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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 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 due to Citibank and pays to Citibank interest equal to LIBOR plus 120 basis points on the outstanding notional amount of the underlying obligations, which was approximately $80 million as of September 30, 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 statement 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. 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 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
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
(Amount in thousands)
Total return swap - Other assets
$
346

 
$
0

 
$
0

 
$
0

Equity contracts - Other liabilities
0

 
0

 
0

 
175

Interest rate swap - Other liabilities
0

 
0

 
0

 
103

Total derivatives
$
346

 
$
0

 
$
0

 
$
278



 
 
Gain Recognized in Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Amounts in thousands)
Total return swap - Net realized investment (losses) gains
$
381

 
$
0

 
$
381

 
$
0

Equity contracts - Net realized investment (losses) gains
543

 
757

 
1,722

 
2,342

Interest rate swap - Other revenue
0

 
139

 
103

 
410

Total
$
924

 
$
896

 
$
2,206

 
$
2,752


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.