Derivative Financial Instruments

12 Months Ended

Dec. 31, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

7. 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 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 is to offset the variability of cash flows resulting from the variable interest rate. The swap is not designated as a hedge and changes in the fair value are adjusted through the consolidated statement of operations in the period of change.

Effective January 2, 2002, the Company entered into an interest rate swap on the $125 million senior notes for a floating rate of LIBOR plus 107 basis points. The swap was designated as a fair value hedge and qualified for the shortcut method as the hedge was deemed to have no ineffectiveness. The Company included the gain or loss on the hedged item in the same line item, other revenue, as the offsetting loss or gain on the related interest rate swaps as follows:

	Year Ended December 31,
	2011					2010					2009
Income Statement Classification	Gain (Loss) on swap			Gain (Loss) on senior notes		Gain (Loss) on swap			Gain (Loss) on senior notes		Gain (Loss) on swap			Gain (Loss) on senior notes
	(Amounts in thousands)
Other revenue	$	(4,240	)	$	4,240	$	(4,232	)	$	4,232	$	(5,922	)	$	5,922

The Company retired all of its $125 million 7.25% senior notes on the August 15, 2011 maturity date. The related interest rate swap agreement expired concurrently.

On March 3, 2008, the Company entered into an interest rate swap of its floating LIBOR rate on the $18 million bank loan for a fixed rate of 4.25%. 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 its Bank of America $18 million LIBOR plus 50 basis points 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 rate swap was deemed to become ineffective and is no longer designated as a hedge. Consequently, approximately $1 million in losses on the swap was reclassified from accumulated other comprehensive loss into earnings for the year ended December 31, 2011. Changes in the fair value are adjusted through the consolidated statement of operations in the period of change. For the years ended December 31, 2010 and 2009, there were no gains or losses on derivative instruments designated as cash flow hedges reclassified from accumulated other comprehensive income into earnings. The fair market value of the interest rate swap was $0.7 million and $1.1 million as of December 31, 2011 and 2010, respectively.

Fair value amounts, and gains and losses on derivative instruments

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

	Asset Derivatives				Liability Derivatives
	December 31, 2011		December 31, 2010		December 31, 2011			December 31, 2010
	(Amounts in thousands)
Hedging derivatives
Interest rate contracts—Other assets (liabilities)	$	0	$	4,240	$	0		$	(1,139	)
Non-hedging derivatives
Interest rate contracts—Other liabilities	$	0	$	0	$	(670	)	$	(1,903	)
Equity contracts—Short-term investments (Other liabilities)		0		0		(655	)		(2,776	)
Total non-hedging derivatives	$	0	$	0	$	(1,325	)	$	(4,679	)
Total derivatives	$	0	$	4,240	$	(1,325	)	$	(5,818	)

The Effect of Derivative Instruments on the Statements of Operations

	Loss Recognized in Income
	Year Ended December 31,
Derivatives Contracts for Fair Value Hedges	2011		2010			2009
	(Amounts in thousands)
Interest rate contracts—Interest expense	$	4,470	$	7,103		$	7,022
	Gain (Loss) Recognized in Other Comprehensive Income
	Year Ended December 31,
Derivatives Contracts for Cash Flow Hedges	2011		2010			2009
	(Amounts in thousands)
Interest rate contracts—Other comprehensive gain (loss)	$	1,139	$	(220	)	$	(918	)
	Gain or (Loss) Recognized in Income
	Year Ended December 31,
Derivatives Not Designated as Hedging Instruments	2011		2010			2009
	(Amounts in thousands)
Interest rate contract—Other revenue (expense)	$	1,232	$	(457	)	$	(1,446	)
Equity contracts—Net realized investment gains		9,000		4,615			7,801
Total	$	10,232	$	4,158		$	6,355

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.