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:



	December 31,
	2018		2017
	(Dollars in thousands)
Assets
Derivative instruments
Call options	$	205,149	$	1,568,380
Other assets
Interest rate caps	597		415
Interest rate swap	354		—
	$	206,100	$	1,568,795
Liabilities
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives, net	$	8,165,405	$	8,790,427
Other liabilities
Interest rate swap	—		789
	$	8,165,405	$	8,791,216

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



	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Change in fair value of derivatives:
Call options	$	(778,899	)	$	1,678,283		$	165,029
Interest rate swap	869			255			(482		)
Interest rate caps	182			(667		)	(328		)
	$	(777,848	)	$	1,677,871		$	164,219
Change in fair value of embedded derivatives:
Fixed index annuities - embedded derivatives (see Note 2)	$	(2,167,628	)	$	174,154		$	145,045
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting	778,137			745,581			398,420
	$	(1,389,491	)	$	919,735		$	543,465

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 and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the index credit is reset and we purchase new call options to fund the next 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:



			December 31,
			2018				2017
Counterparty	Credit Rating (S&P)	Credit Rating (Moody's)	Notional Amount		Fair Value		Notional Amount		Fair Value
			(Dollars in thousands)
Bank of America	A+	Aa3	$	6,518,808	$	6,704	$	4,645,366	$	237,955
Barclays	A	A2	2,301,414		27,032		4,135,537		154,127
BNP Paribas	A	Aa3	—		—		1,411,989		73,650
Canadian Imperial Bank of Commerce	A+	Aa2	4,856,150		29,313		2,808,030		84,268
Citibank, N.A.	A+	A1	4,792,208		27,239		4,104,666		219,900
Credit Suisse	A	A1	2,877,916		12,887		3,538,855		137,384
J.P. Morgan	A+	Aa2	3,701,964		17,564		1,753,649		109,689
Morgan Stanley	A+	A1	3,560,044		1,561		3,408,179		184,323
Royal Bank of Canada	AA-	A2	1,871,305		14,011		3,027,469		104,141
Societe Generale	A	A1	2,343,165		21,681		—		—
SunTrust	A-	Baa1	1,755,030		12,047		2,331,168		90,399
Wells Fargo	A+	Aa2	4,618,569		33,398		4,036,255		162,781
Exchange traded			224,204		1,712		296,840		9,763
			$	39,420,777	$	205,149	$	35,498,003	$	1,568,380

As of December 31, 2018 and 2017, we held $0.2 billion and $1.6 billion, 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 $16.1 million and $11.9 million at December 31, 2018 and 2017, respectively.

The future 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 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 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 consolidated statements of operations.

Details regarding the interest rate swap are as follows:



						December 31,
						2018		2017
Maturity Date	Notional Amount		Receive Rate	Pay Rate	Counterparty	Fair Value		Fair Value
						(Dollars in thousands)
March 15, 2021	$	85,500	LIBOR	2.415%	SunTrust	$	354	$	(789	)

Details regarding the interest rate caps are as follows:



						December 31,
						2018		2017
Maturity Date	Notional Amount		Floating Rate	Cap Rate	Counterparty	Fair Value		Fair Value
						(Dollars in thousands)
July 7, 2021	$	40,000	LIBOR	2.50%	SunTrust	$	302	$	207
July 8, 2021	12,000		LIBOR	2.50%	SunTrust	91		62
July 29, 2021	27,000		LIBOR	2.50%	SunTrust	204		146
	$	79,000				$	597	$	415

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.