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Derivative Financial Instruments
9 Months Ended
Sep. 30, 2011
Derivative Financial Instruments [Abstract] 
Derivative Financial Instruments

6. 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 loans 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 matures 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:

 

Income Statement Classification

    Three Months Ended September 30,  
   2011      2010  
   Gain (Loss)
on Swap		     Gain (Loss)
on Loan		      Gain (Loss)
on Swap		     Gain (Loss)
on Loan		  
     (Amounts in thousands)  

Other revenue

    $ (902 )    $ 902       $ (985 )    $ 985   

Income Statement Classification

    Nine Months Ended September 30,  
   2011      2010  
   Gain (Loss)
on Swap		     Gain (Loss)
on Loan		      Gain (Loss)
on Swap		     Gain (Loss)
on Loan		  
     (Amounts in thousands)  

Other revenue

    $ (4,240 )    $ 4,240       $ (2,439 )    $ 2,439   

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 3.75%. The swap agreement terminates on March 1, 2013. The swap is designated as a cash flow hedge. The fair market value of the interest rate swap was $0.8 million as of September 30, 2011, and has been reported as a component of other comprehensive income and amortized into earnings over the term of the hedged transaction. The interest rate swap was determined to be highly effective, and no amount of ineffectiveness was recorded in earnings during the nine months ended September 30, 2011 and 2010.

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 and losses in the consolidated statements of operations:

 

     Asset Derivatives      Liability Derivatives  
     September 30, 2011      December 31, 2010      September 30, 2011     December 31, 2010  
     (Amounts in thousands)  

Hedging derivatives

          

Interest rate contracts - Other assets (liabilities)

    $ 0       $ 4,240       $ (829 )    $ (1,139 ) 
  

 

 

     

 

 

     

 

 

    

 

 

  

Non-hedging derivatives

          

Interest rate contracts - Other liabilities

    $ 0       $ 0       $ (519 )    $ (1,903 ) 

Equity contracts - Short-term investments (Other liabilities)

      6         0         (625 )      (2,776 ) 
  

 

 

     

 

 

     

 

 

    

 

 

  

Total non-hedging derivatives

   $ 6       $ 0       $ (1,144 )    $ (4,679 ) 
  

 

 

     

 

 

     

 

 

    

 

 

  

Total derivatives

   $ 6       $ 4,240       $ (1,973 )    $ (5,818 ) 
  

 

 

     

 

 

     

 

 

    

 

 

  

 

The Effect of Derivative Instruments on the Statements of Operations

 

Derivatives Contracts for Fair Value Hedges

    Loss Recognized in Income  
   Three Months Ended September 30,     Nine Months Ended September 30,  
   2011     2010     2011     2010  
     (Amounts in thousands)  

Interest rate contract - Interest expense

    $ (887 )    $ (1,828 )    $ (4,470 )    $ (5,310 ) 
     Gain (Loss) Recognized in Other Comprehensive Income  
     Three Months Ended September 30,     Nine Months Ended September 30,  

Derivatives Contracts for Cash Flow Hedges

    2011     2010     2011     2010  
     (Amounts in thousands)  

Interest rate contract - Other comprehensive income

    $ 141      $ (111 )    $ 310      $ (420 ) 
     Gain (Loss) Recognized in Income  
     Three Months Ended September 30,     Nine Months Ended September 30,  

Derivatives Not Designated as Hedging Instruments

    2011     2010     2011     2010  
     (Amounts in thousands)  

Interest rate contract - Other revenue

    $ 521      $ (83 )    $ 1,384      $ (936 ) 

Equity contracts - Net realized investment (losses) gains

      2,823        982        7,557        4,276   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 3,344      $ 899      $ 8,941      $ 3,340   
  

 

 

    

 

 

    

 

 

    

 

 

  

There were no gains or losses on derivative instruments designated as cash flow hedges reclassified from accumulated other comprehensive income into earnings during the three or nine months ended September 30, 2011 and 2010.

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 5 of Condensed Notes to Consolidated Financial Statements.