WELLPOINT, INC | 2013 | FY | 3

Derivative Financial Instruments
A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments at December 31, 2013 and 2012 is as follows:
 
Contractual/
Notional
Amount
 
Balance Sheet Location
 
Estimated Fair
Value
 
Asset
 
(Liability)
December 31, 2013
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
$
1,660.0

 
Other assets/other liabilities
 
$
30.9

 
$
(20.7
)
Non-hedging instruments
 
 
 
 
 
 
 
Derivatives embedded in convertible securities
295.0

 
Fixed maturity securities
 
89.2

 
—

Interest rate swaps
72.6

 
Equity securities 
 
1.8

 
(2.5
)
Options
7,891.6

 
Equity securities/other assets
 
776.5

 
(787.7
)
Futures
—

 
Equity securities 
 
3.5

 
(1.6
)
Subtotal non-hedging
8,259.2

 
Subtotal non-hedging
 
871.0

 
(791.8
)
Total derivatives
$
9,919.2

 
Total derivatives
 
901.9

 
(812.5
)
 
 
 
Amounts netted
 
(791.8
)
 
791.8

 
 
 
Net derivatives
 
$
110.1

 
$
(20.7
)
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Hedging instruments
 
 
 
 
 
 
 
Interest rate swaps
$
1,650.0

 
Other assets/other liabilities
 
$
58.6

 
$
(0.1
)
Non-hedging instruments
 
 
 
 
 
 
 
Derivatives embedded in convertible securities
278.8

 
Fixed maturity securities
 
67.2

 
—

Credit default and interest rate swaps
95.9

 
Equity securities 
 
—

 
(7.3
)
Options
6,271.8

 
Equity securities 
 
385.6

 
(411.2
)
Futures
—

 
Equity securities 
 
2.1

 
(0.4
)
Subtotal non-hedging
6,646.5

 
Subtotal non-hedging
 
454.9

 
(418.9
)
Total derivatives
$
8,296.5

 
Total derivatives
 
513.5

 
(419.0
)
 
 
 
Amounts netted
 
(418.9
)
 
418.9

 
 
 
Net derivatives
 
$
94.6

 
$
(0.1
)

Fair Value Hedges
We have entered into various interest rate swap contracts to convert a portion of our interest rate exposure on our long-term debt from fixed rates to floating rates. The floating rates payable on all of our fair value hedges are benchmarked to LIBOR. A summary of our outstanding fair value hedges at December 31, 2013 and 2012 is as follows:
Type of Fair Value Hedges
Year
Entered
Into
 
Outstanding Notional Amount
 
Interest
Rate
Received
Expiration Date
 
 
2013
 
2012
 
 
Interest rate swap
2013
 
 
$
10.0

 
$
—

 
 
4.350
%
August 15, 2020
Interest rate swap
2012
 
 
200.0

 
200.0

 
 
4.350
 
August 15, 2020
Interest rate swap
2012
 
 
625.0

 
625.0

 
 
1.875
 
January 15, 2018
Interest rate swap
2012
 
 
200.0

 
200.0

 
 
2.375
 
February 15, 2017
Interest rate swap
2011
 
 
200.0

 
200.0

 
 
5.250
 
January 15, 2016
Interest rate swap
2010
 
 
25.0

 
25.0

 
 
5.250
 
January 15, 2016
Interest rate swap
2006
 
 
200.0

 
200.0

 
 
5.000
 
December 15, 2014
Interest rate swap
2005
 
 
200.0

 
200.0

 
 
5.000
 
December 15, 2014
Total notional amount outstanding
 
 
 
$
1,660.0

 
$
1,650.0

 
 
 
 
 

A summary of the effect of fair value hedges on our income statement for the years ended December 31, 2013, 2012 and 2011 is as follows:
Type of Fair Value Hedges
 
Income Statement
Location of Hedge
Gain
 
Hedge
Gain
Recognized
 
Hedged Item
 
Income Statement
Location of
Hedged Item
Loss
 
Hedged Item
Loss
Recognized
Year ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
31.5

 
Fixed rate debt
 
Interest expense
 
$
(31.5
)
Year ended December 31, 2012
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
38.2

 
Fixed rate debt
 
Interest expense
 
$
(38.2
)
Year ended December 31, 2011
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
45.1

 
Fixed rate debt
 
Interest expense
 
$
(45.1
)

Cash Flow Hedges
We have historically entered into forward starting pay fixed interest rate swaps, with the objective of eliminating the variability of cash flows in the interest payments on various debt issuances. These swaps have all terminated and no amounts were outstanding at December 31, 2013 or 2012. The unrecognized loss for all terminated cash flow hedges included in accumulated other comprehensive income was $32.3 and $35.3 at December 31, 2013 and 2012. As of December 31, 2013, the total amount of amortization over the next twelve months for all cash flow hedges will increase interest expense by approximately $5.0.
A summary of the effect of cash flow hedges on our financial statements for the years ended December 31, 2013, 2012 and 2011 is as follows:
 
 
Effective Portion
 
 
 
 
Pretax Hedge
Loss
Recognized
in Other
Comprehensive
(Loss) Income
 
Income Statement
Location of
Loss
Reclassification
from Accumulated
Other
Comprehensive
Income
 
Hedge Loss
Reclassified from
Accumulated
Other
Comprehensive
Income
 
Ineffective Portion
Type of Cash Flow Hedge
 
 
 
 
Income
Statement
Location of
Loss
Recognized
 
Hedge Loss
Recognized
Year ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
—

 
Interest expense
 
$
(4.6
)
 
None
 
$
—

Year ended December 31, 2012
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(4.0
)
 
Interest expense
 
$
(4.2
)
 
Interest expense
 
$
(0.1
)
Year ended December 31, 2011
 
 
 
 
 
 
 
 
 
 
Forward starting pay fixed swaps
 
$
(18.2
)
 
Interest expense
 
$
(1.8
)
 
None
 
$
—


We test for cash flow hedge effectiveness at hedge inception and re-assess at the end of each reporting period. No amounts were excluded from the assessment of hedge effectiveness.
Non-Hedging Derivatives
A summary of the effect of non-hedging derivatives on our income statement for the years ended December 31, 2013, 2012 and 2011 is as follows:
Type of Non-hedging Derivatives
 
Income Statement Location of
Gain (Loss) Recognized
 
Derivative
Gain (Loss)
Recognized
Year ended December 31, 2013
 
 
 
 
Derivatives embedded in convertible securities
 
Net realized gains on investments
 
$
31.5

Interest rate swaps
 
Net realized gains on investments
 
2.2

Options
 
Net realized gains on investments
 
(111.7
)
Futures
 
Net realized gains on investments
 
22.3

Swaptions
 
Net realized gains on investments
 
$
3.0

Total
 
 
 
$
(52.7
)
Year ended December 31, 2012
 
 
 
 
Derivatives embedded in convertible securities
 
Net realized gains on investments
 
$
(2.4
)
Credit default and interest rate swaps
 
Net realized gains on investments
 
(3.9
)
Options
 
Net realized gains on investments
 
(66.0
)
Futures
 
Net realized gains on investments
 
(6.7
)
Total
 
 
 
$
(79.0
)
Year ended December 31, 2011
 
 
 
 
Derivatives embedded in convertible securities
 
Net realized gains on investments
 
$
(7.6
)
Credit default and interest rate swaps
 
Net realized gains on investments
 
(53.3
)
Options
 
Net realized gains on investments
 
9.6

Futures
 
Net realized gains on investments
 
(5.9
)
Total
 
 
 
$
(57.2
)

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