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Derivative Instruments | 9 Months Ended
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Sep. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments We recognize all derivative instruments as assets or liabilities in the consolidated balance sheets at fair value. None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. The fair value of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts, presented in the consolidated balance sheets are as follows:
| September 30, 2013 |  | December 31, 2012
| (Dollars in thousands)
Assets |  |  |
Derivative instruments |  |  |
Call options | $ | 625,236 |  |  | $ | 415,258 |
Other assets |  |  |
2015 notes hedges | 144,904 |  |  | 43,105 |
Interest rate caps | 5,356 |  |  | 3,247 |
| $ | 775,496 |  |  | $ | 461,610 |
Liabilities |  |  |
Policy benefit reserves - annuity products |  |  |
Fixed index annuities - embedded derivatives | $ | 3,975,862 |  |  | $ | 3,337,556 |
Other liabilities |  |  |
2015 notes embedded derivatives | 147,150 |  |  | 43,105 |
2015 warrants | 51,077 |  |  | — |
Interest rate swap | 222 |  |  | 4,261 |
| $ | 4,174,311 |  |  | $ | 3,384,922 |
The changes in fair value of derivatives included in the unaudited consolidated statements of operations are as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2013 |  | 2012 |  | 2013 |  | 2012
| (Dollars in thousands)
Change in fair value of derivatives: |  |  |  |  |  |  |
Call options | $ | 129,428 |  |  | $ | 160,735 |  |  | $ | 532,282 |  |  | $ | 280,014 |
2015 notes hedges | 73,504 |  |  | 1,839 |  |  | 101,799 |  |  | (5,573 | )
2015 warrants | (9,199 | ) |  | — |  |  | (9,199 | ) |  | — |
Interest rate swap | (496 | ) |  | (1,171 | ) |  | 4,039 |  |  | (4,319 | )
Interest rate caps | (209 | ) |  | (313 | ) |  | 2,109 |  |  | (718 | )
| $ | 193,028 |  |  | $ | 161,090 |  |  | $ | 631,030 |  |  | $ | 269,404 |
Change in fair value of embedded derivatives: |  |  |  |  |  |  |
2015 notes embedded derivatives | $ | 75,750 |  |  | $ | 1,839 |  |  | $ | 104,045 |  |  | $ | (5,573 | )
Fixed index annuities | (39,526 | ) |  | 186,362 |  |  | (112,958 | ) |  | 471,851 |
| $ | 36,224 |  |  | $ | 188,201 |  |  | $ | (8,913 | ) |  | $ | 466,278 |
We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or upon early termination and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and we purchase new one-year call options to fund the next annual index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications. Our strategy attempts to mitigate any potential risk of loss under these agreements through a regular monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts. The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:
|  |  |  |  |  | September 30, 2013 |  | December 31, 2012
Counterparty |  | Credit Rating (S&P) |  | Credit Rating (Moody's) |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
|  |  |  |  |  | (Dollars in thousands)
Bank of America |  | A |  | A3 |  | $ | 1,273,995 |  |  | $ | 47,681 |  |  | $ | 568,786 |  |  | $ | 16,533 |
Barclays |  | A |  | A2 |  | 2,936,023 |  |  | 108,872 |  |  | 3,463,777 |  |  | 103,929 |
BNP Paribas |  | A+ |  | A2 |  | 1,481,037 |  |  | 45,958 |  |  | 2,207,097 |  |  | 60,301 |
Citibank, N.A. |  | A |  | A3 |  | 1,368,136 |  |  | 47,915 |  |  | 2,878,588 |  |  | 67,592 |
Credit Suisse |  | A |  | A1 |  | 3,886,014 |  |  | 116,310 |  |  | 936,625 |  |  | 21,518 |
Deutsche Bank |  | A |  | A2 |  | 909,823 |  |  | 37,627 |  |  | 886,688 |  |  | 20,787 |
HSBC |  | AA- |  | A1 |  | 235,430 |  |  | 12,415 |  |  | 295,520 |  |  | 6,539 |
J.P. Morgan |  | A+ |  | Aa3 |  | 778,891 |  |  | 21,204 |  |  | 735,016 |  |  | 21,940 |
Morgan Stanley |  | A- |  | Baa1 |  | 2,713,249 |  |  | 89,525 |  |  | 1,590,505 |  |  | 40,113 |
Royal Bank of Canada |  | AA- |  | Aa3 |  | 298,349 |  |  | 5,862 |  |  | — |  |  | — |
Wells Fargo |  | AA- |  | Aa3 |  | 2,284,217 |  |  | 91,867 |  |  | 2,060,903 |  |  | 56,006 |
|  |  |  |  |  | $ | 18,165,164 |  |  | $ | 625,236 |  |  | $ | 15,623,505 |  |  | $ | 415,258 |
As of September 30, 2013 and December 31, 2012, we held $622.0 million and $328.7 million, respectively, of cash and cash equivalents and other securities from counterparties for derivative collateral, which is included in other liabilities on our consolidated balance sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts to $48.0 million and $93.7 million at September 30, 2013 and December 31, 2012, respectively. The future annual index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value. We entered into an interest rate swap and interest rate caps to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures. See Note 10 in our Annual Report on Form 10-K for the year ended December 31, 2012 for more information on our subordinated debentures. The terms of the interest rate swap provide that we pay a fixed rate of interest and receive a floating rate of interest. The terms of the interest rate caps limit the three month London Interbank Offered Rate ("LIBOR") to 2.50%. The interest rate swap and caps are not effective hedges under accounting guidance for derivative instruments and hedging activities. Therefore, we record the interest rate swap and caps at fair value and any net cash payments received or paid are included in the change in fair value of derivatives in the unaudited consolidated statements of operations. Details regarding the interest rate swap are as follows:
