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Derivative Instruments | 9 Months Ended
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Sep. 30, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments Derivatives, except for embedded derivatives and longevity and mortality swaps, are carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value. Longevity and mortality swaps are included on the condensed consolidated balance sheets in other assets or other liabilities, at fair value. Embedded derivative assets and liabilities on modified coinsurance or funds withheld arrangements are included on the condensed consolidated balance sheets with the host contract in funds withheld at interest, at fair value. Embedded derivative liabilities on indexed annuity and variable annuity products are included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. The following table presents the notional amounts and gross fair value of derivative instruments prior to taking into account the netting effects of master netting agreements as of September 30, 2015 and December 31, 2014 (dollars in thousands):
|  | September 30, 2015 |  | December 31, 2014
|  | Notional |  | Carrying Value/Fair Value |  | Notional |  | Carrying Value/Fair Value
|  | Amount |  | Assets |  | Liabilities |  | Amount |  | Assets |  | Liabilities
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 1,130,627 |  |  | $ | 101,194 |  |  | $ | 3,130 |  |  | $ | 1,144,661 |  |  | $ | 93,783 |  |  | $ | 3,934 |
Interest rate options |  | — |  |  | — |  |  | — |  |  | 240,000 |  |  | 18,195 |  |  | — |
Financial futures |  | 354,914 |  |  | — |  |  | — |  |  | 275,983 |  |  | — |  |  | — |
Foreign currency forwards |  | 40,000 |  |  | 343 |  |  | 6,675 |  |  | 67,967 |  |  | 87 |  |  | 15,098 |
Consumer price index swaps |  | 36,002 |  |  | 14 |  |  | 282 |  |  | 41,938 |  |  | — |  |  | 561 |
Credit default swaps |  | 902,000 |  |  | 7,015 |  |  | 9,007 |  |  | 805,700 |  |  | 11,689 |  |  | 3,502 |
Equity options |  | 483,830 |  |  | 60,032 |  |  | — |  |  | 555,361 |  |  | 35,242 |  |  | — |
Longevity swaps |  | 894,160 |  |  | 13,321 |  |  | 23 |  |  | 450,000 |  |  | 7,727 |  |  | — |
Mortality swaps |  | 50,000 |  |  | — |  |  | 2,196 |  |  | 50,000 |  |  | — |  |  | 797 |
Synthetic guaranteed investment contracts |  | 6,969,973 |  |  | — |  |  | — |  |  | 6,500,942 |  |  | — |  |  | — |
Embedded derivatives in: |  |  |  |  |  |  |  |  |  |  |  |
Modified coinsurance or funds withheld arrangements |  | — |  |  | — |  |  | 49,498 |  |  | — |  |  | 22,094 |  |  | — |
Indexed annuity products |  | — |  |  | — |  |  | 877,503 |  |  | — |  |  | — |  |  | 925,887 |
Variable annuity products |  | — |  |  | — |  |  | 228,907 |  |  | — |  |  | — |  |  | 159,279 |
Total non-hedging derivatives |  | 10,861,506 |  |  | 181,919 |  |  | 1,177,221 |  |  | 10,132,552 |  |  | 188,817 |  |  | 1,109,058 |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | 120,000 |  |  | — |  |  | 36,801 |  |  | 120,000 |  |  | — |  |  | 18,228 |
Foreign currency swaps |  | 826,891 |  |  | 128,486 |  |  | 2,428 |  |  | 676,972 |  |  | 70,906 |  |  | — |
Forward bond purchase commitments |  | — |  |  | — |  |  | — |  |  | 196,452 |  |  | 1,175 |  |  | 14,545 |
Total hedging derivatives |  | 946,891 |  |  | 128,486 |  |  | 39,229 |  |  | 993,424 |  |  | 72,081 |  |  | 32,773 |
Total derivatives |  | $ | 11,808,397 |  |  | $ | 310,405 |  |  | $ | 1,216,450 |  |  | $ | 11,125,976 |  |  | $ | 260,898 |  |  | $ | 1,141,831 |
Netting Arrangements Certain of the Company’s derivatives are subject to enforceable master netting arrangements and reported as a net asset or liability in the condensed consolidated balance sheets. The Company nets all derivatives that are subject to such arrangements. The Company has elected to include all derivatives, except embedded derivatives, in the tables below, irrespective of whether they are subject to an enforceable master netting arrangement or a similar agreement. See Note 4 – "Investments" for information regarding the Company’s securities borrowing, repurchase and repurchase/reverse repurchase programs. See “Embedded Derivatives” below for information regarding the Company’s bifurcated embedded derivatives. The following table provides information relating to the Company’s derivative instruments as of September 30, 2015 and December 31, 2014 (dollars in thousands):
