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, presented in the consolidated balance sheets are as follows:



	March 31, 2016		December 31, 2015
	(Dollars in thousands)
Assets
Derivative instruments
Call options	$	387,469	$	337,256
Other assets
Interest rate caps	740		1,410
	$	388,209	$	338,666
Liabilities
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives	$	6,254,466	$	5,983,622
Other liabilities
Interest rate swap	5,375		3,139
	$	6,259,841	$	5,986,761

The changes in fair value of derivatives included in the unaudited consolidated statements of operations are as follows:



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Change in fair value of derivatives:
Call options	$	(70,751	)	$	(29,220	)
2015 notes hedges	—			567
Interest rate swap	(2,644		)	(1,761		)
Interest rate caps	(670		)	(686		)
	$	(74,065	)	$	(31,100	)
Change in fair value of embedded derivatives:
Fixed index annuities—embedded derivatives	$	179,715		$	(69,877	)
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting	86,142			120,523
2015 notes embedded conversion derivative	—			567
	$	265,857		$	51,213

The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivatives that is presented as Level 3 liabilities in Note 2.

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 due to the nonperformance of the counterparties to these call options 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:



			March 31, 2016				December 31, 2015
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	$	6,697,638	$	78,296	$	6,257,861	$	67,662
Barclays	A-	A2	2,290,633		37,769		2,463,768		35,273
BNP Paribas	A	A1	1,351,337		20,456		1,520,710		16,944
Citibank, N.A.	A	A1	3,749,452		23,432		3,786,498		23,587
Credit Suisse	A	A2	1,610,605		25,342		1,278,492		12,508
Deutsche Bank	BBB+	Baa1	1,042,549		6,063		1,349,002		10,704
J.P. Morgan	A+	Aa3	1,087,115		15,110		838,982		5,283
Morgan Stanley	A	A1	3,272,374		23,861		3,465,457		33,171
Royal Bank of Canada	AA-	Aa3	2,949,467		50,617		2,820,410		48,654
SunTrust	A-	Baa1	1,342,568		26,269		1,308,434		20,028
Wells Fargo	AA-	Aa2	4,481,969		80,254		4,187,955		63,442
			$	29,875,707	$	387,469	$	29,277,569	$	337,256

As of March 31, 2016 and December 31, 2015, we held $326.2 million and $349.8 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 $74.4 million and $36.9 million at March 31, 2016 and December 31, 2015, 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, 2015 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			March 31, 2016			December 31, 2015
Maturity Date	Amount		Receive Rate	Rate		Counterparty	Fair Value			Fair Value
							(Dollars in thousands)
March 15, 2021	$	85,500	LIBOR	2.415	%	SunTrust	$	(5,375	)	$	(3,139	)

Details regarding the interest rate caps are as follows:



	Notional			Cap			March 31, 2016		December 31, 2015
Maturity Date	Amount		Floating Rate	Rate		Counterparty	Fair Value		Fair Value
							(Dollars in thousands)
July 7, 2021	$	40,000	LIBOR	2.50	%	SunTrust	$	370	$	708
July 8, 2021	12,000		LIBOR	2.50	%	SunTrust	111		212
July 29, 2021	27,000		LIBOR	2.50	%	SunTrust	259		490
	$	79,000					$	740	$	1,410

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 March 31, 2016, we deposited $4.3 million of collateral with the counterparty to the swap.

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 2015 notes hedges were accounted for as derivative assets and were included in other assets in our consolidated balance sheets. The 2015 notes hedges and the 2015 notes embedded conversion derivative liability were settled with the extinguishment of the 2015 notes in 2015. 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 June 2016. 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.

In December 2015, we began settling the 2015 warrants in net shares on a weekly basis, and as of March 31, 2016, 127,767 shares of our common stock have been delivered to holders of the expiring warrants. 2015 warrants remained outstanding on 0.8 million and 1.6 million shares of our common stock at a strike price of $15.59 per share at March 31, 2016 and December 31, 2015, respectively. The average price of our common stock exceeded the strike price of the 2015 warrants for the three months ended March 31, 2016 and 2015, and the effect has been included in diluted earnings per share for both periods.