Derivative Instruments

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 and derivative instruments embedded in a convertible debt issue, presented in the consolidated balance sheets are as follows:



	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Assets
Derivative instruments
Call options	$	180,649	$	731,113
Other assets
2015 notes hedges	—		30,291
Interest rate caps	1,492		2,778
	$	182,141	$	764,182
Liabilities
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives	$	5,731,117	$	5,574,653
Other liabilities
2015 notes embedded conversion derivative	—		30,291
Interest rate swap	4,528		2,644
	$	5,735,645	$	5,607,588

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,
	2015			2014			2015			2014
	(Dollars in thousands)
Change in fair value of derivatives:
Call options	$	(347,038	)	$	45,931		$	(396,399	)	$	391,173
2015 notes hedges	(1,141		)	(6,823		)	(4,516		)	(27,124		)
Interest rate swap	(2,349		)	254			(3,283		)	(2,996		)
Interest rate caps	(832		)	(144		)	(1,286		)	(2,459		)
	$	(351,360	)	$	39,218		$	(405,484	)	$	358,594
Change in fair value of embedded derivatives:
Fixed index annuities—embedded derivatives	$	(413,583	)	$	(188,383	)	$	(578,596	)	$	9,704
2015 notes embedded conversion derivative	(1,141		)	(6,823		)	(4,516		)	(31,356		)
	$	(414,724	)	$	(195,206	)	$	(583,112	)	$	(21,652	)

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, 2015				December 31, 2014
Counterparty	Credit Rating (S&P)	Credit Rating (Moody's)	Notional Amount		Fair Value		Notional Amount		Fair Value
			(Dollars in thousands)
Bank of America	A	A1	$	5,415,765	$	33,313	$	2,114,812	$	62,932
Barclays	A-	A2	2,816,999		30,954		4,083,259		135,609
BNP Paribas	A+	A1	1,749,912		15,409		1,321,136		42,644
Citibank, N.A.	A	A1	3,314,018		6,834		3,190,204		96,759
Credit Suisse	A	A1	1,517,315		8,875		2,354,811		75,381
Deutsche Bank	BBB+	A3	1,733,406		1,537		2,682,960		64,028
HSBC	AA-	Aa3	—		—		38,599		1,767
J.P. Morgan	A+	Aa3	703,532		2,309		401,804		13,488
Morgan Stanley	A-	A3	3,622,471		19,178		2,605,687		77,106
Royal Bank of Canada	AA-	Aa3	2,265,389		22,342		1,364,362		41,717
SunTrust	A-	Baa1	836,304		4,096		248,622		5,405
Wells Fargo	AA-	Aa2	4,043,630		35,802		3,550,188		114,277
			$	28,018,741	$	180,649	$	23,956,444	$	731,113

As of September 30, 2015 and December 31, 2014, we held $98.0 million and $743.0 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 $82.8 million and $47.4 million at September 30, 2015 and December 31, 2014, 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. During the nine months ended September 30, 2014, we revised future period assumptions for lapse rates and the expected costs of annual call options used in determining fixed index annuity embedded derivatives. These revisions decreased the change in fair value of embedded derivatives for the nine months ended September 30, 2014 by $62.6 million, which after related adjustments to deferred sales inducements and deferred policy acquisition costs and income taxes, increased net income and earnings per common share - assuming dilution by $14.8 million and $0.19, respectively.

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, 2014 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, 2015			December 31, 2014
Maturity Date	Amount		Receive Rate	Rate		Counterparty	Fair Value			Fair Value
							(Dollars in thousands)
March 15, 2021	$	85,500	LIBOR	2.415	%	SunTrust	$	(4,528	)	$	(2,644	)

Details regarding the interest rate caps are as follows:



	Notional			Cap			September 30, 2015		December 31, 2014
Maturity Date	Amount		Floating Rate	Rate		Counterparty	Fair Value		Fair Value
							(Dollars in thousands)
July 7, 2021	$	40,000	LIBOR	2.50	%	SunTrust	$	748	$	1,398
July 8, 2021	12,000		LIBOR	2.50	%	SunTrust	225		420
July 29, 2021	27,000		LIBOR	2.50	%	SunTrust	519		960
	$	79,000					$	1,492	$	2,778

The interest rate swap converts floating rates to fixed rates for seven years which began in March 2014. The interest rate caps cap our interest rates for seven years which began in July 2014. As of September 30, 2015, we deposited $2.8 million of collateral with the counterparty to the swap and caps.

In September 2010, concurrently with the issuance of $200.0 million principal amount of 3.50% Convertible Senior Notes due September 15, 2015 (the "2015 notes"), we entered into hedge transactions (the "2015 notes hedges") with two counterparties whereby we would 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. The number of shares and strike price of the 2015 notes hedges are subject to adjustment based on dividends we pay subsequent to their purchase. At December 31, 2014, as a result of partial unwind transactions executed in 2013 and 2014 and cash dividend adjustments, we had 2015 notes hedges outstanding on 1.8 million shares of our common stock at a strike price of $12.25 per share. The 2015 notes hedges expired on September 15, 2015, and we received $25.8 million in cash. The 2015 notes hedges were accounted for as derivative assets and were included in other assets in our consolidated balance sheets. The 2015 notes embedded conversion derivative liability was settled with the extinguishment of the 2015 notes (see Note 6) whereby we paid holders of the notes a total of $25.8 million in cash to settle the conversion premium. The 2015 notes hedges and 2015 notes embedded conversion derivative were adjusted to fair value each reporting period and unrealized gains and losses are reflected in our consolidated statements of operations.

In separate transactions, we sold warrants (the "2015 warrants") to the 2015 notes hedges counterparties for the purchase of up to 16.0 million shares of our common stock at a price of $16.00 per share. We received $15.6 million in cash proceeds from the sale of the 2015 warrants, which was recorded as an increase in additional paid-in capital. The number of shares and strike price of the warrants are subject to adjustment based on dividends we pay subsequent to selling the warrants. The warrants expire on various dates from December 2015 through March 2016 and are intended to be settled in net shares. 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. At September 30, 2015 and December 31, 2014, as a result of partial unwind transactions executed in 2013 and 2014 and cash dividend adjustments, we had 2015 warrants outstanding on 1.8 million shares of our common stock at a strike price of $15.68 per share.

At September 30, 2015 and 2014, the remaining 2015 warrants were dilutive as the average price of our common stock exceeded the strike price of the 2015 warrants and the effect has been included in diluted earnings per share for the three and nine months ended September 30, 2015 and 2014.