|  |  |  |  |  |  |  | Gross Amounts Not Offset in the Balance Sheet |  |
|  | Gross Amounts Recognized |  | Gross Amounts Offset in the Balance Sheet |  | Net Amounts Presented in the Balance Sheet |  | Financial Instruments |  | Cash Collateral Pledged/ Received |  | Net Amount
September 30, 2015: |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  | $ | 310,405 |  |  | $ | (21,589 | ) |  | $ | 288,816 |  |  | $ | (19,127 | ) |  | $ | (260,135 | ) |  | $ | 9,554 |
Derivative liabilities |  | 60,542 |  |  | (21,589 | ) |  | 38,953 |  |  | (60,120 | ) |  | (15,916 | ) |  | (37,083 | )
December 31, 2014: |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  | $ | 238,804 |  |  | $ | (14,111 | ) |  | $ | 224,693 |  |  | $ | (20,260 | ) |  | $ | (178,141 | ) |  | $ | 26,292 |
Derivative liabilities |  | 56,665 |  |  | (14,111 | ) |  | 42,554 |  |  | (47,222 | ) |  | — |  |  | (4,668 | )
Accounting for Derivative Instruments and Hedging Activities The Company does not enter into derivative instruments for speculative purposes. As discussed below under “Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging,” the Company uses various derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. As of September 30, 2015 and December 31, 2014, the Company held interest rate swaps that were designated and qualified as cash flow hedges of interest rate risk, held foreign currency swaps that were designated and qualified as hedges of a portion of its net investment in its foreign operations and had derivative instruments that were not designated as hedging instruments. In addition, as of September 30, 2015, the Company held foreign currency swaps that were designated and qualified as fair value hedges of foreign currency risk and, as of December 31, 2014, the Company had forward bond purchase commitments that qualified as cash flow hedges. See Note 2 – “Summary of Significant Accounting Policies” of the Company’s 2014 Annual Report for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. Derivative instruments are carried at fair value and generally require an insignificant amount of cash at inception of the contracts. Fair Value Hedges The Company designates and reports certain foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets as fair value hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item attributable to a change in foreign currency and the offsetting gain or loss on the related foreign currency swaps as of September 30, 2015, were (dollars in thousands):
Type of Fair Value Hedge |  | Hedged Item |  | Gains (Losses) Recognized for Derivatives |  | Gains (Losses) Recognized for Hedged Items |  | Ineffectiveness Recognized in Investment Related Gains (Losses)
For the three and nine months ended September 30, 2015: |  |  |  |  |  |
Foreign currency swaps |  | Foreign-denominated fixed maturity securities |  | $ | (293 | ) |  | $ | 293 |  |  | $ | — |
A regression analysis was used, both at inception of the hedge and on an ongoing basis, to determine whether each derivative used in a hedged transaction is highly effective in offsetting changes in the hedged item. For the foreign currency swaps, the change in fair value related to changes in the benchmark interest rate and credit spreads are excluded from the hedge effectiveness. For the three and nine months ended September 30, 2015, $2.1 million of the change in the estimated fair value of derivatives, was excluded from hedge effectiveness. Cash Flow Hedges Certain derivative instruments are designated as cash flow hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The Company designates and accounts for certain interest rate swaps, in which the cash flows are denominated in different currencies, commonly referred to as cross-currency swaps, as cash flow hedges. In addition, the Company designates and accounts for its forward bond purchase commitments as cash flow hedges. The following table presents the components of AOCI, before income tax, and the condensed consolidated income statement classification where the gain or loss is recognized related to cash flow hedges for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):
