Notes to financial statements

Note 6: Derivative Financial Instruments

Derivative financial instruments are defined as futures, forward, swap or option contracts and other financial instruments with similar characteristics. We have had limited involvement with these instruments for purposes of hedging against fluctuations in market indices, foreign currency exchange rates and interest rates. All investments, including derivative instruments, have some degree of market and credit risk associated with them. However, the market risk on our derivatives substantially offsets the market risk associated with fluctuations in interest rates. We seek to reduce our credit risk by conducting derivative transactions only with reputable, investment-grade counterparties.

We enter into interest rate swap agreements for the purpose of reducing the effect of interest rate fluctuations on some of our debt and investments. We purchase foreign exchange forward contracts to minimize the impact of fluctuating foreign currencies on our results of operations. We hedge our obligation to pay credited rates on equity-indexed annuity products by purchasing options tied to the S&P 500 index. Individually, and in the aggregate, the impact of these transactions on our financial position and results of operations is not material.