|  | Notional |  |  |  | Pay |  |  |  | September 30, 2013 |  | December 31, 2012
Maturity Date |  | Amount |  | Receive Rate |  | Rate |  | Counterparty |  | Fair Value |  | Fair Value
|  |  |  |  |  |  |  |  |  | (Dollars in thousands)
March 15, 2021 |  | $ | 85,500 |  |  | LIBOR |  | 2.415 | % |  | SunTrust |  | $ | (222 | ) |  | $ | (4,261 | )
Details regarding the interest rate caps are as follows:
|  | Notional |  |  |  | Cap |  |  |  | September 30, 2013 |  | December 31, 2012
Maturity Date |  | Amount |  | Floating Rate |  | Rate |  | Counterparty |  | Fair Value |  | Fair Value
|  |  |  |  |  |  |  |  |  | (Dollars in thousands)
July 7, 2021 |  | $ | 40,000 |  |  | LIBOR |  | 2.50 | % |  | SunTrust |  | $ | 2,697 |  |  | $ | 1,634 |
July 8, 2021 |  | 12,000 |  |  | LIBOR |  | 2.50 | % |  | SunTrust |  | 809 |  |  | 490 |
July 29, 2021 |  | 27,000 |  |  | LIBOR |  | 2.50 | % |  | SunTrust |  | 1,850 |  |  | 1,123 |
|  | $ | 79,000 |  |  |  |  |  |  |  |  | $ | 5,356 |  |  | $ | 3,247 |
The interest rate swap has a forward starting date beginning in March 2014 and converts floating rates to fixed rates for seven years. The interest rate caps have a forward starting date beginning in July 2014 and cap our interest rates for seven years. As of September 30, 2013, we held $5.2 million of cash and cash equivalents from the counterparty for derivative collateral related to the swap and caps, which is included in other liabilities on our consolidated balance sheets. In September 2010, concurrently with the issuance of $200.0 million principal amount of 3.5% Convertible Senior Notes Due 2015 (the "2015 notes"), we entered into hedge transactions (the "2015 notes hedges") with two counterparties whereby we have the option to receive the cash equivalent of the conversion spread on 16.0 million shares of our common stock based upon a strike price of $12.50 per share, subject to certain conversion rate adjustments in the 2015 notes. These options expire on September 15, 2015, and must be settled in cash. The 2015 notes hedges are accounted for as derivative assets, and are included in Other assets in our Consolidated Balance Sheets. The 2015 notes embedded conversion derivative and the 2015 notes hedges are adjusted to fair value each reporting period and unrealized gains and losses are reflected in our Consolidated Statements of Operations. In separate transactions, we also sold warrants (the "2015 warrants") to two counterparties for the purchase of up to 16.0 million shares of our common stock at a price of $16.00 per share. The number of shares and strike price of the warrants are subject to adjustment based on dividends we pay subsequent to selling the warrants. As of September 30, 2013, such adjustments have resulted in warrants outstanding for the purchase of up to 16.2 million shares of our common stock at a strike price of $15.81 per share. The warrants expire on various dates from December 2015 through March 2016 and are intended to be settled in net shares. The total number of shares of common stock deliverable under the 2015 warrants is, however, currently limited to 11.6 million shares. We received $15.6 million in cash proceeds from the sale of the 2015 warrants, which has been recorded as an increase in additional paid-in capital. Changes in the fair value of these warrants will not be recognized in our Consolidated Financial Statements as long as the instruments remain classified as equity. On August 26, 2013, we entered into partial unwind agreements with the two counterparties to the 2015 notes hedges and the 2015 warrants. We agreed to settle 50% of both the outstanding call options (2015 notes hedges) and warrants on October 22, 2013, in net cash to be received from each counterparty. This coincides with the expiration of the exchange offer for the outstanding 2015 Notes discussed below. The agreements to settle the warrants in net cash required us to reclassify $41.9 million from equity to a derivative liability which represents the fair value of 50% of the outstanding warrants on the day that we entered into the unwind agreements. Subsequent to the reclassification, we are required to recognize the change in fair value of these warrants committed to the unwind agreements through net income.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708773-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5618551-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624163-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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