|  | Three months ended September 30,
|  | 2015 |  | 2014
Accumulated other comprehensive income (loss), balance beginning of period |  | $ | (23,901 | ) |  | $ | 457 |
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges |  | (13,199 | ) |  | (10,679 | )
Amounts reclassified to investment related gains (losses), net |  | (179 | ) |  | — |
Amounts reclassified to investment income |  | 112 |  |  | (393 | )
Accumulated other comprehensive income (loss), balance end of period |  | $ | (37,167 | ) |  | $ | (10,615 | )
|  | Nine months ended September 30,
|  | 2015 |  | 2014
Accumulated other comprehensive income (loss), balance beginning of period |  | $ | (31,591 | ) |  | $ | (4,578 | )
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges |  | (4,251 | ) |  | (5,105 | )
Amounts reclassified to investment related gains (losses), net |  | (834 | ) |  | — |
Amounts reclassified to investment income |  | (491 | ) |  | (932 | )
Accumulated other comprehensive income (loss), balance end of period |  | $ | (37,167 | ) |  | $ | (10,615 | )
As of September 30, 2015, the before-tax deferred net losses on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are approximately $0.2 million. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to investment income over the term of the investment cash flows. The following table presents the effective portion of derivatives in cash flow hedging relationships on the condensed consolidated statements of income and AOCI for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):
|  | Effective Portion
Derivative Type |  | Gain (Loss) Recognized in OCI |  | Gain (Loss) Reclassified into Income from OCI
|  |  |  | Investment Related Gains (Losses) |  | Investment Income
For the three months ended September 30, 2015:
Interest rate swaps |  | $ | (13,199 | ) |  | $ | — |  |  | $ | (60 | )
Forward bond purchase commitments |  | — |  |  | 179 |  |  | (52 | )
Total |  | $ | (13,199 | ) |  | $ | 179 |  |  | $ | (112 | )
For the three months ended September 30, 2014: |  |  |  |  |  |
Interest rate swaps |  | $ | (10,679 | ) |  | $ | — |  |  | $ | 393 |
For the nine months ended September 30, 2015: |  |  |  |  |  |
Interest rate swaps |  | $ | (18,349 | ) |  | $ | — |  |  | $ | 231 |
Forward bond purchase commitments |  | 14,098 |  |  | 834 |  |  | 260 |
Total |  | $ | (4,251 | ) |  | $ | 834 |  |  | $ | 491 |
For the nine months ended September 30, 2014: |  |  |  |  |  |
Interest rate swaps |  | $ | (5,105 | ) |  | $ | — |  |  | $ | 932 |
All components of each derivative's gain or loss were included in the assessment of hedge effectiveness. For the three and nine months ended September 30, 2015 and 2014, the ineffective portion of derivatives reported as cash flow hedges was not material to the Company's results of operations. Also, there were no material amounts reclassified into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging. Hedges of Net Investments in Foreign Operations The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. The following table illustrates the Company’s net investments in foreign operations (“NIFO”) hedges for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):
|  | Derivative Gains (Losses) Deferred in AOCI
|  | For the three months ended September 30, |  | For the nine months ended September 30,
Type of NIFO Hedge (1) (2) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Foreign currency swaps |  | $ | 42,702 |  |  | $ | 27,931 |  |  | $ | 79,723 |  |  | $ | 28,675 |
(1) | There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods presented.
