Derivative Financial Instruments

12 Months Ended

Dec. 31, 2013

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts on various equity securities are intended to manage the price risk associated with forecasted purchases or sales of such securities. Interest rate swaps are intended to manage the interest rate risk associated with the Company’s debts with fixed or floating rates.

On August 9, 2013, AFL entered into a three-year total return swap agreement with Citibank. Under the total return swap agreement, AFL receives the income equivalent on underlying obligations and pays to Citibank interest equal to LIBOR plus 120 basis points on the outstanding notional amount of the underlying obligations, which was approximately $149 million as of December 31, 2013. The total return swap is secured by approximately $40 million of U.S. Treasuries as collateral, which is included in short-term investments on the consolidated balance sheets.

On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on a $120 million credit facility for a fixed rate of 1.93% that matured on January 3, 2012. The purpose of the swap was to offset the variability of cash flows resulting from the variable interest rate. The swap was not designated as a hedge and changes in the fair value were adjusted through the consolidated statements of operations in the period of change.

On March 3, 2008, the Company entered into an interest rate swap of its floating LIBOR rate on a Bank of America $18 million LIBOR plus 50 basis points loan for a fixed rate of 4.25% that matured on March 1, 2013. The swap was designated as a cash flow hedge and the fair market value of the interest rate swap was reported as a component of other comprehensive income and amortized into earnings over the term of the hedged transaction. On October 4, 2011, the Company refinanced the $18 million loan that was scheduled to mature on March 1, 2013 with a Union Bank $20 million LIBOR plus 40 basis points loan that matures on January 2, 2015. The related interest swap was deemed to become ineffective and was no longer designated as a hedge. The related interest rate swap expired on March 1, 2013.

Fair value amounts, and gains and losses on derivative instruments

The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains in the consolidated statements of operations:

	Asset Derivatives				Liability Derivatives
	December 31, 2013		December 31, 2012		December 31, 2013			December 31, 2012
	(Amounts in thousands)
Total return swap - Other assets	$	1,650	$	0	$	0		$	0
Equity contracts - Other liabilities	0		0		(140		)	(175		)
Interest rate swap - Other liabilities	0		0		0			(103		)
Total derivatives	$	1,650	$	0	$	(140	)	$	(278	)

	Gain Recognized in Comprehensive Income
	Year Ended December 31,
Derivatives Contracts for Cash Flow Hedges	2013		2012		2011
	(Amounts in thousands)
Interest rate contracts—Other comprehensive income	$	0	$	0	$	1,139

	Gain Recognized in Income
	Year Ended December 31,
	2013		2012		2011
	(Amounts in thousands)
Total return swap - Net realized investment (losses) gains	$	2,177	$	0	$	0
Equity contracts—Net realized investment (losses) gains	1,776		2,680		9,000
Interest rate contract - Other revenue	103		567		1,232
Total	$	4,056	$	3,247	$	10,232

Most equity contracts consist of covered calls. The Company writes covered calls on underlying equity positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under statutory regulations. The Company manages the risk associated with covered calls through strict capital limitations and asset diversification throughout various industries. For additional disclosures regarding equity contracts, see Note 3.