,599
Embedded derivative - Modco reinsurance treaties	2,512,057		341,698		2,562,848		311,727
Funds withheld derivative	1,477,462		71,533		1,233,424		57,305
Embedded derivative - GMWB	1,322,637		44,312		1,702,899		63,460
Embedded derivative - FIA	790,225		83,126		749,933		124,465
Embedded derivative - IUL	18,262		8,593		12,019		6,691
Interest rate futures	8,140		54		—		—
Equity futures	666,286		4,547		385,256		15,069
Currency futures	122,150		1,379		—		—
Equity options	960,718		38,866		699,295		47,077
Other	609		42		—		—
	$	8,147,831	$	595,997	$	7,661,143	$	629,535

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

Based on the expected cash flows of the underlying hedged items, the Company expects to reclassify the remaining balance of its derivative financial instruments out of accumulated other comprehensive income (loss) into earnings during the next twelve months.