(2) | There was no ineffectiveness recognized for the Company’s hedges of net investments in foreign operations.
The cumulative foreign currency translation gain recorded in AOCI related to these hedges was $155.6 million and $75.8 million at September 30, 2015 and December 31, 2014, respectively. If a foreign operation was sold or substantially liquidated, the amounts in AOCI would be reclassified to the condensed consolidated statements of income. A pro rata portion would be reclassified upon partial sale of a foreign operation. Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. The gain or loss related to the change in fair value for these derivative instruments is recognized in investment related gains (losses), in the condensed consolidated statements of income, except where otherwise noted. A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s income statement for the three and nine months ended September 30, 2015 and 2014 is as follows (dollars in thousands):
|  |  |  | Gain (Loss) for the three months ended September 30,
Type of Non-hedging Derivative |  | Income Statement Location of Gain (Loss) |  | 2015 |  | 2014
Interest rate swaps |  | Investment related gains (losses), net |  | $ | 42,014 |  |  | $ | 9,121 |
Interest rate options |  | Investment related gains (losses), net |  | — |  |  | 865 |
Financial futures |  | Investment related gains (losses), net |  | 16,654 |  |  | 6,446 |
Foreign currency forwards |  | Investment related gains (losses), net |  | 708 |  |  | (5,277 | )
CPI swaps |  | Investment related gains (losses), net |  | (250 | ) |  | (274 | )
Credit default swaps |  | Investment related gains (losses), net |  | (8,407 | ) |  | (1,389 | )
Equity options |  | Investment related gains (losses), net |  | 15,150 |  |  | 1,018 |
Longevity swaps |  | Other revenues |  | 2,404 |  |  | 4,499 |
Mortality swaps |  | Other revenues |  | (442 | ) |  | (320 | )
Subtotal |  |  |  | 67,831 |  |  | 14,689 |
Embedded derivatives in: |  |  |  |  |  |
Modified coinsurance or funds withheld arrangements |  | Investment related gains (losses), net |  | (46,169 | ) |  | 56,811 |
Indexed annuity products |  | Interest credited |  | 50,246 |  |  | (35,650 | )
Variable annuity products |  | Investment related gains (losses), net |  | (95,372 | ) |  | (47,479 | )
Total non-hedging derivatives |  |  |  | $ | (23,464 | ) |  | $ | (11,629 | )
|  |  |  | Gain (Loss) for the nine months ended September 30,
Type of Non-hedging Derivative |  | Income Statement Location of Gain (Loss) |  | 2015 |  | 2014
Interest rate swaps |  | Investment related gains (losses), net |  | $ | 29,629 |  |  | $ | 61,025 |
Interest rate options |  | Investment related gains (losses), net |  | 3,275 |  |  | 4,151 |
Financial futures |  | Investment related gains (losses), net |  | 7,141 |  |  | (2,822 | )
Foreign currency forwards |  | Investment related gains (losses), net |  | (946 | ) |  | (2,945 | )
CPI swaps |  | Investment related gains (losses), net |  | (153 | ) |  | 193 |
Credit default swaps |  | Investment related gains (losses), net |  | (5,936 | ) |  | 1,280 |
Equity options |  | Investment related gains (losses), net |  | 4,477 |  |  | (16,748 | )
Longevity swaps |  | Other revenues |  | 6,136 |  |  | 4,499 |
Mortality swaps |  | Other revenues |  | (1,399 | ) |  | (320 | )
Subtotal |  |  |  | 42,224 |  |  | 48,313 |
Embedded derivatives in: |  |  |  |  |  |
Modified coinsurance or funds withheld arrangements |  | Investment related gains (losses), net |  | (71,592 | ) |  | 212,887 |
Indexed annuity products |  | Interest credited |  | 28,999 |  |  | (86,775 | )
Variable annuity products |  | Investment related gains (losses), net |  | (69,628 | ) |  | (76,323 | )
Total non-hedging derivatives |  |  |  | $ | (69,997 | ) |  | $ | 98,102 |
Types of Derivatives Used by the Company Interest Rate Swaps Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). With an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between two rates, which can be either fixed-rate or floating-rate interest amounts, tied to an agreed-upon notional principal amount. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments at each due date. Interest Rate Options Interest rate options, commonly referred to as swaptions, are used by the Company primarily to hedge living benefit guarantees embedded in certain variable annuity products. A swaption, used to hedge against adverse changes in interest rates, is an option to enter into a swap with a forward starting effective date. The Company pays an upfront premium for the right to exercise this option in the future. Financial Futures Exchange-traded futures are used primarily to economically hedge liabilities embedded in certain variable annuity products. With exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the relevant indices, and to post variation margin on a daily basis in an amount equal to the difference between the daily estimated fair values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Equity Options Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products. To hedge against adverse changes in equity indices volatility, the Company buys put options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price. Consumer Price Index Swaps Consumer price index (“CPI”) swaps are used by the Company primarily to economically hedge liabilities embedded in certain insurance products where value is directly affected by changes in a designated benchmark consumer price index. With a CPI swap transaction, the Company agrees with another party to exchange the actual amount of inflation realized over a specified period of time for a fixed amount of inflation determined at inception. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments to be made by the counterparty at each due date. Most of these swaps will require a single payment to be made by one counterparty at the maturity date of the swap. Foreign Currency Swaps Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the termination of the currency swap by each party. The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign operations and foreign currency securities against adverse movements in exchange rates. The Company also uses foreign currency swaps to hedge its exposure to market risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell. Foreign Currency Forwards Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date. Forward Bond Purchase Commitments Forward bond purchase commitments are used by the Company to hedge against the variability in the anticipated cash flows required to purchase securities. With forward bond purchase commitments, the forward price is agreed upon at the time of the contract and payment for such contract is made at the future specified settlement date of the securities. Credit Default Swaps The Company sells protection under single name credit default swaps and credit default swap index tranches to diversify its credit risk exposure in certain portfolios and, in combination with purchasing securities, to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for indexed reference entities and single name reference entities are defined in the contracts. The Company’s maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default of a referencing entity, the Company is typically required to pay the protection holder the full notional value less a recovery amount determined at auction. The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of credit default swaps sold by the Company at September 30, 2015 and December 31, 2014 (dollars in thousands):
|  | September 30, 2015 |  | December 31, 2014
Rating Agency Designation of Referenced Credit Obligations(1) |  | Estimated Fair Value of Credit Default Swaps |  | Maximum Amount of Future Payments under Credit Default Swaps(2) |  | Weighted Average Years to Maturity(3) |  | Estimated Fair Value of Credit Default Swaps |  | Maximum Amount of Future Payments under Credit Default Swaps(2) |  | Weighted Average Years to Maturity(3)
AAA/AA-/A+/A/A- |  |  |  |  |  |  |  |  |  |  |  |
Single name credit default swaps |  | $ | 1,827 |  |  | $ | 180,000 |  |  | 4.8 |  | $ | 1,498 |  |  | $ | 167,500 |  |  | 4.6
Credit default swaps referencing indices |  | — |  |  | — |  |  | — |  | — |  |  | — |  |  | —
Subtotal |  | 1,827 |  |  | 180,000 |  |  | 4.8 |  | 1,498 |  |  | 167,500 |  |  | 4.6
BBB+/BBB/BBB- |  |  |  |  |  |  |  |  |  |  |  |
Single name credit default swaps |  | (3,063 | ) |  | 296,000 |  |  | 5.3 |  | 168 |  |  | 217,200 |  |  | 4.9
Credit default swaps referencing indices |  | 1,373 |  |  | 416,000 |  |  | 5.2 |  | 6,651 |  |  | 416,000 |  |  | 5.0
Subtotal |  | (1,690 | ) |  | 712,000 |  |  | 5.3 |  | 6,819 |  |  | 633,200 |  |  | 4.9
BB+ |  |  |  |  |  |  |  |  |  |  |  |
Single name credit default swaps |  | (2,129 | ) |  | 10,000 |  |  | 4.4 |  | (130 | ) |  | 5,000 |  |  | 4.5
Credit default swaps referencing indices |  | — |  |  | — |  |  | — |  | — |  |  | — |  |  | —
Subtotal |  | (2,129 | ) |  | 10,000 |  |  | 4.4 |  | (130 | ) |  | 5,000 |  |  | 4.5
Total |  | $ | (1,992 | ) |  | $ | 902,000 |  |  | 5.2 |  | $ | 8,187 |  |  | $ | 805,700 |  |  | 4.9
(1) | The rating agency designations are based on ratings from Standard and Poor’s (“S&P”).
(2) | Assumes the value of the referenced credit obligations is zero.
(3) | The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts.
Longevity Swaps The Company enters into longevity swaps in the form of out-of-the-money options, which provide protection against changes in mortality improvement to retirement plans and insurers of such plans. With a longevity swap transaction, the Company agrees with another party to exchange a proportion of a notional value. The proportion is determined by the difference between a predefined benefit, and the realized benefit plus the future expected benefit, calculated by reference to a population index for a fixed premium. Mortality Swaps Mortality swaps are used by the Company to hedge risk from changes in mortality experience associated with its reinsurance of life insurance risk. The Company agrees with another party to exchange, at specified intervals, a proportion of a notional value determined by the difference between a predefined expected and realized claim amount on a designated index of reinsured lives, for a fixed percentage (premium) each term. Synthetic Guaranteed Investment Contracts The Company sells fee-based synthetic guaranteed investment contracts to retirement plans which include investment-only, stable value contracts. The assets are owned by the trustees of such plans, who invest the assets under the terms of investment guidelines to which the Company agrees. The contracts contain a guarantee of a minimum rate of return on participant balances supported by the underlying assets, and a guarantee of liquidity to meet certain participant-initiated plan cash flow requirements. These contracts are reported as derivatives, recorded at fair value and classified as interest rate derivatives. Embedded Derivatives The Company has certain embedded derivatives which are required to be valued separately from their host contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a modified coinsurance (“modco”) or funds withheld basis. The valuation of embedded derivatives is sensitive to the investment credit spread environment. Changes in investment credit spreads are also affected by the application of a credit valuation adjustment (“CVA”). The fair value calculation of an embedded derivative in an asset position utilizes a CVA based on the ceding company’s credit risk. Conversely, the fair value calculation of an embedded derivative in a liability position utilizes a CVA based on the Company’s credit risk. Generally, an increase in investment credit spreads, ignoring changes in the CVA, will have a negative impact on the fair value of the embedded derivative (decrease in income). Changes in fair values of embedded derivatives on modco or funds withheld treaties are net of an increase (decrease) in investment related gains (losses) of $0.4 million and $(0.5) million for the three months and $0.6 million and $(1.8) million for the nine months ended September 30, 2015 and 2014, respectively, associated with a CVA. The Company also reinsures equity-indexed annuity and variable annuity contracts with benefits that are considered embedded derivatives, including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. Changes in fair values of embedded derivatives on variable annuity contracts are net of an increase in investment related gains (losses) of $2.1 million and $1.0 million for the three months, and $1.3 million and $1.6 million for the nine month periods ended September 30, 2015 and 2014, associated with a CVA. The related gains (losses) and the effect on net income after amortization of deferred acquisition costs (“DAC”) and income taxes for the three and nine months ended September 30, 2015 and 2014 are reflected in the following table (dollars in thousands):
| Three months ended September 30, |  | Nine months ended September 30,
| 2015 |  | 2014 |  | 2015 |  | 2014
Embedded derivatives in modco or funds withheld arrangements included in investment related gains | $ | (46,169 | ) |  | $ | 56,812 |  |  | $ | (71,592 | ) |  | $ | 212,888 |
After the associated amortization of DAC and taxes, the related amounts included in net income | (11,783 | ) |  | 13,353 |  |  | (18,287 | ) |  | 49,394 |
Embedded derivatives in variable annuity contracts included in investment related gains | (95,372 | ) |  | (47,479 | ) |  | (69,628 | ) |  | (76,323 | )
After the associated amortization of DAC and taxes, the related amounts included in net income | (116,994 | ) |  | 26,542 |  |  | (106,796 | ) |  | 6,388 |
Amounts related to embedded derivatives in equity-indexed annuities included in benefits and expenses | 50,246 |  |  | (35,650 | ) |  | 28,999 |  |  | (86,775 | )
After the associated amortization of DAC and taxes, the related amounts included in net income | 27,861 |  |  | (23,920 | ) |  | 13,095 |  |  | (57,896 | )
Credit Risk The Company manages its credit risk related to over-the-counter ("OTC") derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master netting agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. The credit exposure of the Company's OTC derivative transactions is represented by the contracts with a positive fair value (market value) at the reporting date. To reduce credit exposures, the Company seeks to (i) enter into OTC derivative transactions pursuant to master netting agreements that provide for a netting of payments and receipts with a single counterparty, and (ii) enter into agreements that allow the use of credit support annexes, which are bilateral rating-sensitive agreements that require collateral postings at established threshold levels. Certain of the Company's OTC derivatives are cleared derivatives, which are bilateral transactions between the Company and a counterparty where the transactions are cleared through a clearinghouse, such that each derivative counterparty is only exposed to the default of the clearinghouse. These cleared transactions require initial and daily variation margin collateral postings and include certain interest rate swaps and credit default swaps entered into on or after June 10, 2013, related to guidelines implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Also, the Company enters into exchange-traded futures through regulated exchanges and these transactions are settled on a daily basis, thereby reducing credit risk exposure in the event of non-performance by counterparties to such financial instruments. The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that may vary depending on the posting party’s ratings. Additionally, a decline in the Company’s or the counterparty’s credit ratings to specified levels could result in potential settlement of the derivative positions under the Company’s agreements with its counterparties. The Company also has exchange-traded futures, which require the maintenance of a margin account. As exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties. The Company’s credit exposure related to derivative contracts is generally limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. The Company’s credit exposure to mortality swaps is minimal, as they are fully collateralized by a counterparty. Information regarding the Company’s credit exposure related to its over-the-counter derivative contracts, centrally cleared derivative contracts and margin account for exchange-traded futures, excluding mortality swaps, at September 30, 2015 and December 31, 2014 are reflected in the following table (dollars in thousands):
|  | September 30, 2015 |  | December 31, 2014
Estimated fair value of derivatives in net asset position |  | $ | 252,059 |  |  | $ | 175,209 |
Cash provided as collateral(1) |  | 15,916 |  |  | — |
Securities pledged to counterparties as collateral(2) |  | 60,120 |  |  | 47,222 |
Cash pledged from counterparties as collateral(3) |  | (260,135 | ) |  | (178,141 | )
Securities pledged from counterparties as collateral(4) |  | (19,127 | ) |  | (20,260 | )
Initial margin for cleared derivatives(2) |  | (33,380 | ) |  | (16,333 | )
Net credit exposure |  | $ | 15,453 |  |  | $ | 7,697 |
Margin account related to exchange-traded futures(5) |  | $ | 9,761 |  |  | $ | 7,976 |
(1) | Consists of receivable from counterparty, included in other assets.
(2) | Included in available-for-sale securities, primarily consists of U.S. Treasury securities.
(3) | Included in cash and cash equivalents, with obligation to return cash collateral recorded in other liabilities.
(4) | Consists of U.S. Treasury securities.
(5) | Included in cash and cash equivalents.

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